BASIC ACCOUNTING

(FINANCIAL ACCOUNTING AND REPORTING)

-ABDUL SALAM M. BARRAT
INTRODUCTION TO
ACCOUNTING
-ABDUL SALAM M. BARRAT
DEFINITION
ACCOUNTING is an art of:
• recording
• classifying and
• summarizing
• in a significant manner and
• in terms of money
• transaction and events
• which are of financial character and
• interpreting the result thereof
DEFINITION
“Accounting is the process of IDENTIFYING, RECORDING, and COMMUNICATING
economic events of an organization to interested users.” (Weygandt, J. et. al)

IDENTIFYING – this involves selecting economic events that are relevant to a

particular business transaction
RECORDING – this involves keeping a chronological diary of events that are
measured in pesos. The diary referred to in the definition are the journals and
ledgers which will be discussed in future chapters.
COMMUNICATING – occurs through the preparation and distribution of financial
and other accounting reports.
NATURE
“Accounting is a systematic recording of financial transactions and the
presentation of the related information to appropriate persons.”

ACCOUNTING is a:
• service entity
• process
• both art and a discipline
• deals with financial information and transactions
• is an information system
BOA COMPOSITION
BOA MEMBERS QUALIFICATION
QUALITATIVE CHARACTERISTICS
IFRS identifies two levels of qualitative characteristics of useful
financial information:
1)Fundamental Qualitative Characteristics
• Required for information to be useful
• Include Relevance and Faithful Representation
2) Enhancing Qualitative Characteristics
• Enhance usefulness of accounting information
• Include Comparability, Verifiability, Understandability &
Timeliness
FUNDAMENTAL QUALITATIVE CHARACTERISTICS

1. Relevance
• Information is relevant if it influences stakeholder decisions.
Financial information icapable of making relevance if it has:
• Confirmatory value
• Predictive value
2. Faithful Representation
• Financial statements must capture the economic activity of an
entity. Information must be:
• Complete
• Neutral – freedom from bias
• Free from error – no significant errors or omissions
ENHANCING QUALITATIVE CHARACTERISTICS

1. Comparability
• Provides users with information that is readily comparable
2. Verifiability
• Independent and knowledgeable observers should find similar results
when measuring an attribute
3. Understandability
• Accounting information is prepared for stakeholders with ‘reasonable
understanding of business’
4. Timeliness
• Helps users make informed decisions
USERS OF FINANCIAL
INFORMATIONS
-ABDUL SALAM M. BARRAT
INTERNAL USERS
INTERNAL USERS DECISIONS
EXTERNAL USERS
EXTERNAL USERS
EXTERNAL USERS DECISIONS
INFORMATIONS NEEDED
TYPES OF BUSINESS ACCORDING
TO ACTIVITIES
-ABDUL SALAM M. BARRAT
MAJOR TYPES OF BUSINESS ACTIVITY

1. Service Entities (service concern)

2. Merchandising Entities (buy and sell)
3. Manufacturing Entities (manufacturer)
4. Hybrid Entities
SERVICE ENTITIES
are firms that generally use their employees to
provide intangible products or services (or industry) to
customers . These services include professional skills,
advice, expertise, and other related products.

Examples are as follows:

• accounting firms
• tutorial services
• and dry cleaning establishments, etc.
OPERATING CYCLE

cash

collection services

accounts
receivable
MERCHANDISING ENTITIES
sell tangible products. This type of business buys
finished or almost finished goods from their suppliers
and resell the same to customers.
Primarily earn revenues from the sale of the goods
of merchandise, also known as sales revenue or sales.

Examples are:
• Sari-sari store
• super market, etc.
TYPES OF MERCHANDISING
• Retailer
is a merchandising company that sells goods
directly to customers.
(sari-sari store)
• Wholesaler
is amerchandising company that sells goods to
retailers.
(Sam's Club)
OPERATING CYCLE
cash

collection inventory

receivable sales
MANUFACTURING ENTITIES
buy materials, convert them into products, and
then sell the products to other companies or to the final
consumers.

Examples are:
• Jack 'n jill company
• unilever, etc
OPERATING CYCLE
cash/payable

collection inventory

receivables finished goods

sales
BUSINESS ACTIVITY ADVANTAGES DISADVANTAGES
SERVICE • Absence of inventory • Inability to
• No production facilities standardize services
• Maintaining human
capital
MERCHANDISING • Visible products • Managing inventory
• Less conversion,
time,and effort
MANUFACTURING • Quality control • Generally needs
• Visible products production facilities
• High conversion costs
• Cost of quality
control
• Managing inventory
HYBRID ENTITES
those that offer two or more of the activities
simultaneously. Can be a service concern at the same
time manufacturer and merchandising entity, etc.

Examples are as follows:

• Restaurants
• Hotel
• cinema, etc.
ACCOUNTING CONCEPTS AND
PRINCIPLES
-ABDUL SALAM M. BARRAT
GENERALLY ACCEPTED AND
ACCOUNTING PRINCIPLES (GAAP)
• is a collection of commonly-followed accounting rules
and standards for financial reporting
• are a set of rules that encompass the details,
complexities, and legalities of business and corporate
accounting. The Financial Accounting Standards Board
( FA S B ) u s e s G A A P a s t h e f o u n d a t i o n f o r i t s
comprehensive set of approved accounting methods
and practices.
ACCOUNTING STANDARD COUNCIL
ACCOUNTING STANDARD COUNCIL
FINANCIAL REPORTING STANDARDS
COUNCIL
ACCEPTED STANDARDS IN THE PHIL

• Philippine Accounting Standard (PAS) issued by Accounting Standard Council

(ASC)
Corresponds to International Accounting Standards (IAS)
• Philippine Financial Reporting Standards (PFRS) issued by Financial Reporting
Standards Council (FRSC)
adopted from IFRS
• International Financial Reporting Standard (IFRS) issued by the International
Accounting Standard Board (IASB), current
• Interpretations of Philippine Interpretation Committee (PIC) made by FRSC
Changed the Interpretations Committee made by ASC
• Auditing and Assurance Standards Council issued standards
FUNDAMENTAL CONCEPTS
In recording business transactions, accountants should consider the
following:
1. Entity Concept
the business and the owner are separate entity. Each should be
evaluated separately
2. Periodicity Concept
an entity's life can be meaningfully subdivided into equal time
periods for reporting purposes for users to obtain timely reports.
3. Stable Monetary Unit Concept
the Philippine peso is a reasonable unit of measure and that its
purchasing power is relatively stable.
BASIC ACCOUNTING PRINCIPLES
1. Objectivity Principle
this principle states that accounting records should be based on
reliable and verifiable data as evidence of the transactions
2. Cost Principle
this principle requires that assets should be recorded at original
and acquisition cost.
3. Materiality
this principle dictates practicability to rule over theory in
determining the valuation of an item. To judge whether an item is
material or not, is a matter of professional judgment of an
accountant.
BASIC ACCOUNTING PRINCIPLES
4. Matching Principles
a combined concept of Revenue and Expense Recognition Principle.
5. Consistency Principles
this principle requires that accounting procedures should be
applied uniformly from period to period to achieve comparability
in the financial statements.
6. Adequate Disclosure
this principle requires that financial statements should be free
from material misstatements, and that if there’s any, should be
properly disclosed or reported.
UNDERLYING ASSUMPTION
GOING CONCERN
• it is assumed that the enterprise has neither the intention nor
the need to liquidate or curtail materially the scale of its
operation.
• the IFRS Framework states that the going concern assumption
is an underlying assumption. Thus, the financial statements
presume that an entity will continue in operation indefinitely,
or if that presumption is not valid, disclosure anda different
basis of reporting is required.
ACCOUNTING EQUATION
-ABDUL SALAM M. BARRAT
 BASIC ACCOUNTING EQUATION

ASSETS = LIABILITIES + EQUITY

what business owns what business owes owner's investment

debit (dr) Credit (cr) credit (cr)

ACCOUNTING EQUATION
ASSETS = LIABILITIES + EQUITY
1 500,000 = 250,000 + ?
2 ? = 75,000 + 98,000
3 670,000 = 80% + ?
4 ? = 25,000 + 65%
5 23,000 = ? + 55%
6 increased by 20,000 = ? + decreased by 3,000
7 ? = increased to 5,000 + increased to 5,000
8 increased to 35,000 = ? + increased to 6,000
9 ? = increased to 8,000 + decreased to 9,000
10 increased by 6,000 = decreased by 3,000 + ?
ACCOUNTING EQUATION

ASSETS = LIABILITIES + EQUITY

1 60,000 = 15% + ?
2 ? = 5,000 + 55%
3 increased to 5,000 = ? + increased to 2,000
4 ? = increased to 5,000 + decreased to 7,000
5 increased by 6,000 = decreased by 3,000 + ?
MAJOR ACCOUNTS
• PERMANENT ACCOUNTS
1. Assets
2. Liabilities
3. Owner's Equity
• TEMPORARY ACCOUNTS
4. Income
5. Expense
ASSETS
• are valuable resources that are owned by a firm. They represent probable future economic benefits and arise
as the result of past transactions or events. by LIQUIDITY

CURRENT ASSETS NONCURRENT ASSETS

expected to be realized in, or is intended for sale or an asset that is not likely to turn to unrestricted cash
consumption in the entity’s normal operating cycle or within one year. It is also referred toas a long-term
one year, whichever is longer asset
Cash Long-term investments
Accounts Receivables Land
Allowance for Doubtful Accounts (Contra asset) Building
Notes Receivable Property, Plant and Equipment
Accrued Income Accumulated Depreciation (Contra asset)
Inventories Furnitures and Fixtures
Supplies Intangible Assets
Prepayments Biological Assets
LIABILITIES
• are present obligations of the firm. They are probable future sacrifices of economic benefits which arise as
the result of past transactions or events. by SOLVENCY

CURRENT LIABILITIES NONCURRENT LIABILITIES

amounts due to be paid to creditors within one year are long term liabilities or obligations which are
payable for a period longer than one year.
Accounts Payable Notes Payable (longterm)
Notes Payable Mortgage Payble
Salaries and Wages Payable Loan Payable
Utilities Payables Bonds Payable
Rent Payables
Accrued Expense
Unearned Income
OWNER'S EQUITY
• is an account bearing the name of the owner representing the original and additional investment of the
owner of the business.

Capital Account
Drawing Account
Income Accounts
Expense Accounts
INCOME
• what an individual or business receives in exchange for providing labor, producing a good or service, or
through investing capital.

Sales
Service Revenue
Professional Fees
Rent Income
Interest Income
Retainer's Fee
EXPENSES
• An expense is the cost of operations that a company incurs to generate revenue.

Cost f Goods Sold

Cost of Service
Salaries and Wages Expense
Utilities Expense
Bad Debts Expense
Depreciation Expense
Interest Expense
1. The following are the assets of Pandemic Company:
-cash 9,000 -ADA 4,000 -supplies 900
-AR 4,500 -ADE 8,000 -machinery 17,000
how much is the current assets?
2. How much is the AR if the current assets worth 10,000 is composed of the following:
-cash 3,500 -land 90,000 -ADA 400
-inventory 5,000 -PPE 150,000 -ADE 55,000
3. How much is the noncurrent assets if business is composed of the ff:
-current assets 60% -assets 295,000 -land 85,000
-building 80,000 -machineries 55,000
4. How much is the ADE if business is composed of the ff:
-current assets 111,00 -assets 295,000 -land 85,000
-building 80,000 -machineries 55,000
TRANSACTION ANALYSIS
-ABDUL SALAM M. BARRAT
WHAT TO RECORD?

1. A business transaction
2. A two-way transaction, meaning the business is a party
3. It should have a monetary value
4. It affects the at least two or more account title
IDENTIFY THE FOLLOWING:

1. ABC Co. hired Mr Montilla as its new Auditor.

2. Paid the utility bill
3. Used 25,000 inventories for production
4. XYZ and CBX transacted with each other
5. Mr Quizon, the president of ABC Co. purchased a car for personal
use
6. ABC Co. paid the 25,000 tution fee of mr. Quizon's son
HOW TO RECORD?