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Chapter 1Introduction to Accounting

20 June 2013

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1. Explain the definition and importance of accounting and appreciate its role in business

2. Describe the specialized accounting services.

3. Identify the career opportunities in accounting and appreciate the accounting profession.

4. Narrate the brief history of accounting

5. Introduce the Financial Reporting Standards Council (FRSC) and the framework for the Preparation and Presentation of Financial Statements

Learning ObjectivesLearning Objectives

After studying this chapter, you should

be able to:

After studying this chapter, you should

be able to:

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Learning ObjectivesLearning Objectives

6. Discuss ethics standards in accounting.7. Appreciate the accounting profession in the

Philippines.8. Learn the different accounting organizations

and international certifications in the accounting profession.

9. Introduce the hotel industry, its need for accounting information and financial challenges

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Definition of AccountingDefinition of Accounting

Multiple definitions existQuoted from the Basic Concepts and Accounting

Principles Underlying Financial Statements of Business Enterprises, Statement of Financial Accounting Standards, Accounting Standards Council (ASC)

“Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature,

about economic entities that is intended to be useful in making economic decisions in making reasoned choices among alternative courses of action.”

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Definition of AccountingDefinition of Accounting

According to American Institute of Certified Public Accountants (AICPA) –

“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.”

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Importance of AccountingImportance of Accounting

Keeps track of the profit Provides framework by which profit can

be planned, monitored and controlled. To understand the business, he should

understand basic accounting terminology Language of business

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Specialized Accounting ServicesSpecialized Accounting Services

Auditing Tax Accounting. Management Consulting Cost Accounting Financial Accounting Accounting Systems Government AccountingBudgetingAccounting Education

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Career OpportunitiesCareer Opportunities

Entry level Public practice: audit staff, tax staff Commerce and industry: financial acctg and

reporting staff, mgmt acctg staff Government: state accounting examiner,state

accountant, revenue officer Education: junior accounting instructor

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Career OpportunitiesCareer Opportunities

Middle – level positions Public practice: audit manager, tax manager Commerce and industry: comptroller, senior

information systems auditor Government: state accountant V, director III Education: senior faculty, accounting

department chair

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Career OpportunitiesCareer Opportunities

Advanced positions Public practice: partner, senior partner, senior

consultant/financial advisor Commerce and industry: chief financial officer,

chief information officer Government: national treasurer, vice president

for finance, commissioner Education: vice dean for academic affairs,

dean

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Accounting ProfessionAccounting Profession

Bookkeeping refers to the clerical dimension of the accounting

Accounting involves not only the recording aspect of the accounting but also the preparation and the interpretation of financial reports.

Bookkeeper – responsible for keeping the records of the day-to0day routine operations of the business

Accountant – reviews the work of a bookkeeper and while his work involves some level of bookkeeping, a higher level of degree of knowledge and analytical skills are required of him than of a bookkeeper

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Accounting ProfessionAccounting Profession

Financial accounting – refers to accounting process that starts with the accumulation of accounting information and ends with the preparation of the financial statements

Financial reporting refers to the process of communicating financial accounting to interested users of such information

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Divisions of AccountingDivisions of Accounting

Financial accounting – provides information needed by decision makers outside the firm like government authorities and creditors

Managerial Accounting – serves the information needs of decision makers wi Financial reporting refers to the process of communicating financial accounting to interested users of such information

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Financial InformationFinancial Information

• One of the accounting functions is to provide information about the enterprise. The financial information generated must be useful to users. In order to be useful, the information must have the following basic characteristics:

 

• Understandability• Relevance• Reliability• Comparability

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Branches of AccountingBranches of Accounting

Auditing• Most significant service to the public• Includes an independent examination

that ensures the fairness and reliability of the reports that management submits to users outside the business entity.

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Branches of AccountingBranches of Accounting

Bookkeeping• Mechanical task involving the collection

of basic financial data• Normally takes place once a month• The procedures usually end when the

basic data have been entered in the books of accounts and the accuracy of each entry has been tested.

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Branches of AccountingBranches of Accounting

• Industrial revolution and modern mass manufacturing process;– Business profiting model is changed;

• Originally, buy low, sell high;• Now, buy raw materials, manufacture into products

and sell out;• The determination of the cost of manufactured

products is essential in profit determination;

– Cost Accounting is “invented”;

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Branches of AccountingBranches of Accounting

• From Bookkeeping to Financial Accounting– Capital market: accounting information is widely

circulated;– The most common users: outside of the reporting

entity;– GAAP: the symbol of the conversion;

• Financial Accounting is also called External Accounting;

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Branches of AccountingBranches of Accounting

Financial management• Relatively new branch of accounting

that has grown rapidly over the last 30 years.

• Responsible for setting financial objectives, making plans based on those objectives, obtaining the finance needed to achieve the plans and generally safeguarding all the financial resources of the entity.

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Branches of AccountingBranches of Accounting

• From cost accounting to management accounting;– More complicated business activities;– Dynamic and keep-changing environment;– Much larger business scale;

• Decision making: much more complicated• Management / Managerial Accounting is

“invented”;

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Branches of AccountingBranches of Accounting

Tax AccountingIncludes preparation of tax returns and the consideration of the tax consequences of proposed business transactions or alternative courses of action.

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Branches of AccountingBranches of Accounting

• Government accounting Concerned with the identification of the sources and uses of resources consistent with the provisions of city, municipal, provincial or national laws

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Branches of AccountingBranches of AccountingSummary: Auditing

Bookkeeping

Cost accounting

Financial accounting

Financial management

Management accounting

Tax accounting

Government accounting

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Corporate Finance and AuditingCorporate Finance and Auditing

Accounting Firms

FirmFirmFinancial statements

InvestorsGovernmentAccounting

GovernmentAccounting

AuditingFinancial, Cost Tax

Accounting

Financial, Cost Tax

Accounting

Management Accounting

Management Accounting

Financial Management

Financial Management

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Types and activities of AccountantsTypes and activities of Accountants

Fields of Accounting

Types of Accountants Financial Accounting Managerial Accounting Tax AccountingPrivate Accountants Preparing Financial statements General Accounting Prepare Tax Returns

Cost Accounting PlanningBudgetingInternal Auditing

Public Accountants Auditing financial statements Providing management advisory services Preparing Tax ReturnsPlanning

Government Accountants Preparing Financial statements General Accounting Reviewing Tax returnsReviewing fisnancial repor Cost Accounting Assisting taxpayersWriting regulations Budgeting Writing regulationsAssisting companies Internal Auditing Investigating violationsInvestigating violations

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Evolution of

Accounting

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Florentine vs. Venetian ApproachFlorentine vs. Venetian Approach

• In the 14th Century, Amatino Manucci, the inventor of double entry bookkeeping and partner of a merchant partnership called Giovanni Farolfe & Company in Florence, introduced the Florentine Approach (known as Journal entries)

• This method records each transaction twice in at least one account being debited and at least one account credited, with the total debits of the transaction equal to total credits.

.

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Florentine vs. Venetian ApproachFlorentine vs. Venetian Approach

• The Venetian approach ( known as the ledger posting ), were accounts are recorded in bilateral forms, with debits recorded on the left side of the page across form credits. It points to highly evolved system using several books, carefully cross indexed and coordinated to form a coherent whole.

• This was introduced by merchant Andrea Bargarigo (1418-1449)..

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The Florentine Approach of double entry in Journal Entries

The Florentine Approach of double entry in Journal Entries

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Illustration of Venetian Approach Illustration of Venetian Approach

Gave emphasis on Ledger Posting which is

simplified in T-account

Gave emphasis on Ledger Posting which is

simplified in T-account

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Financial Accounting - EvolutionFinancial Accounting - Evolution

¨ Evidence of recording of economic transactions in ancient civilizations

¨ Franciscan Monk Fra Luca Pacioli (1445-1515) known as the father of modern accounting

¨ His Summa de Arithmetica, Geometria, Proportioni et Proportionalita, is considered as the first text on accounting

Pacioli structured and organized the initial accounting system

based on the ‘benefit and sacrifice’ principle

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Financial Accounting - EvolutionFinancial Accounting - Evolution Product of economic environment

Gradually evolved as a profession with the development of economic activity especially … Industrial Revolution

Scope and nature of accounting is closely associated with the gradual changes in the field of organization and management of organizations

In the modern IT era, accounting is getting integrated into software packages and constantly adapting itself

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Evolution of AccountingEvolution of Accounting

• Accounting will evolve with the development of economy and technology;– The invention of computer and its

adoption into accounting practice;• Reduces time, effort and cost of

record-keeping;• Improves clerical accuracy;• Changes the way we store, process and

summarize large masses of data;

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Evolution of AccountingEvolution of Accounting– Website and Internet;

• dissemination of accounting information: easy and no increment cost;

– Internet based financial reporting system;• Extensible Business Reporting Language (XBRL) was

developed to provide users with an efficient and effective means of preparing and exchanging financial information over the Internet.

• Extensible Assurance Reporting Language (XARL) was designed to enable assurance providers to report on the integrity of information distributed over the Internet and help users and companies place warranted reliance on such information

– Events accounting: may be re-introduced under internet environment;

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Evolution of AccountingEvolution of Accounting

• SOX and its impact on accounting;– Enron filed for bankruptcy protect in December 3,

2001;– WorldCom reported billions of false profit in June,

2002;– Sarbanes-Oxley Act of 2002 was signed by President

Bush and became a law in June 30, 2002;– It mainly focuses on accounting;

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Accountant as a historian – keeps records

Accountant as a historian – keeps records

But with a difference

Respects the facts

Bring into focus all known and knowable relevant facts

Finally, provide an interpretation of the history proposed

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Purpose of AccountingPurpose of Accounting

Planning how you are going to use your money

Recording accounting data. Keeping specific records of information in

specific manual. Enabling circulating information. Use accounting data to make decision.

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Financial Reporting Standards Council (FRSC)Financial Reporting Standards Council (FRSC)

• Established in 2006 by Board of Accountancy of the Philippine Regulation Commission (PRC)

• Main function is to promulgate accounting standards and the generally accepted accounting principles (GAAP) in the Philippines

• It’s operation is funded by Philippine Institute of Public Accountant (PICPA)

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Framework issued by the IASBFramework issued by the IASB

States the following users of accounting information and reasons for their need:

Investor

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•To help them decide whether to buy, hold or sell

•To help them assess the ability of the enterprise to pay dividends

Employees

•To compare how well the enterprise is doing vs. other companies

•To assess the ability of the enterprise to provide remuneration, retirement benefits and employment opportunities

Lenders

•To determine whether their loans, and the interest attaching to them, will be paid when due.

Supplier

s

•To determine whether amounts owing to them will be paid when due

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Framework issued by the IASBFramework issued by the IASB

States the following users of accounting information and reasons for their need:

Customer

s

•Interested in information about the continuance of an enterprise, especially when they have a long-term involvement with, or are dependent on, the enterprise

Government

•Interested in the allocation of resources

•To regulate the activities of the enterprises and determine taxation policies

Public

•To determine the number of people they employ and their patronage of local suppliers.

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Objectives of financial statementsObjectives of financial statements

The framework for the preparation and presentation of financial statements of the PFRS stated the following objectives of financial statements:• To provide information about the financial position,

performance and changes in financial position of the enterprise that are useful to a wide range of users in making economic decisions

• To meet the common needs of most users• Show the results of the stewardship of management

of the accountability of management for the resources entrusted to it.

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FrameworkFramework

The framework for the preparation and presentation of financial statements:• Underlying assumptions

• Accrual basis – effects of transactions and other events are recognized when they occur

• Going concern – • entities have a life of infinite duration, unless

facts are known that indicate otherwise. • the basis of valuation of resources is

influenced more by their future utility to the business entity than by their current market valuation

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FrameworkFramework

The framework for the preparation and presentation of financial statements:• Underlying assumptions

• Understandability-users are assumed to have reasonable knowledge of business and economic activities and accounting and willingness to study the information with reasonable diligence.

• Relevance – information influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting their past evaluations.

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FrameworkFramework

The framework for the preparation and presentation of financial statements:• Underlying assumptions

• Reliability- free from material error and bias• Comparability – Can be compared through time in

order to identify trends in its FS and can be compared against other entities in order to evaluate their relative FS

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FrameworkFramework

Other qualitative characteristics of financial statements:• Materiality-if the omission or misstatement could

influence the economic decisions of users• Faithful representation – must represent faithfully the

transactions and other events it either purports to represent

• Substance over form- information is accounted for and presented in accordance with their substance and economic reality and not merely their legal form.

• Neutrality – free from bias

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FrameworkFramework

Other qualitative characteristics of financial statements:• Prudence – uncertainties are recognized by the

disclosure of their nature and extent.• Completeness- must be complete within the bounds

of materiality and cost.

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Accounting Concepts and PrinciplesAccounting Concepts and Principles

Accounting concepts and principles are the bases of accounting practices:• Matching Principle – Revenues are recognize at the

same time that its corresponding expenses are recognized.

• Cost Principle- Assets and services should be recorded based on the actual price paid.

• Materiality-information that is significant to affect evaluations or decisions.

• Conservatism-choose the method that will be least likely to overstate assets and net income

• Entity Concept-business maintains a distinct and separate personality from that of the owners.

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There are three types of business organizations

There are three types of business organizations

Proprietorship Partnership Corporation

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A proprietorship is owned by one

individual.

A proprietorship is owned by one

individual.

Advantages• Ease in organizing• Low cost of

organizing

Disadvantage• Limited source of

financial resources• Unlimited liability• Disband if owner

died

Joe’s

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A partnership is owned by two or

more individuals.

A partnership is owned by two or

more individuals.

Advantages• More financial

resources than a proprietorship.

• Additional management skills.

Disadvantage• Unlimited liability.• Limited life.• Partners – mutual

agency

Joe and Marty’s

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A corporation is organized as a separate legal entity composed of one or more individuals

or entities.

A corporation is organized as a separate legal entity composed of one or more individuals

or entities.

Advantage• The ability to obtain

large amounts of resources by issuing stocks.

Disadvantage• Double taxation.

J & M, Inc.

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Product Product

General Motors Cars, trucks, vansIntel Computer chipsBoeing Jet aircraftNike Athletic shoes and apparelCoca-Cola BeveragesSony Stereos and television

General Motors Cars, trucks, vansIntel Computer chipsBoeing Jet aircraftNike Athletic shoes and apparelCoca-Cola BeveragesSony Stereos and television

Types of Businesses

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Merchandising BusinessMerchandising Business

Product Product

Wal-Mart General merchandiseToys “R” Us ToysCircuit City Consumer electronicsLands’ End ApparelAmazon.com Internet books, music, video

retailer

Wal-Mart General merchandiseToys “R” Us ToysCircuit City Consumer electronicsLands’ End ApparelAmazon.com Internet books, music, video

retailer

Types of Businesses

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Product Product

Disney EntertainmentDelta Air Lines TransportationMarriott Hotels Hospitality and lodgingMerrill Lynch Financial adviceSprint Telecommunication

Disney EntertainmentDelta Air Lines TransportationMarriott Hotels Hospitality and lodgingMerrill Lynch Financial adviceSprint Telecommunication

Types of Businesses

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EthicsEthics

• Standard of conduct by which one’s actions are judged as right or wrong, honest or dishonest, fair or not fair.

• Business is a good source of ethical dilemmas

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Scenario of ethicsScenario of ethicsOk, Rachelle, I want you to calculate the year’s earnings.

I will, sir.

I want it to be true, accurate, and reflective of our actual financial performance.

Definitely, sir.

But wait, by the way, make it P150 million.

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SOX major provisionsSOX major provisions• The SEC is required to establish a

full-time five-member federal oversight board that police the accounting industry

• Chief executive and financial officers are required to certify periodic financial reports and are subject to criminal penalties for violations of securities reporting requirements.

To restore public confidence

To restore public confidence

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SOX major provisionsSOX major provisions• Accounting firms are prohibited from

providing many types of consulting services to the companies they audit.

• Auditors must maintain financial documents and audit work papers for 5 years.

• Auditors and accountant can be imprisoned for up to twenty years for destroying financial documents and willful violations of the securities law.

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SOX major provisionsSOX major provisions• A public corporation must change its lead

auditing firm every five years.• There is added protection for whistle-blowers

who report violations of the SOX.• SOX shifts responsibility for financial probity and

accuracy to the board’s audit committee.• It also requires appointment of independent

directors, increased financial statement disclosures, an internal code of ethics, among others

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International CertificationsInternational Certifications

• Certified Management Accountant (CMA)• Certified Internal Auditor (CIA)• Certified Hospitality Accountant Executive

(CHAE)• Certified Information System Auditor (CISA)• Certified Information Security Manager

(CISM)P22-23

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Organizations that Influence Accounting Organizations that Influence Accounting

Philippine Institute of Certified Public Accountants (PICPA)

Financial Accounting Standards Board (FASB)

Securities and Exchange Commission (SEC)

Bureau of Internal Revenue (BIR)

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PICPAPICPA• Philippine Institute of Certified Public Accountants• Objectives:

• To promote and maintain high professional and ethical standards among accountants

• To advance the science of accounting• To develop and improve the accountancy education• To encourage cordial relations among accountants• To protect the Certificate of Certified Public

Accountants granted by the Republic of the Philippines

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Users of Accounting InformationUsers of Accounting Information

Internal -Internal users comprise various management and supervisory staff within the organization. EG: EMPLOYEE AND MANAGEMENT.External -External users comprise investors (present and future), lenders, suppliers, customers, government and public at large.

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Hospitality IndustryHospitality IndustryHeterogeneous industry Including but not limited to operations of hotels, motels,

restaurants, fast-food outlets, pubs and bars, airline, country and sport clubs, and cruise liners.

Segment: Lodging industry, foodservice industry, club industry, SPA industry, and gaming industry

Depends heavily on shift work Objective: To strive for outstanding guest satisfaction,

leading to guest loyalty and yes, to profit generation.

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Hotel Accounting Department OrganizationHotel Accounting Department Organization

Controller Assistant ControllerDirector of Information

Technology Credit and collection

manager Payroll staff Accounts Receivable

clerk

Accounts Payable clerk

Night / day auditor Storeroom clerk Purchasing and yield

analyst Food and Beverage

cost analyst

P27-29

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Homework # 1Homework # 1

Fill in the blanks page 4

Spell out the following acronyms page 9

Research work page 12