The Principles and History of Accounting: Block Review

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The Principles and

History of Accounting
BLOCK REVIEW
The History of
Accounting
Ancient Civilization

14th Century

19th Century

20th and 21st Century

Future of Accounting
Ancient Civilizat
ion
Mesopotamia, Egypt, and
Rome
 Ancient Mesopotamia used
scribes to track accounting
expenses.

 Egyptians used clay tablets to
record accounting information.

 In Rome, government and
banking accounts grew out of
records kept by the heads of
families.

 Severe punishment tactics were
14th Century
Beginning Modern
Accounting
 Luca Pacioli (1445-1517).
 Pacioli was an Italian mathematician.
 He developed a system that was called
"double-entry bookkeeping," which he
recorded in a textbook called "Summa
de Arithmetica, Geometria,
Proportionate Proportionalita."
 The Italians are credited as the first
society to use Arabic numerals instead
of Roman throughout the 14th, 15th,
and 16th centuries.
19th Century
Scotland Creates
Accounting Jobs
 Accounting as a profession took off in
1854, when Queen Victoria granted a
royal charter to the Institute of
Accountants in Glasgow, creating the
profession of Chartered Accountant.
 The longest standing societies of public
accountants are still found in Scotland
today.
 Scotland and Britain sent chartered
accoutants to the United States so they
could audit British investments in the late
19th century.
20th and 21st
Century
Accounting in the United
States
 The accounting profession in the 20th
century developed around state
requirements for financial statement audits.
 The profession expanded to revolve around
Federal requirements created by securities
acts passed in 1933 and 1934. These acts
created the Securities and Exchange
Commission (SEC).
 The SEC is responsible for enforcing the
federal securities laws, proposing securities
rules, and regulating the securities industry,
and the nation's stock and options
exchanges.
Future of
Accounting
Project for the Future
 The invention of computers, accounting
software, and other technology has
drastically improved accounting methods
and our ability to ensure accuracy in all
transactions. In the future, Imagine the
accounting software will continue to
improve, but eventually all transactions
will be automatically recorded.
Accounting jobs will probably decrease
over time due to the rise in technological
capabilities.
What is
Accounting?
Meaning
What do we mean by an
account?
Account Types
Account Manager
MEANING
 "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 there of."
MEANING
 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.
What do we mean by an
account?
 Account is responsible for providing
the registration of operations,
transactions or economic events that
a company which can increase or
decrease the Assets, Liabilities or
Equity.
ACCOUNT TYPES
 Assets
 Liabilities
 Patrimony
 Revenues
 Expenditures
 Cost of Sales
 Production Costs
 Account Payable
 Account Receivable
Assets
 Any item of economic value owned
by an individual or corporation,
especially that which could be
converted to cash. Examples are
cash, securities, accounts
receivable, inventory, office
equipment, real estate, and other
property.
Liabilities
 An obligation that legally binds
an individual or company to
settle a debt. When one is
liable for a debt, they are
responsible for paying the debt
or settling a wrongful act they
may have committed.
Patrimony
 Groups all the accounts that represents the
residual value of comparing the total assets
minus foreign liabilities as a result of the net
proceeds of the economic entity which have
been supplied by the owner thereof includes
contribution from shareholders, partners or
owners, capital surplus, reserves, revaluation
of assets, dividends or declared holding of
shares, quotas or social interest, earnings,
results of previous years and the surplus
reappraisal.

Revenues
The income generated from sales of
goods and services, or any other use of
capital or assets associated with the
main operations of an organization
before any costs or expenses are
deducted. It is shown usually as the top
item in an income (profit and loss)
statement from all the charges, costs
and expenses are subtracted to arrive
at net income. Also, called sales or (in
the UK) turnover.
Expenditures
 Payment of cash or cash-
equivalent for goods or services,
or a charge against available
funds in settlement of an
obligation as evidenced by an
invoice, receipt, voucher, or other
such document.

Costs of Sales
The costs associated with
producing the sales. In a standard
manufacturing or distribution
company, this is about the same
as the cost of the goods sold. This
term is commonly used
interchangeably with "cost of
goods sold," particularly when it
is for a manufacturing, retail,
distribution, or other product-
based company.
Production Costs
 Production is a process of
combining various material inputs
and immaterial inputs (plans,
know-how) in order to make
something for consumption
(output). It is the act of creating
an output, a good or service
which has value and contributes
to the utility of individuals.
Account Payable
 It is money owed by a business to
its suppliers shown as a liability
on a company's balance sheet. It
is distinct from notes payable
liabilities, which are debts created
by formal legal instrument
documents.
Account Receivable
 are legally enforceable claims for
payment held by a business for
goods supplied and/or services
rendered that customers/clients
have ordered but not paid for.
These are generally in the form of
invoices raised by a business and
delivered to the customer for
payment within an agreed time
frame.
Account Manager
 An employee who is responsible for
the day-to-day management of a
particular customer's account with
the business. The account manager is
a point of contact, and provides
customer support, up selling,
technical assistance and general
relationship management. An
account manager may be in charge of
a number of smaller accounts, or may
focus on a few larger accounts.
The Purpose of
Accounting
Why is Accounting important?
Accounting is useful for decision
making
The main purpose of Accounting
Why is Accounting
important?
 Accounting is important in so many
ways. It is very important in
managing company's checkbook,
analyzing the success of the business
through the statements of accounts
and interpreting the documents to
be able to know if the business is
making a profit or going at a loss.
Accounting is useful for
decision making
EXAMPLE:
Managers want to know if a new
product will be profitable.
Owners want to know which employees
are productive.
Investors want to know if a company is
a good investment.
The Main Purpose of
Accounting
Record Transactions
Monitor Activity
Control the Business Accounts
Management of the Business
Measurement of Financial
Performance
Record Transaction
Its needed to Record Financial
Transactions. They can help the accountant
to: keep records of what the firm bought
and from which supplier.
It also keep records of what the firm sold
and to which customer. If a business fails to
do so they may find themselves not
chasing payments and forgetting to pay
bills at the right time.
Monitor Activity
Records will be updated on regular basis and
so they can monitor wheter the business is
doing good or bad in sales, receiving
payments and paying off debts or expenses.
They should also monitor the bank balance
of the business to ensure that they have
sufficient money to pay for daily expenses.
Control the Business
Accounts
Its quite similar to the other two
purposes. However if accurate record
of transactions are made and activity is
closely monitored. The business may
be able to get more money in flow than
outflow.
Management of the
Business
A manager is someone who is
responsible for planning monitoring
and controlling resources. The
managers are able to make informed
decisions and plan for the future.
Measurement of Financial
Performance
Without financial records it would be
impossible to find out wheter a business is
making a loss or profit or the business owns or
is in debt of money.
The Balance Sheet is a The purpose of a
statement of financial profit and loss
position of a business at a account is to show
specific point in time you if your business
usually at the end of the is making a profit or
month or year. By analyzing a loss. This account
and reviewing this financial also helps one to
statement the current understand how the
profit/loss came to
financial situation of a
be.
business can be
determined.
Accounting
Information Users
and their
Information Needs
Accountanting is the process of
communicating financial
information about a busines
entity users such as
stakeholders and managers.
There are two types of
Accounting Information
Users:

1. Internal Users
2. External Users
Internal Users
Internal Users
Internal users are those who own,
manage or are employed by, the
business — users whose decisions
affect the internal affairs of the
enterprise.
• Managers
• Employees
• Owners
Managers
for analyzing the organization's
performance and position and taking
appropriate measures to improve the
company results.
Employees
for assessing company's profitability and
its consequence on their future
remuneration and job security.
Owners
for analyzing the viability and
profitability of their investment and
determining any future course of action.
External Users
External Users
External users are those who use financial
information to facilitate decisions about
their financial relationship with the
enterprise.
• Creditors
• Tax Authorities
• Customers
• Investors
Creditors
for determining the credit worthiness of
the organization. Terms of credit are set
by creditors according to the
assessment of their customers' financial
health. Creditors include suppliers as
well as lenders of finance such as banks.
Tax Authorities
for determining the credibility of the tax
returns filed on behalf of the company.
Customers
for assessing the financial position of its
suppliers which is necessary for them to
maintain a stable source of supply in the
long term.
Investors
for analyzing the feasibility of investing
in the company. Investors want to make
sure they can earn a reasonable return
on their investment before they commit
any financial resources to the company.
Uses of Accounting
Information
Performance Management

A common use of accounting


information is measuring the
performance of various business
operations.
Create Budget
Business owners often use accounting
information to create budgets for their
companies.
Business Decision
Accounting information is commonly
used to make business decisions.
Decisions may include expanding
current operations, using different
economic resources, purchasing new
equipment or facilities.
Investment Decision
External business stakeholders often use
accounting information to make
investment decisions. Banks, lenders,
venture capitalists or private investors
often review a company's accounting
information.
Forms of Business
Organization
By nature of operations
By legal form
Business Organization by
legal form
The three main forms of business
organizations in modern government
are the sole proprietorship, the
partnership, and the corporation.
The Sole Proprietorship
The sole proprietorship is a business owned
and run by one person.

 Typically the most numerous


 Typically the most profitable
 Smallest in size
 Earns about one-sixth of the net income
earned by all businesses
 Easiest form of business to start
 Almost no requirements except
occasional business licenses and fees
Advantages
 Ease of starting up, all one has to do
is come up with an idea or
opportunity to make profit and
decide to go into business.
 Relative ease of management
 Designs made me made quickly
 Owner enjoys the profits of
successful management without
having to give part away
Disadvantages
 The owner has unlimited liability,
meaning they are completely
responsible for any losses of money
and debt.
 Difficulty in raising financial capital, a
large amount of money is generally
needed to start a business and the
amount of wealth each individual
has is limited.
 Small size and efficiency
Disadvantages
 Proprietor often has limited
experience as a manager
 Difficulty of attracting qualified
emplomone
 Limited life, the firm legally ceases to
exist when the owner dies
The Partnership
A partnership is formed by two or more
persons who agree to contribute
money, property or industry to a
commom fund with the purpose of
dividing the profits among themselves.
The owners of partnership are called
partners.
Advantages
 Ease of establishment
 Ease of management, generally each
partner brings a different area of
expertise to the business
 Lack of special taxes on a partnership
 Partnerships can usually attract financial
capital more easily than sole
proprietorships
 Larger size and therefore more efficient
operations
 Find it easier to attract "top talent" in
their companies
Disadvantages
 Each partner is responsible for the actions
of all other partners
 If a limited partnership took place, the
limited partners have limited liability,
meaning their responsibility depends of
the size of their investment
 Limited life
 Potential for conflict among partners
 Increased access to financial capital does
not always work out
The Corporation
A corporation is a form of business
organization recognized by law as a separate
legal entity having all the rights of an
individual.
 Very formal and legal arrangement.
 Most complex form of business organization.
 Charter needed, which grants permission to create
a corporation, states the details of the business,
and specifies the number of shares of stock.
 A person who invests in a corporation is called a
stockholders.
 Shares of stock are ownership certificates in the
firm and are sold to stockholders.
 The money is then used to set up corporation
Advantages
 Ease of raising financial capital, if the corporation
needs more capital it can easily sell additional
stock
 May borrow money by issuing bonds, a written
promise to repay the amount borrowed
 Directors of the corporation can hire professional
managers to run the firm
 The corporation provides limited liability, the
owners are not responsible for any losses
 Unlimited life, corporation still exists regardless if
the ownership changes
 Ease of transferring ownership
Disadvantages
 Difficulty and expense of getting a charter,
attorney fees and filing expenses can cost
several thousand dollars.
 The owners have little say in how the
business is run after they have voted for
the board of directors.
 Double taxation, stock holders are taxed
once as corporate profit and again as
personal income.
 Subject to more government regulation
that other forms of business.
Business Organization by
nature of operations
There are three major types of businesses
.These are Service business, Merchandising
business and Manafacturing business.
Service Business
A service type of business provides intangible
products (products with no physical form).
Service type firms offer professional skills,
expertise, advice, and other similar products.

Examples of service businesses are: salons,


repair shops, schools, banks, accounting
firms, and law firms.
Merchandising Business
• This type of business buys products at
wholesale price and sells the same at retail
price. They are known as "buy and sell"
businesses. They make profit by selling the
products at prices higher than their purchase
costs.
• A merchandising business sells a product
without changing its form.

Examples are: grocery stores, convenience


stores, distributors, and other resellers.
Manafacturing Business
• Unlike a merchandising business, a
manufacturing business buys products with
the intention of using them as materials in
making a new product. Thus, there is a
transformation of the products purchased.
• A manufacturing business combines raw
materials, labor, and overhead costs in its
production process. The manufactured
goods will then be sold to customers.
Accounting Concepts and
Principles
Entity Concept

 separating accounts from branches or personal


to business, it's a separate economic unit
Time Period Principle

 Financial Statements are to be divided into


specific time intervals.
The Reliability (Objectivity)
Principle
 Using the best information available to use in
financial records
Cost Principle
 Recording business transactions at the actual
cost for more accurate statements
Accrual Accounting
Principle
 Revenue should be recognized when earned
regardless of collection and expenses should be
recognized when incurred regardless of
payment.
Going-Concern Principle
 The mindset that a business will stay in
business in order to predict busines statements
Stable - Monetary - Unit
Concept
 The mindset that money exchanges will remain
stable between nations for use in financial
statements
Matching Principle
 Cost should be matched with the revenue
generated.
Disclosure Principle
 All relevant and material information shpuld be
reported.
Disclosure Principle
 All relevant and material information shpuld be
reported.
Conservatism Principle
 Also known as prudence, In case of doubt,
assets and income should not be overstated
while liabilities and expenses should not be
understated.
Materiality Principle
 In case of assets that are immaterial to move a
differences in the Financial Statement, the
company should instead record it as an
expense.

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