I.
Definition of Accounting
Accounting
 is a service activity. Its function is to
provide quantitative information,
primarily financial in nature, about
economic entities that is intended to be
useful in making economic decisions, in
making reasoned choices among alternative
courses of action.
 is also defined as the process of identifying,
measuring and communicating economic
information to permit informed judgment and
decision by users of the information.
 is the 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 financial
character and interpreting the results
thereof.
II. Purpose and Functions
 To provide quantitative, financial information
about economic entities to statement users so
that they could make informed judgment and
better decision.
ILLUSTRATION:In each of the following transactions, determine the value received
and the value parted with.
1. Purchased tools for cash
2. Purchased office supplies on credit
3. Completed repair work for S. Cruz and received
cash
4. Completed repair work for J. Santos on credit
5. Paid for advertising in the local paper
6. Paid the account in # 2
7. Received payment from J. Santos
8. Paid the monthly salary of the assistant
9. Paid the rent of the shop space
10. Paid the monthly telephone bill.
Fields of Accounting:
1. Private business accounting
2. Government Accounting
3. Public Accounting
Users of Accounting Information:
1. Owners
2. Management
3. Prospective investors
4. Creditors
5. Employees
6. Government
Functions of Accounting
 Recording – technically called bookkeeping
 Classifying – items are sorted and grouped,
similar items are classified under the same
name.
 Summarizing- through financial statements
(Balance Sheet, Income Statement, Cash Flow)
 Interpreting- analysis reports of Financial
Statements, e.g. breakdown of certain revenue
or expense accounts.
Events
o Economic occurrence that causes changes in an
enterprise’s assets, liabilities and or equity. It
may be internal or external
Transactions
o particular kind of event that involves the
transfer of something of value between two
entities such as acquiring assets from owners,
borrowing funds from creditors and purchase
or selling of goods and services.
o an exchange of goods or services for a certain
sum of money.
o an exchange of monetary value.
*In every transaction, there is VALUE RECEIVED AND
VALUE PARTED WITH.
Classification of Business Organizations
1. According to nature of the business
 Service
 Merchandising
 Manufacturing
2. According to ownership
 Sole or single proprietorship
 Partnership
 Corporation
 Cooperative
Business as an accounting entity
“The business is treated as an entity or person distinct
and separate from the owner.”
ACCOUNTING ELEMENTS(OR VALUES)
ASSETS - these are properties or rights on property owned by the business; economic resources of the
business.

LIABILITIES – financial obligations or debts of the business in favor of persons or parties other than the
owner or owners.

CAPITAL – represents the equity of owners in the property of the business after the amount of debts to
outsiders are deducted.

LIST OF ACCOUNT TITLES COMMONLY USED IN BUSINESS

ASSETS SUPPLIES ON HAND, OFFICE SUPPLIES,

CASH ON HAND. Coins, currency and other cash
STORE SUPPLIES and FACTORY SUPPLIES.
equivalents owned by the business and
PREPAID INSURANCE. Already paid insurance which
not yet deposited in the bank.
are applicable in the future periods.
CASH IN BANK. Unwithdrawn deposits in the bank.
FURNITURE AND FIXTURES. It includes tables, chairs,
Usually, the name of the bank is used as
showcase, counters and other similar
account title.
assets owned and used by the business in
NOTES RECEIVABLE. Amounts collectible from the
its operation.
customers for goods sold and services
EQUIPMENT. It includes typewriters, calculators, cash
rendered on credit or for others for loans
registers and other similar assets.
granted. Such claims are evidenced by a
DELIVERY EQUIPMENT. Assets used for transporting
promissory note.
merchandise.
ACCOUNTS RECEIVABLE. Claims from customer arising
ACCUMULATED DEPRECIATION. A valuation account
from goods sold or services on credit. It
that reduces the total cost of the fixed
represents the debtor’s oral promises to
assets. It is another contra-asset account
pay.
that represents the total amount of
ALLOWANCE FOR BAD DEBTS. Contra-asset account to
depreciation expense charged in the past
provide for uncollectible accounts. It is
and current periods.
deducted from Accounts Receivable to
LAND. Asset owned by the business used for building
present the amount still collectible from
sites and other business purposes.
debtors.
BUILDING. Asset owned and used by the business in its
MERCHANDISE INVENTORY. Goods purchased by the
operation.
business to be sold at a profit.
INTEREST RECEIVABLE. Interest earned on notes on
hand which had not been received in cash.
SUPPLIES UNUSED. Miscellaneous supplies which have
been bought for office use but are still
unused as of the balance sheet date. Other
account titles which can be used are
LIABILITIES
ACCOUNTS PAYABLE. Amounts due to creditors for the
goods or services bought on credit.
NOTES PAYABLE. Amounts due to creditors which are
supported by a promissory note.
INTEREST PAYABLE. Interest incurred but not yet paid.
SALARIES PAYABLE. Amount due to the employees for
the services they have rendered.
MORTGAGE PAYABLE. Obligations which are evidenced
by a mortgage on real property. Examples
are real estate loans and other housing
loans.
PROPRIETORSHIP ACCOUNTS
OWNER’S CAPITAL. Amount of capital contribution of
the owner to the business.
OWNER’S DRAWING. Amount withdrawn by the owner
from the assets of the business for
personal use.
REVENUES
SALES. Total sale of merchandise.
PROFESSIONAL FEE INCOME. Amount earned by
professionals such as CPA’s, doctors,
lawyers, etc.
RENT INCOME. Amount of rental earned for the period.
SERVICE INCOME. Amount of income earned from
service rendered of a service concern.
INTEREST INCOME. Amount earned for lending money.
EXPENSES
COST OF SALES. Cost of goods purchased and sold or
materials manufactured and sold.
ADVERTISING EXPENSE. Expenses incurred to promote
the product of the business.
SALESMEN’S SALARIES. Compensation given to sales
agents.
SALESMEN’S COMMISSION. Compensation given to
sales agents based on the amount of their
sales.
OFFICE SALARIES. Compensation of administrative
employees.
SUPPLIES EXPENSE. Amount of supplies used.
TAXES. Duties incurred in the current period.
UTILITIES EXPENSE. Amount of light and water
consumed by the business.
REPAIRS AND MAINTENANCE. Expenses incurred for
repairing the assets of the business.
BAD DEBTS. Estimated amount of losses from the
uncollectible accounts of the business.
DEPRECIATION EXPENSE. Allocated cost of fixed assets
in the current period.
INTANGIBLES
PATENTS. Exclusive rights to produce and sell goods
with one or more unique features.
COPYRIGHTS. Exclusive right to publish and sell a
literary, artistic or musical composition.
TRADEMARKS. Name, term or symbol used to identify a
business and its products.
GOODWILL. Created from such favorable factors as
location, product quality, reputation and managerial
skills.
The Accounting Equation proprietorship caused by the business transactions and
Assets = Liabilities + Capital events.

A = L + C
The Expanded Accounting Equation
A= L + ( C + I – W + i – D )
where:
A = assets
L = liabilities
C = capital originally placed in the
business.
I = additional investment by the
owner
W = withdrawal or taking away of
capital from the business.
The ACCOUNT
Account is defined as an accounting device used in
summarizing the changes in the assets, liabilities and
i = income or earnings of the business
D = deduction from income; expenses
THE THEORY OF DEBIT and CREDIT
Double-Entry Bookkeeping method – this is based on the
principle of duality which means that every transaction
has two aspects: effort and reward, sacrifice and benefit,
source and use, a left-side and a right-side, a debit and a
credit.
Rules of Debits and Credits
Debit to: Credit to:
Increase assets Decrease assets
Decrease liabilities Increase in liabilities
Decrease capital due to: Inc. in capital due to:
Increase in withdrawal Decrease in withdrawal
Decrease in income Increase in income
Inc.in deductions frm income Dec.in ded. frm income

Name of the Item

ILLUSTRATION:
Write the accounting equation of the following transactions.
Oct 2009
1 Mr. Gil opened a motor repair shop and invested P100,000
4 He purchased repair supplies worth P25,000 on credit from De Mesa Trading
7 Billed Mr. Cruz for repair work done on his automobile P12,000.
8 He bought table and chair for the business, P6,000 cash.
ACCOUNTING PRINCIPLES
Some GAAP:
Development of Accounting/Auditing Standards  Business entity Concept
 Cost concept
International Accounting Standards ofCommittee  Reliability or Objectivity Principle
 Going-Concern Concept
 Time-period Concept
 Stable-monetary unit concept
Philippine Institute of Certified Public Accountants  Comparability Principle
 Revenue Realization Principle
 Matching Principle
 Adequate Disclosure Principle
Accounting Standards Council (ASC)
 Materiality Concept
 Conservation Concept
 Consistency Principle
Statement of Financial Accounting Standards (SFAS)
Some Applications of GAAP

Generally Accepted Accounting Principles(GAAP) Marketable Securities

Sources of GAAP:
 The SFAS issued by the ASC
 Accounting principles issued by PICPA
 The opinions published by other authorities
 Common practices used on business
 SEC, Insurance Commission, BSP, Stock
Exchange, Public Service Commission and BIR
 Should be carried at lower of the aggregated
cost or market value
Inventories
 Stated at lower cost market
 Market is determined by replacement cost
Property, Plant and Equipment
 Evaluated at cost less depreciation allowance
 Depreciated over the life of the asset

GAAP Capital
 Ground rules for financial reporting  In excess of par
 Are conventions, rules and procedures  Treasury Stock
necessary to define what is accepted accounting
principle Provisions and Reserves
 These principles have developed on the basis of  Deferred tax accounting
experience, reason, custom, usage and practical
necessity
Business Combination
 They originate from a combination of tradition,
experience and official degree  Purchase
 Are sometimes arbitrary  Pooling of interest
 May change overtime  Goodwill
 Must be clearly understood and observed by all
Basic Financial Statements
participants
 Balance Sheet
 Regulates the form and content of financial
statements  Income Statement
 Statement of Retained Earnings
 Statement of Cash Flow and
Related Notes
Increase in Asset = Increase in Capital DR Asset   xxx  
CR   Capital   xxx
4,0
Example: Initial Investment, P4,000 Cash 00
Owner's Capital 4,000

Increase in Asset = Increase in Capital DR Asset   xxx  

CR   Revenue   xxx
3,0
Example: Rendered service and received Cash 00
money, P3,000 Service Income 3,000

2,5
Example: Rendered service on account, Accounts Receivable 00
P2,500 Service Income 2,500

Decrease in Asset = Decrease in Capital DR Drawing   xxx  

CR   Asset   xxx
1,0
Example: Withdrew money for personal Owner's Drawing 00
use P1,000 Cash 1,000

Decrease in Asset = Decrease in Capital DR Expense   xxx  

CR   Asset   xxx
3
Example: Paid Electric Bills, P350 Utilities 50
Cash 350

Increase in Asset = Increase in Liability DR Asset   xxx  

CR   Liability   xxx
1,5
Example: Purchased office supplies on Office Supplies 00
account P1,500 Accounts Payable 1,500

Decrease in Asset = Decrease in Liability DR Liability   xxx  

CR   Asset   xxx
2,0
Example: Paid account due, P2,000 Accounts Payable 00
Cash 2,000

Increase in one Asset = Decrease in another

Asset DR Asset   xxx  
CR   Asset   xxx
10,0
Example: Collected account due from Cash 00
Mr. Cruz, P10,000 Accounts Receivable 10,000