ACCOUNTING TUTORIAL (Part 4)

"BASIC ACCOUNTING"

"FORMS" OF BUSINESS ORGANIZATION

1. SINGLE/SOLE PROPRIETORSHIP is a business owned by only ONE INDIVIDUAL.

2.PARTNERSHIP is an association of "TWO or MORE" persons who bind themselves to contribute money,
property or industry(services) to a common fund, with the intention of dividing the profits among
themselves.

3. CORPORATION is an artifical being(not natural, like human being) created by operation of LAW,
having the rights of SUCCESSION, and the POWERS AND ATTRIBUTES expressly authorized by law or
incident to its existence.

4. COOPERATIVE is a legal entity owned and democratically controlled by its members. Members often
have a close association with the enterprise as producers or consumers of its products or services, or as
its employees.

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"TYPES" OF BUSINESS

4.SERVICE BUSINESS. This business renders services to customers or clients for a fee.

(Sale of SERVICES)

5. MERCHANDISING/TRADING BUSINESS. This business buy goods or commodities and sell them at a
profit.

(Sale of GOODS) (Buy=>Sell)

6. MANUFACTURING BUSINESS. This business makes "finished goods" from "raw materials" or
unassembled parts. It "produces" the goods that it sells.

(Sale of GOODS) (Buy=>"Produce"=>Sell)

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"ELEMENTS" of FS (Financial Statements)

7. INCOME/REVENUE is the gross INFLOW of economic benefits during the period in the form of
INFLOWS or enhancements on assets or decrease in liabilities that result in increase in equity, other
than those relating to contributions from the owner or owners.

8. EXPENSE is defined as the gross OUTFLOW of economic benefits during the period in the course of
ordinary activities when these OUTFLOWS result in DECREASE in equity other than those relating to
distribution to owners.

~In simple terms, these are COSTS incurred to produce income/revenue.

9. ASSETS are defined as RESOURCES controlled by the enterprise as a result of past transactions and
events and from which future economic benefits are expected to flow to the enterprise.

~In simple terms, these are PROPERTIES owned by the business.

10. LIABILITIES are defined as present OBLIGATIONS of an enterprise arising from past transactions or
events, the settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits.

~In simple terms, these are the financial obligations or DEBTS of the business.It is also described as
CLAIM of the CREDITORS on the Assets of the enterprise.

11. OWNER'S EQUITY/CAPITAL represents the CLAIM of the OWNER on the Assets of the business. It is
the RESIDUAL INTEREST in the Assets of the business after deducting all its liabilities.

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Important: CAPITAL ACOUNT (or EQUITY ACCOUNT) consists of the following:

a. "Owner's Capital"

b. "Owner's Drawing"

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EXAMPLES of "ASSET" Accounts

1. CASH is any medium of exchange that a bank will accept at face value. It includes coins and
currencies, checks, money orders and bank drafts.

Current asset.

2. TRADING SECURITIES are debt and equity securities that are purchased with the intent of selling them
in the "near term" or very soon.

Current asset.

3. ACCOUNTS RECEIVABLES are claims against debtors or customers arising from services rendered on
account and sale of merchandise on account.

Current asset.

4. ALLOWANCE FOR DOUBTFUL ACCOUNT relates to the company's receivables which might not be
collected.

Current asset. (Contra-Asset)

#NOTE: "CONTRA-ASSET" account is the opposite of "ADJUNCT" account

In layman's term,

CONTRA = deducted

ADJUNCT = added (Example: Freight In)

5. NOTES RECEIVABLE are claims supported by promissory note.

Current asset, if short-term. (Also a Current Asset if the problem is SILENT)

Noncurrent asset, if long-term.

6. MERCHANDISE INVENTORY are goods on hand and are available for sale.

Current asset.

7. ACCRUED INCOME. Earned but not yet received/collected.

Current asset.

8. ADVANCES TO EMPLOYEES. Cash received by employees to be deducted from their salaries in the
future.

Current Asset.

9. PREPAID EXPENSES are expenses PAID IN ADVANCE by the business ("Paid but not yet incurred").

Current asset.

10. OFFICE/STORE SUPPLIES are being used by the business like papers, pens, pencils, folders, staplers,
etc.
Current asset.

11. LAND is an asset that is not subject to depreciation. It appreciates (value increases) as time goes by.

Noncurrent asset.

12. BUILDING can be acquired by PURCHASE or by means of CONSTRUCTION. Construction costs may
include materials, labor, overhead, permit or license, Architect fee, Excavation cost, etc.

Noncurrent asset.

13. MACHINERY & EQUIPMENT includes computers, air-conditioning units, electric fans, freezers,
refrigerators, truck, etc.

Noncurrent asset.

14. FURNITURE AND FIXTURES includes tables, chairs, filing cabinets, etc.

Noncurrent asset.

15. ACCUMULATED DEPRECIATION. "Total" depreciated cost of a depreciable asset.

Noncurrent asset. (Contra-asset)

16. INTANGIBLE ASSET is an identifiable non-monetary asset "without physical substance" or have no
physical appearance but are expected to provide future economic benefits to the company.

Noncurrent asset.
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"LIABILITIES"

1. ACCOUNTS PAYABLE are amounts due to creditors for ASSETS ACQUIRED on account.

(Current Liab)

2. NOTES PAYABLE(short-term) are amounts due to creditors "within" one year, evidenced by WRITTEN
PROMISE to pay.

(Current Liab)

3. ACCRUED EXPENSES are amounts owed to others for UNPAID EXPENSES.

(Current Liab)

4. UNEARNED INCOME is revenue collected by the business in advance. (Received/ collected IN

ADVANCE, but not yet earned).

(Current Liab)

5. CURRENT PORTION OF LONG-TERM DEBT are portions of mortgage, notes, bonds and other long-term
indebtedness which are to be paid "WITHIN ONE YEAR" from the Balance Sheet date (or end of
Reporting Period).

(Current Liab)

6. NOTES PAYABLE (long-term) are amounts due to creditors "beyond" one year, evidenced by WRITTEN
PROMISE to pay.
(Noncurrent Liab)

7. BONDS PAYABLE is a liability owed by a company to obtain substantial sums of money from lenders to
finance the acquisition of equipment and other needed assets.

(Noncurrent Liab)

8. MORTGAGE PAYABLE. Long-term debt of the business for which the business entity has PLEDGED
certain assets as SECURITY to the creditor. In the event that the debt payments are not made, the
creditor can foreclose or cause the mortgaged asset TO BE SOLD to enable the entity to settle the claim.

(Noncurrent Liab)

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"OWNER'S EQUITY"

9. CAPITAL. This account is used to record the "ORIGINAL and ADDITIONAL INVESTMENTS" of the owner
of the business entity. It is increased by the amount of PROFIT earned during the year or is decreased by
a LOSS.

#NOTE: This account is also used to record the "PERMANENT withdrawal" of the owner.

(PERMANENT withdrawal means withdrawal of INVESTED capital)

10. DRAWINGS/TEMPORARY WITHDRAWALS. Charged to this account are cash or other assets
withdrawn by the owner from the business for personal use (represented by the owner's share in profit)

11. INCOME SUMMARY. It is a temporary account used at the end of the accounting period to close
income and expenses. This account shows the profit or loss for the period before closing to the capital
account.
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True or False

12. The excess of INCOME over EXPENSES is called "NET INCOME". True

13. The excess of EXPENSES over INCOME is called "NET LOSS". True

14. INCOME "increases" Owner's Equity. True

15. EXPENSE "decreases" Owner's Equity. True

16. ADDITIONAL INVESTMENT "increases" Owner's. True

17. OWNER's DRAWING "decreases" Owner's Equity. True

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DEBIT OR CREDIT

Guide:

A = L + OE

Look at the equal sign ( = )

If LEFT: Debit

If RIGHT: Credit

(Normal Balance)
18. INCREASE in ASSET..... DEBIT

19. INCREASE in LIAB..... CREDIT

20. INCREASE in OE..... CREDIT*

Apply "FRIENDS" and "ENEMIES" of OE

Who are the "Friends" of OE?

-Income, Revenue, Gain (CREDIT)*

Who are the "Enemies"

-Expense, Drawings (DEBIT)

21. INCREASE in INCOME..... CREDIT

22. INCREASE in EXPENSE..... DEBIT

23. INCREASE in OWNER'S DRAWING..... DEBIT

NOTE:

(INCREASE in ASSET..... DEBIT)

(INCREASE in "CONTRA-ASSET.".... "CREDIT")

(Normal Balance) - DEAL & GIRLS 😊

DEBIT (DEAL)

D-ividends (Drawings)

E-xpenses

A-sset

L-osses
CREDIT (GIRLS)

G-ains

I-ncome

R-evenues

L-iabilities

S-tockholder's (or Owner's) Equity

(Normal Balance) - ADE & LOR 😊

DEBIT (ADE)

A - sset

D -rawings

E - xpense

CREDIT (LOR)

L - iabilities

O - wner's equity

R - evenue

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*For DECREASES, just do the "OPPOSITE"

24. DECREASE in ASSET..... CREDIT

25. DECREASE in LIAB..... DEBIT

26. DECREASE in OE..... DEBIT

27. DEREASE in INCOME..... DEBIT

28. DECREASE in EXPENSE..... CREDIT

29. DECREASE in OWNER'S DRAWING..... CREDIT

DECREASE in CONTRA-ASSET..... DEBIT

30. What is the "NORMAL BALANCE" of Cash, Trading Securities, Accounts Receivables, Notes
Receivables, Accrued Income, Supplies, Prepaid Expense, Land, Building, Machinery & Equipment,
Furniture & Fixtures..... DEBIT

31. What is the "NORMAL BALANCE" of Accounts Payable, Notes Payable, Accrued Expense, Unearned
Income, Bonds Payable, Mortgage Payable..... CREDIT

32. What is the "NORMAL BALANCE" of Owner's Capital, Revenue or Income..... CREDIT

33. What is the "NORMAL BALANCE" of Owner's Drawing, Expense..... DEBIT

34. What is the "NORMAL BALANCE" of Allowance for Doubtful Accounts, Accumulated Depreciation.....
CREDIT*

*CREDIT, because they are contra-assets

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Definitions, Classifications and Examples of Accounts

I.

-REAL accounts (or PERMANENT accounts)

The real accounts are

-Assets

-Liabilities and

-Owner’s Equity/Capital

Real accounts are reported in the Statement of Financial Position(or "BALANCE SHEET"). They are not
"closed" at the end of accounting period.

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-NOMINAL accounts (or TEMPORARY accounts)

The nominal accounts are

-Income/revenues

-Expenses and

-Owner’s Drawing

Nominal Accounts are those that comprise the elements of the Statement of Financial Performance (or
INCOME STATEMENT) – the revenue and expenses accounts.

These accounts are called temporary because they are "closed", or put into zero balance, at the end of
the accounting period.

*Please note that Owner’s Drawing is NOT an income statement account, but must also be closed, or
put into zero balance, at the end of the accounting period.

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SUMMARY:

REAL accounts (or PERMANENT accounts)

-Assets

-Liabilities

-Owner’s Equity

NOMINAL accounts (or TEMPORARY accounts)

-Income/revenues

-Expenses and

-Owner’s Drawing

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II.

The REVENUE Accounts

Revenue represents the earnings of the business from sales of goods or service rendered.

Revenue accounts have normal CREDIT balance.

Below are some common revenue accounts:

Sales – an account used to summarize sale of goods of a trade or merchandising business. This
includes cash sales and sales on account.

Service Income – the earning derived from service rendered by a servicing business to its customers.
This includes cash and on account service.

Professional Fees – the earning derived from services rendered by a professional or professional
servicing firm which could be in cash or in collectibles to its clients.
 Interest Income – the earning representing the time value of money derived from promissory notes
received by the business, whether in cash or collectibles in the future.

Rent Income – the income earned from allowing others to use property or facility of the business.

Gain on Sales of other Assets – the income derived from the sales of assets used in the business
operation. There is a gain on sale if the proceeds exceed the book value or cost of disposed asset.
Examples are gain on equipment, gain on sale investments, gain on sale of land, etc.

Others

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The EXPENSES Account

Expenses are cost incurred in conducting the business activities. Expense accounts have normal DEBIT
balances. Some common expense accounts are as follows:

Cost of Sales – the value of merchandise sold

Supplies Expense – the amount of supplies consumed or used by the business during the period.
Examples: used in papers, inks, ballpoint pens, etc.

Salaries and Wages Expenses – the amount paid to service rendered by the employees in the
operation of the business

Insurance Expense – the amount of insurance policy incurred during the current period. Examples:
premiums on building insurance, life insurance, plant insurance, etc.

Taxes and Licenses Expenses – the cost of local as well as national taxes that are incurred and required
to be paid in connection with the conduct of the business.
Example: Cost to acquire mayor’s permit, registration cost of the building, percentage tax on sales, etc.

Others

"Estimated Expense"

Doubtful Account Expenses – the estimated amount of losses the uncollectible accounts arising from
credit sales of the current period. This is also called the debt expense or uncollectible account expense.

Depreciation Expense – represents the current periodic cost for using depreciable plant assets. In
accordance with the systemic cost of depreciable asset should be allocated as expense over its useful
life.

Others

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SUMMARY:

Revenue

-Sales

-Service Income

-Professional Fees

-Interest Income

-Rent Income

-Gain on Sales of other Assets

-Others

Expenses

-Cost of Sales
-Supplies Expense

-Salaries and Wages Expenses

-Insurance Expense

-Taxes and Licenses Expenses

-Doubtful Account Expenses

-Depreciation Expense

-Others

~ Admin/Tutor Michael V.

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