1.

ACCOUNTING CONCEPTS
Accounting
It is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing,
interpreting and communicating financial information. It reveals profit or loss for a given period,
and the value and nature of a firm's assets, liabilities and owners' equity.

 Business entity concept| This concept assumes that, for accounting purposes, the business
enterprise and its owners are two separate independent entities.
 Money measurement concept l This concept assumes that all business transactions must be
in terms of money, that is in the currency of a country.
 Going concern concept l This concept states that a business firm will continue to carry on
its activities for an indefinite period of time. Simply stated, it means that every business
entity has continuity of life.
 Accounting period concept l All the transactions are recorded in the books of accounts on
the assumption that profits on these transactions are to be ascertained for a specified
period. This is known as accounting period concept.
 Accounting cost concept l Accounting cost concept states that all assets are recorded in the
books of accounts at their purchase price, which includes cost of acquisition, transportation
and installation and not at its market price.
 Duality aspect concept l Dual aspect is the foundation or basic principle of accounting. It
provides the very basis of recording business transactions in the books of accounts. This
concept assumes that every transaction has a dual effect, i.e. it affects two accounts in their
respective opposite sides. [Assets = Liabilities + Capital]
 Realisation concept l This concept states that revenue from any business transaction
should be included in the accounting records only when it is realised. The term realisation
means creation of legal right to receive money. Selling goods is realisation, receiving order is
not.
 Accrual concept l The accrual concept under accounting assumes that revenue is realised at
the time of sale of goods or services irrespective of the fact when the cash is received.
 Matching concept| The matching concept states that the revenue and the expenses
incurred to earn the revenues must belong to the same accounting period. So once the
revenue is realised, the next step is to allocate it to the relevant accounting period.

2. DEVELOPMENT OF ACCOUNTING

2500 B.C. Historical accounting records have been found in ancient civilizations like the Egyptian,
Roman, and Greek Empires as well as ancient Arabia. Back then accounting records were kept by rulers
for taxing and spending on public works.

1000 B.C. The Phoenicians created an alphabet with accounting so that they were not cheated
through trades with ancient Egyptians.

500 B.C. Egyptians carried on with accounting records and even invented the first bead and wire abacus.
423 B.C. The auditing profession was born to double check storehouses as to what came in and out the
door. The reports that were taken by these accountants were given orally hence the name “auditor.”
1200 – 1493 The first requirement for businesses to keep accounting records spread across many of the
Italian Republics in the 13th century.

1494 Luca Pacioli, the father of accounting, writes his famous paper “Everything about Arithmetic,
Geometry, and Proportion.” With these records came the primitive income and balance sheets
Statements.

1500 – 1700 As the time progressed large and small innovations were added to the double entry
records. This also created the need for a change in financial accounting and managerial accounting.

1700 – 1900 During the Industrial Revolution accounting really took off as industrial companies sought
out to gain financing and maintain efficiency through operations. Shortly after the first accounting
organization was developed in New York in the year 1887. The title and professional license of
the Certified Public Accountant followed shortly in the year 1896.

1920 – 1940 The 20s accounting really became important to reduce the amount of fraud and scandals
that were performed in businesses around the country. U.S. GAAP was developed shortly after by
the American Institute of Certified Public Accountants (AICPA) and the Financial Accounting Standards
Board (FASB) in the year 1939.

1940 – Present
Since this time the AICPA and FASB have been working together with the Securities Exchange
Commission (SEC) to develop accounting standards for business. Through the help of technology and
computer systems all standards created for U.S. GAAP have been centrally located into what is known as
the “codification.” The codification reveals all of the current practices and standards, and even reveals
developing areas of standards of accounting that are currently being debated upon.
Several accounting systems like Peachtree and Quickbooks have also made the accounting profession
automated. These programs not only ease the reporting of transactions, but are also programmed to
comply with GAAP. Because of this there is a lesser need for accountants to post transactions, and more
of a need for the review of these transactions. This change is unrealized in some firms as they still
employ a full accounting staff. As time moves forward it is necessary for accountants to move into a role
of reviewing transactions rather than posting them.

3. GAAP (Generally accepted Accounting Principles)

Generally accepted accounting principles (GAAP) are a common set of accounting principles, standards
and procedures that companies must follow when they compile their financial statements. GAAP is a
combination of authoritative standards (set by policy boards) and the commonly accepted ways of
recording and reporting accounting information. GAAP improves the clarity of the communication of
financial information.

The Philippine Financial Reporting Standards (PFRS)/Philippine Accounting Standards (PAS) are the new
set of Generally Accepted Accounting Principles (GAAP) issued by the Accounting Standards Council
(ASC) to govern the preparation of financial statements. These standards are patterned after the revised
International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) issued
by the International Accounting Standards Board (IASB).
GAAP is meant to ensure a minimum level of consistency in a company's financial statements, which
makes it easier for investors to analyze and extract useful information. GAAP also facilitates the cross
comparison of financial information across different companies.

4. FORMS OF BUSINESS ORGANIZATIONS

Sole proprietorship
With this type of business organization, you are the sole owner, and fully responsible for all debts and
obligations related to your business. All profits are yours to keep. Because you are personally liable, a
creditor can make a claim against your personal assets as well as your business assets in order to satisfy
any debts.

Eg. Sales representatives who work on a commission-only basis, Freelance professional, small
businesses, in dependent contractors

Partnership
A partnership is a non-incorporated business that is created between two or more people. In a
partnership, your financial resources are combined with those of your business partner(s), and put into
the business. You and your partner(s) would then share in the profits of the business according to any
legal agreement you have drawn up.
In a general partnership, each partner is jointly liable for the debts of the partnership. In a limited
partnership, a person can contribute to the business without being involved in its operations. A limited
liability partnership is usually only available to a group of professionals, such as lawyers, accountants or
doctors.

Eg. General partnerships commonly occur between physicians who share office space; General
partnerships are the basis for many legal firms; General partnerships can exist for businesses focusing on
real estate; General partnerships can be found in creative endeavors, such as advertising, marketing and
graphic design businesses

Corporation
Another type of business structure is a corporation. Incorporation can be done at the federal or
provincial/territorial level. When you incorporate your business, it is considered to be a legal entity that
is separate from its shareholders. As a shareholder of a corporation, you will not be personally liable for
the debts, obligations or acts of the corporation. It is always wise to seek legal advice before
incorporating.

Eg. Microsoft, Hewlett and Packard, FedEx, Comcast

5. TYPES OF BUSINESS OWNERSHIP

Sole Proprietorships
The vast majority of small businesses start out as sole proprietorships. These firms are owned by one
person, usually the individual who has day-to-day responsibilities for running the business. Sole
proprietors own all the assets of the business and the profits generated by it. They also assume
complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, you are
one in the same with the business.
Partnerships
In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law
does not distinguish between the business and its owners. The partners should have a legal agreement
that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future
partners will be admitted to the partnership, how partners can be bought out, and what steps will be
taken to dissolve the partnership when needed. Yes, it's hard to think about a breakup when the
business is just getting started, but many partnerships split up at crisis times, and unless there is a
defined process, there will be even greater problems. They also must decide up-front how much time
and capital each will contribute, etc.

Types of Partnerships that should be considered:

General Partnership
Partners divide responsibility for management and liability as well as the shares of profit or loss
according to their internal agreement. Equal shares are assumed unless there is a written agreement
that states differently.

Limited Partnership and Partnership with limited liability

Limited means that most of the partners have limited liability (to the extent of their investment) as well
as limited input regarding management decisions, which generally encourages investors for short-term
projects or for investing in capital assets. This form of ownership is not often used for operating retail or
service businesses. Forming a limited partnership is more complex and formal than that of a general
partnership.

Joint Venture
Acts like a general partnership, but is clearly for a limited period of time or a single project. If the
partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will
have to file as such as well as distribute accumulated partnership assets upon dissolution of the entity.

Corporations

A corporation chartered by the state in which it is headquartered is considered by law to be a unique

entity, separate and apart from those who own it. A corporation can be taxed, it can be sued, and it can
enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders
elect a board of directors to oversee the major policies and decisions. The corporation has a life of its
own and does not dissolve when ownership changes.

Subchapter S Corporations

A tax election only; this election enables the shareholder to treat the earnings and profits as
distributions and have them pass through directly to their personal tax return. The catch here is that the
shareholder, if working for the company, and if there is a profit, must pay him/herself wages, and must
meet standards of "reasonable compensation". This can vary by geographical region as well as
occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as
long as there is enough profit. If you do not do this, the IRS can reclassify all of the earnings and profit as
wages, and you will be liable for all of the payroll taxes on the total amount.

Limited Liability Company (LLC)

The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It is
designed to provide the limited liability features of a corporation and the tax efficiencies and
operational flexibility of a partnership. Formation is more complex and formal than that of a general
partnership.

The owners are members, and the duration of the LLC is usually determined when the organization
papers are filed. The time limit can be continued, if desired, by a vote of the members at the time of
expiration. LLCs must not have more than two of the four characteristics that define corporations:
Limited liability to the extent of assets, continuity of life, centralization of management, and free
transferability of ownership interests.

6. ACCOUNTING CYCLE

The accounting cycle is the name given to the collective process of recording and processing
the accounting events of a company. The series of steps begin when a transaction occurs and end with
its inclusion in the financial statements.

a. Transactions Financial transactions start the process. Transactions can include the sale
or return of a product, the purchase of supplies for business activities, or any other
financial activity that involves the exchange of the company’s assets, the establishment
or payoff of a debt, or the deposit from or payout of money to the company’s owners.

b. Journal entries The transaction is listed in the appropriate journal, maintaining the
journal’s chronological order of transactions. The journal is also known as the “book of
original entry” and is the first place a transaction is listed.

c. Posting The transactions are posted to the account that it impacts. These accounts are
part of the General Ledger, where you can find a summary of all the business’s accounts.

d. Trial balance At the end of the accounting period (which may be a month, quarter, or
year depending on a business’s practices), you calculate a trial balance.

e. Worksheet Unfortunately, many times your first calculation of the trial balance shows
that the books aren’t in balance. If that’s the case, you look for errors and make
corrections called adjustments, which are tracked on a worksheet.
Adjustments are also made to account for the depreciation of assets and to adjust for
one-time payments (such as insurance) that should be allocated on a monthly basis to
more accurately match monthly expenses with monthly revenues. After you make and
record adjustments, you take another trial balance to be sure the accounts are in
balance.

f. Adjusting journal entries You post any corrections needed to the affected accounts
once your trial balance shows the accounts will be balanced once the adjustments
needed are made to the accounts. You don’t need to make adjusting entries until the
 trial balance process is completed and all needed corrections and adjustments have
been identified.

g. Financial statements You prepare the balance sheet and income statement using the
corrected account balances.

h. Closing the books You close the books for the revenue and expense accounts and begin
the entire cycle again with zero balances in those accounts.

7. DEFINITION

SAP - A German software company whose products allow businesses to track customer and business
interactions. SAP is especially well-known for its Enterprise Resource Planning (ERP) and data
management programs. SAP is an acronym for Systems, Applications and Products.

DATA MANAGEMENT- The official definition provided by DAMA International, the professional
organization for those in the data management profession, is: "Data Resource Management is the
development and execution of architectures, policies, practices and procedures that properly manage
the full data lifecycle needs of an enterprise." SAP NetWeaver Master Data Management (SAP NW
MDM) is a component of SAP's NetWeaver product group and is used as a platform to consolidate,
cleanse and synchronise a single version of the truth for master data within a heterogeneous application
landscape. It has the ability to distribute internally and externally to SAP and non-SAP applications.

SYSTEM ANALYSIS AND DESIGN- The development of a new information system involves several
different, but related activities. These activities, or phases, usually include planning, analysis, design,
implementation, and maintenance/support. In other words, SDLC is a conceptual model that guides
project management in information system development.