LESSON 1: ACCOUNTING AND ITS
ENVIRONMENT
Accounting – language of business; service; information
system; process; art
Accountants – scorekeepers of business
Accounting history – study of the evolution in
accounting thought, practices and institutions in
response to changes in the environment and societal
needs. It also considers the effect that this evolution has
worked on the environment.
Amatino Manucci – inventor of double-entry
bookkeeping
Luca Pacioli – father of double-entry accounting
TYPES OF BUSINESS
 Services – selling people’s time
 Trader – buying and selling products
 Manufacture – designing products, aggregating
components and assembling finished products
 Raw materials – growing or extracting raw
materials
 Infrastructure – selling the utilization of
infrastructure
 Financial – receiving deposits, lending and
investing money
 Insurance – pooling premiums of many to meet
claims of a few
FORMS OF BUSINESS ORGANIZATIONS
 Sole Proprietorship – has single owner called the
proprietor
- receives all profits, absorbs all losses, solely
responsible for all debts of the business
- the sole proprietorship is distinct from its
proprietor
 Partnership – owned and operated by two or
more persons
- divide profit among themselves; both owners
are liable for any debt incurred by the business
-the partnership is distinct from the personal
affairs of each partner
 Corporation – owned by its stockholders
- stockholders are not personally liable for the
corporation’s debts
- the corporation is separate legal entity
Micro enterprises – those with assets, before financing,
of P3.0 (before P1.5 million) or less and employ not
more than nine workers
Small enterprises - those with assets, before financing, of
above P3.0 (before P1.5 million) to P15 million and
employ 10 to 99 workers
Medium enterprises - those with assets, before financing,
of above P15 million to P100 million and employ 100 to
199 workers
ACTIVITIES IN BUSINESS ORGANIZATIONS
 Financing Activities – methods an organization
uses to obtain financial resources from financial
markets and how it manages this resources
 Investing Activities – use of capital from
financing activities to acquire other resources
used in the transformation processes
Efficient business – provides goods and services
at low cost relative to their selling prices
Effective business – successful in providing
goods and services demanded by the customers
 Operating Activities – use of resources to
design, produce, distribute, and market goods
and services
PURPOSE AND PHASES OF ACCOUNTING
Money – serves as both a medium of exchange and a
measure of value
(Recognition, Valuation, Classification,
Summarization, Interpretation/Analysis)
PACIOLI’S DOUBLE-ENTRY BOOKKEPING
AND ITS EVOLUTION
Double-entry accounting system – for every debet
dare (should give) there exists a debet habere
(should have or should receive)
Memorandum – book where all transactions are
recorded, in the currency in which they are
conducted, at the time they are conducted
Journal – merchant’s private book; entries are in one
currency, in chronological order, and in narrative
form
Ledger – alphabetical listing of all the business’s
accounts along with the running balance of each
particular account
Financial Accounting – concerned with the supply of
information to the owners of an entity
Management Accounting – concerned with the
supply of information to the manager of an entity
FUNDAMENTAL CONCEPTS
 Entity Concept – assumes that all business
transactions are separated from the business
owner’s personal transactions
 Periodicity Concept – an entity’s life can be
meaningfully subdivided into equal time periods
for reporting purposes
 Stable Monetary Unit Concept – the Philippine
peso is a reasonable unit of measure and that its
purchasing power is relatively stable
 Going Concern – assumes that the reporting
entity is a going concern and will continue in
operation for the foreseeable future
CRITERIA FOR GENERAL ACCEPTANCE OF
AN ACCOUNTING PRICIPLE
 GAAP or generally accepted accounting principles –
encompasses the conventions, rules and procedures
necessary to define accepted accounting practice at a
particular time
 Relevance – it results in information that is
meaningful and useful to those who need to
know something about a certain
organization
 Objectivity – resulting information is not
influenced by the personal bias or judgement
of those who furnish it.
 Feasibility – it can be implemented without
undue complexity or cost
BASIC PRINCIPLES
 Objectivity Principle – accounting records and
statements are based on the most reliable date
available so that they will be as accurate and as
useful as possible
 Historical Cost – acquired assets should be
recorded at their actual cost and not at what
management thinks they are worth as at
reporting date
 Revenue Recognition Principle – revenue is to
be recognized in the accounting period when
goods are delivered or services are rendered or
performed
 Expense Recognition Principle – expenses
should be recognized in the accounting period in
which goods and services are used up to produce
revenue and not when the entity pays for those
goods and services
 Adequate Disclosure – requires that all relevant
information that would affect the user’s
understanding and assessment of the accounting
entity be disclosed in the financial statements
 Materiality – financial reporting is only
concerned with information that is significant
enough to affect evaluations and decisions
 Consistency Principle – the firms should use the
same accounting method from period to period
to achieve comparability overtime within a
single enterprise
LESSON 2: ACCOUNTING EQUATION AND
THE DOUBLE-ENTRY SYSTEM
Accounting information system – generate reliable
financial information needed by the decision-makers
in a timely manner
Accounting manual – specifies the policies and
procedures to be followed in accumulating
information within the accounting information
system
TYPES OF ACCOUNTING INFORMATION
SYSTEM
 Manual systems – utilize paper-based
journals and ledgers
 Computer-based transaction systems –
replace paper records with computer
records; maintains accounting data
separately from other operating data
 Database systems – embed accounting data
within the business event data on which they
are based
ELEMENTS OF FINANCIAL STATEMENTS
 Assets, liabilities and equity – relate to reporting
entity’s financial position
 Income and expenses – relate to reporting
entity’s financial performance
FINANCIAL POSITION
Asset – present economic resource controlled by the
entity as a result of past events
Liability – present obligation of the entity to transfer an
economic resource as a result of past events
Obligation – duty or responsibility that an entity
has no practical ability to avoid.
Equity – residual interest in the assets of the enterprise
after deducting all its liabilities
FINANCIAL PERFORMACE
Income – increases in assets, or decreases in liabilities,
that result in increases in equity, other than those relating
to contributions from holders of equity claims
Expenses – decreases in assets, or increases in liabilities,
that result in decreases in equity, other than those
relating to distributions to holders of equity claims
THE ACCOUNT
Account – basic summary device of accounting
- detailed record of the increases, decreases and
balance of each element that appears in an entity’s
financial statements
THE ACCOUNTING EQUATION
Financial statements – tell us how a business is
performing; final products of the accounting process
Accounting equation – most basic tool of accounting
Assets = Liabilities + Owner’s Equity
DEBITS AND CREDITS – THE DOUBLE-ENTRY
SYSTEM
*A debit side entry must have a corresponding credit
side entry.
*Each transaction affects at least two accounts.
Debit – left side; Dr. from the Latin debere
Credit – right side; Cr. From the Latin credere
ACCOUNTING EVENTS AND TRANSACTIONS
Accounting event – economic occurrence that causes  Telecommunications, Electricity, Fuel, and
changes in an enterprise’s assets, liabilities, and/or Water Expenses
owner’s equity.  Rent Expense
Transaction – particular kind of event that involves the  Supplies Expense
transfer of something of value between two entities  Insurance Expense
 Depreciation Expense
TYPES AND EFFECTS OF TRANSACTIONS  Uncollectible Accounts Expense
 Source of Assets (SA)  Interest Expense
 Exchange of Assets (EA) ACCOUNTING FOR BUSINESS TRANSACTIONS
 Use of Assets (UA)
 Exchange of Claims (EC) Business transaction – occurrence of an event or a
condition that affects financial position and can be
TYPICAL ACCOUNT TITLES USED reliably recorded
ASSETS
Operating cycle – time between the acquisition of assets LESSON 3: RECORDING BUSINESS
for processing and their realization in cash or cash TRANSACTIONS
equivalents
Source documents – identify and describe transactions
Current Assets and events entering the accounting process; original
written evidences that contain information about the
 Cash nature and the amounts of the transactions
 Cash Equivalents
 Notes Receivable ACCOUNTING CYCLE
 Accounts Receivable Step 1 – Identification of Events to be Recorded
 Inventories
 Prepaid Expenses Step 2 – Transactions are recorded in the Journal

Non-current Assets Step 3 – Journal Entries are Posted to the Ledger

 Property, Plant and Equipment Step 4 – Preparation of a Trial Balance

 Accumulated Depreciation Step 5 – Preparation of the Worksheet including
 Intangible Assets Adjusting Entries
LIABILITIES Step 6 – Prepare and Post Adjusting Entries
Current Liabilities Step 7 – Preparation of Financial Statements
 Accounts Payable Step 8 – Closing Journal Entries are
 Notes Payable
Journalized and Posted
 Accrued Liabilities
 Unearned Revenues Step 9 – Preparation of a Post-Closing Trial Balance
 Current Portion of Long-Term Debt
Step 10 – Reversing Journal Entries are Journalized and
Non-current Liabilities Posted

 Mortgage Payable General Journal – shows all the effects of a transaction

 Bonds Payable in terms of debits and credits

OWNER’S EQUITY Posting – transferring the amounts from the general

journal to appropriate accounts in the ledger
 Capital
 Withdrawals Ledger – a grouping of accounts; used to classify and
 Income Summary summarize transactions and to prepare data for basic
financial statements
INCOME STATEMENT
Trial Balance – listing all ledger accounts in order, with
Income their respective debit or credit balances
 Service Income THE JOURNAL
 Sales
Journal – chronological record of the entity’s
Expenses transactions; book of original entry

 Cost of Sales Format

 Salaries/Wages Expense
 Date
 Account Titles and Explanation
  P.R. (Posting reference) Derecognition – the removal of all or part of a
 Debit recognized asset or liability from an entity’s statement of
 Credit financial position

Simple entry – only two accounts are affected THE NEED FOR ADJUSTMENTS

Compound Entry – three or more accounts are affected
Journalizing – process of recording a transaction
Ledger – grouping of the entity’s accounts
General Ledger – “reference book” of the accounting
system and is used to classify and summarize
transactions, and to prepare data for basic financial
statements
Balance sheet or permanent accounts – assets, liabilities,
and owner’s equity
Income statement or temporary accounts – income and
expenses
Chart of Accounts – listing of all the accounts and their
account numbers in the ledger
Posting – means transferring the amounts from the
journal to the appropriate accounts in the ledger
Trial Balance – list of all accounts with their respective
debit or credit balances; prepared to verify the equality
of debits and credits in the ledger
Adjusting entries – assign revenues to the period in
which they are earned, and expenses to the period in
which they are incurred
Deferral – postponement of the recognition of an
“expense already paid but not yet incurred” or of
“revenue already collected but not yet earned”
-decreases the balance sheet account and increases an
income statement account
Accrual – the recognition of an “expense already
incurred but unpaid” or “revenue earned but
uncollected”
-increases both a balance sheet and an income statement
account

LESSON 4: ADJUSTING THE ACCOUNTS

Accrual basis – the effects of transactions and other
events are recognized when they occur and not as cash is
received or paid
- the accountant records revenues as they are earned and ADJUSTMENTS FOR DEFERRALS
expenses as they are incurred
Prepaid Expenses
*GAAP require that a business use accrual basis
Prepaid Rent
Cash basis – the accountant does not record a transaction
Prepaid Expense
until cash is received or paid
Prepaid Rent
Liquidation –
Prepaid Insurance
Fiscal year – period of any twelve consecutive months
Insurance Expense
Calendar year – annual period ending on December 31
Prepaid Insurance
Natural business year – twelve-month period that ends
when business activities are at their lowest level of the Supplies
annual cycle
Supplies Expense
Interim period – period less than a year
Supplies
RECOGNITION AND DERECOGNITION
Depreciation of Property and Equipment
Recognition – process of capturing for inclusion in the
statement of financial position or the statement of Depreciation or depreciation expense – estimated
financial performance an item that meets the definition amount allocated to any one accounting period
of an asset, a liability, equity income, or expenses  Asset Cost – amount an entity paid to acquire
Carrying amount – the amount at which an asset, the depreciable asset
a liability, or equity is recognized in the SFP  Salvage value – amount that the asset can
probably be sold for the end of its estimated
useful life
  Useful life – estimated number of periods that an Worksheet – used by accountants to help transfer data
entity can make use of the asset from unadjusted trial balance to the financial statements
Cross-footing – combining horizontally, line by line, the
amount of each account in the unadjusted trial balance
Straight-line method columns with the corresponding amounts in the
Asset Cost xx adjustment columns

Less: Estimated salvage value xx Balance sheet – asset, liability, capital, and withdrawal
accounts
Depreciation cost xx
Income statement – income and expense
Divided by: Estimated useful life
xx *Profit must be added and withdrawals subtracted to
arrive at the ending capital balance (post-closing trial
Depreciation Expense for each time period xx balance)
Contra account – used to record reductions in a related ESSENCE OF FINANCIAL STATEMENTS
account and its normal balance is opposite that of the
related account Financial Statements – means by which the
information accumulated and processed in financial
Depreciation Expense – Building accounting is periodically communicated to the users to
arrive at sound economic decisions
Accumulated Depreciation – Building
COMPLETE SET OF FINANCIAL STATEMENTS
Allocating Revenues Receive in Advance to Revenues
Statement of Financial Position or balance sheet –
Unearned Revenue
lists all the assets, liabilities and equity of an entity as at
Service Revenue a specific date
Statement of Financial Performance or income
statement – present a summary of the revenues and
expenses of an entity for a specific period
Statement of Changes in Equity – presents a summary
of the changes in capital such as investments, profit or
loss, and withdrawals during a specific period
Statement of Cash Flows – reports the amount of cash
ADJUSTMENTS FOR ACCRUALS received and disbursed during the period
Accrued Expenses Accounting policies – specific principles, bases,
Accrued Salaries conventions, rules and practices adopted by an enterprise
in preparing and presenting financial statements
Salaries Expense
Notes to financial statements – provide narrative
Salaries Payable descriptions or disaggregation of items presented in the
statement and information about items that do not
Accrued Interest
qualify for recognition in the statements
Interest Expense
(Statement of Financial Position)
Interest Payable
Liquidity – availability of cash in the near future after
Accrued Revenues taking account of the financial commitments over this
period
Accounts Receivable
Financial flexibility – ability to take effective actions to
Service Revenue alter the amounts and timings of cash flows so that it can
Accrual for Uncollectible Accounts respond to unexpected needs and opportunities

Uncollectible Accounts Expense Solvency – availability of cash over the longer term to
meet financial commitments as they fall due
Allowance for uncollectible Accounts
Report format – vertical
Account format – horizontal
LESSON 5: WORKSHEEET AND FINANCIAL
STATEMENTS (Statement of Cash Flows)

THE WORKSHEET Cash receipts – inflows

Cash payments – outflows
LESSON 6: COMPLETING THE ACCOUNTING
CYCLE
CLOSING ENTRIES ARE JOURNALIZED AND
POSTED
Closing procedure – the balance of the owner’s capital
account represents the cumulative net result of income,
expense and withdrawal transactions
*The balances of the temporary accounts (income,
expense, and withdrawal) are transferred to the capital
account.
Income Summary – a summary account used to close the
income and expense accounts

 Close the income accounts

 Close the expense accounts
 Close the income summary account
 Close the withdrawal account

PREPARATION OF A POST-CLOSING TRIAL

BALANCE
Post-closing trial balance – verifies that all debits equal
credits in the trial balance
- contains only balance sheet items such as assets,
liabilities, and ending capital because all income and
expense accounts, as well as withdrawal account, have
zero balances
REVERSING ENTRIES
Reversing entry – journal entry which is the exact
opposite of a related adjusting entry made at the end of
the period
- made to simplify the recording of regular transactions
in the next accounting period