Prepared by: Lord Gen A.

Rilloraza, CPA, MBA

BUSINESS AND ACCOUNTING

Business and Its Objective

 Business refers to any activity that is geared towards earning profit.
 To achieve the objective of earning profit, it is necessary for owners managing the business to know from time
to time the profits earned or losses sustained by businesses. It is also important to know the value of resources
owned by the business and the periodic costs of running the business
 Accounting shows a concise picture of the results of operations and financial condition of the business.
 Accounting is the medium of communication between business entities and many parties; hence, it is called the
language of business

Branches of Accounting
 Financial Accounting – this involves recording and summarizing business transactions and presenting them in the
form of financial statements useful to a variety of users. Accordingly, it emphasizes general-purpose information
that is designed to serve the common needs of a wide range of users.
 Management Accounting – focuses on the needs of internal users, such as management and board of directors.
It is concerned primarily with the types of reports needed by decision-makers to assist them in planning and
controlling the business.
 Tax Accounting – concerned with the type of information that will assist business entities in complying with tax
laws and regulations.
 Government Accounting – deals with recording and reporting of government agencies.

Four Major Areas (Sectors) in Accounting

 Public – the sector of accounting where practitioners provide independent services, such as auditing, tax
accounting, compilation, etc.
 Private, or Commerce and Industry – the sector of accounting where practitioners are employed in a private
entity providing accounting services to the entity, such as general ledger accountants, tax accountants,
controllers, etc.
 Government – the sector of accounting where practitioners are employed in government agencies.
 Academe, or Education – the sector of accounting where practitioners teach accounting, such as professors.

Forms of Business Organizations

 Sole Proprietorship – a business organization that is formed and owned by only one person.
 Partnership – a business organization that is formed and owned by two or more persons, called “partners”.
 Corporation – a business organization created by the operation of law. It is formed by five (5) to fifteen (15)
natural persons.

Types of Business Activities

 Service Type Business – an entity that is primarily engaged in providing services to various customers, such as
hospitals, telecommunication companies, salons, etc.
 Merchandising Business – an entity that is primarily engaged in “trading” or “buying and selling”; such as
retailers, grocery stores, department stores, etc.
 Manufacturing Business – an entity that is primarily engaged in transforming raw materials into finished
products, such as car companies, smartphone companies, semi-conductor companies, etc.

DEFINITION OF ACCOUNTING

Definition Provided by the Accounting Standards Council

“Accounting is a service activity. The accounting function is to provide quantitative information, primarily financial in
nature, about economic entities, that is intended to be useful in making economic decisions.”

Important Points
1) Accounting is about quantitative information which are financial in nature
2) The financial information provided should be useful for decision-making

Definition Provided by the American Accounting Association

“Accounting is the process of identifying, measuring, and communicating economic information to permit informed
judgements or decisions by users of the information.”

Important Points
1) Process of accounting (Identifying, Measuring, and Communicating)
2) Financial statements (where the economic information is provided)
 Prepared by: Lord Gen A. Rilloraza, CPA, MBA

3) For decision-making (by the users of such information)

Process of Accounting
Identifying
 The process of recognition or nonrecognition of business activities as “accountable” events.
 An event is “accountable” or quantifiable when it has an effect on the elements of accounting (assets, liabilities,
equity, income, and expenses).
 Only economic activities (accountable events) are emphasized and recognized in accounting.

Examples of accountable events:

 Purchase of goods from a supplier
 Sale of goods to a customer
 Borrowing money from a bank
 Withdrawal of money by the owner
 Payment of taxes to the government
 Production of finished good using raw materials

Examples of events that are not accountable:

 Hiring of employees
 Death of the entity president
 Promotion of a junior associate to senior associate

Measuring
 The process of assigning peso amounts to accountable economic transactions and events.
 In the Philippines, the unit of measuring accountable economic transactions and events is the Philippine Peso.

Communicating
 The process of preparing and distributing accounting reports (financial statements) to potential users of
accounting information
 Implicit in the communication process are the following aspects:
o Recording (journalizing) – process of systematically maintaining a record of all economic business
transactions after they have been identified and measured.
o Classifying (posting to the ledger) – sorting or grouping of similar and interrelated economic transactions
into their respective classes.
o Summarizing – preparation of the financial statements.

Financial Statements
 This is where the financial information are embodied.
 A complete set of financial statements includes the following:
o Statement of Financial Position – where the Assets, Liabilities, and Equity of an entity are presented.
o Income Statement – where the Revenues, and Expenses of an entity are presented.
o Statement of Changes in Equity – shows the movements in the balances of the equity account/s.
o Statement of Cash Flows – shows the movements in the cash balance of an entity.
o Notes to the Financial Statements – includes information such as detailed assumptions made by the
accountants, breakdown of items presented in the other reports, and other information not presented
in the other reports, but are deemed useful for the users of the financial statements.

Users of Financial Statements

 The users of the financial statements are those individuals (or entities) that use the financial statements for
decision making.
 They may be classified as primary users or other users:
o Primary Users:
 Creditors or Lenders, including potential creditors and lenders
 Owners, shareholders, or investors, including potential owners, shareholders, and investors
o Other Users – those that are not classified as primary users. Examples:
 Employees
 Suppliers
 Customers
 Government agencies
 Public
 Prepared by: Lord Gen A. Rilloraza, CPA, MBA

ELEMENTS OF THE FINANCIAL STATEMENTS

Elements
The elements of accounting are as follows:
1) Assets
2) Liabilities
3) Capital or Equity
4) Income
5) Expenses

Classification based on where the elements are presented

1) Presented in the Statement of Financial Position
a. Assets
b. Liabilities
c. Capital or Equity
2) Presented in the Income Statement
a. Income
b. Expenses

Assets
Assets are the actual resources of the company. These are the economic resources that provide future economic
benefits to the entity.

Examples:
 Cash – coins, bills, checks, and other cash items, on hand and in bank
 Accounts Receivables – amounts collectible from customers for the sale of goods and services
 Notes Receivables – amounts receivable that are evidenced by a promissory note
 Accrued Income – receivable for the value of services earned but not yet collected (such as interest receivable,
rent receivable)
 Merchandise Inventory – goods for sale in the ordinary course of business
 Prepaid Expenses – advance payments for services or rights to be received within the year (such as prepaid rent,
prepaid insurance)
 Office Supplies – Unused stationery and supplies for use in the office
 Land – lot presently used in the business
 Building – buildings used in the business
 Furniture and Fixtures – chairs, tables, fixtures, filing cabinets, shelves, and other fixtures
 Office Equipment – typewriters, adding machines, calculators, computers, copiers, fax machines, paper
shredders
 Delivery Equipment – trucks, vans and other equipment for delivery of goods to customers

Liabilities
Liabilities basically represent the amount owed to other people.

Examples:
 Accounts Payable – amounts due to suppliers for purchase of goods or service, on credit (or on account)
 Notes Payable – obligations to pay evidenced by a promissory note
 Accrued Expenses – liabilities for services already incurred but not yet paid (such as salaries payable, interest
payable, utilities payable)
 Loans Payable – obligations due to banks for loans obtained
 Unearned Revenue – liability for items already collected but not yet earned; meaning, the goods or services
have not yet been provided (such as unearned service revenue, unearned rent revenue)

Equity or Capital
Equity or Capital represents the amount invested by the owner/s, and the amount that can be claimed by the owner/s
from the assets of the entity.

Examples:
 Owner’s Capital – represents the owner’s investment or his equity in the business
 Owner’s Drawing – represents the withdrawal made by the owner for his personal use or in anticipation of
profits
 Prepared by: Lord Gen A. Rilloraza, CPA, MBA

Income (or Revenue)

Income or revenue is basically the amount earned for goods or services sold. Technically, income or revenue represents
the increase in assets or decrease in liabilities not caused by any transactions with the owner/s.

Examples:
 Service Revenue – represents amount earned for service rendered to customers
 Sales Revenue – represents amount earned for the value of goods sold to customers
 Professional Fees Revenue – represents amount earned for professional services rendered to clients
 Rent Revenue – represents amount earned for rental of entity’s property
 Interest Revenue – represents amount earned for interest earned

Expenses
Expenses basically represent amounts used up to obtain revenues. Technically, expenses represent the decrease in asset
or increase in liabilities not caused by any transactions with the owner/s.

Examples:
 Salaries Expense – represents the value of compensation for services received from employees
 Rent Expense – represents the amount incurred for the use of property not owned by the entity
 Insurance Expense – represents the expired portion of the amount of insurance premium paid
 Advertising Expense – represents the amount incurred for the advertising services rendered by others in
promoting the goods or services of the entity
 Repairs and Maintenance Expense – represents the amount incurred for the services or the parts used to repair
or maintain entity’s assets
 Utilities Expense – amount incurred for power, electricity, and water
 Supplies Expense – represents the value of supplies used (specifically termed as Office Supplies Expense, or
Store Supplies Expense)
 Depreciation Expense – represents the portion of the property and equipment that expired during the period

Classification of Accounts
Accounts can be classified as either real or nominal:
 Real Accounts – those accounts representing the assets, liabilities, and capital (i.e., those accounts appearing in
the Statement of Financial Position)
 Nominal Accounts – those accounts representing the income and expenses (i.e., those accounts appearing in the
Income Statement)
 Prepared by: Lord Gen A. Rilloraza, CPA, MBA

ACCOUNTING EQUATION (BASIC)

Before we can analyze the transactions, we have to understand first the accounting equation. The accounting equation
looks like this:

ASSETS = LIABILITIES + CAPITAL

To fully understand the equation, we have to understand that individuals establish a business entity to earn profits. And
in order to earn profits, the business entity must have resources.

In other words, the entity must have ASSETS to earn profits.

In order for an entity to have assets, there must be an investment or a contribution from individuals. The main
contributors of the assets of a company are the owner/s, and the creditors.

CREDITORS

contribute RESOURCES
(ASSETS)

OWNER/S

The contributions of the owner will appear as CAPITAL (or equity), and the contributions of the creditors will appear as
LIABILITIES.

TRANSACTION ANALYSIS (for Basic Accounting Equation)

Dual Aspect Concept

A transaction always involves the exchange of goods and services measurable in money. Since a transaction entails
exchanges of values, for every peso value received, there will always be a corresponding peso value given up.

VALUE RECEIVED = VALUE GIVEN UP

For instance, if you purchase a car for P1,000,000, the two aspects of the transactions are as follows:
 P1,000,000 worth of cash is given up
 A car worth P1,000,000 is received

Accounting requires the recognition and recording of these two aspects of every transaction. This also maintains the
accounting equations.

In other words, if an account is increased or decreased, there must be a corresponding change in another account (or
other accounts).
 Prepared by: Lord Gen A. Rilloraza, CPA, MBA

Summary of Effects of Transactions

ASSETS = LIABILITIES + CAPITAL
1) Increase Increase
2) Increase Increase
3) Increase
(Decrease)
4) (Decrease) (Decrease)
5) (Decrease) (Decrease)
6) Increase (Decrease)
7) Increase
(Decrease)
8) (Decrease) Increase
9) Increase
(Decrease)

Illustrative Example 1
Mr. Bean started a business on January 1, 2021. The following transactions occurred in January:
 January 1 – Mr. Bean invested P200,000 cash
 January 2 – Mr. Bean made additional investments in the form of personal computer and printer, valued at
P100,000.
 January 5 – The entity obtained a loan from a bank for P70,000.
 January 10 – Purchased a delivery truck for P50,000.
 January 15 – Purchased P1,500 worth of supplies on account.
 January 20 – Paid P700 for the supplies purchased on account on January 15.
 January 31 – Mr. Bean withdrew P20,000 cash from the business.

Requirement:
Indicate the effects of the transactions on the assets, liabilities, and capital of the entity.

Solution:
Date Transaction Assets = Liabilities + Capital
Jan. 1 Investment of cash 200,000       200,000
Jan. 2 Investment of computer and printer 100,000       100,000
Jan. 5 Bank loan 70,000   70,000    
50,000        
Jan. 10 Purchase of delivery truck
(50,000)        
Jan. 15 Purchase of supplies on account 1,500   1,500    
Jan. 20 Partial payment (700)   (700)    
Jan. 31 Withdrawal from business (20,000)       (20,000)
  Totals 350,800 = 70,800 + 280,000

Exercise 1
(refer to “1.3.6 Workbook”)

During the month of January, Ms. Fortune, a CPA, had the following transactions:
1. Ms. Fortune invested P250,000 to open her accounting practice.
2. Bought office supplies on account, P10,000.
3. Borrowed P50,000 from a bank.
4. Purchased a land of P75,000.
5. Paid P6,000 on the account for the office supplies.
6. Paid P25,000 of the amount borrowed from a bank.
7. Ms. Fortune withdrew P10,000 for personal use.

Requirement:
Indicate the effects of the transactions on the assets, liabilities, and capital of the entity.
 Prepared by: Lord Gen A. Rilloraza, CPA, MBA

Exercise 2
(refer to “1.3.6 Workbook”)

Mr. Bryant established a car wash business on October 1, 2020. The following transactions transpired during the month:

Oct. 1 – Mr. Bryant invested P800,000

Oct. 2 – A P700,000 bank loan was obtained for additional funding of the business
Oct. 5 – A land costing P300,000, was purchased on cash basis
Oct. 7 – A building was purchased for P500,000 in exchange of a promissory note
Oct. 15 – Various furniture and fixtures were purchased, on account, for P125,000
Oct. 17 – Various office supplies were purchased for P10,000
Oct. 20 – Partial payment of P200,000 was made for the bank loan
Oct. 25 – Payment was made for the purchase of furniture and fixtures
Oct. 30 – Mr. Bryant made a partial withdrawal of P20,000

Requirement:
Indicate the effects of the transactions on the assets, liabilities, and capital of the entity.

Now that we have mastered the effects of the transactions to assets, liabilities, and capital, we can now analyze the
transactions and their effects on the specific accounts under assets, liabilities, and capital.

Illustrative Example 2
(same given as that of Illustrative Problem 1)

Mr. Bean started a business on January 1, 2021. The following transactions occurred in January:
 January 1 – Mr. Bean invested P200,000 cash
 January 2 – Mr. Bean made additional investments in the form of personal computer and printer, valued at
P100,000.
 January 5 – The entity obtained a loan from a bank for P70,000.
 January 10 – Purchased a delivery truck for P50,000.
 January 15 – Purchased P1,500 worth of supplies on account.
 January 20 – Paid P700 for the supplies purchased on account on January 15.
 January 31 – Mr. Bean withdrew P20,000 cash from the business.

Requirement:
Indicate the effects of the transactions on the different accounts under assets, liabilities, and capital of the entity.

Solution:
ASSETS LIABILITIES CAPITAL
Office Delivery Accounts Loan Bean,
Date Cash Supplies Equipment Truck Payable Payable Capital
Jan. 1 200,000           200,000
Jan. 2     100,000       100,000
Jan. 5 70,000         70,000  
Jan. 10 (50,000)     50,000      
Jan. 15   1,500     1,500    
Jan. 20 (700)       (700)    
Jan. 31 (20,000)           (20,000)
Totals 199,300 1,500 100,000 50,000 800 70,000 280,000
Totals 350,800 70,800 280,000

Exercise 3
(same given as that of Exercise 1)
(refer to “1.3.6 Workbook”)

During the month of January, Ms. Fortune, a CPA, had the following transactions:
1. Ms. Fortune invested P250,000 to open her accounting practice.
2. Bought office supplies on account, P10,000.
3. Borrowed P50,000 from a bank.
 Prepared by: Lord Gen A. Rilloraza, CPA, MBA

4. Purchased a land of P75,000.

5. Paid P6,000 on the account for the office supplies.
6. Paid P25,000 of the amount borrowed from a bank.
7. Ms. Fortune withdrew P10,000 for personal use.

Requirement:
Indicate the effects of the transactions on the different accounts under assets, liabilities, and capital of the entity.

Exercise 4
(same given as that of Exercise 1)
(refer to “1.3.6 Workbook”)

Mr. Bryant established a car wash business on October 1, 2020. The following transactions transpired during the month:

Oct. 1 – Mr. Bryant invested P800,000

Oct. 2 – A P700,000 bank loan was obtained for additional funding of the business
Oct. 5 – A land costing P300,000, was purchased on cash basis
Oct. 7 – A building was purchased for P500,000 in exchange of a promissory note
Oct. 15 – Various furniture and fixtures were purchased, on account, for P125,000
Oct. 17 – Various office supplies were purchased for P10,000
Oct. 20 – Partial payment of P200,000 was made for the bank loan
Oct. 25 – Payment was made for the purchase of furniture and fixtures
Oct. 30 – Mr. Bryant made a partial withdrawal of P20,000

Requirement:
Indicate the effects of the transactions on the different accounts under assets, liabilities, and capital of the entity.