BASIC ACCOUNTING
Accounting - is a service activity that
provides quantitative information, primarily
financial in nature, that is intended to be
useful in making concrete decisions among
alternative courses of action.
BRANCHES OF ACCOUNTING
1. Financial Accounting focuses
primarily on the preparation of
financial statements.
2. Management Accounting focuses
on the preparation of financial
reports used by managers on day to
day decision making. Also, they do
not follow International Accounting
Standards (IAS) and International
Financial Reporting Standards
(IFRS).
3. Government Accounting is used
by all government agencies.
4. Auditing is an unbiased
examination and evaluation of the
financial statement.
➔ External Auditing -
independent opinion outside
the company.
➔ Internal Auditing - opinion
inside the company, from the
company’s auditor.
5. Tax Accounting focuses on the
preparation of tax returns.
6. Cost Accounting is helpful in the
pricing of the goods and services.
7. Accounting Education molds the
future accountants.
8. Accounting Research is
responsible for researching the
effects on the process of accounting.
Luna de Pacioli - philosopher,
mathematician, priest and the Father of
Modern Accounting.
❖ “Summa de Arithmetica”
➔ Also known as “Double
Entry System of
Bookkeeping.”
➔ A value received should be
equal to the value that is
parted with.
USERS OF ACCOUNTING INFORMATION
❖ Internal users (owners, managers,
employees, and accountants)
➔ Users within the
organization.
❖ External users (investors, suppliers,
and customers)
➔ Users outside of the
organization.
FORMS OF ACCOUNTING REPORTS
1. Financial reports are prepared by
financial accountants.
➔ Financial aspect
2. Managerial reports are prepared by
management accountants.
➔ Financial and non-financial
reports
FINANCIAL STATEMENTS
1. Statement of Comprehensive
Income or Income Statement
2. Statement of Change in Equity
3. Statement of Financial Position or
Balance Sheet
4. Statement of Cash Flows
5. Notes to Financial Statements
FORMS OF BUSINESS ORGANIZATION
❖ Sole Proprietorship is owned by
one person wherein the owner is
also the manager.e’
➔ Easy to manage
➔ Single taxation
➔ Limited in size
➔ Unlimited liability (meaning
the liability of the company
extends up to the personal
assets of the owner)
❖ Partnership is owned by two or
more people.
➔ Unlimited liability
➔ Limited life
➔ Mutual agency (one partner
can bind the partnership)
➔ Co-ownership of the property
❖ Corporation is owned by
stockholders.
➔ Limited liability
➔ Unlimited life
➔ Separate legal personality
(juridical person)
➔ Double taxation
➔ Transferable ownership right
“The higher the risk, the higher the reward.”
ACCOUNTING CONCEPTS AND
PRINCIPLES
1. Reliability - users can depend on
the financial statement to be
accurate and faithfully represented.
2. Timeliness - accounting information
should be passed on time.
3. Neutrality - free from bias.
4. Faithful Representative - every
transaction must be accounted for in
its substance rather than legal form.
5. Completeness - financial
statements can only be reliable if
they’re complete.
6. Understandability - financial
statements should be easy to
understand by the users.
7. Going Concern - the company will
continue to operate in an indefinite
period of time (may forever sa
accounting :) ehehe).
8. Materiality - financial statement
should be without any material
omission or misstatement.
9. Prudence - exercising caution in
some degree like income shouldn’t
be overstated and expenses
shouldn’t be understated).
10. Accrual Concept - all revenues
earned and expenses incurred this
year must only be recorded this
year.
11. Matching Principle - the revenues
earned should be charged with their
corresponding expenses.
12. Business Entity - the transactions
of the owner are separated from the
transactions of the business.
13. Periodicity - the indefinite life of the
company is divided into certain
periods.
TYPES OF BUSINESS ACTIVITIES
❖ Service is the business activity
wherein it provides services.
❖ Merchandising - they buy and sell
like retailer.
❖ Manufacturing - they buy, process
and sell like factories.
 THE ACCOUNTING EQUATION TYPES OF MAJOR ACCOUNTS (ALCIE)
(ALOE)
1. Assets
a. Current Assets - consumed/
Assets = Liabilities + Owner’s Equity
sold/ used within one year.
> controlled > claims of > claims of the ● Cash: cash on hand
but not the creditor owner/s and cash in bank
owned > utang > owned ● Accounts Receivable:
> with > things or right to collect
economical money that ● Notes Receivable:
use needs to be
with promissory note
> hindi pa paid back
nagagamit, by the ● Inventory: cost of
may creditor unsold merchandise
pakinabang > owed owned and bought for
pa reselling
● Prepaid Expense:
The account titles under assets, expenses paid but not
liabilities and owner’s equity: yet incurred that is
applicable in supplies
prepaid rent and
ASSETS LIABILITIES OWNER’S prepaid insurance
EQUITY b. Non-Current Assets - more
Cash Accounts Capital than a year.
Payable (investment) ● Equipment
● Furniture and Fixtures
Accounts Notes Income ● Automobile
Receivable Payable (earned) ● Land
(promissory ● Building
note)

Supplies Expense 2. Liabilities - obligations

(incurred, a. Current Liabilities - pay within 1 year
used or ● Accounts Payable: obligation
consumed) to pay
● Notes Payable
Inventory Withdrawal
● Unearned Revenues:
(held for sale) (for personal
use) revenues collected but not
yet earned
Equipment b. Non-Current Liabilities
● Mortgage Payable
Furniture & ● Loans Payable
Fixtures
3. Capital POSTING TO THE LEDGER
● Capital: investments of the owner ➔ Transferring records from journal to
● Withdrawal or Drawing: ledger
contra-capital account ➔ Summarize the balances per
account
4. Income - earned T-accounts - representation of ledger
● Service Revenue
● Sales

5. Expenses - incurred
● Salaries Expense
● Utilities Expense: meralco, maynilad,
sky cable and PLDT
● Rent Expense
● Insurance Expense

THE ACCOUNTING PROCESS OR

CYCLE

1. Analyzing transactions
2. Journalizing entries
3. Posting to the ledger
4. Unadjusted trial balance
5. Adjusted trial balance
6. Financial statements
7. Closing entries
8. Post-closing trial balance
9. Reversing entries

JOURNALIZING ENTRIES
Rules of Debit and Credit:
Left= Debit (Dr) Right= Credit (Cr)

Increase Decrease

A Dr Cr

L Cr Dr

C Cr Dr

I Cr Dr

E Dr Cr
 UNADJUSTED TRIAL BALANCE 6. Bad Debts/ Uncollectible
➔ A listing of the ledger accounts and Accounts/ Doubtful Accounts -
their balances that aids improving receivable which is unlikely to be
the equality of a debit and credit. collected.

Depreciation = Cost - Salvage Value

Useful life

● Salvage value is also called

Residual value and Scrap value.

❖ PREPAID EXPENSE
● Asset Method (Normal
method)

* In this method, you will record the USED.

ADJUSTING ENTRIES ● Expense Method

➔ These are accounts to be adjusted.

1. Prepaid Expense - expenses paid

but not yet incurred. This is an Asset
account. * In this method, you will record UNUSED.
2. Accrued Expense - expenses
incurred but not yet paid. This is a ❖ UNEARNED REVENUE
Liability account. ● Liability Method (Normal
3. Unearned Revenue - revenues Method)
collected but not yet earned. This is
a Liability account.
4. Accrued Revenue - revenues
earned but not yet collected. This is
an Asset account. * In this method, you will record EARNED.
5. Depreciation - is the allocation of
the cost of such over its useful life.
 ● Income Method Depreciation = Cost - Salvage Value
Useful life

* In this method, you will record the

UNEARNED account. Net Book Value = COST - AD
Machinery P 100,000
❖ ACCRUED EXPENSE
Expense will increase (↑) and Accumulated D. (4,948)
Accounts Payable will also increase
NET BOOK V. P 95,052
(↑).

❖ BAD DEBTS
Bad Debts Expense
is an Expense account while
the Allowance for Bad Debts
is a Contra-asset account.

* Interest expense (I = PRT), Utilities

expense and Salaries expense are
applicable here.

❖ ACCRUED REVENUE Net Receivable= RECEIVAB. - ALLOW.

Receivable will increase (↑) Receivable P 10,000
and Revenue will also increase (↑).
Allowance (1000)

Net Receivable N. P 9,000

* Interest Revenue is also applicable

here with the formula: I = PRT.

❖ DEPRECIATION
Depreciation Expense is an
Expense account while the
Accumulated Depreciation is a
Contra-asset account. The formula
used is called the STRAIGHT LINE
METHOD.
 FINANCIAL STATEMENT
● Income Statement or
Comprehensive Income is for
INCOME and EXPENSE.
● Financial Position or Balance Sheet
is for Asset, Liability and Capital.

CLOSING ENTRIES
➔ The nominal accounts must be equal
to zero. There is a principle stating
that nominal accounts must be be
zero before proceeding to the next
year.

NOMINAL REAL
ACCOUNTS/ ACCOUNTS/
TEMPORARY PERMANENT
ACCOUNTS ACCOUNTS

● Income ● Assets

● Expense ● Liabilities

● Withdrawal ● Capital

ACTUAL CLOSING ENTRY ACCOUNT:

Service Revenue ----------- XX

Income Summary------ XX

Income Summary------------ XX
Expense--------- XX

Income Summary---------- XX
Capital------------ XX

Capital------------------ XX
Withdrawal------- XX