THE FIVE FINANCIAL STATEMENTS (FS)  Purchasing power is to remain relatively

stable over the years

1. Statement of Financial Position (SFP/Balance
Sheet)
2. Statement of Comprehensive
(SCI/Income Statement)
3. Statement of Changes in Equity (SCE)
4. Statement of Cash Flows
5. Notes to the Financial Statement
OBJECTIVES OF FINANCIAL STATEMENTS
 Inflation is ignored
 Money transactions must the one only
Income
recorded
5. Time-Period Assumption
 FS may be prepared monthly, quarterly,
or annually.
 The life of an economic entity can be
divided equally

 Provides information about the financial BASIC ACCOUNTING PRINCIPLES

position (SFP), financial performance (SCI), and
1. Cost Principle
cash flows of a business
 Cost should be recorded based on its
 Provide information about a business’ assets,
actual/original cost of acquisition. The
liabilities, equity, income and expenses,
prevailing market value is excluded
contributions by and contributions to owners in
2. Full Disclosure Principle
their capacity as owners, and cash flows
 Important info must be included in the
ACCOUNTING financial report
3. Matching Principle
 Process of identifying, measuring, and
 The revenue recorded should have its
communicating economic info to permit
corresponding expense recorded in
judgment and decisions by users of the info
order to show the true profit of the
(American Accounting Association - AAA)
business
 The art if recording, classifying and summarizing
4. Revenue Recognition Principle
in a significant manner and in terms of money,
 Revenues are recognized as soon as
transactions and events which are in part at
goods have been sold
least of financial character, and interpreting
5. Materiality Principle
results thereof. (American Institute of Certified
 Another accounting principle may be
Public Accountants – AICPA)
violated if an amount is insignificant
 Luca Pacioli: Father of Accounting
6. Conservatism/Prudence Principle
UNDERLYING ACCOUNTING ASSUMPTIONS  Anticipate no profit and provide for all
losses
1. Economic Entity Assumption
 (Di ko rin masyado gets ito sorry
 business transactions must be
hahaha)
separated from personal transactions
7. Objectivity Principle
 business is distinct from the owner
 Business transactions must have source
2. Accrual Basis Assumption
documents that will be needed for
 Every BUSINESS transaction must be
bookkeeping and financial reporting
recorded in the accounting records
8. Consistency Principle
3. Going Concern Assumption
 Accounting procedures should be
 The business shall continue to operate
applied on a uniform basis from period
in an indefinite period of time
to period
 Assets are recorded at their original
9. Timeliness
acquisition costs and not based on their
 Accounting information must be
market values
available when a decision is to be made
4. Monetary Unit Assumption
BASIC ACCOUNTING EQUATION
 Assets = Liabilities + Owner’s Equity
EXAMPLES OF ASSETS:
Account – individual accounting record of the
movements (increases and decreases) in specific
accounts
Chart of Accounts – Listing of all the accounts and is
usually tailored to the operations of the business. It is a
guide for bookkeepers or accountants for uniformity.
Example:
EXAMPLES OF LIABILITIES:
MAJOR ACCOUNTS
1. Assets – resoruces controlled by the business as
a result of past transactions and events from
which fututre economic benefits are expected
to flow within the business
2. Liabilities – present obligations if an entity
arising from past transactions or events, the
settlement of which is expected to result in an
outflow from the business of resources
embodying economic benefits
 Current Liab – expected to be paid
within a year
 Noncurrent Liab – expected to be paid
beyond a year
3. Equity – represents onwership and its
terminology changes depending on the form of
business organization
4. Revenue – earnings arising from the main line of
operations of the business
5. Expenses – costs incurred by the business in
generating revenues
 Cash
 Accounts Receivable (A/R) – money owed by the
customers to the business
 Notes Receivable (N/R) – money owed by the
customers to the business WITH a promissory
note
 Inventories – finished goods
 Unused supplies
 Prepaid Rent – advanced payment for future
rental payments
 Property, Plant, and Equipment (PPE)
 Building
 Land
 Allowance for Doubtful Accounts – contra-asset
which refers to the portion of the A/R that is
estimated to be uncollectible at the end of a
particular accounting period (bawas sa assets)
 Accumulated Depreciation – contra-asset which
refers to the aggregate portion of the total cost
of PPE that has been charged to the
depreciation expense
 Accounts Payable (A/P) – amount of money
owed by the business to the creditors/suppliers
 Notes Payable (N/P) – amount of money owed
by the business to the creditors/suppliers WITH
a promissory note
 Loan Payable
 Mortgage Payable
 Unearned Revenue – cash collected by the
business in advance for a service or good that is
yet to be rendered or delivered
BOOK OF ACCOUNTS – JOURNALS and LEDGERS 9. Preparing post-closing Trial Balance
10. Journalizing and Posting Reversing Journal
JOURNAL
Entries.
 used to record chronologically all transactions of
a business as they occur
 Book of Original Entry
 Two Types: Special and General Journals

ADVANTAGES OF A JOURNAL:

1. Systematic and chorological record of

transactions
2. Simplifies the ledger
3. Presents adequate explanation and necessary
info
4. ensures that the double-entry bookkeeping
system is observed
5. helps in solving misunderstanding

LEDGER

 Used to sort all entries made in the journal in

chronological order to facilitate the preparation
of the FS
 Book of Final Entry
 Two Types: General and Subsidiary Ledgers

ADVANTAGES OF A LEDGER:

1. Provides a detailed info about revenues and

expenses in one place, hence the results of
business operations can be easily determined
2. Provides detailed information about assets,
liabilities, and owner’s equity of the business
3. It assists management in monitoring business
performance through in individual ledger
accounts
4. Serves as a tool for auditors to track the flow of
the business transactions for a given period of
time

ACCOUNTING CYCLE:

1. Analyzing business transactions from source

documents
2. Journalizing the business transactions
3. Posting the journal entries to the ledger
4. Preparing (Unadjusted) Trial Balance
5. Journalizing and Posting Adjusting Journal
Entries
6. Preparing Adjusted Trial Balance
7. Preparing Financial Statements
8. Journalizing and Posting Closing Journal Entries