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Fun-Acc Chapter-1 - Tax

Tax
Course

Business tax (BSAC 242)

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Academic year: 2023/2024

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FUNDAMENTALS OF ACCOUNTING

(FUN ACC)

I. ACCOUNTING AND its ENVIRONMENT

Learning Objectives:

After studying this chapter, you should be able to:

a. Understand and explain the definition, purpose, nature, functions and objectives of accounting. b. Have a fair knowledge of the evolution of accounting c. Distinguish between the different forms and activities of business organizations d. Distinguish the branches of accounting, users of accounting information e. Explain the fundamental accounting concepts and principles.

INTRODUCTION

In a market economy, information helps decision-makers make informed choices regarding the allocation of scarce resources under their control. When decision-makers are able to make well-informed decisions, resources are allocated in a way that better meets the needs and goals of those within the market.

Accounting is relevant in all walks of life, and it is absolutely essential in the world of business. Accounting is the system that measures business activities, processes that information into reports and communicates the results to decision-makers. Accounting quantifies business communication. For this reason, accounting is called the language of business.

DEFINITIONS OF ACCOUNTNG

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.

Accounting is an information system that measures, processes and communicates financial information about an economic entity.

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.

NATURE OF ACCOUNTING

1. Accounting is a service activity

Accounting provides assistance to decision makers by providing them financial reports that will guide them in coming up with sound decisions.

2. Accounting is both an art, science and a discipline.

Accounting is a practical art which requires the use of creative skill and judgment. The word ‘art’ refers to the way something is performed

Accounting is a social science with a body of knowledge which has been systematically gathered, classified, and systematic organized. It is influenced by, and interacts with, economic, social and political environments.

Accounting follows certain standards and professional ethics, it is also a discipline.

  1. Accounting deals with financial information and transactions. Accounting records financial transactions and data, classifies these and finalizes their results given for a specified period of time, as needed by their users

  2. Accounting is an information system. Accounting identifies and measures economic activities, processes information into financial reports and communicates these reports to decision makers.

Economic Activities:

a. Production – the process of converting economic resources into outputs of goods

and services that are intended to have greater utility than the required inputs.

b. Exchange – the process of trading resources or obligations for other resources or

obligation.

c. Income distribution - the process of allocating rights to the use of output among

individuals and groups in society.

d. Consumption – the process of using the final output of the production process.

e. Investment – the process of using current inputs to increase the stock of resources

available for output as opposed to immediately consumable output.

f. Savings – the process by which individuals and groups set aside rights to present consumption in exchange for rights to future consumption.

FUNCTIONS OF ACCOUNTNG IN BUSINESS

 To provide information for managers and owners to use in operating the business.  Allows business owners to assess the efficiency and effectiveness of their business operations.  Accounting reports can be compared with industry standards or to a leading competitor to determine how the business is doing.  Use historical financial accounting statements to create trends for analyzing and forecasting future sales.

• The Cradle of Civilization

Around 3600 B., record-keeping was already common from Mesopotamia, China and India to Central and South America. The oldest evidence of this practice was the “clay tablet” of Mesopotamia which dealt with commercial transactions at the time such as listing of accounts receivable and accounts payable.

• 14th Century - Double-Entry Bookkeeping

The most important event in accounting history is generally considered to be the dissemination of double entry bookkeeping by Luca Pacioli (‘The Father of Accounting’) in 14th century Italy.

Pacioli was much revered in his day, and was a friend and contemporary of Leonardo da Vinci. The Italians of the 14th to 16th centuries are widely acknowledged as the fathers of modern accounting and were the first to commonly use Arabic numerals, rather than Roman, for tracking business accounts.

Luca Pacioli wrote Summa de Arithmetical, the first book published that contained a detailed chapter on double-entry bookkeeping. He stated that the purpose of bookkeeping was to “give the trader without delay information as to his assets and liabilities.”

Modern bookkeeping systems are still based on the principles established in the 15th century although they have had to be adapted to suit modern conditions.

• French Revolution (1700s)

The thorough study of accounting and development of accounting theory began during this period. Social upheavals affecting government, finances, laws, customs and business had greatly influenced the development of accounting.

• The Industrial Revolution (1760-1830)

Mass production and the great importance of fixed assets were given attention during this period.

• 19th Century – The Beginnings of Modern Accounting in Europe and America

The modern, formal accounting profession emerged in Scotland in 1854 when Queen Victoria granted a Royal Charter to the Institute of Accountants in Glasgow, creating the profession of the Chartered Accountant (CA).

In the late 1800s, chartered accountants from Scotland and Britain came to the U. to audit British investments. Some of these accountants stayed in the U., setting up accounting practices and becoming the origins of several U. accounting firms. The first national U. accounting society was set up in 1887. The American Association of Public Accountants was the forerunner to the current American Institute of Certified Public Accountants (AICPA).

In this period rapid changes in accounting practice and reports were made. Accounting standards to be observed by accounting professionals were promulgated. Notable practices such as mergers, acquisitions and growth of multinational corporations were developed.

A merger is when one company takes over all the operations of another business entity resulting in the dissolution of another business. Businesses expanded by acquiring other companies. These types

of transactions have challenged accounting professionals to develop new standards that will address accounting issues related to these business combinations.

  • The Present - The Development of Modern Accounting Standards and Commerce

The accounting profession in the 20th century developed around state requirements for financial statement audits. Beyond the industry's self-regulation, the government also sets accounting standards, through laws and agencies such as the Securities and Exchange Commission (SEC).

As economies worldwide continued to globalize, accounting regulatory bodies required accounting practitioners to observe International Accounting Standards. This is to assure transparency and reliability, and to obtain greater confidence on accounting information used by global investors.

Nowadays, investors seek investment opportunities all over the world. To remain competitive, businesses everywhere feel the need to operate globally. The trend now for accounting professionals is to observe one single set of global accounting standards in order to have greater transparency and comparability of financial data across borders.

 Accountancy in the Philippines

Although accounting has been practiced in the Philippines since the Spanish period and possibly even before, the seeds of Philippine accountancy as a recognized profession were planted on March 17, 1928, when Act No. 3105 was approved by the Sixth Legislature, Entitled "An Act Regulating the Practice of Public Accounting; Creating the Board Of Accountancy Providing for Examination, for the Granting of Certificates, and the Registration Of Certified Public Accountants; for the Suspension Or Revocation of Certificates; and for Other Purposes," the law paved the way for local accountants to do the work which, up to that time was performed by foreign accountants in the country.

Since then, both the profession and the body that directly regulates it have grown rapidly. From 43 registered accountants in 1923, the number of CPAs has grown to over 100 by 1999 and conservatively at least 160,000 as at today. And least 5,500 new CPAs are added to the roster every years,

Don Vicente Fabella. in 1915, became the first Filipino CPA in the United States (passed the Milwaukee, Wisconsin CPA Board Exams), and founder of Jose Rizal University in 1919;

Dr. Nicanor Reyes, founder and first president of the Fat Eastern university ,started in 1928 as the Institute of Accountancy, which later became the Institute of Accounts, Business and Finance, and then registered as the Far Eastern University in Jan. 1934

Local accounting firms and partnerships have likewise entered the mainstream of international practice. The biggest of the local firms, SGV & Co., was the first to offer services outside the country and initiated the establishment of The SGV Group composed of leading national accounting firms in East and Southeast Asia,

In 197S with the accreditation the {Professional Regulations Commission (PRC} of the Philippine Institute of Certified Public Accountants (PICPA) as the bona fide professional Organization representing CPAS in the country.

 Financial and Sustainability Reporting Standards Council

The Financial and Sustainability Reporting Standards Council (FSRSC) was established by the Professional Regulatory Commission (PRC) under the Implementing Rules and Regulations of the Philippine Accountancy Act of 2004 to assist the Board of Accountancy (BOA) in carrying out its power and function to promulgate accounting standards in the Philippines. The FSRSC’s main function is to establish generally accepted accounting principles in the Philippines.

The FSRSC is the successor of the Accounting Standards Council (ASC). The FSRSC carries on the decision made by the ASC to converge Philippine accounting standards with international accounting standards issued by the International Accounting Standards Board (IASB). The FSRSC has full discretion in developing and pursuing the technical agenda for setting accounting standards in the Philippines. Financial support is received principally from the PICPA Foundation.

The FSRSC consists of a Chairman and members who are appointed by the BOA and include representatives from the BOA, Securities and Exchange Commission (SEC), Bangko Sentral ng Pilipinas (BSP), Bureau of Internal Revenue (BIR), Insurance Commission (IC), Commission on Audit (COA), Financial Executives Institute of the Philippines (FINEX), and PICPA.

BRANCHES OF ACCOUNTING

The main branches of accounting and their brief descriptions are discussed as follows:

  1. Accountancy and Accounting Accountancy is a profession whose members are engaged in the collection of: a. Collection of financial data b. The summary of the data c. Presentation of information in a form which helps the recipient take effective decisions.

Accountancy vs accounting

 Accountancy – to describe the profession  Accounting- term referred to as the subject 2. Auditing

Auditing is the accountancy profession's most significant service to the public

There are two types of auditing: external and internal auditing.

 External auditing refers to the examination of financial statements by an independent CPA (Certified Public Accountant) with the purpose of expressing an opinion as to fairness of presentation and compliance with the generally accepted accounting principles (GAAP). The audit does not cover 100% of the accounting records but the CPA reviews a selected sample of these records and issues an audit report.

 Internal auditing deals with determining the operational efficiency of the company regarding the protection of the company’s assets, accuracy and reliability of the accounting data, and adherence to certain management policies. It focuses on evaluating the adequacy of a company's internal control structure by testing segregation of duties, policies and procedures, degrees of authorization, and other controls implemented by management.

  1. Bookkeeping

Bookkeeping is a mechanical task involving the collection of basic financial data. The data are first entered in the accounting records or the books of accounts, and then extracted, classified and summarized in the form of income statement, balance sheet and cash flows statement.

  1. Cost Accounting

Sometimes considered as a subset of management accounting, cost accounting refers to the recording, presentation, and analysis of manufacturing costs.

Cost accounting is very useful in manufacturing businesses since they have the most complicated costing process. Cost accountants also analyze actual and standard costs to help managers determine future courses of action regarding the company's operations. Cost accounting will also help the owner set the selling price of his products.

For example, if the cost accounting records shows that the total cost to produce one can of sardines is PHP50, then the owner can set the selling price at PHP60.

  1. Financial Accounting

The recording of transactions, preparation of financial statements and communication of financial information to external user groups. Focuses on general purpose reports.

  1. Financial Management

Relatively new branch of accounting that has been grown rapidly over the last 35 years. Financial managers are 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.

  1. Management Accounting

Management Accounting incorporates cast accounting data end adapts them for specific decisions which management may be called to make. A management accounting system incorporates all type of financial and non-financial information from a wide range of sources.

Price-level Accounting Otherwise known as accounting for hyperinflationary economies – simply defined, is accounting that recognizes in the financial statements changes in the purchasing power of money.

USERS OF ACCOUNTNG INFORMATION

  1. Internal Users ( Primary user) are those who make decisions directly affecting the internal operations of the business.

a. Management .Managers are directly involved in operation of the business. They need accounting data to improve the efficiency and effective of the organization.  Information need: income/earnings for the period, sales, available cash, production cost.  Decisions supported: analyze the organization's performance and position and take appropriate measures to improve the company results. sufficiency of cash to pay dividends to stockholders; pricing decisions

b. Employees use financial data to assess whether they are receiving the right compensation and to check if they bargain for higher remuneration, retirement benefits and employment opportunities.  Information need: profit for the period, salaries paid to employees  Decisions supported: job security, consider staying in the employ of the company or look for other employment opportunities

c. Officers, also called as the company executives who are interested to know if the company is doing well in its operation so they can plan for possible expansion or branching out to widen its geographical and demographic market the act of making money.

d. Internal Auditors, there role is to protect and by making people believe safeguard the resources of the company against something which is not fraud or irregularities.

Fraud - the act of making money by making people believe something which is not true Irregularities – improper, such as improper or dishonest conduct of business. e. Owners  Information need: profit or income for the period, resources or assets of the business, liabilities of the business  Decisions supported: considerations regarding additional investment, expanding the business, borrowing funds to support any expansion plans.

Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and financial statements. This information will support whatever decision of the internal users. Discuss the external users of accounting information

  1. External users are individuals or enterprises that have financial interest in the business but they are not involved in the day activities of the organization. These are:

a. Investors (The providers of risk capital) are interested in information which enables them to assess the ability of the enterprise to pay dividends. They need information on whether they should buy, hold or sell their shares in.

b. Lenders, Suppliers and other trade creditors - interested in information that enables them to determine whether their loans, and their interest attaching to them will be paid when due.  Determining the credit worthiness of an organization  Assessment of their customers' financial health  Creditors include suppliers as well as lenders of finance such as banks

c. Customers are interested in the quality of goods and services that they are getting from the entity.

d. Government and their agencies require information in order to regulate the activities of the enterprise, determine taxation policies and as a basis for national income and similar activities  Tax Authorities (BIR)  Regulatory Authorities (SEC, DOLE)

e. Public/ Customers- are assisted by information through financial statements about the trend and recent developments in the prosperity of the enterprise and the range of its activities.

FUNDAMENTAL BUSINESS MODEL

For a business to be successful:  Develop a product or service that customers are willing to pay for and thus create a revenue stream.  Sell a new product or service that meets specific needs  Sell a product or service that offers a better value proposition.  Must invest for infrastructure, equipment and personnel.

TYPES OF BUSINESS

The types of business can be summarized into seven broad categorized depending range of product and services they offer.

Type Activity Structure Examples

  1. Services Selling people’s skill and time

Hiring skilled staff and selling their time

Software development Accounting Legal Teaching and training 2. Trader Buying and selling of products

Buying a range of materials and manufactured goods and consolidating them. Making them available for sale to customers for delivery.

Wholesaler Retailer

  1. Manufacture Designing products, aggregating component and assembling finished products.

Taking raw material and using equipment and workers/ employees to convert them into finished goods.

Vehicle assembly Construction Engineering Food and beverages Chemicals Pharmaceuticals

Type Activity Structure Examples 4. Raw Materials Growing or extracting materials

Buying blocks of land an using them to produce raw materials

Farming Mining Oil 5. Infrastructure Selling the utilization of infrastructure

Buying and operating assets ( typically large assets) ; selling occupancy often combination with services

Transport (airport operators, airlines, trains, ferries, buses.) Hotels Telecommunications Sports facilities Property management 6. Financial Receiving deposit , lending and investing money

Accepting cash from depositor and paying them interest; using money to provide loans to borrowers, charging them fees and a higher rate of interest that the depositors received

Bank Investment Houses

  1. Insurance Pooling premium of many to meet claims of a few.

Collecting cash from many customers; investing the money to pay the losses from few

Insurance Companies

customers. By understanding the risk accepted and the likelihood of a claim, more premium income can be earned than the claims paid.

FORMS OF BUSINES ORGANIZATIONS

A business generally assumes one of the three forms if organization: The accounting procedures depend on which form the organization takes.

Sole Proprietorship.

This organization has a Single owner called the proprietor who generally is also the manager, Sole proprietorships tend to be small service-type (e. physicians, lawyers and accountants) businesses and retail establishments.  The owner receives profits, absorbs ail losses and is solely responsible for all debts of the business.  From the accounting viewpoint, the sole proprietorship is distinct from its proprietor- Thus the accounting records of the sole proprietorship do not include the proprietor’s personal financial records.  It is easy to form and operate.

Partnership

A partnership is a business owned and operated by two or more persons who themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.

Each partner is personally liable for any debt incurred by the partnership. Accounting considers the partnership as a separate organization, distinct from the personal affairs of each partner.

Corporation.

A corporation [s a business owned by its stockholders. It is an artificial being created by operation of law having the rights of succession and the powers attributes and properties expressly authorized law or incident to its existence. The stockholders are not personally liable for the corporation's debts.  The corporation is a separate legal entity.

MICRO, SMALL AND MEDIUM ENTERPRISES (MSME)

On May 23, 2008, Republic Act No. 9501 was signed into law by President Gloria Macapagal- Arroyo. This law seeks to address problems facing MSMEs, particularly the lack of capital and access to credit.

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Fun-Acc Chapter-1 - Tax

Course: Business tax (BSAC 242)

29 Documents
Students shared 29 documents in this course

University: The Philippine Women's University

Was this document helpful?
1 |Fundamentals of Accounting_ ALCRobles
FUNDAMENTALS OF ACCOUNTING
(FUN ACC)
I. ACCOUNTING AND its ENVIRONMENT
Learning Objectives:
After studying this chapter, you should be able to:
a. Understand and explain the definition, purpose, nature, functions and objectives of accounting.
b. Have a fair knowledge of the evolution of accounting
c. Distinguish between the different forms and activities of business organizations
d. Distinguish the branches of accounting, users of accounting information
e. Explain the fundamental accounting concepts and principles.
INTRODUCTION
In a market economy, information helps decision-makers make informed choices regarding the
allocation of scarce resources under their control. When decision-makers are able to make well-informed
decisions, resources are allocated in a way that better meets the needs and goals of those within the
market.
Accounting is relevant in all walks of life, and it is absolutely essential in the world of business.
Accounting is the system that measures business activities, processes that information into reports and
communicates the results to decision-makers. Accounting quantifies business communication. For this
reason, accounting is called the language of business.
DEFINITIONS OF ACCOUNTNG
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.
Accounting is an information system that measures, processes and communicates financial
information about an economic entity.
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.
NATURE OF ACCOUNTING
1. Accounting is a service activity
Accounting provides assistance to decision makers by providing them financial reports that
will guide them in coming up with sound decisions.

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