01-THE-ACCOUNTING-ENVIRONMENT-AND-ACCOUNTING-FRAMEWORK.pptx

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1. The Accounting Environment and Accounting Framework

2. MODULE GOALS/LEARNING OBJECTIVES: At the end of the session, the learners will be able to: Explain the importance of accounting to business. Identify the activities and users associated with accounting and explain why they need accounting information. Define business. Describe the forms of business organizations and types of operations. Identify the financial reports and the financial information contained therein.

3. Accounting is part of your life! As a student, you actually encounter accounting in your daily routine not knowing that you are doing some accounting task.

4. Whenever you board a public utility vehicle, be it a jeepney or a bus you pay for fare. All fares received by the driver represent his REVENUES . He has to spend for gasoline, vehicle repairs, food and a fee called boundary which is paid to the operator or owner of the vehicle. These would be his EXPENSES . The excess of his total revenues over the expenses will be his take home pay called PROFIT or NET INCOME .

5. Accounting does this for you: Tracks down business activities, Analyzes, calculates (or measures and records these activities , and then Prepares a progress report These three steps are the first part of accounting process called Bookkeeping .

6. The earliest bookkeeping records were used to keep track of pyramids and palaces being constructed especially in Babylonia (present-day Iraq) and Egypt . A record was kept of the number of slaves who worked for the King and Pharaohs. They also recorded the materials used and the number of days it took for the work to be finished. A registry of record of people living in a town or city was also kept which became the basis for collecting taxes by the governor of a town or province. History of Accounting

7. The first accounting book was written by Cotrugli in Naples and the modern double entry bookkeeping system could be traced from the book prepared in 1494 by an Italian mathematician , fr. Luca Pacioli , entitled Summa de Arithmetica . In the Philippines, bookkeeping was introduced by the Spaniards and the bookkeeper was called Tenedor de Libro . But even before the Spaniards came, trade was already flourishing between the Philippines and the other Asian countries and records of goods being bartered were kept by the traders. History of Accounting (cont.)

8. All businesses have one thing in common: they need financial information before making decisions. The accountant provides the information by preparing the following financial statements: Statement of Financial Position is a progress report showing a list of assets and liabilities Income Statement is a performance report of revenues against costs and expenses Statement of Cash Flows is a cash report showing where the money came from and where the money was used. Statement of Owner’s Net Worth is a progress report showing changes in your wealth. Accounting and Business

9. A business is an economic units that engages in buying and selling of goods or services. A major concern of a business is how best its resources : machines, raw materials, labor skills, number of men to employ. In a business endeavor, success is possible when money, machines, men and materials are used efficiently at the least possible cost. Most often success is measured in terms of profit and increase in funds . Business, its motive and role in society

10. Any money making venture is risky. The higher profit you desire, the more risky the venture is. Risk is the element of uncertainty in an outcome. An endeavor like a business has always an element of uncertainty – it is not certain that the operation of the business will turn out well, nor is it certain that the owner will recover what was invested nor is it certain that the creditors will be paid. But there are ways of reducing risks such as: Minimizing Business Risk

11. But there are ways of reducing risks such as: Careful planning and control by the manager Making a business plan and carefully assessing the business you want to put up Having adequate knowledge about 9the product or service and Choosing the right form of business and the right type of operation.

12. Sole Proprietorship This is a business set up and managed by one person. Most small businesses such as beauty parlors, dress shops, barbershops, and bakers are sole proprietor-owned. Forms of Business

13. Advantages Only a small amount of capital is needed Its operation can be managed easily by the proprietor. The owner or proprietor gets all the profits. Ease in formation since only a minimum requirement to legally operate is needed. Disadvantages Difficult to expand the business and sell different products or services because of low capital and only one owner-manager. It has no indefinite life. Owner may just one day want to close it or become incapacitated or die. Owner has unlimited liability. It means that if the business is unable to pay its debt, the bank or creditor can attach the owner’s personal properties.

14. 2. Partnership This is business owned by two or more persons called partners who contribute money, property and talent into common fund for the purpose of sharing profit among themselves. Most often the partners are also the managers. Professionals such as lawyers, accountants, engineers, and doctors usually put up a partnership or consultancy firm. Forms of Business

15. Advantages Ease in managing the business and in attracting clients because of more owners involved. Management is more efficient because of division of responsibilities among partners. Disadvantages No indefinite life since disagreement could easily arise because of many owners involved. Partners, like sole proprietors, have unlimited liability.

16. 3. Corporation A business organized as a separate legal entity from the owners. It means that it can conduct business by itself – enter into contracts, buys and sells properties and stocks. An investor simply buys shares of stocks in a corporation and become a shareholder. It is managed by a Board of Directors elected by the shareholders from among themselves. Forms of Business

17. Advantages More capital can be raised because of the large number of shareholders. Can afford to hire experts who can efficiently manage and operate the business. More stable than a partnership because it is not affected by the withdrawal of a shareholder. A shareholder who wants to withdraw from the corporation simply sells the shares owned to others or can even sell the shares back to the corporation. Higher amounts of profit may be obtained because of its large amount of resources used. Disadvantages A shareholder, unlike a sole proprietor or a partner, has no unlimited liability. There is therefore a higher risk involved on a corporate debts since these can only be paid out of corporate funds. It is subjects to more legal and tax requirements. Abuse of power by the Board of Directors could certainly affect the welfare of the corporation and its shareholders.

18. Service Business Merchandising Business Manufacturing Business Types of Business Operation

19. Management involves four processes: planning, organizing, directing and controlling. Planning starts with determining the goals of the business and lining u activities to accomplish these goals. Organizing involves creating divisions, appointing managers, hiring and defining the roles of duties of each one (managers and staff). Managing the Business

20. c. Directing means overseeing the daily operations of carrying out the planned activities – managers must act, decide, agree, argue, question approve, solve. d. Controlling means guarding and guiding people to ensure tasks and activities are done according to plans and some standard of performance. Controlling prevents commission of error or if detected then error must be corrected and the product or service reworked.

21. Accounting is defined as a service activity whose function is to prepare financial reports that will provide relevant information about the business. It is difficult for users to make financial decisions that are not supported by facts. These facts are contained in the accounting reports. Accounting as a Business Language

22. Accounting may also be defined as a process of recording , classifying , and summarizing transactions and events which are financial in nature and interpreting the results thereof .

23. Users of Financial Information

24. Financial Reports

25. Income statement reports the financial performance of the business and is also called profit or loss statement or statement of earnings . It lists down the income (revenues and gains) earned as well as the expenses incurred by the business. A favorable operation called profit or net income results when income exceeds expense. Income Statement

26. Statement of Owner’s Equity is another report prepared by the accountant which explains the activities for a period of time that caused the owner’s equity to change . There are four activities affecting owner’s equity: investment , withdrawal or recovery of capital , profit or loss . Statement of Owner’s Equity

27. The Statement of Cash Flows shows what caused the change in the cash. This statement shows three kinds of activities: financing (investment of the owner and cash loan), investing (acquisition and sale of properties) and operating (revenues and expenses). Statement of Cash flow

28. Statement of Financial Position (formerly called the balance sheet ) shows how healthy or robust the enterprise is when it shows a listing of the accumulated resources (cash and properties) owned and a listing of the accumulated liabilities (debts or obligations to pay) owned by the enterprise. After deducting the liabilities from the assets, the net asset show the net value or net worth of the firm which belongs to the owner. Hence, it is also called the owner’s equity . Statement of Financial Position

29. Career Opportunities in Accounting

30. Basic Accounting or Bookkeeping Financial Accounting Cost Accounting Mangement Accounting Auditing Governmanet and Non – Profit Accounting Tax Accounting Accounting Areas

31. The practice of the accounting profession, among others, is governed by regulatory bodies such as PICPA, BOA and PRC. The financial reports prepared are also affected by the rulings and promulgations issued out by the SEC, BSP, and BIR. Professional Regulation Commission (PRC) Board of Accountancy (BOA) Philippine Institute of Certified Public Accountants (PICPA) Securities and Exchange Commission (SEC) Bangko Sentral ng Pilipinas (BSP) Bureau of Internal Revenue (BIR) Professional Regulatory Bodies

32. The framework is a pervasive structure which sets the boundaries of the accounting practice with its basic rules, objectives and assumptions. The framework provides formation of accounting standards which prescribe the nature of financial reporting. The framework serves as a guide to: Financial Reporting Standard Council (FRSC) in developing future and reviewing existing Financial Reporting Standards Framework of Accounting

33. Conceptual Framework THE ACCOUNTING FRAMEWORK FINANCIAL REPORTING STANDARDS OBJECTIVES OPERATING GUIDELINES ELEMENTS QUALITATIVE CHARACTERISTICS GENRAL PURPOSE FINANCIAL STATEMENTS

34. Pronouncement on the financial reporting standards are under the authority of PICPA thru its Financial Reporting Standard Council (FRSC) and the Philippine Interpretation Committee (PIC). Once standardized, these became part of the PFRS. If a conflict should arise between Financial Reporting Standard and a concept within the accounting framework, the standard shall prevail.

35. Is there a difference between a standard and a concept? A standard is specific, example a standard for measuring and recognizing cash. While a concept is more or less a general rule such as rule for asset recognition.

36. Framework deals with the following: Objective of financial statements Qualitative characteristics of financial information Definition, measurement and recognition of the elements of the financial statements Concepts of capital and capital maintenance

37. 21 st Century Accounting Process; 2015 edition, by Zenaida Vera Cruz-Manuel SOURCE:

38. Thank you 