1.

1 The History and Definition of Accounting

         Accounting is as old as civilization. The earliest bookkeeping records were used by the
Egyptians in building their pyramids. This is to keep track of the number of slaves, the number
of days work, and the materials used in building these pyramids. It is also used to register
people living in towns or cities for purposes of collecting taxes which is similar to the “ census”
of today. It is also used in various trading ports to record their cargoes loaded and unloaded.

The History of Accounting

If Matthew does not have records, how can he collect taxes from the people?
However, it is very evident that the modern-day accounting has an Italian influence.

 In Genoa, Italy, The oldest double-entry books were written in 1340

entitled"Massari (Treasury Officials) Ledgers of Commune de Genoa". These books were
known as a "perfect double-entry form". Under the present system, this is the simplified T-
Account.
 In Florence, Italy, 14th century, Amantino Manucci, invented the double-entry records
wherein debts were written over credits or the Florentine Approach. This method is now
shown in the Journal Entries.

 In Venice, Italy, Merchants kept their accounts in a bilateral form (Alla Veneziana), with
debits recorded on the left side of the page across from credits. This is the“Venetian 
Approach” now our ledger postings. This method was introduced in the extant books of
Andrea Bargarigo.
Florentine Approach   

Vanetian Approach

   The "Summa de Aritmetica"

In this book Fr. Pacioli introduced three(3) important book of records, namely:

 Memorandum book- contains all the information about the transaction (narrative)
 Journal Book - for the original entry
 ledger book - for the final entry (posting) , the center of the accounting system.

Through the Venetian Method, double-entry accounting became known to the world. The
present Ledger posting is the modern adoption of the Venetian method. For this reason, Fr.
Luca Pacioli is known as the "Father of Modern Accounting" even if he was neither an
accountant or a merchant.

Actually, The Debit and Credit or the “DR. and CR.” used in double-entry bookkeeping are from
the Latin words “ Debere and Credere".
  Debit or Debere (DR.) means ”to receive.”

 A credit or Credere (CR.) means “ to part with”

The double-entry bookkeeping system emphasizes the principle of balance in every

transaction, wherein “for every value received, there is a corresponding value parted with.” Let
us illustrate, your left hand or left side represents the Debit, and your right hand or right side
represents the Credit. Both hands should have equal values. And, this is easily represented by
the T-account.

The CPA can practice accounting in four (4) major fields such as public accounting (for
accountants in accounting/auditing firms), private accounting (for accountants in private
companies), education accounting (for accounting teachers), and government accounting (for
government accountants).
          The CPA in the Philippines was only forty -three (43) in the 1920s and would you believe
that to date the number has grown to more than one hundred sixty (160,000) thousand plus.
So, that is the history of accounting. The End.
 

Definition of Accounting

Accounting has many definitions given by different accounting bodies:

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)
ACCOUNTING is an information system that measures, processes, and communicates financial
information about an economic entity in making economic decisions. (FINANCIAL  ACCOUNTING STANDARDS
BOARD)

ACCOUNTING is the process of identifying, measuring, and communicating economic

information to permit informed judgments and decisions by users of the information. (American
Institute of Certified Public Accountants)

ACCOUNTING 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 a financial character,
and interpreting the results thereof    (American Institute of Certified Public Accountants)
 To simplify:
1.1.2 The Account Profession and Other Related Topics

The Practice of Accounting in the Philippines actually started in the Spanish period until it was
recognized as a profession in the 1920s.  From forty-three (43) registered accountants in 1923,
it has grown to more than 160,000 today. Would you believe that the accounting profession
now,  has attained its' status as equivalent to that of law and medicine? So you see, that is how
important the practice of accounting is.
And, to regulate the accounting profession in the Philippines, the Board of
Accountancy (BOA) was created. It is under the Professional Regulations Commission (PRC) ,
the body which is in-charge the licensing of all specialized professions in the Philippines.

REPUBLIC ACT 9298

(Philippine Accountancy Act of 2004)

 serves as the regulating law for the practice of   Accountancy in the Philippines.
 Sections of RA 9298 :
o scope of practice of accountancy
o creation of the Professional Regulatory Board for CPAs
o examination and qualification of applicants
o Scope of the examination and required rating
o Report of ratings of passed and failed candidates

Four Sectors in the Practice of Accountancy

 Public Accountancy -involves the rendering of audit or accounting related services to

more than one (1)  client on a fee basis.
 Commerce and Industry - refers to employment in the private sector requiring
professional knowledge as a CPA.
 Education and Academe - involves the teaching of accounting, auditing, taxation, and
other technology-related subjects.
 Government - employment in the government where professional knowledge as a CPA
is a pre-requisite.

 The work of an accountant goes far beyond the simple summarizing of financial information for
the business entity to know how much profit was made, its' receivables and obligations, The
accountant also embarks on different types of work or what we call specialization.

Branches of Accounting

 Financial Accounting - focuses on general-purpose financial statements

 Management Accounting - focuses on special purpose financial reports for use by an
entity's management
 Tax Accounting - involves the preparation of tax returns and rendering tax advice.
 Government Accounting - refers to the accounting for the government, the emphasis is
on the custody and disposition of public funds.
 Cost Accounting - the systematic recording and analysis of the cost materials, labor, and
overhead incident to production.
 Auditing - the process of evaluating the correspondence of certain assertions with
established criteria and expressing an opinion thereon.

Three  (3) Requirements to qualify to practice the Accountancy Profession

The person must:

 be a holder of a Bachelors Degree in Accountancy

 pass the difficult CPA Licensure Examination (CPALE) administered by the Board of
Accountancy with an average rating of 75% (with no grade lower than 65% in any subject).
The examination is given every May and November of each year.
 accredited by the BOA to practice accounting upon showing that such registrant has:

o acquired a minimum of 3 years of meaningful experience in any of the areas of

public practice including taxation

o completed the required 120 Continuing Professional Development (CPD) units as

mandated by RA 10912, the law strengthening all regulated professions to enhance the
technical skills and competence of the CPA.
1.1.2.1 The Accounting Standards

The Need for Reporting Standards

 Entities should follow a uniform set of generally acceptable reporting standards when
preparing and presenting financial statements; otherwise, financial statements would be
misleading.

 The term “generally acceptable” means that either

o the standard has been established by an authoritative accounting rule-making
body; or
o the principle has gained general acceptance due to practice over time and has
been proven to be most useful

 Accounting Standards  in the Philippines

The Accounting Standards promulgated by the Financial Reporting Standards Council (FRSC)

constitute the “highest hierarchy” of GAAP in the Philippines which is comprised of the
following:
1.Philippine Financial Reporting Standards (PFRS)
2.Philippine Accounting Standards (PAS)
3.Interpretations
 Accounting Standard Setting Bodies and other relevant organizations
Financial Reporting Standards Council (FRSC)

  is the official accounting standard setting body in the Philippines created under the Phil.
Accountancy Act of 2004 (RA 9298).
 It is composed of a chairman and 14 representative members.
  It replaced the Accounting Standards Council (ASC) which was created in 1981 to
establish and improve the generally accepted accounting standards in the Philippines.

Philippine Interpretations Committee (PIC)

 -it has the role of reviewing the interpretations of the International Financial Reporting
Interpretations Committee (IFRIC) for approval and adoption of the FRSC.

International Accounting Standards Board (IASB)

 the standard-setting body of the IFRS foundation with the main objective of developing
and promoting global accounting standards.
International Financial Reporting Interpretations Committee (IFRIC)

   the committee that prepares interpretations of how specific issues should be

accounted for under the application of the IFRS.

IFRS Advisory Council (IFRSAC)

 group of organizations and individuals with an interest in international financial

reporting.

International Federation of Accountants (IFAC)

  it is a non-profit , non-governmental, non-political organization of accountancy bodies

that represents the worldwide accountancy profession.

Board of Accountancy (BOA)

  the professional regulatory board created under RA 9298 to supervise the registration,
licensure and practice of accountancy in the Philippines.
 It consists of a chairperson and 6 members with a tenure of  1 year.

Philippine Institute of Certified Public Accountant (PICPA)

 The national professional organization of Certified Public Accountants in the Philippines

having the basic authority of setting-up and implementing rules vital to the accounting
profession.
 Accounting Associations under the wing of PICPA
o National Association of Certified Public Accountants in Education (NaCPAE) –for
accounting professors
o Government Association Certified Public Accountants (GACPA) –for government
accountants
o Association of Internal Auditors (AIA) – for all internal auditors
o Association of CPAs in Commerce and Industry (ACPACI) -for all private and
public accountants
1.1.2.2 The Conceptual Framework and the Basic Accounting Concepts and
Principles

The “Conceptual Framework"

 a set of concepts and principles used in the preparation and presentation of financial
statements and is divided into eight (8) chapters as shown above.

  The objective in the preparation of the financial statements

 is to provide information about the financial position, performance and changes in the
financial position of an entity  that is useful in making economic decisions. 

To meet these objectives , the financial statements must be prepared based on generally
accepted accounting principles and assumptions .
 The “Qualitative Characteristics” that makes the financial statements trustworthy and useful
for stakeholders  :

1. Understandability - the financial information must be clear when it comes to

terminologies used, form and presentation must be in order, and the user must have
reasonable knowledge of accounting and other related fields such as finance and economics
to be able to understand the information. 
2. Relevance- the ability of the information to help the user forecast future events
(predictive value), confirm or correct prior expectations (feedback value). The information
must also be “material and timely” so as to greatly influence the decision of the user.
3. Reliability- the information is free from bias and material errors or misstatements. The
information should be  verifiable and based on facts.
4. Comparability- the financial information should be comparable with other business
enterprise on the same line of business. It is also a requirement that the company is
consistent or uses the same accounting principles and methods from year to year.
5. The Accounting Concepts and Principles used in analyzing financial data:
1. Going-concern assumption -assumes that the business enterprise will continue to
operate for an indefinite period of time or for more than one year.
2. Monetary unit assumption -business transactions are expressed in terms of money ( or
the legal currency of  the country).
3. Economic/Business entity concept- the owner is separate from the business. So, the
personal transactions of the owner  is not mixed with the transactions of the business.
4. Time period assumption -the life of the business is divided into a series of reporting
periods which can be monthly, quarterly, semi-annual or yearly.An accounting period is
normally a period of twelve (12) months. It can either be a “calendar year’ or a fiscal year.
5. Double-entry system concept- each business transaction should be recorded in two (2)
parts or the Debit and Credit.
6. Materiality concept- a business transaction is considered material if its omission or
misstatement could greatly influence an economic decision which can be based on the
nature and size of the transaction.
7. Cost-Benefit principle- the value of acquiring a financial information should not exceed
the benefits derived from it.
8. Accrual basis of accounting -revenues should be recorded when earned and expenses
when incurred. It does not matter if cash has been received or paid.
9. Cost Principle (Historical Cost Concept) -the value of an asset should be recorded based
on its’ acquisition cost or the actual price that you paid for the asset.
10. Concept of Articulation- the components of a complete set of financial statements are
interrelated, so they should be interpreted as a whole see the whole picture.
11. Full disclosure principle- all necessary information that can not be presented on the
face of the financial statements should be included in the notes to the financial statements.
12. Consistency concept -the financial statements are prepared based on the same
accounting methods and principles from year to year; and any change in the accounting
policies should be disclosed in the notes.
13. Matching principle- the corresponding expenses should be recognized on the same
period that the revenue or income is generated.
14. Entity theory- It gives emphasis on the income statement and the basic accounting
equation “Assets = Liabilities + Equity. “
15. Prudence concept (Conservatism principle)-  emphasizes on the use of caution when
making estimates such that “assets/revenues are not overstated and liabilities/ expenses
are not understated.
1.1.2.3 The Accounting Information System

Principles of an effective and efficient Accounting Information System

1. The accounting system must be cost effective.Benefits of information must outweigh the cost of
providing it.

2. It must be useful to serve its purpose. The financial statements and reports generated should be
relevant, reliable , accurate and timely.

3. It must be flexible to changes such as technological advances,government rules ,regulations and de-
regulations,increased competition, and changing accounting principle.
1.1.2.4 The Financial Statements

Why are the accountants very famous every last quarter of the year ? That is because of the financial
statements that accountants prepare for submission to different regulatory bodies like the BIR , SEC, BSP
and other interested parties.

The Financial Statements (FS) are the basic financial reports of the business enterprise which provides
information about the financial position, financial performance and changes in its’ equity, including its
cash flows.

The Complete set of Financial Statements:

 The Statement of Financial Performance

 The Statement of Changes in Equity
 The Statement of Financial Position
 The Statement of Cash Flows
 The Notes to the Financial Statements

Statement of Financial Performance (or the Income Statement)

 this statement provides information regarding the financial performance of the business or its
profitability for a certain period of time.
 It has two (2) elements, the “Revenues and Expenses”.
 If the revenues exceed the expenses, the results of its operation is “Net Income” But if, the
expenses exceed the revenues , the result of its operation is “Net Loss”

Statement of Changes in Equity

 this statements shows the changes in the capital of the owners.

Statement of Financial Position (or the Balance Sheet)

 this statement provides information regarding the financial condition of the business at a given
date.
 It has three (3) basic elements , the “Assets, Liabilities and Equity”. This statement shows the
liquidity or solvency of the business.

Statement of Cash Flows

 this statement shows the cash inflows (sources of cash) and the cash outflows (uses of cash) in the
business under its three activities namely : the operating, investing and financing activities.

Notes to the Financial Statements

 is not a statement, but it is a mandatory requirement in the preparation of the Financial Statements.
It contains the details or breakdown of items that cannot be presented on the face of the financial
statements but makes the financial statements more meaningful to the user.
1.1.3 Business Types, Forms and Activities of a Business
What is a Business?

 It is a commercial activity intended for the development and distribution of goods and
services with the main objective of generating profit.
   In other words, a business is one who is either engaged in the performance of services
to others for a fee; buying and selling of goods, or processing/manufacturing of goods for
sale with a mark-up.

And, in order for the business to know if the business is profitable, liquid or stable, It relies
on the analysis and evaluation of financial reports. Again, that is why we need to study
accounting.

Business Classifications

 Legal Forms of Businesses

Sole Proprietorship
o business is set-up and managed by 1 person called the proprietor

Partnership
o owned by 2 to 5 persons called partners who contribute money, property, talent
/skill or industry to a  common fund with the purpose of sharing the profits among
themselves
Corporation

 composed of 5 – 15 persons  called incorporators;

 Separate legal entity from the owners; can conduct business or enter into a contract by
itself.
 Comparison of the three (3) Forms of Businesses

 Number of Owners and Capital

 Management, Profit and Formation

 Expansion, Lifespan and Liabilities

Types of Business Operations

Service Business

 provides service for a fee to clients or customers

Merchandising

 buys and sells goods or merchandise

Manufacturing

 buys raw materials and process these to finished goods then sells to customers

 Types of Business Activities

Financing Activity

 When the owner finances the business with start-up capital in cash and other resources.
 Withdrawal of capital by owner or investor
 Loans from lenders
 Loans repaid to lenders

Investing Activity

 Acquisition of properties in land, building, machinery, equipment, furnitures.

Operating Activities
 Earning income
  Incurring expenses

1.1 THE ACCOOUNTING CYCLE

-is a series of sequential steps or procedures performed to accomplish the accounting process.

Step 10: Reversing entry (optional) -accomplished at the beginning of the next reporting period,
and applicable only to accounts using the revenue/expense method.
The accounting cycle is divided into two phases:
1. Recording phase (steps 1-3) -these steps are accomplished during the accounting
period.
2. Summarizing phase (steps 4-9)- these steps are accomplished at the end of the
accounting period
3. Reversing entry (step 10 -optional)-accomplished at the beginning of the next
accounting period.
1.2.1 The Accounting Equation and the Double -Entry System

         Before we can proceed to the first phase of the accounting process, it is important to
introduce technical accounting terms that we are going to use. Familiarization of these terms
will give you a better understanding of the process of recording transactions. And, we will start
with the accounting elements.
THE ACCOUNTING ELEMENTS AND ACCOUNTING CHARTS
The accounting elements are affected by “business transactions”.
A business transaction is an exchange of values (of equal amounts) between two parties
expressed in terms of money. It must have a dual effect or a “debit and credit”, this is what we
call the double-entry bookkeeping system.
The relationship of balance between the accounting elements is represented by :

Let us have an example :    

Assets = Liabilities + Owner's Equity

500,00 = 100,000 + 400,000

0

 Assets = Liabilities + +Capital - Drawing+Revenues- Expenses

Let us expand this equation:

 Always remember that both sides of the equation should always be equal.

 Please take note that in the accounting equation, the elements of financial performance
“revenues and expenses” are under the Equity account.

Traditionally, the left side of the accounting equation is called the DEBIT (DR) , and the right is
called the CREDIT (DR).
So as not to be confused in analyzing transactions, your point of reference is always the normal
balance of the account.
GUIDE

Account     Normal Balance Increase the account  Decrease the account

Asset   DR DR CR
Liabilities CR CR DR
Revenues CR CR DR
Expenses DR DR CR
Capital CR CR DR
Drawing DR DR CR

Let us now summarize the effects of business transactions on the accounting elements through
the use of the accounting equation:      
(+) increase in the accounting element
(-) decrease in the accounting element     

Now, Total both sides of the equation.

Totals:   Assets = P 825,000
                 Liabilities + Equity = P 90,000 + P 735,000 = P 825,000
 1.3 Accounting for a Service Business
Steps in the Recording Phase:
1. Analyzing the transactions
2. Journalizing the transactions in the Journals
3. Posting in the Ledgers
The recording phase starts with the analysis of business transactions based on what we call
business documents such as the Official Receipts, Invoices, Billing Statements, Bank Statements,
Debit/Credit memos, etc. These documents are arranged chronologically or by date. These are
the supporting documents for your transactions.
After the transactions are analyzed, these transactions are recorded in the Journal or the “book
of original entry”.
Journalizing is the process of recording chronologically the business transactions based on the
double-entry accounting system. These journalized transactions are what we call “Journal
Entries.”

General Journal Page 1

Date Particulars   Ref  Debit Credit
2020
Jan.      1 Cash     P 100,000
          M. Cruz, Capital     P 100,000
                To record cash investment
      
               2 Equipment           20,000
         Cash           20,000

                To record purchase of equipment

blue - represents the debit entry

red - represents the credit entry
black - represents the date of the transaction and the explanation
If the transactions of the business are few, the business can just use the General Journal. But if
the transactions of the business are numerous, Special Journals are designed to record
repetitive transactions of the business conveniently. Examples of Special Journals are the
Purchase and Sales Journals, Cash Receipts and Cash Disbursement Journal, and Combination
Journals. (We will have a separate discussion on the Special Journals.)
Two (2) Types of Journal Entries:

 Simple entry - there is only one (1) debit and one (1) credit entry.
 Compound entry - if there are three(3) or more accounts required in one (1) journal entry.
1.3.1.1 Summary of Journal Entries
 1.3.2 The Ledger and Posting of Transactions
Now that we are finished journalizing our transactions, The journal entries are then transferred
to their corresponding accounts in terms of DR. and CR. in the General Ledger or the “book of
final entry”. This procedure is what we call “posting”.

 The Ledger refers to the entire group of accounts maintained by the company
 The General ledger (GL) contains all the assets, liabilities and owner's equity accounts
 The simplified General ledger is what we call the “ T-Account”, for the simple reason
that it looks like the letter T.
The General Ledger (GL) is where the transactions of each account is accumulated and the
balance is extracted at the end of the accounting period. Each GL account is assigned an
account no. for easy referencing.

Posting a Journal Entry from the Journal to the Ledger:

General Journal    page  1

Date Particulars   Ref  Debit Credit
2020
Jan.      1 Cash  101     P 100,000
          A. Cruz , Capital     301     P 100,000
               To record the  investment
      

How to post the journal entry above:

 In the  General Ledger (GL) below, Post the  Debit and Credit  entries in their
appropriate accounts (Cash and Cruz, Capital), including the date of the transaction and the
General Journal (GJ) page no.  in the Reference (Ref) Column.
 After posting in the GL, go back to the General Jounal and fill-up the Ref. Column  with
the Account no. of the GL, to indicate that the entry had been posted.

THE GENERAL LEDGERS

Cash 101
Date Particulars   Ref Debit  Credit Balance
2020
Jan.      1 Investment GJ1 P 100,000      P100,000
 CAPITAL 301

DATE PARTICULARS REF DEBIT CREDIT BALANCE

2020

Jan 1 Investment GJ1 P 100,000 P 100,000

The T-Account can also be used for posting (for illustrative purposes

Note: Always check for the equality of the balances by applying the accounting equation

Warning: Journalize first before posting, and not the other way around.

The Control Account and the Subsidiary Ledgers

Subsidiary Ledgers

A Subsidiary Ledger is a group of accounts with a common characteristic, such as customer

accounts.

The subsidiary ledger is assembled to facilitate the recording process by freeing the general
ledger from details concerning individual balances.

Two common subsidiary ledgers are the Accounts Receivable Ledger (customers) and the
Accounts Payable Ledger (suppliers or creditors).

Control Account

The General Ledger account that summarizes subsidiary ledger data is called a Control Account.

Each general ledger control account balance must equal the composite balance of the
individual accounts in the Subsidiary Ledger.

RELATIONSHIP OF GENERAL LEDGERS AND SUBSIDIARY LEDGERS

Advantages of using subsidiary ledgers :

1. Show transactions affecting one customer or one creditor in a single account.

2. Free the general ledger of excessive details.
3. Help locate errors in individual accounts by reducing the number of accounts combined
in one ledger and by using controlling accounts.
4. Create a division of labor in posting by allowing one employee to post to the general
ledger and a different employee to post to the subsidiary ledger.
1.3.3 The Trial Balance (Unadjusted or Preliminary Trial Balance)
After all the transactions have been posted to the General ledger and the balances for each
account determined.

 The balances are transferred to the Trial Balance.

 The Trial Balance is prepared to prove the equality of the DR. and the CR.
This is the first step in the Summarizing Phase
Trial Balance

 is a list of accounts and their balances at a given time.

 The primary purpose of a trial balance is to prove the mathematical equality of debits
and credits after posting.
 A trial balance also uncovers errors in journalizing and posting.
 The procedures for preparing a trial balance consist of
 listing the account titles and their balances,
 totaling the debit and credit columns, and
 proving the equality of the two columns.
Gallardo Accounting Service
Trial Balance

                December 31, 2019

Account
Account Title Debit Credit
No.

10 Cash P 100,000 
11 Accounts receivable 50,000
12 Supplies 10,000
13 Prepaid Insurance 10,000
14 Equipment 50,000
15 Land 750,000
20 Accounts payable P 50,000
21 Notes payable 150,000
22 Taxes payable 50,000
30 F. Gallardo, Capital 500,000
31 F. Gallardo, Drawing
40 Service Income   300,000
51 Licenses expense 30,000  
52 Rent expense 50,000  
53 Salaries expense 50,000  
54 Utilities expense 50,000
                Totals P  1,100,000 P  1,100,000

The equality of the DR and the CR provides a check on the accuracy of the recording and
postings. This initial trial balance is referred to as the “Preliminary or Unadjusted Trial Balance.”
But, If the Trial Balance is out of balance errors might have been committed during  the  
journalization or  posting of transactions.
         However, the equality of the debit and the credit in the trial balance does not necessarily
mean that no errors have been  committed. There are errors that cannot be detected by the
trial balance and might need some adjustments.
There are three (3) types of Trial Balance:

 Preliminary Trial balance  - Unadjusted Trial balance (before adjustments)

 Pre-Closing  Trial Balance - Trial Balance after the adjusting entries had been posted.
 Post -Closing Trial Balance - Trial balance after the closing entries had been posted.

1.4 Summary: Introduction to Accounting and the Service Business

 Introduction to Accounting and the Service Business

1.1. Introduction to Accounting

 Accounting is a system that measures business activities, processes information into

reports, and communicates the results to decision-makers. It is also called the language of
business.
 The accounting profession is regulated by the Board of Accountancy under R.A. 9298.
 Four sectors in the practice of Accountancy
o Public Accountancy
o Commerce and Industry
o Education and Academe  
o Government
 Entities should follow a uniform set of generally accepted reporting standards when
preparing and presenting financial statements; otherwise, financial statements would be
misleading.
 Branches of accounting
o Financial Accounting
o Management Accounting
o Tax Accounting
o Government Accounting
o Cost Accounting
o Auditing

 Legal forms of business

o Sole Proprietorship
o Partnership
o Corporations
 Types of Business Operations
o Service business
o Merchandising business
o Manufacturing
 Types of Business Activities
o Operating activities
o Investing activities
o Financing activities
 The basic financial statements
o Statement of Financial Position (Balance Sheet)
o Statement of Financial Performance(Income Statement)
o Statement of Changes in Equity
o Statement of Cashflows
 
1.2 The Accounting Cycle

 The basic Accounting Equation  is  Assets = Liabilities + Owner's Equity

 The elements of  Financial Position
o Assets
o Liabilities
o Equity  (Capital and Drawing accounts)
 The elements of Financial Performance
o Revenues
o Expenses
 Recording phase-
o analyzing transactions
o journalizing transactions in the Journals
o posting of transactions in the Ledger
 Summarizing phase
o Trial Balance (unadjusted)
o Adjusting Entries
o Adjusted Trial Balance
o Financial Statements
o Closing Entries
o Post-closing Trial Balance
o Reversing entries (optional)
o Post-Closing Trial

 
1.3 Recording Transactions of a Service Business

 Analyzing transactions based on business documents.

 Journalizing transactions in the General Journal (Book of original entry) using the double
-try bookkeeping system.
 The Debit and Credit entries should always be equal.
 The journal entries are posted in the General ledger (Book of final entry) where the
transaction s of each account is accumulated.
 The balances in the General ledgers are extracted and transferred to the Trial Balance.
 The Trial Balance is used to check the equality of the debits and credits.
 The equality of the debits and credits in the Trial Balance does not necessarily mean that
the transactions for the period have no errors in journalizing or posting.