Prof Lagbas - Funda of ACCTG Module 12

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TAGUIG CITY UNIVERSITY

Gen. Santos Ave. Upper Bicutan
Taguig City
College of Business Management

Entrepreneurial Management
MODULE
IN
FUNDAMENTALS OF
ACCOUNTING
Submitted by:
MARIA CRIS G. LAGBAS, Ph.D Faculty

/ OJT Coordinator
Noted by
VERLITA M. MERCULLO, CPA EM

COORDINATOR
DR. CARLITO OSTRIA

Acting Dean, College of Business Management
FUNDAMENTALS OF ACCOUNTING 1 & 2 | Prof. Lagbas. CBM- Entrepreneurial Mgt Page 1

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TAGUIG CITY UNIVERSITY

Gen. Santos Ave. Upper Bicutan
Taguig City
College of Business Management

Entrepreneurial Management
PHILOSOPHY
Social transformation for a caring community and an ecologically balance country
VISION
An eminent center of excellent higher education towards societal advancement
MISSION
To nurture a vibrant culture of academic wellness responsive to the challenges of

technology and the global community

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FUNDAMENTALS OF ACCOUNTING
MODULE 1
This course provides an introduction to accounting, within the context of business

and business decisions. Students obtain basic understanding of the principles and
concepts of accounting as well as their applicability and relevance in the national context
and learn how to use various types of accounting information found in financial statements
and annual reports. Emphasis is placed on understanding the reasons underlying basic
accounting concepts and providing students with an adequate background on the
recording, classification and summarization functions of accounting to enable them to
appreciate the varied uses of accounting data.
LESSON 1
INTRODUCTION TO ACCOUNTING
a. LEARNING OBJECTIVES
The learners should be able to:

1. Define accounting.
2. Describe the nature of accounting.
3. Explain the functions of accounting in business.
4. Narrate the history/origin of accounting
b. TOPIC DISCUSSION
• Definition of Accounting: Accounting is a process of identifying,

recording and communicating economic information that is useful in
making economic decisions.
• Essential elements of the definition of Accounting
• Identifying – The accountant analyzes each business transaction and
identifies whether the transaction is an “accountable event” or
“nonaccountable event.” This is because only “accountable events”
are recorded in the accounting books. “Non-accountable events” are
not recorded in the accounting books.
• Recording – The accountant recognizes (i.e., records) the
“accountable events” he has identified. This process is called
“journalizing.”After journalizing, the accountant then classifies the
effects of the event on the “accounts.” This process is called “posting.”
• Communicating – At the end of each accounting period, the
accountant summarizes the information processed in the accounting
system in order to produce meaningful reports. Accounting
information is communicated to interested users through accounting
reports, the most common form of which is the financial statements.
• Nature of Accounting
• Accounting is a process with the basic purpose of providing
information about economic activities intended to be useful in making
economic decisions.
• Types of Information provided by accounting
• Quantitative information
• Qualitative information
• Financial information
• Functions of Accounting in Business

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• To provide external users with information that is useful in making

investment and credit decisions; and
• To provide internal users with information that is useful in managing the
business.
• Accounting as a managerial tool
Accounting provides information that helps a business manager perform the
following management functions:
• Planning
• Organizing
• Staffing
• Directing
• Controlling
• Brief History of Accounting
• Accounting can be traced as far back as the prehistoric times, perhaps
more than 10,000 years ago.
• Archaeologists have found clay tokens as old as 8500 B.C. in
Mesopotamia which were usually cones, disks, spheres and pellets.
These tokens correspond to commodities like sheep, clothing or bread.
They were used in the Middle West in keeping records. After some
time, the tokens were replaced by wet clay tablets. During such time,
experts concluded this to be the start of the art of writing. (Source:
http://EzineArticles.com/456988)
• Double entry records first came out during 1340 A.D. in Genoa.
• In 1494, the first systematic record keeping dealing with the “double
entry recording system” was formulated by Fra Luca Pacioli, a
Franciscan monk and mathematician. The “double entry recording
system” was included in Pacioli’s book titled “Summadi
ArithmeticaGeometriaProportioni and Proportionista,” published on
November 10, 1494 in Venice.
• The concept of “double entry recording” is being used to this day. Thus,
Fra Luca Pacioli is considered as the father of modern accounting.

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c. ACTIVITY /TEST
Instruction: Before each statement, write C if the statement is correct or I if the

statement is incorrect.
1. Only accountable events are recorded in the accounting books.
2. Accounting is a service activity.
3. Although bookkeeping and accounting are interrelated, they are not the
same.
4. The purpose of accounting is to provide information that is useful in making
economic decisions.
5. Accounting is often referred to as the “language of business” because it is
fundamental to the communication of financial information.
6. Marketing is the process of establishing common objectives, coordinating
efforts towards those objectives, and efficiently and effectively utilizing
available resources in order to achieve certain goals.
7. Accounting can be traced as far back as the prehistoric times.
8. Directing involves motivating, communicating, guiding and encouraging
personnel.
9. Accounting is as old as civilization and has evolved in response to economic
and social needs of men.
10. Fra Luca Pacioli is the mother of modern accounting.
Answer to Activity/Test
1. C 6. I (management)
2. C 7.C
3. C 8.C
4. C 9.C
5. C 10. I (father)
LESSON 2
BRANCHES OF ACCOUNTING

1. Differentiate the branches of accounting.
2. Explain the kind or type of services rendered in each of the branches of
accounting.
3. Define external users and give examples.
4. Define internal users and give examples.
b. TOPIC DISCUSSION

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• Common Branches of Accounting

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• Users of Accounting Information
1. Internal users – those who are directly involved in managing the business.
Examples:
• Business owners who are directly involved in managing the
business
• Board of directors
• Managerial personnel
1. External users – those who are not directly involved in managing the
business. Examples:
• Existing and potential investors (e.g., stockholders who are
not directly involved in managing the business)
• Lenders (e.g., banks) and Creditors (e.g., suppliers)
• Non-managerial employees
• Public

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c. ACTIVITY /TEST
Instruction: Before each statement, write C if the statement is correct or I if the statement
is incorrect.
1. Financial accounting is the branch of accounting that deals with the
specific needs of an entity’s management.
2. The internal users of accounting information include management,
owners, and customers.
3. The external users of accounting information include potential and
existing investors and lenders and other creditors.
4. Government accounting is the branch of accounting that deals with the
analysis of the costs of products and services.
5. Erroneous financial statements can lead to bad financial decisions.
6. External users of financial information refer to the entity’s management
personnel.
7. Cost accounting refers to the branch of accounting that deals with tax
computations, filing of tax returns, and tax planning.
8. Accounting education is the branch of accounting that deals with the
teaching of accounting and related subjects in order to produce
competent and responsible business professionals.
9. Management needs accounting information primarily to assess the ability
of the business to pay dividends.
10. Financial accounting is the branch of accounting that deals with the
preparation of general-purpose financial statements.
1. I, (Management accounting)
2. C
3. C
4. I, (Cost accounting)
5. C
6. I
7. I, (Tax accounting)
8. C
9. I, (investors, not management)
10. C

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LESSON 3
BUSINESS ORGANIZATIONS
The learners should be able To:

1. Differentiate the forms of business organization.
2. Identify the advantages and disadvantages of each form of business
organization.
3. Compare and contrast the types of business according to activities.
4. Identify the advantages, disadvantages, and business requirements of
each type of business organization.
b. TOPIC DISCUSSION
Forms of Business Organizations

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Types of Business According to Activities

2. Service Business
3. Merchandising (Trading)
4. Manufacturing
Advantages and Disadvantages of Type of Business

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c.. ACTIVITY /TEST
Instruction: Identify the type of business organization described by the

statements provided below.
1. This business is owned by only one individual.

________________________________________
2. This business is owned by two or more individuals who agree to contribute

resources and carry out a business and divide among themselves the profits
or losses therefrom. ______________
3. This type of business offers services, such as, professional skills, expertise,
advice, lending, and similar services, as its main product, rather than
physical goods. _______________________
4. This business engages in the “buying” and “selling” of goods. Its earnings
are primarily derived from the markup it adds to the cost of the goods it sells
to the customers. ____________________________________
5. This business is owned by at least five members who are called

stockholders or shareholders.
________________________________________
6. This business engages in buying raw materials and processing them into
final products.______________________________________
7. This organization is owned by at least 15 individuals who are called

members. The distinguishing characteristic of this organization is that its
members need to patronize its products. __________________________
8. In this type of business organization, you are the only boss, and hence, you
keep all the profits but assume all the risk of loss.
_____________________________________
9. In this type of business organization, you may be an owner but not the boss.
Indeed, your “say” in the business may be insignificant if you have
insignificant shareholdings. _________________
10. In this type of business organization, you are automatically one of the
bosses, but not the only one. This type of business organization is relatively
easier to form as compared to the other business organizations that are
owned by more than one individual. ____________________
1. Sole or single 6. Manufacturing single
proprietorship 7. Cooperative
2. Partnership 8. Sole or
3. Service business proprietorship
4. Merchandising 9. Corporation

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5. Corporation 10. Partnership

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LESSON 4
ACCOUNTING CONCEPTS AND PRINCIPLES

1. Explain the varied accounting concepts and principles.
2. Solve exercises on accounting principles as applied in various cases.
b. TOPIC DISCUSSION
Basic Accounting Concepts
1. Separate entity concept 7. Time Period

2. Historical cost concept 8. Stable monetary unit
3. Going concern assumption 9. Materiality concept
4. Matching 10. Cost-benefit
5. Accrual Basis 11. Full disclosure principle
6. Prudence (or Conservatism) 12. Consistency conce
Philippine Financial Reporting Standards (PFRSs)
The PFRSsareStandards andInterpretationsadopted by the FRSC.They

consist of the following:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations
Qualitative Characteristics
1. Fundamental Qualitative Characteristics
i.Relevance (Predictive Value, Confirmatory Value, Materiality)

ii.Faithful Representation (Completeness,Neutrality,
Free from error)
2. Enhancing Qualitative Characteristics
i. Comparability
ii. Verifiability iii.
Timeliness
iv. Understandability

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c.. ACTIVITY /TEST
MULTIPLE CHOICE
1. Under this concept, the business is treated separately from its owners.
a. Separate entity concept
b. Historical cost concept
c. Going concern
d. Matching principle
2. Under this concept, the business is assumed to continue to exist for an

indefinite period of time.
a. Separate entity concept
c. Going concern
3. Under this concept, some costs are initially recognized as assets and
recognized only as expenses when the related revenue is recognized. a.
Separate entity concept
c. Going concern
4. It is the official accounting standard setting body in the Philippines.

a. Philippine Institute of Certified Public Accountants
b. Financial Reporting Standards Council
c. Accounting Standards Council
d. American Accounting Association
5. Businesses are required by to law to file tax returns with this government
agency.
a. Security and Exchange Commission
b. Bureau of Internal Revenue
c. Cooperative Development Authority
d. BangkoSentralngPilipinas
6. Under this concept, assets are initially recorded at their acquisition cost.
a. Single entity concept
c. Going concern concept
7. Which of the following are considered enhancing qualitative characteristics?

I. Comparability
II. Verifiability
III. Materiality
IV. Understandability
a. I only
b. I, II and IV

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c. I and II
d. I, II, III and IV
8. This qualitative characteristic means that financial statements are neither

materially misstated nor important information is omitted. a. Completeness
b. Neutrality
c. Free from Error
d. None of the above
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9. This qualitative characteristic enables users to make comparisons to identify

and understand the similarities in, and the differences among, reported
information.
a. Comparability
b. Timeliness
c. Verifiability
d. Understandability
10. The accounting standards used in the Philippines are specifically referred
to as the
• Generally Acceptance Accounting Principles
• Philippine Financial Reporting Standards
• International Accounting Standards
• Philippine Accounting Standardizations
• With YELLOW highlight

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LESSON 5
THE ACCOUNTING EQUATION
1. Illustrate the accounting equation.
2. Perform operations involving simple cases with the use of accounting equation.
b. TOPIC DISCUSSION
• THE ACCOUNTING EQUATION
Assets = Liabilities + Equity
• Essential Elements of an Asset
a. Control
b. Past Events
c. Future Economic Benefits
Essential Elements of a Liability
a. Present obligation
b. Outflow of economic benefits
c. The EXPANDED ACCOUNTING EQUATION
Assets = Liabilities + Equity + Income - Expenses

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c.. ACTIVITY /TEST
MULTIPLE CHOICE
1. Which of the following is not a correct variation of the basic accounting
equation?
a. Assets = Liability + Equity
b. Assets – Liabilities = Equity
c. Assets – Equity = Liability
d. Assets = Liability - Equity
2. Which of the following is not an essential element of an asset?

a. A resource controlled
b. Arising from past event
c. Expected to provide future economic benefits
d. Must be owned by the business
3. Which of the following is not an essential element of a liability?

a. A present obligation
b. Arising from past event
c. Expected to cause an outflow of economic benefits
d. Arising from a future event
4. A business has a past practice of making refunds to customers who are not
satisfied with their purchases. This practice has created valid expectations from
customers that if they return the goods they have purchased, the business will
refund their payment. The business has been honoring this practice for a very
long period of time. The type of obligation created by this practice is called
a. Constructive obligation
b. Legal obligation
c. Construction obligation
d. Valid obligation
5. Equity is
a. Assets plus liabilities
b. Assets less liabilities

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c. Liabilities less assets

d. Assets times liabilities
6. Which of the following is not a correct expanded accounting equation?

a. Assets = Liabilities + Equity + Income - Expenses
b. Assets + Expenses = Liabilities + Equity + Income
c. Assets – Liabilities = Equity + Income - Expenses
d. Assets = Liabilities + Equity + Income + Expenses
7. These areincreases in economic benefits during the period in the form of inflows
or enhancements of assets or decreases of liabilities that result in increases in
equity, other than those relating to investments by the business owners.
a. Expense
b. Income
c. Equity
d. Assets
8. Which of the following statements is correct?

a. Income increases equity
b. Expense increases equity
c. Income decreases equity
d. Income and expense do not affect equity
9. Which of the following statements is incorrect?

a. If expense is greater than income, the difference is profit.
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b. If income is greater than expenses, the difference is profit.

c. If income is less than expenses, the difference is loss.
d. Profit increases equity.
10. The start-up capital of a business consisted of ₱1,000,000 cash provided by

the business owner and an additional ₱250,000 from a bank loan. The total
start-up assets of the business therefore is a. ₱1,250,000
b. ₱1,000,000
c. ₱750,000
d. ₱250,000
Answer to Activity/Test With

YELLOW highlight

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LESSON 6
TYPES OF MAJOR ACCOUNTS

1. Discuss the five major accounts.
2.Cite examples of each type of account.
3. Prepare a Chart of Accounts.
b. TOPIC DISCUSSION
• The Account
An accountis the basic storage of information in accounting. It is a record of

the increases and decreases in a specific item of asset, liability, equity,
income or expense.
• The T-Account

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• The Five Major Accounts
1. ASSETS – are the resources you control that have resulted from past
events and can provide you with future economic benefits.
2. LIABILITIES – are your present obligations that have resulted from past
events and can require you to give up resources when settling them.
3. EQUITY – is assets minus liabilities.
4. INCOME – are increases in economic benefits during the period in the

form of inflows or enhancements of assets or decreases of liabilities that
result in increases in equity, other than those relating to investments by
the business owners.
5. EXPENSES – are decreases in economic benefits during the period in

the form of outflows or depletions of assets or increases of liabilities that
result in decreases in equity, other than those relating to distributions to
the business owners.
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• Classification of the Five Major Accounts
• Chart of Accounts
A chart of accounts is a list of all the accounts used by a business.
• Common Account Titles
 BALANCE SHEET ACCOUNTS

ASSETS
a. Cash
b. Accounts receivable

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c. Allowance for bad debts

d. Notes receivable
e. Prepaid supplies
f. Prepaid rent
g. Prepaid insurance
h. Land
i. Building
j. Accumulated depreciation - Building
k. Equipment
l. Accumulated depreciation - equipment
LIABILITIES
a. Accounts payable
b. Notes payable
c. Interest payable
d. Salaries payable
e. Utilities payable
f. Unearned
EQUITY
a. Owner’s capital (or Owner’s equity)
b. Owner’s drawings
 INCOME STATEMENT ACCOUNTS

INCOME
a. Service fees
b. Sales
c. Interest income
d. Gains
EXPENSES
a. Cost of sales (or Cost of goods sold)
b. Freight-out
c. Salaries expense
d. Rent expense
e. Utilities expense
f. Supplies expense
g. Bad debt expense
h. Depreciation expense
i. Advertising expense
j. Insurance expense
k. Taxes and licenses
l. Transportation and travel expense
m. Interest expense
n. Miscellaneous expense
o. Losses
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c.. ACTIVITY /TEST
IDENTIFICATION:
Instruction: Identify the account title referred to by each of the following

statements. Place your answers before the numberings.
1. This account is used to record the costs incurred in marketing or

promoting the products or services of a business.

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2. This is the expense account used to record the uncollectible

portion of accounts receivable.
3. This is used to record the cost of supplies used during the period.
4. This account may be used to record the payments for water and
electricity bills.
5. Transport costs of delivering goods to customers are recorded in

this account.
6. It is a liability account that is used to record amounts received

from customers in advance of providing goods or services.
7. These represent claims for cash that are supported by oral or

informal promises to pay by a customer.
8. This is used to record the unused portion of supplies.
9. This represents the goods that are held for sale by a business.
10. This represents various small expenditures that do not warrant

separate presentation.
1. Advertising expense or Carriage

2. Bad debts expense (or Doubtful accounts outwards)
expense) 6. Unearned income
3. Supplies expense (Unearned revenue
4. Utilities expense or Advances from
5. Freight out customers)
(Delivery expense, 7. Accounts receivable
Transportation-out, 8. Prepaid supplies
9. Inventory
10. Miscellaneous
expense
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LESSON 7
BOOKS OF ACCOUNTS AND DOUBLE-ENTRY SYSTEM

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1. Identify the uses of the two books of accounts.
2. Illustrate the format of general and special journals.
3. Illustrate the format of general and subsidiary ledgers
b. TOPIC DISCUSSION
The Books of Accounts

1. Journal (General and Special)
2. Ledger (General and Subsidiary)
JOURNAL
The journal, also called the “book of original entries,” is the accounting
record where business transactions are first recorded.
1. Special Journal – is used to record transactions with similar nature (e.g.,
Sales journal, Purchases journal, Cash receipts journal, and Cash
disbursements journal)
2. General Journal – All other transactions that cannot be recorded in the
special journals are recorded in the general journal.
LEDGER
The ledgeris used to classify the effects of business transactions on the

accounts. It is also called the “book of final entries.”
1. General ledger – contains all the accounts appearing in the trial balance.
2. Subsidiary ledger – provides a breakdown of the balances of controlling
accounts.
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• Format of the General Journal
Formats of the Ledgers
Double-entry System
Concept of duality – each transaction is recorded in two parts – debit

and credit
Concept of equilibrium – each transaction is recorded in terms of
equal debits and credits.
Normal Balance of Accounts

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• Rules of Debits and Credits
• Contra and Adjunct Accounts
Contra accounts are presented in the financial statements as

deduction to their related accounts.
Adjunct accountsare presented in the financial statements as

addition to their related accounts.

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c.. ACTIVITY /TEST
IDENTIFICATION:
Instruction: Identify the normal balancesof the accounts and state
how the accounts are increased or decreased (e.g., debit or credit).
Type of account Normal balance Increase Decrease
1. Asset
2. Liability
3. Equity
4. Income
5. Expense
Type of account Normal balance Increase Decrease
Debit Debit Credit

1. Asset
Credit Credit Debit
2. Liability
Credit Credit Debit
3. Equity
Credit Credit Debit
4. Income
Debit Debit Credit
5. Expense

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LESSON 8
BUSINESS TRANSACTIONS AND THEIR ANALYSIS

1. Describe the nature and give examples of business transactions.
2. Identify the different types of business documents.
3. Analyze common business transactions using the rules of debit and credit.
b. TOPIC DISCUSSION
• Steps in the Accounting Cycle

1. Identifying and analyzing
2. Journalizing
3. Posting
4. Unadjusted trial balance
5. Adjusting entries
6. Adjusted trial balance (and/or Worksheet)
7. Financial statements
8. Closing entries
9. Post-closing trial balance
10. Reversing entries
• Identifying and Analyzing transactions and events
a. Only accountable events are recorded. Accountable events are those

that affect the assets, liabilities, equity, income or expenses of the
business.
b. Accountable events are normally identified from source documents,
such as sales invoice, official receipts, delivery receipts, and the like.
• Types of Events
1. External events – are transactions that involve the business and

another external party.
2. Internal events– are events that do not involve an external party.
• JOURNALIZING
Journalizing refers to recording an identified accountable event in the
journal by means of a journal entry.

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• Simple and Compound Journal Entries o Simple journal entry – contains a

single debit and a single credit element.
o Compound journal entry – contains two or more debits or credits
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c.. ACTIVITY /TEST
Instruction: Record the transactions in the journal. Indicate the dates and
provide a brief description for each journal entry.
Date Transaction .
A business owner provides ₱2,000,000 cash as investment to the
Nov. 1, 20x1 business.
Nov. 5, 20x1 The business obtains a ₱500,000 loan and issues a promissory note.
Nov. 8, 20x1 The business acquires equipment costing ₱1,000,000 on cash basis.
Nov. 16, 20x1 The business purchases inventory costing ₱200,000 on cash basis.
Nov. 30, 20x1 The business sells goods for ₱300,000 on cash basis.
JOURNAL
Date Account titles Debit Credit

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JOURNAL
Nov. 1, 20x1 Cash 2,000,000
Owner’s capital 2,000,00

0
to record the contribution by the

owner
Nov. 5, 20x1 Cash 500,000
Note payable 500,000
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to record the loan obtained
Nov. 8, 20x1 Equipment 1,000,000
Cash 1,000,00
0
to record the acquisition of

equipment
Nov. 16, 20x1 Inventory 200,000
Cash 200,000
to record the purchase of inventory
Nov. 30, 20x1 Cash 300,000
Sales 300,000
to record the sale of goods

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LESSON 9
ACCOUNTING CYCLE OF A SERVICE BUSINESS

1. Describe the nature of transactions in a service business.
2. Record transactions of a service business in the general journal.
3. Post transactions in the ledger.
4. Prepare a trial balance.
5. Prepare adjusting entries.
6. Complete the accounting cycle.
b. TOPIC DISCUSSION
• POSTING
Posting, the third step in the accounting cycle,is the process of
transferring data from the journal to the appropriate accounts in the ledger.
Example of Posting
Transaction: Jan. 8 - Services worth ₱30,000 were rendered for
cash.
Journalizing:

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Posting:
• TRIAL BALANCE
A trial balance is a list of general ledger accounts and their balances.

It is prepared to check the equality of total debits and total credits in the
ledger.
• TYPES OF TRIAL BALANCE

1. Unadjusted trial balance– this is prepared before adjusting
entries are made.
2. Adjusted trial balance – this is prepared after adjusting entries
but before the financial statements are prepared.
3. Post-closing trial balance– this is prepared after the closing
process.
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• ADJUSTING ENTRIES
Adjusting entries are entries made prior to the preparation of financial
statements to update certain accounts so that they reflect correct balances
as of the designated time.
• PURPOSE OF ADJUSTING ENTRIES

1. To take up unrecorded income and expense of the period.
2. To split mixed accounts into their real and nominal elements.
• REAL, NOMINAL AND MIXED ACCOUNTS

a. Real Accounts (Permanent accounts) – accounts that are not closed at
the end of the accounting period. These accounts include all balance
sheet accounts, except the “Owner’s drawings” account.
b. Nominal Accounts(Temporary accounts) – accounts that are closed at
the end of the accounting period. These accounts include all income
statement accounts, drawings account, clearing accounts and suspense
accounts.
c. Mixed accounts – accounts that have both real and nominal account
components. These accounts are subject to adjustment.

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• METHODS OF INITIAL RECORDING OF INCOME

1. Liability method – under this method, cash receipts from items
of income are initially credited to a liability account. At the end
of the period, the earned portion is recognized as income
while the unearned portionremains as liability.
2. Income method – under this method cash receipts from items
of income are initially credited to an income account. At the
end of the period, the unearned portion is recognized as
liability while the earned portionremains as income.
• METHODS OF INITIAL RECORDING OF EXPENSES

1. Asset method – under this method cash disbursements for
items of expenses are initially debited to an asset account. At
the end of the period, the incurred portion (‘used up’ or
‘expired’)is recognized as expense while the unused
portionremains as asset.
2. Expense method – under this method, cash disbursements for
items of expenses are initially debited to an expense account.
At the end of the period, the unused portion (‘not yet incurred’
or ‘unexpired’)is recognized as asset while the incurred
portionremains as expense.
• WORKSHEET
A worksheet is an analytical device used to facilitate the gathering of
data for adjustments, the preparation of financial statements, and closing
entries.
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FINANCIAL STATEMENT
The financial statements are the end product of the accounting
process. Information from the journal and the ledger are meaningless to
most users unless they are summarized and communicated through the
financial statements .
THE MAJOR PROCESSES IN ACCOUNTING ARE SUMMARIZED BELOW:
• FINANCIAL STATEMENTS
 Statement of financial position (or Balance sheet) – shows
information on assets, liabilities and equity.
 Statement of profit or loss (or Income statement) – shows information
on income and expenses, and consequently, the profit or loss for the
period.
• CLOSING ENTRIES
Closing entries are entries prepared at the end of the accounting
period to “zero out” all nominal accountsin the ledger. This is done so that
the transactions during the period will not commingle with the transactions
in the next period
• CLOSING ENTRIES ARE PREPARED AS FOLLOWS:
a. All income accounts are debited and all expense accounts are credited.
The resulting balance is recorded in a clearing account called the
“Income summary.”
b. The balance of “Income summary” is closed to the “Owner’s capital”
account.
c. Any balance in the “Owner’s drawings” account is closed to the “Owner’s
capital” account.
34

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• REVERSING ENTRIES
Reversing entries are entries usually made on the first day of the next
accounting period to reverse certain adjusting entries made in the
immediately preceding period.
• REVERSING ENTRIES THAT MAY BE REVERSED

1. Accruals for income or expense
2. Prepayments initially recorded using the expense method 3.
Advanced collections initially recorded using the income method

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35
c.. ACTIVITY /TEST
JOURNALIZING AND POSTING

The following were the transactions of Entity A during the period:
Date Transactions
Jan. 8 Services worth ₱150,000 were rendered for cash.
Jan. 9
Services worth ₱200,000 were rendered on account.
Jan. Cash amounting to ₱25,000 was disbursed for advertising expense.

10
Jan. Accounts receivable of ₱180,000 was collected.
11
Jan. The owner made a temporary withdrawal of ₱10,000 cash from the
12 business.
Requirements:
a. Provide the journal entries.
b. Post the journal entries to the ledger then determine the ending balances
of the accounts. Use T-accounts for this purpose. Arrange your T-
accounts in this order: Assets, Liabilities, Equity, Income and Expenses.
Requirement (a): Journal entries
JOURNAL
Jan. 8 Cash 150,000
Service fees to 150,000

record service fees
Jan. 9 Accounts receivable 200,000

Service fees to
record service fees 200,000
Jan. 10 Advertising expense 25,000
Cash 25,000
to record thepayment for advertising

expense
Jan. 11 Cash 180,000
Accounts receivable 180,000
to record the collection of accounts

receivable

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Jan. 12 Owner’s drawings Cash 10,000
to record the drawings of the owner 10,000
36
Requirement (b): Posting
ASSETS
Accounts Cash receivable
1/8 150,000 1/9 200,000
180,000 25,000 180,000 1/11

1/10 1/11
10,000
1/12
295,000 end. end. 20,000
EQUITY
Owner's drawings
1/12 10,000
10,000 end.
INCOME Service fees
150,000 1/8
200,000 1/9
end. 350,000
EXPENSES
Advertising
expense
1/10 25,000
end.
25,000
JOURNALIZING, POSTING AND UNADJUSTED TRIAL BALANCE
Entity A started operations on January 1, 20x1. The following were the

transactions during the first week of operations:

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Jan. Transactions
1 The owner provided ₱600,000 cash as initial investment to the business.
2 The business acquired a building for ₱400,000 cash.
3 The business acquired office equipment for ₱100,000 cash.
4 The businesspurchased supplies for ₱20,000 cash.The business uses a
prepaid asset account.
5 The businessrendered services worth ₱150,000 on cash basis.
6 The businessrendered services worth ₱100,000 on account. 7 The
businesspaid ₱25,000 salaries expense.
37
Requirements:
a. Provide the journal entries.
b. Post the journal entries to the ledger. Use T-accounts for this purpose. Arrange
your T-accounts in this order: Assets, Liabilities, Equity, Income and Expenses.
c. Prepare the unadjusted trial balance.

Jan. 1 Cash 600,000
Owner’s, Capital 600,000
to record the owner’s investment to the
business
2 Building 400,000
Cash 400,000
to record the acquisition of building for
cash
3 Office equipment 100,000
Cash 100,000
to record the acquisition of equipment for
cash
4 Prepaid supplies 20,000
Cash 20,000
to record the purchase of supplies
5 Cash 150,000
Service fees to 150,000
record service fees
6 Accounts receivable 100,000
Service fees 100,000
to record service fees
7 Salaries expense 25,000
Cash 25,000
to record salaries expense
ASSETS
Cash Accounts receivable

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1 600,000
2 6 100,000
400,000 3
100,000
4
5 150,000 20,000
25,000 7
Bal.
Bal. 100,000
Prepaid supplies
4 20,000
20,000
Bal.
38
Building Office equipment
2 400,000 3 100,000
Bal. Bal.
400,000 100,000
EQUITY
Owner‘s capital
600,000
1
600,000
Bal.
INCOME EXPENSES
Service fees Salaries expense
150,000 56 7 25,000
100,000 Bal.
250,000 Bal.
25,000
Requirement (c): Unadjusted trial balance

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Entity A
Unadjusted Trial Balance
January 7, 20x1
Accounts Debit Credit
Cash ₱205,000
Prepaid supplies 20,000
Building 400,000
Office equipment 100,000

Owner’s capital ₱600,000
Service fees 250,000

Salaries expense 25,000
₱850,000 ₱850,000
39
LESSON 10
ACCOUNTING CYCLE OF A MERCHANDISING BUSINESS

1. Describe the nature of transactions in a merchandising business.
2. Record transactions of a merchandising business in the general and special
journals.
3. Post transactions in the general and subsidiary ledgers.
4. Prepare a trial balance.
5. Prepare adjusting entries.
6. Complete the accounting cycle of a merchandising business.
7. Prepare the Statement of Cost of Goods Sold and Gross Profit.
b. TOPIC DISCUSSION
• MERCHANDISING BUSINESS
A merchandising business is one that buys and sells goods,in their
original form and without any further processing. Those goods are referred
to as merchandise inventory (or simply, inventory).
• INVENTORY SYSTEMS

Page of 46
a. Perpetual inventory system – under this system, the “Inventory” account

is updated each time a purchase or sale is made. Thus, the “Inventory”
account shows a continuing or running balance of the goods on hand.
b. Periodic inventory system – under this system, the “Inventory” account
is updated only when a physical count is performed. Thus, the amounts
of inventory and cost of goods sold are determined only periodically.
• ACCOUNTS USED UNDER PERIODIC SYSTEM
a. Purchases – the account used to record purchases of inventory under

the periodic system.
b. Freight-in (Transportation-in)– the account used to record the shipping
costs incurred on purchases of inventory under the periodic system.
c. Purchase returns – the account used to record returns of purchased
goods to the supplier.
d. Purchase discounts – the account used to record cash discounts availed
of on the purchased goods.
40

Page of 46
GROSS PROFIT

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41
o Sales – include both cash sales and credit sales. o Sales returns –
the account used to goods sold but were returned by customers.
o Sales discounts – the account used to record cash discounts given
to and taken by customers.
STATEMENT OF COST OF GOODS SOLD AND GROSS PROFIT

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42
c.. ACTIVITY /TEST
MULTIPLE CHOICE
1. If debits do not equal credits, the first step to find the error is to
a. call your manager and ask for advice.
b. add the debit and credit columns again.
c. review the journal entries for errors.
d. make correcting entries rather than adjusting entries.
2. Entity A has a beginning inventory of ₱280,000. During the period Entity A

purchased inventories costing ₱890,000. Freight paid on the purchase totaled
₱30,000. If the ending inventory is ₱220,000, how much is the cost of goods
sold?
a. 1,360,000
b. 980,000
c. 950,000
d. 920,000
3. Entity A has gross purchases of ₱360,000. Freight paid on the purchases

amounted to ₱50,000. Purchase discounts totaled ₱20,000 while purchase
returns totaled ₱15,000. How much is the net purchases? a. 375,000
b. 390,000
c. 410,000
d. 445,000

₱40,000. The ending inventory was ₱360,000. If the net sales were
₱1,200,000, how much is the gross profit? a. 1,010,000
b. 1,200,000
c. 190,000
d. 260,000

₱10,000. The ending inventory was ₱60,000. Gross sales were ₱1,800,000
while sales returns and discounts totaled ₱220,000. How much is the gross
profit?
a. 680,000
b. 700,000
c. 780,000
d. 880,000
1. B
2. B280,000 + 890,000 + 30,000 – 220,000 = 980,000
3. A 360,000 + 50,000 – 20,000 – 15,000 = 375,000
4. C 340,000 + 990,000 + 40,000 – 360,000 = 1,010,000 Cost of goods sold;

1,200,000 – 1,010,000 = 190,000 gross profit

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5. B 140,000 + 790,000 + 10,000 – 60,000 = 880,000 Cost of goods sold;

1,800,000 – 220,000 = 1,580,000 Net sales – 880,000 =
700,000 Gross profit
ACTIVITY /TEST :UNADJUSTED TRIAL BALANCE

43
Entity A started operations during the period. The following were the
transactions:
a. Mr. A, the sole owner of Entity A, invested ₱1,000,000 to the business.

b. Equipment costing ₱250,000 was acquired for cash.
c. Inventory costing ₱180,000 was acquired on credit. Entity A uses the perpetual
inventory system.
d. Inventory costing ₱120,000 was sold for ₱400,000 on credit.
e. Accounts payable of ₱160,000 was settled.
f. Accounts receivable of ₱340,000 was collected.
g. Utilities expense of ₱60,000 was paid.
h. Salaries expense of ₱280,000 was paid.
i. Owner’s drawings during the period totaled ₱70,000.
j. Depreciation expense on the equipment for the period was ₱25,000.
Requirements:
a. Journalize the transactions above. Be sure to provide a briefdescription for each
journal entry.
b. Post the transactions to the general ledger. Use T-accounts for this purpose.
Arrange your T-accounts in the following order: Assets, Liabilities, Equity,
Income and Expenses.
c. Prepare the unadjusted trial balance of Entity A on December 31, 20x1. Be sure
to provide a proper heading for the trial balance.
(a) Cash 1,000,000

Owner’s capital 1,000,000
to record the owner’s initial investment to
the business
(b) Equipment 250,000
Cash 250,000
to record the acquisition of equipment
(c) Inventory 180,000
Accounts payable 180,000
to record the acquisition of inventory on
credit

Sale 400,000
to record credit sale
(d) Cost of sale (or Cost of goods sold) 120,000
Inventory 120,000
to charge the cost of inventories sold as
expense

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(e) Accounts payable 160,000

Cash 160,000
to record the settlement of accounts
payable
(f) Cash 340,000
Account receivable 340,000
to record the collection of accounts
receivable
(g) Utilities expense 60,000
Cash 60,000
to record the payment for utilities
expense
44
(h) Salaries expense 280,000

Cash 280,000
to record the payment for salaries
expense
(i) Owner’s drawings 70,000
Cash 70,000
to record the temporary withdrawals of the
owner
(j) Depreciation expense 25,000
Accumulated depreciation - 25,000
Equipment
to record the depreciation expense for the
period
ASSETS

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LIABILITIES
EQUITY
INCOME
45
EXPENSES
Requirement (c): Unadjusted Trial Balance

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Entity A
Unadjusted Trial Balance December Cr.

31, 20x1
Dr.
Cash 520,000
Inventory 60,000
Equipment 250,000
Accumulated depreciation - equipment
25,000
Accounts payable 20,000
Owner's capital 1,000,000
Owner's drawings
400,000
Sales
70,000
Cost of sales
Utilities expense
120,000 60,000
Salaries expense 280,000
Depreciation expense 25,000
Totals 1,445,000 1,445,000
46
REFERENCE:
Rodiel C. Ferrer and Zeus Vernon B. Millan

Fundamentals of Accountancy, business and management Part
I. 2nd Edition. 2018.

Page of 46
Prepared and Submitted by:
MARIA CRIS G. LAGBAS, Ph.D

Faculty / OJT Coordinator
Noted by
VERLITA M. MERCULLO, CPA

EM COORDINATOR
DR. CARLITO OSTRIA

Acting Dean, College of Business Management

Prof Lagbas - Funda of ACCTG Module 12

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Page of 46

TAGUIG CITY UNIVERSITY

College of Business Management

MARIA CRIS G. LAGBAS, Ph.D Faculty

VERLITA M. MERCULLO, CPA EM

DR. CARLITO OSTRIA

FUNDAMENTALS OF ACCOUNTING 1 & 2 | Prof. Lagbas. CBM- Entrepreneurial Mgt Page 1

TAGUIG CITY UNIVERSITY

College of Business Management

Social transformation for a caring community and an ecologically balance country

An eminent center of excellent higher education towards societal advancement

To nurture a vibrant culture of academic wellness responsive to the challenges of

FUNDAMENTALS OF ACCOUNTING 1 & 2 | Prof. Lagbas. CBM- Entrepreneurial Mgt Page 2

This course provides an introduction to accounting, within the context of business

The learners should be able to:

• Definition of Accounting: Accounting is a process of identifying,

FUNDAMENTALS OF ACCOUNTING 1 & 2 | Prof. Lagbas. CBM- Entrepreneurial Mgt Page 4

• To provide external users with information that is useful in making

FUNDAMENTALS OF ACCOUNTING 1 & 2 | Prof. Lagbas. CBM- Entrepreneurial Mgt Page 5

Instruction: Before each statement, write C if the statement is correct or I if the

The learners should be able to:

FUNDAMENTALS OF ACCOUNTING 1 & 2 | Prof. Lagbas. CBM- Entrepreneurial Mgt Page 6

• Common Branches of Accounting

FUNDAMENTALS OF ACCOUNTING 1 & 2 | Prof. Lagbas. CBM- Entrepreneurial Mgt Page 7

• Users of Accounting Information

FUNDAMENTALS OF ACCOUNTING 1 & 2 | Prof. Lagbas. CBM- Entrepreneurial Mgt Page 8

FUNDAMENTALS OF ACCOUNTING 1 & 2 | Prof. Lagbas. CBM- Entrepreneurial Mgt Page 9

The learners should be able To:

Forms of Business Organizations

FUNDAMENTALS OF ACCOUNTING 1 & 2 | Prof. Lagbas. CBM- Entrepreneurial Mgt Page 10

FUNDAMENTALS OF ACCOUNTING 1 & 2 | Prof. Lagbas. CBM- Entrepreneurial Mgt Page 11

FUNDAMENTALS OF ACCOUNTING 1 & 2 | Prof. Lagbas. CBM- Entrepreneurial Mgt Page 12

FUNDAMENTALS OF ACCOUNTING 1 & 2 | Prof. Lagbas. CBM- Entrepreneurial Mgt Page 14

Types of Business According to Activities

Advantages and Disadvantages of Type of Business

FUNDAMENTALS OF ACCOUNTING 1 & 2 | Prof. Lagbas. CBM- Entrepreneurial Mgt Page 15

FUNDAMENTALS OF ACCOUNTING 1 & 2 | Prof. Lagbas. CBM- Entrepreneurial Mgt Page 16

c.. ACTIVITY /TEST

Instruction: Identify the type of business organization described by the

1. This business is owned by only one individual.

2. This business is owned by two or more individuals who agree to contribute

5. This business is owned by at least five members who are called

7. This organization is owned by at least 15 individuals who are called

FUNDAMENTALS OF ACCOUNTING 1 & 2 | Prof. Lagbas. CBM- Entrepreneurial Mgt Page 17

5. Corporation 10. Partnership

FUNDAMENTALS OF ACCOUNTING 1 & 2 | Prof. Lagbas. CBM- Entrepreneurial Mgt Page 18

ACCOUNTING CONCEPTS AND PRINCIPLES

The learners should be able To:

Basic Accounting Concepts

1. Separate entity concept 7. Time Period

Philippine Financial Reporting Standards (PFRSs)

The PFRSsareStandards andInterpretationsadopted by the FRSC.They

1. Fundamental Qualitative Characteristics

i.Relevance (Predictive Value, Confirmatory Value, Materiality)

2. Enhancing Qualitative Characteristics

FUNDAMENTALS OF ACCOUNTING 1 & 2 | Prof. Lagbas. CBM- Entrepreneurial Mgt Page 19

c.. ACTIVITY /TEST

2. Under this concept, the business is assumed to continue to exist for an

4. It is the official accounting standard setting body in the Philippines.

7. Which of the following are considered enhancing qualitative characteristics?

FUNDAMENTALS OF ACCOUNTING 1 & 2 | Prof. Lagbas. CBM- Entrepreneurial Mgt Page 20

8. This qualitative characteristic means that financial statements are neither