Accounting Theories
 Obtained when amounts received from customers and
ACCOUNTING
 more comprehensive than bookkeeping
 involves preparation of various financial reports for
planning and controlling the various activities of the
business
 service activity whose function is to prepare financial
reports that will provide relevant information about the
business
 process of recording, classifying and summarizing
transactions and events which are financial in nature and
interpreting the result thereof
 Most important accounting terms
 ASSET
 Economic resources owned by the business
 Use in operating business and expected to benefit
the business over a number of years
 Three features: (1) resources obtained from past
event, (2) enterprise has full control over it and
(3) future economic benefit will be received from
its use
 LIABILITY
 Debts or obligation to pay
 Three features: (1) Present obligation, (2) arising
from past events and (3) settlement is expected to
be made in the future in the form of outflow
resources
 EXPENSE (Outflow)
 Recognizing expenses either decreases assets or
increases liabilities which in turn decreases the
owner’s equity
 Consumption of asset or using up of service to
generate revenue
  Income Statement/Profit or Loss Statement
 NET INCOME/PROFIT
clients are higher than the cost of goods or
services incurred or used up
 Generates more resources or funds for the business
 NET WORTH/NET ASSET
 it represent your wealth or finance, the bigger the
stable your life is
 residual right or interest of the owner
 REVENUE (Inflow)
 recognizing it increases asset which in turn
increases either owner’s equity or decreases
liability

 Three accounting areas.
 BUDGETING
 process of receiving money, planning and allocating
it according to ones needs
 BOOKKEEPING
 includes tracking down business activities,
analyzing, calculating, and recording activities
and preparing a progress report
 keeping track on the revenues and expenses as well
as the assets and liabilities is a basic procedure
 FINANCIAL ANALYSIS
 interpretation of financial reports
 General Purpose Financial Statements
 Statement of Financial Position/Balance Sheet
 Progress report that shows a list of assets,
liabilities and net worth of the business
 Performance report that shows income (revenue or
gain) against costs and expenses

 Statement of Cash Flows
 Cash report showing where we got and where we uses
the money
 Three kinds of activities: Financing (investment of
the owner and cash loan), investing (acquisition
and sale of properties), and operating (revenue and
expenses)
 Statement of Owner’s Net Worth
 Progress report that shows changes in wealth
 Four activities: investment(+), withdrawal (-),
recovery of capital, and profit (+) or loss (-)
 Business
 An economic unit that engages in buying and selling of
goods and services
 Entrepreneur
 One who organizes, manages, and take the risk
putting up a business
 Sources of Capital
 Owner/Investor
 Investor succeeds not only in getting back what was
invested (return of capital) but receives more than
the amount invested (return on capital)
 Relative/friends/banks/cooperatives
 Forms of Business
1) Sole Proprietorship
 Set up and manage by one person
 Small business like beauty parlors, barber shops,
bakeries etc.
2) Partnership
 Owned by two or more persons called partners who
contribute money, property, and talent into a
common fund for the purpose of sharing profit
among themselves
 Partners are also the managers
3) Corporation
 Organized as a separate legal entity from the
owners
 Can conduct business for itself – enter into
contracts, buys and sell properties and stocks
 Investor buys shares of stocks and become
shareholder
 Manage by Board of Directors
 Types of Business Operation
1) Services business is one which provides service.
Examples: beauty parlor, barbershop, internet shop,
school, airline
2) Merchandising business is one which buys and sells
goods or merchandise
Examples: shoe store, bookstore, drugstore
of
3) Manufacturing business is the one who buys raw
materials, processes these into finish goods and then
sells these to customers
Examples: shoe factory, food processors
 Types of Business Activities
 Financing Activities
 Owner finances his business with a startup capital
in cash and other resources
 If insufficient, additional financing can be
extended by banks and other financing institutions
 Includes withdrawal by the owner or investors and
loads repaid to lenders
 Investing Activities
 Acquisition of properties in land, furniture,
machineries and equipment
 Operating Activities
 Earning of income by selling goods or services
  Incurring expenses such as wages, rent, utilities  Reads it to determine the credit worth of the
and transportation paid business

 Management  Government
 Getting things done by using resources and directing  Reads it to investigate tax returns and assesses
people as efficiently as possible to be able to truthfulness of the reported profit as well as the
accomplish the goals of the business tax liability paid by the business
 Four process of management
1) Planning  Employee
2) Organizing  Reads it to assess the ability of the business to
3) Directing grant higher wages, benefits, good working
4) Controlling conditions, and security of tenure.

 Manager  Customer
 Hired to head different departments  Reads it to assess the company’s ability to
1) Production Manager continuously supply the goods they need at the
2) Marketing Manager right price and right quality
3) Finance Manager
4) Sales Manager  Four Accounting Areas
5) Personnel Manager  Managerial (Managerial Report/Management Accounting)
 Financial (Financial Report/Financial Accounting)
 Users of Financial Information
 Tax (Tax Accounting)
 Owner/Investor
 Government
 One who puts capital
 Reads the financial information to minimize the
 Accrual Concept Recognizing Revenue and Expense
risk of losing money and seek answers to their
 Supported by Realization Principle (recognized revenue
questions
when it is earned regardless of collection) and Expense
Recognition Principle (expense is recognized when
 Manager
incurred regardless of whether cash is paid or not)
 The one responsible for running the business
 Three ways of recognizing expenses in generating
 Reads it to evaluate performance of the business
income:
1) Expense is recognized when revenue is recognized
 Lender/Creditor
because it is not possible to earn revenue without
 Read it to assesses the paying ability of the
incurring expenses.(Matching Principle)
business-borrower
EXAMPLE: commission paid to a sales man in every
sale, freight or transportation cost paid to a
 Supplier
carrier every delivered goods
 They offer goods or merchandise on cash basis or on
credit term
 2) Assets that will benefit the business for long time  Break-even
should be allocated as Depreciation Expense over  Revenue is equal to cost and expenses
the years it will be used  Cash Inflow
 Investment and sales
3) Expenses that are regularly incurred salaries for  Cash Outflow
services received from employees, utilities  Purchase and payment of expenses
expenses, and rent expenses  Solvent
 Ability to take care of the obligation
 Liquidity
 Income  Ability of the enterprise to pay promptly for
 Inflows of cash and other assets coming from a client obligations that are due
or customer for service rendered or for merchandise  Income
sold
 Inflows of cash and other assets coming from a
 An increase in economic benefits during the period that client or customer for service rendered or for
results in increase in equity merchandise sold
 It encompasses revenues and gains  Accounts Receivable
 Revenue  A right to collect from customers and is considered
- An income coming from normal courses of an asset because it is convertible into cash
business
- Sales is the revenue of a merchandisers and
manufacturers
- Service Income or Professional Income is the
revenue of the service providers
 Gain
- An income which may arise but not really from
its normal course of operation
- Old machinery has been sold at more than its
purchase cost

 Profit or Loss
 Difference between total income received against total
expenses incurred spells the success or failure of the
organization
 Income > Expense = Profit
 Income < Expense = Loss
 Accounting Terminologies:
 Profit/Net Profit
 Revenue is higher than cost and expenses
 Loss/Net Loss
 Revenue is lower than cost and expenses
  Spanish bookkeeper named Tenedor de Libro introduces
the bookkeeping in the Philippines but before he came
Asian traders have their own record in their
transactions

Facts about Accounting:

 Earliest bookkeeping records were used to record track

of pyramids and palaces being constructed. It records
number of slaves, materials used and number of days it
took to complete. Record of people also kept in using
collecting taxes. (Babylonia or Iraq in present time
and Egypt)
 In 15th century, records were also kept at the trading
ports in Greece. The records listed the number of days
spent in trading voyage, number and value of cargoes
loaded and unloaded.
 The first accounting book was written by Cotrugli in
Naples
 Fr. Luca Pacioli wrote in 1494 a modern double entry
bookkeeping system entitled Summa de Aritmetica