Ca 5101

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1.

Compare and discuss the three definitions of Accounting

Accounting Standards Council (ASC) states that accounting is a service activity that provides
quantitative information about economic entities to be useful in making decisions. Hence,
accounting provides the users the data they need about the business which will become their basis
in decision-making.

According to American Institute of Certified Public Accountants (AICPA), accounting is an art. It also
emphasizes the words recording, classifying, and summarizing. These three terms describes the
Phases of accounting. Recording, also referred as bookkeeping, is the phase of accounting in which
financial transactions are recorded systematically and chronologically. Next is classifying where
sorting and grouping of all the transactions are involved. Lastly, summarizing is the process wherein
all the data will be converted into financial statements.

American Accounting Association (AAA) says that accounting is the process of identifying,
measuring, communicating economic information. Therefore, it indicates that accounting is a system
that identifies, measures, and communicates the information about the activities of business entities
to help users make sensible economic decisions.

Accounting Standards Council primarily focuses on the function of accounting. On the other hand,
American Institute of Certified Public Accountants aims to illustrate the phases of accounting
process. Lastly, American Accounting Association is a combination of both. It illustrates the process
of accounting and defines the importance of it to the users. Nevertheless, all definitions stresses
that accounting is essential to help its financial information users to make better decisions. In
addition, accounting is a discipline and art and must be recorded, classified and summarized in a
proper and systematic way

2. Discuss the accrual principle of accounting and give examples

The Accrual Principle is an accounting concept that requires accounting transactions to be


recorded in the time period in which they occur. It is prepared in two ways: cash basis and
accrual basis.

Accrual Basis of accounting states that revenues are recognized when services have been
rendered or goods have been delivered regardless when cash is received. Expenses are
recognized when it is incurred (used or expired) regardless when cash is paid. The accrual
concept is considered to be standard accounting practice for companies and is supported by
both the International Financial Reporting Standards (IFRS) and the Generally Accepted
Accounting Principles (GAAP).
For instance, if ABC Company performed services for XYZ Company in August 23, 2019 on
account, the revenue is recorded at that time even though cash has not been received. When
ABC Company received the payment from XYZ Company a year later, no revenue is recorded
because it has already been recorded when services are performed.
Cash Basis of accounting recognizes revenue when cash is received and recognizes expenses
when cash is paid. This is generally considered unacceptable because of improper assignments
of revenues and expenses.
For instance, if ABC Company rendered services to XYZ Company in 2019 and cash is collected in
2020, it would be treated as 2020 revenues.

Example No. 1

3. Distinguish the ff:


 Service Business provides intangible products to customers and earns profit through
charging service fees. They offer professional skills, expertise, advise and other similar
products.
Examples are G Liner Bus Company, David’s Salon Inc., BDO Unibank Inc., Urban Smiles
Dental Clinic, Accenture Inc.

 Merchandising business is known as “buy and sell” business. They make profit by selling
products at prices higher than their purchase costs without the need for further
processing of the product.
Examples are National Bookstore Inc., Octagon Computer Superstore, All Value Holding
Inc. (All Day Supermarket), Robinsons Retail Holdings Inc. (Robinsons Department
Store), Ace Hardware Inc.

 Manufacturing Business buys products with the intention of using them as materials in
making a new product. Thus, there is a conversion process of the products purchased.
The manufactured goods will then be sold to the customers.
Examples are Mitsubishi Motors Corporation (Montero Sport, Strada, Xpander),
Gardenia Bakeries Phils. Inc. (Gardenia Classic White Bread, Gardenia Butter Toast,
Gardenia Chocolate Cream Roll), Unilever (Rexona, Surf, Closeup), Unilab (Bioflu,
Enervon, Solmux), Procter and Gamble Company (Pampers, Downy, Safeguard)

4. Discuss “Accounting is the language of business”

The main purpose of accounting is to provide financial information about a business


entity to users such as the owners, investors, managers, and creditors so that they could make
informed judgement and better decision. It communicates all information about the business
through the use of financial statements. Without accounting, a business could not function
optimally; it would not know whether it is making a profit, and it would not know its financial
situation.

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