Accounting is a service activity. It's function is to provide quantitative information, primarily financial in nature, about economic entity that is intended to be useful in making economic decisions. (Accounting Standard Council, 1983)
Accounting is an information system that measures, processes and communicates financial information about an economic entity (Financial Accounting Standards Board, 1978)
Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information. (New York: AICPA, 1970)
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 (New York: AICPA, 1953)
Bookkeeping
- is a mechanical task involving the collection of basic financial data.
USERS OF THE INFORMATION
* External Users - are individuals and others that have current or potential financial interest in the company but are not involved in the daily operations of the entity. (Ex. Owners, Stockholders, Creditors, Potential Investors, Suppliers, Customers, Government Agencies and the Public)
* Internal Users - These are employees that have different specific goals. (Management and Employees)
THE ACCOUNTING EQUATION
Assets = Liabilities + Owners' Equity
DEBITS AND CREDITS - THE DOUBLE-ENTRY SYSTEM
Accounting is based on a double-entry system which means that the dual effects of a business transaction is recorded. A debit side entry must have a corresponding credit side entry.
The account type determines how increases or decreases in it are recorded. Increases in assets are recorded as debits (on the left side of the account) while decreases in assets are recorded as credits (on the right side). Conversely, increases in liabilities and owners' equity are recorded by credits and decreases are entered as debits.
ASSETS - are resources with future benefits that are within the control of the company.
Cash - is any medium of exchange that a bank will accept for deposit at face value.
Accounts Receivable - These are claims against customers arising from sale of goods or services on credit.
Notes Receivable - is a written pledge that the customer will pay the business a fixed amount of money on a certain date.
Inventory - are assets that are held for sale or for production of goods.
Supplies - assets used in the day to day operation. (Ex. Bond Papers, Ballpens and other Office Supplies)
Prepaid Expenses - are expenses paid for by the business in advance. It is an asset because the business avoids having to pay cash in the future for a specific expense. (Ex. Insurance and Rent)
Property, Plant and Equipment - are tangible assets that are held for use in business and are expected to be used during more than one period or 12 months. (ex. Land, Building, Warehouse, Machineries, Transportation Equipment, Computer and Manufacturing Equipment.)
LIABILITIES - are obligations that the company is required to pay. Entities to whom the company is indebted are called creditors.
Accounts Payable - This account represents the reverse relationship of the accounts receivable. By accepting the goods or services, the buyer agrees to pay for them in the near future.
Notes Payable - refers to an obligation evidenced by a promissory note. Promissory Note is a document that expresses the borrower's promise to pay.
Accrued Liabilities - refers to the unpaid expenses of the company as of the cut-off date of the Statement of Financial Position. (ex. Salaries Payable, Utilities Payable, Rent Payable and Interest Payable)
Unearned Revenue - is a liability. However, unlike regular liability, the settlement of unearned income is not through direct cash payments to the customer. Rather, it is settled by the delivery of goods or rendering of services.
OWNERS' EQUITY - is the residual interest in the company.
Capital (from the Latin capitalis, meaning "property") - This account is used to record the original and additional investments of the owner of the business.
Withdrawals - when the owner of a business entity withdraws cash or other assets to be used outside the business or for personal use.
Income Summary - It is a temporary account used at the end of the accounting period to close income and expenses.
REVENUE
Service Revenue - income earned by performing services for a customer or client.
Sales - revenue earned as a result of sale of merchandise. (for future discussion)
EXPENSES
Salaries or Wages Expense - payment for rendering services as an employee in an employer-employee relationship.
Utilities Expense - expenses related to use of telecommunications facilities, consumption of electricity, fuel and water.
Rent Expense - expense for space, equipment or other asset rentals.
Supplies Expense - expense of using supplies (ex. Office Supplies) in the conduct of daily business.
Insurance Expense - portion of premiums paid on insurance coverage which has expired.
Depreciation Expense - the portion of the cost of a tangible asset charged as expense during an accounting period.
Interest Expense - an expense related to use borrowed funds.
