FINANCIAL ACCOUNTING AND REPORTING 1 (ACG001)

WEEK 2: ACCOUNTING AND ITS ENVIRONMENT (PART 1)

Why do I have to learn accounting?

● Accounting is part of daily life of all people and the world is in need of Accountants!
o It helps the business a lot since it manages profit or loss and it also helps the business on where to slash
expenses and other aspects of your money.
o When it comes to accounting, it is part of the daily lives of the people. Accounting concepts are applied to
many things in the world that’s why the demand is really high. Accounting is a branch of business but it is
very important.

What awaits you to Accountancy Profession?

ACCOUNTANCY PROFESSION
Certified Public Accountant
● Have earned a Bachelor of Science in Accountancy degree and have passed the CPA Licensure
Examinations.
● Have their own body language
o professional integrity​ – with ​ethical behavior​ like honesty, honor, dependability and trustworthiness
● Adherence to Code of Ethics ​(​RA 9298​ – Philippine Accountancy Act of 2004)
● Member of a national organization – ​PICPA​ ​(Philippine Institute of Certified Public Accountants)
How to be a Certified Public Accountant?
● All applicants for registration for the practice of accountancy shall be required to undergo a licensure
examination to be given by the ​Board ​(​BOA ​– Board of Accountancy)​ in such places and dates as the
Commission​ (​ ​PRC​ – Professional Regulation Commission) ​may designate subject to compliance with the
requirements prescribed by the Commission in accordance with ​Republic Act No. 8981.
Qualifications of Applications for Examinations
● BSA graduate ● Has not been convicted a criminal offense (NBI
● Filipino citizen clearance)
● Good moral character
Scope of Examination ​(7 Subjects)
● Business Law ● Auditing Theory
● Taxation ● Regulatory Framework for Business
● Financial Accounting and Reporting Transactions (not sure lang)
● Management Accounting
● Practical Accounting
Rating in the Licensure Examinations Report of Ratings
● You must have a general average of ​75% ● PRC announces the exam results
● Shouldn’t have a grade of ​64% in any of the
subject areas

Failing Candidates to Take Refresher Courses:

● Refresher courses​ – courses to retake since you failed it on the exam
● You could only have ​2 chances to take the CPA Licensure Exam UNLESS you have submitted evidence to the
satisfaction of the BOA that you enrolled in and completed at least twenty-four units of subjects given by CPA
Examinations.
Branches of Accounting
● Bookkeeping – is the routine activity of ​recording, classifying, and summarizing business transactions in a
systematic manner. It is the procedural aspect of accounting.
● Basic accounting process which involves the repetitive task of recording and classifying transactions before
summarizing the data into financial reports.
● Auditing – deals with ​the independent verification and examination of the accounting records for the
purpose of ​giving credibility to the financial statements​.
● An accounting area which involves the review and examination of accounting records and financial statement and
from which a professional and unbiased opinion is given as to the fairness of the accounting information
contained in the financial statements.
● Cost Accounting – deals with ​recording, classifying, and summarizing the details of ​materials, labor, and
overhead​ necessary to produce and sell a product or service.
● An accounting area which is concerned with systematic recording and measurement of the cost of manufacturing
a product or the cost of rendering services.
● Financial Accounting – involves the ​preparation and interpretation of financial statements primarily
intended for ​external users​ such as the investors, lenders, suppliers, government, and customers.
● An accounting area that provides reports to external users such as the banks and suppliers
● Management Accounting – deals with ​financial and non-financial information primarily for ​managers and
other internal users​ to assist them in ​planning, directing, and controlling the affairs of the business​.
● Accounting information are used to evaluation performance, determine, analyze and control cost and cost
behavior to achieve the target profit, prepare operating and capital budgets, and design and install accounting info
system.
● Financial Management – are responsible for ​setting financial objectives, making plans, and generally
safeguarding all the financial resources of the entity​.
● Financial managers are much more heavily involved in the management of the entity than is generally the case
with either financial or management accountants. It should also be noted that the financial manager draws on a
much wider range of disciplines (such as economics and mathematics) and relies more extensively on
non-financial data than does the more traditional accountant.
● Taxation – deals with ​tax matters affecting firms (partnership and corporation), ​individuals, trusts and
estates​.
● It involves preparation of tax returns, interpretations and application of tax rules in the determination of tax liability,
analyzing tax effect on firm’s or individual’s projects and plans.
● Government Accounting – deals with the ​administration or use of public or community funds to bring
about the service to the people.
● An accounting area which deals with the administration or use of public funds to bring about service to the
community

CAREER OPPORTUNITIES
1. Public Practices
● Accountants who ​render services on a fee basis and staff accountants employed by them are ​engaged
in public practice​. ​(One of the biggest sectors in a CPA’s career. You’re hired for making financial of various
businesses that doesn’t have an accountant. Provides different accounting services for different companies)
● Public accountants, who practice individually or as members of public accounting firms, should be
certified public accountants​. Their work includes auditing, taxation, and management advisory
services.
o SGV o EY o Deloitte o KPMG o PWC
● EY and SGV are partners. International is EY and SGV is in Philippines.
● Deloitte is worldwide.
● Their offices are mostly located at Makati.
2. Commerce and Industry
● Accountants employed in this area ​vary widely in their scope of activities and responsibilities​.
Sample Entry level positions: (Employed as a certain company’s accountant.)
● Financial Accounting and Reporting Staff ● Financial Analyst
● Management Accounting Staff ● Budget Analyst
● Tax Accounting Staff ● Credit Analyst
● Internal Audit Staff ● Cost Accountant
Middle-level positions: (They have certain role and have expertise)

● Comptroller ● Senior Fraud Examiner

● Senior Information Systems Auditor ● Senior Forensic Auditor
Advanced positions: (They are the head of the company.)

● Chief Financial Officer ● Chief Information Office

3. Government Service
Accountants may be hired by the following:
● Bangko Sentral ng Pilipinas – banking
o Governs different banks in the Philippines and has the most credibility
● Department of Budget and Management – budgeting
o They are more on budget and releases budgets.
● Bureau of Internal Revenue – tax collectors
o Collects taxes, gives guidelines, etc.
● Commission on Audit – audits or checks the govt. practices and funds
o Audits to different government agencies and they also give reports. Auditing and providing opinion on the
credibility of the government agency on how they spend their fund or budget if it is right or if there is
corruption happening but they don’t have the power to sue.
● Department of Finance
o interrelated with DBM. This is where the money came from and DBM will budget it. (not sure)
● Congress

4. Education/ Academe
● This area guarantees the ​continued development of the profession by endeavoring to clarify and
address emerging issues​ through research and sharing the results obtained with their colleagues
● This is not limited by professors, there are also research and sharing about what to study about accounting
because it evolves.

Sample jobs:
● Junior Accounting Instructor
● Senior Faculty
● Accounting Department Chair
● Vice President for Academic Fairs
● Dean
 WEEK 3:
ACCOUNTING AND ITS ENVIRONMENT (PART 2)

What is Accounting?
● Accounting is ​an 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 a ​financial character​, and ​interpreting
the results​ thereof
- American Institute of Certified Public Accountants
1. Considered as ​an art
- for it requires the use of skills and creative judgment. One has to be trained in this discipline to be able to
perform accounting functions well.
- Accounting is also considered a science because it is a body of knowledge. However, accounting is not an
exact science since the rules and principles are constantly changing (improved).
2. Accounting involves interconnected "phases"
● Recording​ – pertains to writing down or keeping records of business transactions
o What you need to record: ​money, transactions and events.
● Classifying – ​involves grouping similar items that have been recorded. Once they are classified
● information is ​summarized​ into reports which we call financial statements.
✔ Significant manner​- proper way of recording, classifying and summarizing. It should be in chronological
order.
3. Concerned with ​transactions and events​ having ​financial character
Example: ​Hiring an additional employee is qualitative information with no financial character. Hence, it is not
recorded. However, the payment of salaries, acquisition of an office building, sale of goods, etc. are recorded
because they involve financial value.
4. Business transactions are expressed ​in terms of money
- They are assigned amounts when processed in an accounting system. It must include monetary figures –
example: 20,000 salaries expense.
5. Interpreting the results
- Information is useless if they cannot be interpreted and understood. The amounts, figures, and other data in
the financial reports have meanings that are useful to the users.
- The accounting information must be understandable for users that will affect in decision-making.
● Accounting is the process of identifying, measuring and communicating economic information to permit
informed judgments and decisions by users of the information
- American Accounting Association
● 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.
- Accounting Standards Council
QUICK TRIVIA! History of Accounting
Babylonia and Egypt
- Record was kept of the number of slaves working for Kings and Pharaohs
- Recorded the materials used and number of days it took for the work to be finished.
- The earliest bookkeeping records were used to keep track of pyramids and palaces being constructed
especially in Babylonia (present-day Iraq) and Egypt.
Ports of Greece 15​th​ Century
- Record was kept of the number of days spent for a trading voyage and number of loaded cargoes and
unloaded for a particular voyage.
- Servants were usually entrusted by their merchant-masters to keep track of their properties (assets)
and the debts (liabilities) they owed especially after a particular voyage.
Contrugli and Fr. Luca Pacioli
- The first accounting book was written by Cotrugli in Naples and the modern double entry bookkeeping
system could be traced from the book prepared in 1494 by an Italian mathematician, Fr. Luca Pacioli
entitled Summa de Aritmetica
- In the Philippines, bookkeeping was introduced by Spaniards and the bookkeeper was called Tenedor
de Libro but even before the Spaniards came, trade was already flourishing between Philippines and
the other Asian countries and records of goods being bartered were kept by the traders.

FUNDAMENTAL BUSINESS MODEL

The business owner will have to invest first to start a business. The business owner provides a capital in different forms
(money, property, service). The capital can be from the bank. The cash that is in business will be called asset (cash) and
will be used for the business (like puhunan and operating assets). Operational assets will be used to produce product or
services and the business will gain sales. The sales will be used again for the business. If enough na yung cash, the
owner can have the money for personal use or save it.

1. Investors – provide required capital for the business. The cash investment will then be held in a bank
account
Business Owner ​needs to invest money or property.

It will only be considered as ​capital​ if it is accounted to the business​.

2. The cash in the business can be:

a. Converted into another type of asset that will be used in the business (e.g. equipment) or sold (e.g.
inventory); or
b. Spent on operating costs such as salaries, rentals and utilities.
Cash is used to buy operating assets
3. The combination of business resources provides the basis for producing the products or services.
The operating assets will be used to produce products or services.
4. The sale of a product or service generates an asset called a receivable. This asset once collected will
produce a cash inflow for the business.
The sales/receivables could be used to buy more operating assets or for the company to continuously produce
products or services.
5. If there’s an existing debt from banks, the cash inflow from collections will be used to provide the debt
providers with interest on their loans to the company.
The rest of the cash can be sent back to the cycle by being converted into other assets or spent on operating
costs (back to stage 2).
In the normal course of business, this whole process will earn profits on which tax will have to be paid.
Any profit after tax can continue to be reinvested in the cycle or paid out to the owners as a “return” on their
investment
TYPES OF BUSINESS
1. Services – ​provides intangible products (products with no physical form)
● Activity: Selling People’s Time
● Structure: Hiring skilled staff and selling their name
● Examples: Software development, Accounting, Legal Services

2. Trader – ​business working with different kinds of products which are sold for consumers (also known as
Merchandising​)
● Activity: Buying and selling products
● Structure: Buying a range of raw materials and manufactured goods and consolidating them,
making
them available for sale to customers
● Examples: Wholesaler, Retailer

3. Manufacture​ – as long as you are designing and creating your own product
● Activity: Designing products, aggregating components and assembling finished products
● Structure: Taking raw materials and using equipment and staff to convert them into finished goods
● Examples: Vehicle assembly, Water, Food and drink, Pharmaceuticals

4. Raw Materials​ – ​you will be producing raw materials (not processed yet)
- Raw materials offerings are processed only to the point required to economically distribute them
● Activity: Growing or extracting raw materials
● Structure: Buying blocks of land and using them to provide raw materials
● Examples: Farming, Mining, Oil

5. Infrastructure​ – ​Users pay for infrastructure as a service

● Activity: Selling the utilization of infrastructure
● Structure: Buying and operating assets; selling occupancy often in combination with services
● Examples: Transport operator, airlines, trains, Hotels, Telecom

FORMS OF BUSINESS ORGANIZATIONS

Sole
Descriptions Partnership Corporation
Proprietorship
Must register with SEC ♥ ♥
Investor has unlimited liability ♥ ♥
Profit may easily be withdrawn ♥ ♥
Must register with BIR ♥ ♥ ♥
Usually managed by its investors ♥ ♥ ♥
Business may easily be terminated ♥ ♥
Large amount of contributed capital ♥ ♥
Can have one or more owners ♥ ♥
Can exist for an indefinite period of time ♥
1. Sole Proprietorship
● It has a single owner called the proprietor who generally is also the manager.
 ● Sole Proprietorship tend to be small service-type (e.g. physicians, lawyer and accountants) business
and retail establishments.
● The owner receives all profits, absorbs all losses and is solely responsible for all debts of the business.
● From the accounting viewpoint, the sole proprietorship is distinct from the proprietor. Thus, the
accounting records of the sole proprietorship do not include the proprietor’s personal financial records.
❖ Advantages:
a. Only small amount of capital is needed
b. Its operation can be managed easily by the proprietor
c. The owner or proprietor gets all the profits
d. Ease in information since only a minimum requirement to legally operate is needed.
❖ Disadvantages:
a. Difficult to expand the business and sell different products or services because of low capital and
only one owner-manager
b. It has no indefinite life. Owner may just one day want to close it, or become incapacitated or die.
c. Owner has unlimited liability. It means that if the business is unable to pay its debt, the bank or
creditor can attach the owner’s personal properties

2. Partnership
● a business owned and operated by two or more persons who bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among themselves.
● Each partner is personally liable for any debt incurred by the partnership.
● Accounting considers the partnership as a separate organization, distinct from the personal affairs of
each partner.
Two Types of Partnership:
o General Partnership
▪ All partners contribute to the day-to-day management of the business
▪ General Partner -​may be personally liable for the debts of the company,
o Limited Partnership
▪ Limited Partner - ​not personally liable for the debts of the company.
If a partner left the business, it will undergo:
o liquidation​ (the business fully ends or stops operating); or
o dissolution ​(the partnership is broken/ended but doesn’t tell if the business can continue or not)
❖ Advantages:
a. Ease in managing the business and in attracting clients because of more owners involved.
b. Management is more efficient because of division of responsibilities among partners.
❖ Disadvantages
a. No indefinite life since disagreements could easily arise because of many owners involved.
b. Partners, like sole proprietors, have unlimited liability.
There should be at least one general partner for the protection of the creditor

3. Corporation
● a business owned by its stockholders.
● It is an artificial being created by operation of law, having the rights of succession and the powers,
attributes and properties expressly authorized by law or incident to its existence.
● The stockholders are not personally liable for the corporation’s debts.
● The corporation is a separate legal entity
Corporation Code - a corporation shall exist for a period not exceeding 50 years from the date of incorporation,
unless sooner dissolved or unless said period is extended
There is an ​incorporator​ – first people who created or formed the corporation initially.
 Investors that are ​shareholders/stockholders​ – owners of the business.
If the incorporator or shareholder died, the business can still continue
❖ Advantages:
a. More capital can be raised because of the large number of shareholders.
b. Can afford to hire experts who can efficiently manage and operate the business.
c. Can exist for an indefinite period of time with a legal life of fifty years, which can be renewed by the
SEC for another fifty years.
d. More stable than a partnership because it is not affected by the withdrawal of a shareholder.
❖ Disadvantages:
a. A shareholder, unlike a sole proprietor or a partner, has no unlimited liability. There is therefore a
higher risk involved on corporate debts since these can only be paid out of corporate funds.
A​fter all assets have been sold, management must first pay creditors using the ​retained capital instead of
giving it to the owners.
b. It is subject to more legal and tax requirements.
c. Abuse of power by the Board of Directors could certainly affect the welfare of the corporation and its
shareholders.
Board of Directors​ – they make policies that are not voted by the whole organization
Qualification to be part of Board of Directors
o High shareholding and voted by the shareholders

ACTIVITIES IN BUSINESS ORGANIZATIONS

The cash flows used and created by each of these activities are listed in the cash flow statement. In there, you will be
identifying in which activities do they belong:

❖ Financing Activities ​(final section of cash flow statements)

Concerned with flow of funds and involves decisions related to ​procurement of funds ​(the process of
finding, agreeing to terms, and acquiring funds from an external source which are the ​owners/stockholders
and ​lenders​) M
​ angungutang o manghihiram ng perang pampaikot ng business.
Transactions that deal with how a business gets its funding.
This is where the business gets its resources
❖ Investing Activities​ ​(second section of cash flow statements)
The business itself is the one who investments into different kinds of assets that will provide benefit on the
business
Transactions related to buying and selling items the firm will use for more than a year (long-term assets)
❖ Operating Activities ​(first section of cash flow statements)
Transactions related to the general operations of the firm like buying raw materials or paying salaries
expenses.
Transactions for day-to-day activities with customers, suppliers, and employees

FUNDAMENTAL CONCEPTS OF ACCOUNTING

Accounting principles serve as bases in preparing, presenting and interpreting financial statements. They provide a
foundation to prevent misunderstandings between and among the preparers and users of financial statements.

● Entity Concept
concept of the accounting entity is applicable whenever accounting is involved
Recognizes a specific business enterprise as one accounting entity, ​separate and distinct from the owners,
managers, and employees of that business.
Personal events and transactions are separated from the business events and business transactions.
 o However, you can record a personal transaction unto the business transaction if it will be affected to
the business.
● Periodicity Concept
A business which prepares financial every year is following this concept.
Involves dividing the life of a business entity into accounting periods of equal length thus enabling the
financial users to periodically evaluate the results of business operations.
The indefinite life of an enterprise is subdivided into time periods (​accounting periods​) which are usually of
equal length for the purpose of preparing financial reports on financial position, performance and cash flows.
o Records in chronological order and uses the actual date where the transaction happened
Accounting Period
o Calendar Year​ –12-month period ending December 31
▪ January 1, 2019 to December 31, 2019
o Fiscal Year ​– 12-month period ending in any day throughout the year
▪ February 1, 2019 – January 31, 2020

● Stable Monetary Unit Concept

Two Characteristics
o Quantifiability - records should be stated in terms of money, usually in the currency of the country
where the financial statements are prepared.
o Stability of the currency - the purchasing power of the said currency is stable or constant and that
any insignificant effect of inflation is ignored.
▪ If you are using peso and there’s a transaction with dollars, convert dollars into peso
▪ You can also separate a statement for different currencies
● Going Concern
This concept assumes that the business has an indefinite economic life
A business entity will continue to operate indefinitely, or at least for another twelve months. ​Financial
statements are prepared with the assumption that the entity will continue to exist in the future, unless
otherwise stated (by the owner).
The business continues even if you feel that it could no longer continue unless it has been decided by the
owners

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

Aims to improve the clarity, consistency, and comparability of the communication of financial information.
It is qualitative principle not quantitative
These are the usual standards that you must follow when you recognize income, expense, liabilities, assets.

Three Criteria:
● Relevance
A principle is relevant to the extent that results in information that is meaningful and useful to the users of the
accounting information (especially in decision making).
● Objectivity
 You should use only factual, verifiable data in the books, never a subjective measurement of values. (free
from error)
The accounting information is not influenced by personal bias or judgment of those who provide it. (not
biased)
Faithful representation, you must record what really happened.
● Feasibility
Can be implemented without much complexity or cost.
Is the business feasible? Will the business operate as planned?
Are you able to provide the accounting information?

BASIC PRINCIPLES OF ACCOUNTING

● Objectivity Principle
You should be objective not subjective
Free from error and not biased (same as the explanations above)
Faithful representation, you must record what really happened
● Historical Cost
the value of an asset on the balance sheet is recorded at its original cost when acquired by the company
You record on how much you bought it or in ​fair value (the actual value of an asset that is agreed upon by both
the seller and the buyer)
● Revenue Recognition Principle
Revenues are recognized through the income statement of your company
Two Basis
o Cash Basis
▪ Income/revenue is recognized when it is received not when earned
o Accrual Basis​ (used in Financial Accounting)
▪ Income/revenue is recognized when it is earned not when received

● Expense Recognition Principle

Expenses are recognized through the income statement of your company
Two Basis
o Cash Basis
▪ Expense is recognized when it is paid regardless of when incurred
o Accrual Basis​ – used in Financial Accounting
▪ Expense is recognized when it is incurred regardless of when paid
● Adequate Disclosure
All essential information is included in financial statements for an investor or creditor to rely on when analyzing a
company (even if it cannot be presented as numbers).
● Materiality
An accounting standard can be ignored if the net impact of doing so has such a small impact on the financial
statements that a reader of the financial statements would not be misled.
The way you record or present the numbers must be assessed if it it’s material enough for the decision making?
● Consistency Principle
Refers to a company's use of accounting principles over time.
 If there are multiple methods, a company should apply the same accounting method over time (must be
consistent)

USERS OF FINANCIAL INFORMATION

Direct Users – External Users: ​- u
​ sers that are not involved with the management of the business
● Owner or Investor
o “Is the business profitable?”
o “Has it accumulated sufficient financial wealth to remain stable?”
To help them make decisions on what to do with their investments (shares of stock), i.e. hold, sell, or buy
more.
● Lender or Creditor
o Will the business be able to pay its debt when it falls due?
o Does it have liquid assets?
They are interested in the company’s ability to pay liabilities upon maturity (​solvency)​ .
● Supplier
o If offered on credit, will the business who is buying merchandise in bulk be able to pay its
account on the date it becomes due?
o Does it have liquid assets?
Interested in the company’s ability to pay obligations when they become due.
They are nonetheless especially interested in the company's ​liquidity – its ability to ​pay short-term
obligations​.
● Government
o Is the business paying the right taxes?
o Is it filing all the required documents?
Interested in an entity's financial information for taxation and regulatory purposes.
To know how much the taxpayer makes to determine the tax due thereon.
● Employee
o Higher wages, benefits, good working conditions and security of tenure
Interested in the company’s profitability and stability.
They are after the ability of the company to pay salaries and provide employee benefits.
They may also be interested in its financial position and performance to assess company expansion
possibilities and career development opportunities.
● Customer
o Right price and right quality
Interested in the company’s ability to continue its existence and maintain stability of operations.
This need is also heightened in cases where the customers depend upon the entity.

​ sers that are involved with the management of the business

Direct Users – Internal Users:​ ​- u
● Manager
o Are the plans being implemented beneficial to the business?
o Is the business operating profitably?
 They decide according to the financial information

Indirect User: - ​you don’t have to give them directly the financial information but they might be interested in looking at it.
● Stock Exchange
Financial information facilitates the stock exchange to protect the investors’ interests or to watch as a
watch-dog of corporate investors.
● Trade associations ​- ​an association of people or companies in a particular business or trade, organized to
promote their common interests.
May analyze the financial statements for the purpose of providing service and protection to their members
(financial securities)
● Regulatory bodies
They have to look on the financial information on how the business has been running in long time and how
you price your product in order to approve your business or products/service
● Financial analysts ​- ​assess the financial condition of a business or asset to determine if it is a sound
investment.
Helps the company to make business decisions

WEEK 4:
ACCOUNTING EQUATIONS & DOUBLE-ENTRY SYSTEM

ELEMENTS OF FINANCIAL STATEMENTS

 ELEMENTS Definition
Assets - A present economic resource controlled by the entity as a result of past events. An
economic resource is a right that has the potential to produce economic benefits.

Liabilities - A present obligation of the entity to transfer an economic resource as a result of past
events.

Equity - The residual interest in the assets of the entity after deducting all its liabilities

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

ASSETS ​– properties of the business. Should have these three parts:

● Right​ – it is a right to be controlled by the owner.
● Potential to produce economic benefits​ – something sa business
● Control​ – controlled by the owner for business purposes
Accounts Receivable ​– pinautang informally or walang promissory note
Notes Receivable​ – the formal way of pagpapautang or may note

CLASSIFIED ASSETS EXAMPLES OF ASSET ACCOUNTS

Current Assets
- It is a current asset when it is
convertible into cash within one year.
- It can be realized within one year /
should be realized within the normal
operating cycle (operating assets -
sold - cash)
● Cash
● Cash Equivalents
- time deposits (cannot be used at a certain period or within
3-months)
● Notes Receivable​ - pinautang
● Accounts Receivables
● Inventories
● Prepaid Expenses
- binayaran in advance na di pa nagagamit (ex.: advanced rent
expense)

Non-current Assets ● Property, Plant, Equipment​ (​Land)​

(long term asset)
- It is a non-current asset if it could
give a benefit to business in more
than one year
● Accumulated Depreciation
- When the asset gets old, the value gets lower or depreciates. It is a
contra account​ – it lowers the value of an asset
● Intangible Assets
- assets that cannot be seen.
- More on literary content or trademarks that has a copyright or
patent.

LIABILITY

● Entity has an obligation

● The obligation is to transfer economic resources
● The obligation is a present obligation that exists as a result of past event

CLASSIFIED LIABILITIES EXAMPLES OF LIABILITY ACCOUNTS

Current Liabilites ● Accounts Payable
- If you have to do your obligation or ● Notes Payable
pay it within one year ● Accrued Liabilities
- Expenses already incurred but not yet paid
● Unearned Revenue
- Income already collected but not yet earned
- It is a liability because it is still an obligation
● Current Portion of Long-Term Debt

Non-current Liabilities ● ​Mortgage Payable

(long term liabilities) - Nangutang sa isang financial institution (like banks) na may
- collateral (may habol siya sayo)
● Bonds Payable ​– like notes payable but long-term and has many
technicalities

EXAMPLES OF OWNER’S EQUITY

ACCOUNTS
● Capital
● Withdrawals
- it is a ​contra account (​ because it
lessens the value of the capital or
the owner’s equity)
● Income Summary

OWNER’S EQUITY

● Residual interest in the assets of the enterprise after deducting all its liabilities
● Invested by the owner

EXAMPLES OF INCOME
ACCOUNTS
● Service Income
- From services
● Sales
- From goods

INCOME​ – kita

● Increase in assets or decreases in liabilities, that result in increase in equity, other than those relating to
contributions from holders of equity claims.
● If the owner invests, it is a capital not an income.

EXPENSE

● Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to the
distributions to holders of equity claims.

EXAMPLES OF EXPENSE ACCOUNTS

● Cost of Sales
● Salaries or Wages Expenses
● Telecommunications, Electricity, Fuel and Water Expenses
● Rent Expense
● Supplies Expense
● Insurance Expense
● Depreciation Expense​ (partner of Accumulated Depreciation)
● Uncollectible Accounts Expense​ – if yung pinautang is parang di na mababayaran
● Interest Expense

THE ACCOUNT
● The basic summary device of accounting.
● A separate account is maintained for each element that appears in the balance sheet (assets, liabilities,
and equity and in the income statement (income and expenses)
● May be defined as detailed record of the increases, decreases and balance of element that appears in an
entity’s financial statements
● Simplest form of the account is known as the “T” account because of its similarity to the letter “T”.
● The account has three parts as follows:
Account Title
Left side Right side
Or Or
Debit​ side Credit ​side

THE ACCOUNTING EQUATION

Assets = Liabilities + Owner’s Equity
Asset – Liabilities = Owner’s Equity
Assets – Owner’s Equity = Liabilities

● Note that the assets are on the left side of the equation opposite the liabilities and owner’s equity. This
explains why increases and decreases in assets are recorded in the opposite manner (“mirror image”)
as liabilities and owner’s equity follow the same rules of debit and credit.
● The logic of debiting and crediting is related to the accounting equation. Transactions may require
additions to both sides (left and right sides), subtractions from both sides (left and right sides), or an
addition and subtraction on the same side (left or right side but in all cases the equality must be
maintained.
Permanent/ Real Accounts
● Assets, Liabilities, and Owner’s Equity

Temporary/ Nominal Accounts

● Income and Expense.
● It is temporary as net profit or net loss is added or subtracted to Owner’s Equity.

DEBITS AND CREDITS – THE DOUBLE-ENTRY SYSTEM

Double-entry system – dual effects of a business transaction is recorded. A debit side entry must have a
corresponding credit side entry. For every transaction, there must be one or more accounts debited and one or
more accounts credited. Each transaction affects at least two accounts. The total debits for a transaction must
​ hat you put on debit must have the same value on what you put on credit.
always equal the total credits. W
Summary Rules of Debit and Credit
Balance Sheet Accounts
Assets Liabilities and Owner’s Equity
Debit Credit Debit Credit
(+) Increases (-) Decreases (-) Decreases (+) Increases
Normal Balance Normal Balance
The account type determines how increases or decreases in it are recorded. Increases in assets are
recorded as debits (on the left side of the account) while decreases in assets are recorded as credits (on the
right side). Conversely, increases in liabilities and owner’s equity are recorded by credits and decreases are
entered as debits.
Income Statement Accounts
Debit for decreases in Owner’s Equity Credit for increases in Owner’s Equity
Expenses Income
Debit Credit Debit Credit
(+) Increases (-) Decreases (-) Decreases (+) Increases
Normal Balance Normal Balance

Normal Balance​ - based on the Accounting Equation

The rules of debit and credit for income and expense accounts are based on the relationship of these
accounts to owner’s equity. Income increase owner’s equity and expense decrease owner’s equity. Hence,
increases in income are recorded as credits and decreases as debits. Increases in expenses are recorded as
debits and decreases as credits.

NORMAL BALANCE
● The normal balance of any account refers to the side of the account – debit or credit – where increases are
recorded.
● Asset, owner’s withdraw and expense accounts normally have debit balances
● Liabilities, owner’s equity and income accounts normally have credit balances.

ACCOUNTING FOR BUSINESS TRANSACTIONS

Sample Illustration – Accounting for Business Transactions
During March 2020, the first month of operation, various financial transactions took place. These
transactions are described and analyzed as follows.
March 1 Del Mundo started his new business by depositing P350,000 in a bank account in the name of
Del Mundo Graphics Design at BPI Poblacion Branch
March 5 Computer equipment costing P145,000 is acquired on a cash basis
March 9 Computer supplies in the amount of P25,000 are purchased on account.
March 11 Del Mundo Graphics Design collected P88,000 in cash for designing interactive websites for two
exporters based inside the Ortigas Ecozone.
March 16 Del Mundo paid P18,000 to Ceradoy Bills Express, a one-stop bills payment service company,
for the semi-monthly utilities.
March 17 The entity has service agreements with several Netpreneurs to maintain and update their
websites weekly. Del Mundo billed these clients P35,000 for services already rendered during
the month.
March 19 Del Mundo made a partial payment of P17,000 for the March 9 purchase on account
March 20 Checks totaling P25,000 were received from clients for billings dated Mar.17
March 21 Del Mundo withdrew P20,000 from the business for his personal use.
March 27 Warlito Blanch Publishing submitted a bill to Del Mundo for P8,000 worth of newspaper
advertisements for this month. Del Mundo will pay this bill next month.
March 31 Del Mundo paid his assistant designer salaries of P15,000 for the month.

Assets = Liabilities + Owner's Equity

Owner's
Date Assets Liabilities Equity
Accounts Computer Computer Accounts De Mundo,
Cash Receivables Supplies Equipment Payable Capital
March 1 350000 350000
Balance 350000 0 0 0 0 350000

March 5 - 145000 145000

Balance 205000 0 0 145000 0 350000

March 9 25000 25000

Balance 205000 0 25000 145000 25000 350000

March 11 88000 88000

Balance 293000 25000 145000 25000 438000

March 16 - 18000 - 18000

Balance 275000 0 25000 145000 25000 420000

March 17 35000 35000

Balance 275000 35000 25000 145000 25000 455000

March 19 - 17000 - 17000

Balance 258000 35000 25000 145000 8000 455000

March 20 25000 - 25000

Balance 283000 10000 25000 145000 8000 455000

March 21 - 20000 - 20000

Balance 263000 10000 25000 145000 8000 435000

March 27 8000 - 8000

Balance 263000 10000 25000 145000 16000 427000

March 31 - 15000 - 15000

Balance 248000 10000 25000 145000 16000 412000
428000 428000

Journal
Date Account Titles & Explanation P.R. Debit Credit
2020
March 1 Cash 350000
Del Mundo, Capital 350000
To record the cash invested by the owner

March 5 Computer Equipment 145000

Cash 145000
To record purchase of computer equipment

March 9 Computer Equipment 25000

Accounts Payable 25000
To record the cash collection for designing interactive
websites

March 11 Cash 88000

Service Income 88000
To record the cash collection for designing interactive
websites

March 16 Utilities Expense 18000

Cash 18000
To record payment of utility bills

March 17 Accounts Receivable 35000

Del Mundo, Capital 35000
To record service rendered billed to several Netpreneurs

March 19 Accounts Payable 17000

Cash 17000
To record partial payment of computer supplies purchased
on account last March 9

March 20 Cash 25000

Accounts Receivable 25000
To record checks received from customer previously billed in
March 17

March 21 Del Mundo’s, Drawings 20000

 Accounts Receivable 20000
To record cash withdrewn from the business for personal use

March 27 Advertising Expense 8000

Accounts Payable 8000
To record billed advertisement that will be paid next month

March 31 Salaries Expense 15000

Cash 15000
To record payment of assistant designer’s salaries