Topic-1-Accounting-and-Its-Environment.pptx

for accounting first year

1. Topic 1 ACCOUNTING AND ITS ENVIRONMENT

2. Define accounting and explain its role in business. Discuss the history of accounting and ascertain the need to adapt Fra Luca Pacioli's system for the modern times. Describe the fundamental business model and find how it is applied to the various types of businesses. Distinguish between the different forms and activities of business organizations. Explain the importance of the purpose and phases of accounting. Explain the fundamental accounting concepts and principles. Discuss the source of accountancy standards in the Philippines. Identify the branches of accounting. Learning Objectives

3. WHAT IS ACCOUNTING? The Accounting Standards Council defines Accounting as follows: “Accounting is a service activity, whose function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions.” The Financial Accounting Standards Board defines Accounting as follows: “Accounting is an information system that measures, processes and communicates financial information about an economic entity.” The Accounting Principles Board defines Accounting as follows: “Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.” The American Institute of Certified Public Accountants defines Accounting as follows: “Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.”

4. HISTORY OF ACCOUNTING Luca Pacioli is regarded as the father of double-entry accounting . He is a Franciscan friar and a celebrated mathematician. In 1494 he published his book, Summa de Arithmetica , Geometria , Proportioni et Proportionalita or "Everything about Arithmetic, Geometry, Proportions and Proportionality," which includes, Particularis de Computis et Scripturis or "Details of Calculation and Recording," describing double-entry bookkeeping. His treatise reflected the practices of Venice at the time, which became known as the Method of Venice or the Italian method. Therefore, he did not invent double-entry bookkeeping, but rather described what were prevalent accounting practices of the day. He stated that the purpose of bookkeeping was “to give the trader without delay information as to his assets and liabilities.” He also advised the computation of a periodic profit and the closing of the books. He said, "It is always good to close the books each year, especially if you are in a partnership with others. Frequent accounting makes for long friendship."

5. In Pacioli’s Summa , he stated that to be successful every merchant needs three essential things: sufficient cash or credit, a good bookkeeper, and an accounting system to view the business affairs at a glance. He introduced the double-entry accounting system in which for every debet dare (should give) there exists a debet habere (should have or should receive) He mentioned three books: the memorandum is the book where all transactions are recorded, in the currency in which they are conducted, at the time they are conducted. The memorandum, prepared in chronological order, is a narrative description of the business's economic events. The memorandum is necessary because there are no documents to support transactions. The second book, the journal , is the merchant's private book. The entries made here are in one currency, in chronological order, and in narrative form. The last book, known as the ledger , is an alphabetical listing of all the business's accounts along with the running balance of each particular account.

6. The earliest systematized form of accounting regulation developed in continental Europe, starting in France in 1673. The government introduced the submission of an annual fair value statement of financial position to protect the economy from bankruptcies. This legal requirement for businesses to keep accounting records was first introduced in the Ordonnance de Commerce of 1673 which was put through by Jean-Baptiste Colbert during the reign of Louis XIV, and the Napoleonic Commercial Code of 1807, which influenced the bookkeeping provisions of commercial law throughout Continental Europe, Francophone Africa, and beyond. The Napoleonic Code or Code Napoleon is the French civil code, established under Napoleon Bonaparte on March 21, 1804. The Commercial Code was adopted in 1807. Jacques Savary , the elder {1622-1690} in an early accounting text stated the oldest known formulation of the lower-of-cost-or-­market principle. Inventory valuation at the lower-of-cost-or-market was required by the Code of Commerce in France in 1673, in Prussia in 1794, and in the German Commercial Code of 1884. As Savary was the principal author, the French Commercial Code of 1673 was also called the Code Savary . In the 17th century, Nicolas Petri was the first person to group similar transactions in a separate record and enter the monthly totals in the journal, rather than recording all transactions seriatim, that is, in a series. In 1769, Benjamin Workman published The American Accountant , the earliest ­known American accounting textbook.

7. The concept of depreciation was largely ignored until the 1909 US corporate income tax law permitted a deduction for depreciation charges in the calculation of taxable income. On Mar. 12, 1903, United States Steel published consolidated financial statements as of Dec. 31, 1902, together with Price Waterhouse & Company's (PW) assurance that they were audited and found correct. Eugen Schmalenbach (1873-1955) was a German academic and economist. In the early 1920s, Professor Schmalenbach was frustrated repeatedly with his failure to compare meaningfully the financial data made available by different companies. This led to research on the problem and the publication of his book The Model Chart of Accounts . With this book, he laid the foundation for all subsequent developments in uniform accounting in Germany. It also became the basis for corresponding efforts in other European countries. The Philippines' Bureau of Internal Revenue (BIR) was created through the passage of Reorganization Act No. 1189 dated July 2, 1904. On August 1, i904, the BIR was formally organized and made operational under the Secretary of Finance. Dan Brinklin and Bob Frankston wrote VisiCalc for the Apple 11, the first electronic spreadsheet, the most important business application for the personal computer.

8. FUNDAMENTAL BUSINESS MODEL

9. Proprietorship Partnership Corporation Owned by two or more persons Often retail and service-type businesses Generally unlimited personal liability Partnersh i p agreement Ownership divided into shares of stock Separate legal entity organized under state corporation law Limited liability Owned by one person Owner is often ma nag e r/ o pe r at o r Owner receives any profits, suffers any losses, and is personally liable for all debts Forms of Business Ownership

10. CRITERIA FOR GENERAL ACCEPTANCE OF AN ACCOUNTING PRINCIPLE Accounting practices follow certain guidelines. GAAP , which stands for generally accepted accounting principles, encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. The general acceptance of an accounting principle usually depends on how well it meets three criteria: relevance , objectivity , and feasibility . A principle has relevance to the extent that it results in information that is meaningful and useful to those who need to know something about a certain organization. A principle has objectivity to the extent that the resulting information is not influenced by the personal bias or judgment of those who furnish it. Objectivity connotes reliability and trustworthiness . It also connotes verifiability , which means that there is some way of finding out whether the information is correct. A principle has feasibility to the extent that it can be implemented without undue complexity or cost. These criteria often conflict with one another. In some cases, the most relevant solution may be the least objective and the least feasible.

11. BASIC PRINCIPLES In order to generate information ·that is useful to the users of financial statements, accountants rely upon the following principles: Objectivity Principle. Accounting records and statements are based on the most reliable data available so that they will be as accurate and as useful as possible. Reliable data are verifiable when they can be confirmed by independent observers. Ideally, accounting records are based on information that flows from activities documented by objective evidence. Without this principle, accounting records would be based on whims and opinions and is therefore subject to disputes. Historical Cost. This principle states that acquired assets should be recorded at their actual cost and not at what management thinks they are worth as of reporting date. Revenue Recognition Principle. Revenue is to be recognized in the accounting period when goods are delivered or when services are rendered or performed. Expense Recognition Principle. Expenses should be recognized in the accounting period in which goods and services are used up to produce revenue and not when the entity pays for those goods and services. Adequate Disclosure. Requires that all relevant information that would affect the user's understanding and assessment of the accounting entity be disclosed in the financial statements. Materiality. Financial reporting is only concerned with information that is significant enough to affect evaluations and decisions. Materiality depends on the size and nature of the item judged in the particular circumstances of its omission.

12. BASIC PRINCIPLES Consistency Principle. The firms should use the same accounting method from period to period to achieve comparability over time within a single enterprise. However, changes are permitted if justifiable and disclosed in the financial statements. Per revised Philippine Accoµnting Standards (PAS) No. 1, Presentation of Financial Statements, the presentation and classification of items in the financial statements should be retained from one period to the next unless: it is apparent, following a significant change in the nature of the entity's operations or a review of its financial statement presentation, that another presentation or classification would be more appropriate having regard to the criteria for the selection and application of accounting policies in Philippine Accounting Standards (PAS) No. 8, Accounting Policies, Changes in Accounting Estimates and Errors; or a Philippine Financial Reporting Standards (PFRS) requires a change in presentation.