FAR Completenotes - Complete notes on Financial Accounting and Reporting PDF

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FINANCIAL ACCOUNTING AND REPORTING NOTESby: Jose Noel P. PalomoCHAPTER ONE: INTRODUCTION TO ACCOUNTINGDefinition of Accounting Process of identifying, recording and communicating economic information that is useful in making economic decisionsEssential Elements of t h e D e fi n i t i o n o f Accoun...

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FINANCIAL ACCOUNTING AND REPORTING NOTES by: Jose Noel P. Palomo CHAPTER ONE: INTRODUCTION TO ACCOUNTING Definition of Accounting

Process of identifying, recording and communicating economic information that is useful in making economic decisions

Essential Elements of 1. Identifying t h e D e fi n i t i o n o f 2. Recording Accounting

3. Communicating

Identifying

Analyses

Recording

Recognises

Communicating

Financial Statements

Nature of Accounting

Provide information to be useful in making economic decisions

Types of Information Provided by Accounting

1. Quantitative Information 2. Qualitative Information 3. Financial Information

Quantitative Information

Numbers

Qualitative Information

Words

Financial Information

Money

Accounting as Social Science

Body of Knowledge

Accounting as Practical Art

Creative skills and judgement

Accounting as an Information System

Input, process and an output

Bookkeeping

Process of recording the accounts or transactions

Accounting

Whole process of identifying, recording and communicating

Functions of Accounting in Business

“language of business”

Users of Accounting

1. Internal Users

Information

2. External Users

Internal Users

Directly involved in managing the business

External Users

Not directly involved in managing the business

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Types of Accounting Information Classified as to Users’ Needs General Purpose Accounting Information Special Purpose Accounting Information

History of Accounting

1. General Purpose Accounting Information 2. Special Purpose Accounting Information

Common needs; Financial Accounting; for External users Specific needs; Management Accounting; for Internal users Double Entry Records - 1340 A.D. in Genoa “Double Entry Recording System” - 1494 by Far Luca Pacioli included in his book entitled “Summa di Arithmetica Geometria Proporzioni and Proportionista” 1. Financial Accounting 2. Management Accounting 3. Government Accounting

Common Branches of Accounting

4. Auditing 5. Tax Accounting 6. Cost Accounting 7. Accounting Education 8. Accounting Research

Financial Accounting

General Purpose Financial Statements; common needs of external users; governed by the Philippine Financial Reporting Standards (PFRS)

Financial Statements

Structured representation

Financial Report

Financial Statement + Other Information

Financial Reporting

Useful to external users

Primary Objective of Financial Reporting

Provide information; Claim to those resources; Changes in those resources

Secondary Objective of Financial Reporting

Provide information in management’s stewardship

Management Accounting

Internal Users

Government Accounting

Accounting for government

Auditing

Inspection of financial statements

Tax Accounting

Preparation of tax returns and rendering tax advice

Cost Accounting

Systematic recording and analysis of costs

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Accounting Education

Teaching accounting

Accounting Research

Careful analysis of economic events and other variables

Forms of Business Organisation

Sole or Single Proprietorship

1. 2. 3. 4.

Sole or Single Proprietorship Partnership Corporation Cooperative

Owned by one individual; Owner is called sole proprietor: Registered with Department of Trade and Industry (DTI) Owned by two or more; Entered into a Contract; Owners are called partners; Registered with Securities and Exchange Commission (SEC)

Partnership

Owned by more than one individual; Operation of law; Ownership is represented by shares of stocks; Owners are called stockholders or shareholders; Artificial being; Registered with Securities and

Corporation

Exchange Commission (SEC) Incorporators shall not be less than 5 but more than 15 individuals Owned by more than one individual; Formed in accordance with the provisions of The Philippine Cooperative Code of 2008; Owners are called members; Registered with Cooperative Development Authority

Cooperative

(CDA) Founding members shall not be less than 15 individuals

Types of Business According to Activities

1. Service Business 2. Merchandising (Trading) Business 3. Manufacturing

Service Business

Offers services

Merchandising Business

Sells goods without changing their physical form

Manufacturing

Buys raw materials and processes them into final products

Business

CHAPTER TWO: ACCOUNTING CONCEPTS AND PRINCIPLES Purpose of Accounting Concepts and Principles

Set of logical ideas and procedures

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1. Separate Entity Concept 2. Historical Cost Concept

Basic Accounting Concept

3. 4. 5. 6. 7.

Going Concern Concept Matching Accrual Basis of Accounting Prudence/ Conservatism Time Period

8. Stable Monetary Unit 9. Materiality Concept 10. Cost-benefit/ Cost Constraint 11. Full Disclosure Principle 12. Consistency Concept Accounting concepts and principles are either explicit or implicit. Accounting Standards

Explicit: Mentioned in the Conceptual Framework for Financial Reporting and in the Philippine Financial Reporting Standards (PFRS)

Why do we need to have uniform accounting standards? Relevant Regulatory Bodies

In order for it to be useful, it must be prepared using reporting standards that are generally acceptable 1. Securities and Exchange Commission (SEC) 2. Bureau of Internal Revenue (BIR) 3. Bangko Sentral ng Pilipinas (BSP) 4. Cooperative Development Bank (CDA)

Securities and Exchange Commission (SEC)

Regulating corporations, including partnerships

Bureau of Internal

Collecting national taxes and administering the provisions of the Tax

Revenue (BIR)

Code

Bangkok Sentral ng Pilipinas (BSP)

Regulating banks

Cooperative Development Authority

Regulating cooperative

(CDA) Conceptual Framework for Financial Reporting

Serves as a general frame or reference in developing or applying the standards

Qualitative Characteristics of Useful Financial

1. Fundamental Qualitative Information 2. Enhancing Qualitative Characteristics

Information

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Fundamental Qualitative Information

1. Relevance 2. Faithful Representation 1. Comparability

Enhancing Qualitative Characteristics

2. Verifiability 3. Timeliness 4. Understandability If it affect the decisions of users 1. Predictive Value

Relevance

2. Confirmatory Value 3. Materiality

Predictive Value

Help users to make predictions

Confirmatory Value

Users confirm their past predictions

Materiality

Material if omitting it or misstating it could influence the decisions of users If it is factual

Faithful Representation

1. Completeness 2. Neutrality 3. Free from Error

Neutrality

Presented without bias

Free from Error

Information must be perfectly accurate in all respects because some accounting information necessarily needs to be estimated

Comparability

Can help users identify similarities and differences

Verifiability

Users could reach a general agreement

Timeliness

In time

Understandability

Presented in a clear and concise manner CHAPTER THREE: THE ACCOUNTING EQUATION

Basic Accounting Equation

Assets = Liabilities + Equity Economic resources you control

Assets

Economic resource must have the potential to provide economic benefits

Control

Exclusive right

Liabilites

Obligations

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Types of Obligations

1. Legal Obligations 2. Constructive Obligations Assets - Liabilities

Equity Equality of the accounting equation must be maintained Income

Increases in economic benefits

Expenses

Decreases in economic benefits

Profit or Loss

Difference between income and expenses Come up with an unknown amount in a given formula

Squeeze Simplifies the computation process REMARKS

Please refer to the book for computations CHAPTER FOUR: TYPES OF MAJOR ACCOUNTS

Account

Storage of information

Account Title

Describes the specific item

Debit Side

Left side

Credit Side

Right side Elements of the Financial Statements

Five Major Accounts

1. Assets 2. Liabilities 3. Equity 4. Income 5. Expenses

Assets

Economic resource

Liabilities

Present obligations

Equity

Assets - Liabilities

Income

Increases in economic benefits

Revenue

Income on ordinary activities

Gains

Income on other items Decreases in economic benefits

Expenses On ordinary activities Losses

On other items

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Classification of Five Major Accounts

1. Balance Sheet 2. Income Statement List of all accounts Account numbers are assigned to the accounts to facilitate recording, cross-referencing, and retrieval of information

Chart of Accounts

Should conform to the Bangko Sentral ng Pilipinas (BSP) Cooperative should conform to the Cooperative Development Authority (CDA) National Government Agency should conform to the Revised Chart of Accounts (RCA) issued by the Commission on Audit (COA)

First Digit of Account Number

Major types of accounts 1 - Assets 2 - Liabilities 3 - Equity 4 - Income 5 - Expenses

Second Digit of Account Number Third Digit of Account Number

Account titles and sequence

If not (0), a contra account or adjunct account to that related account 1. Cash 2. Accounts Receivable 3. Allowances for Bad Debts 4. Notes Receivable 5. Inventory

Assets Accounts

6. Prepaid Supplies 7. Prepaid Rent 8. Prepaid Insurance 9. Land 10. Building 11. Accumulated Depreciation - Building 12. Equipment 13. Accumulated Depreciation - Equipment

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1. Accounts Payable 2. Notes Payable Liabilities Accounts

Equity Accounts

Income Accounts

3. 4. 5. 6.

Interest Payable Salaries Payable Utilities Payable Unearned Income

1. Owner’s Capital 2. Owner’s Drawings 1. Service Fees 2. Sales 3. Interest Income 4. Gains 1. Cost of Sales/ Cost of Goods Sold 2. 3. 4. 5. 6.

Expenses Accounts

Freight-out Salaries Expense Rent Expense Utilities Expense Supplies Expense

7. Bad Debt Expense 8. Depreciation Expense 9. Advertising Expense 10. Advertising Expense 11. Insurance Expense 12. Taxes and Licenses 13. Transportation and Travel Expense 14. Interest Expense 15. Miscellaneous Expense 16. Losses

REMARKS

Please refer to the book for computations

CHAPTER FIVE: BOOKS OF ACCOUNTS AND DOUBLE-ENTRY SYSTEM Two Books of Accounts

1. Journal 2. Ledger Book of original entries

Journal Recorded through journalising entries; process is called journalising Types of Journals

1. Special Journal 2. General Journal

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Types of Special Journal

1. Sales Journal 2. Purchases Journal 3. Cash Receipts Journal 4. Cash Disbursement Journal Classify

Ledger

Book of secondary entries or Book of Final Entries Process is called posting

Kinds of Ledger

1. General Ledger 2. Subsidiary Ledger

General Ledger

All the accounts

Subsidiary Ledger

Breakdown Recorded in two parts -debit and credit

Double-entry System Accounting equation to be balanced at all times Concepts of Duality

Two-fold effect

Concept of Equilibrium

Equal debits and credits

Contra Accounts

Deduction to normal balances of accounts

Adjunct Accounts

Addition to normal balances of accounts

Net Carrying Amount REMARKS

Sum of the balances of an account and its related contra or adjunct account Please refer to the book for computations

CHAPTER SIX: BUSINESS TRANSACTION AND THEIR ANALYSIS Accounting Cycle

Steps 1. Identifying and Analysing 2. Journalising 3. Posting 4. Unadjusted Trial Balance

Steps in the Accounting Cycle

5. 6. 7. 8. 9.

Adjusting Entries Adjusted Trial Balance/ Worksheet Preparation Financial Statements Closing the Books Post-closing Trial Balance

10. Reversing Entries

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Identifying and Analysing

Determine if an event is an accountable event or non-accountable event Transactions are normally identified from source documents 1. Sales Invoice/ Official Receipt

Source Documents

2. Purchase Order 3. Delivery Receipt 4. Deposit Slip 5. Bank Statement 6. Check 7. Statement of Account

Sales Invoice (SI)

Sales of goods

Official Receipts (OR)

Rendering of services

Purchase Order

Issued by a buyer to a seller

Delivery Receipt

Signed by the receiver

Bank Deposit Slip

Deposit to a bank account

Bank Statement

Report issued by a bank

Check

Orders a bank to pay

Statement of Account

Notice of billing

Types of Events

1. External Events 2. Internal Events

External Events

Involve the business and other external party

Internal Events

Do not involve an external party

Simple Journal Entry

Single debit and single credit

Compound Journal Entry

Two or more debits or credits

REMARKS

Please refer to the book for computations CHAPTER SEVEN: POSTING TO THE LEDGER

Posting

Third step from transferring data from the journal, transferring the amounts of debits and credits To classify the effects of transactions on specific asset, liability,

Purpose of Posting

equity, income and expense Need to classify to provide a more “refined”

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Types of Trial Balance

1. Unadjusted Trial Balance 2. Adjusted Trial Balance 3. Post-closing Trial Balance

Unadjusted Trial Balance

Before adjusting entries are made

Adjusted Trial Balance

After adjusting entries, but before the financial statements are prepared

Post-closing Trial Balance

Prepared after the closing process

Errors Revealed by a Trial Balance

1. 2. 3. 4.

Transplacement Error

Number of digits in an amount is incorrectly increased or decreased

Transposition Error

Digits in an amount are interchanged

REMARKS

Please refer to the book for computations

Journalising or posting one-half of an entry Recording one part the is different from the other Transplacement Error Transposition Error

CHAPTER EIGHT: ADJUSTING ENTRIES Adjusting Entries

Entries made prior to the preparation of financial statements to update certain accounts

Purpose of Adjusting Entries

1. Take up unrecorded income and expenses 2. Split mixed accounts

Interest Income Formula

Principal X Rate X Time

Concept of Systematic and Rational Allocation

Costs that provide economic benefits over several accounting periods but cannot be directly associated with the earning of revenues are recognised as expenses

Concept of Immediate Recognition

Cost that produces no future economic benefits or an asset that ceases to provide future economic benefits is recognised immediately as an expense

Real Accounts

All balance sheet accounts, except “Owner’s Drawings”

Nominal Accounts

All income statement accounts, drawing accounts, clearing accounts and suspense accounts

Clearing Accounts

Income Summary

Suspense Accounts

Cash shortage or overage

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Mixed Accounts

Subject to adjustment of: 1. Expired or unexpired portion of nominal account 2. Adjusting entries are needed to these components

Methods of Initial Recording of Income

1. Liability Method 2. Income Method

Liability Method

Initially credited to a liability account

Income Method

Initially credited to an income account

Methods of Initial Recording of Expenses

1. Asset Method 2. Expense Method

Asset Method

Initially debited to an asset account

Expense Method

Initially debited to an expense account Income that is not yet collected

Accrual Expense that is not yet paid Income that is in advance collection Deferral Expense that is prepayment REMARKS

Please refer to the book for computations CHAPTER NINE: ACCOUNTING CYCLE OF A SERVICE BUSINESS

Worksheet

Analytical device used to facilitate the gathering of data for adjustments, the preparation of financial statements, and closing entries

Cross-footing

Procedure to compute for the adjusted balances of accounts in the adjusted trial balance, involves adding or subtracting amounts horizontally

Footing

Procedure to compute for the totals of the columns, involves adding or subtracting amounts vertically

Financial Statements

End product of the accounting process. Information from the journal and the ledger are summarised and communicated through the this

Statement of Financial Position/ Balance Sheet

Information on Assets, Liabilities, and Equity

Statement of Profit or Information on Income and Expenses Loss/ Income Statement End of the accounting period to zero out all nominal accounts Closing Entries Debits and credits in the closing entries are placed here

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Post-Closing Trial Balance

Beginning balance of accounts in the next accounting period

Reversing Entries

Made on the first day of the next accounting period

Adjusting Entries that May be Reversed REMARKS

1. Accruals 2. Prepayments using Expense Method 3. Advanced collections using Income Method Please refer to the book for comp...