Quite simply, accounting is a language a language that provides Information about the financial position

of a business. When you study accounting you are essentially learning this specialized language. By
learning this language you can communicate and understand the financial operations of any and all
types of business and business organizations,

So why do we need accounting? Asking that question of an accountant is like asking a farmer why we
need rain. We need accounting because it is the only way for business to grow and flourish. Accounting
is the backbone of the business financial world

Most businesses follow the same pattern in keeping a record of their transactions The person who
manages the records on a daily basis is called the bookkeeper’. The accountant takes the bookkeeper’s
figures and looks through them to see if they are correct The accountant will be able to tell the business
ifit is making a loss or profit and will re organise the data in a way that gives the business owners
direction for the future of the business. Let us begin our study of bookkeeping with the basic accounting
concepts

In the left column below is an alphabetical list of accounting concepts and in the right column are the
definitions which are all mixed-up. Try to connect with a line the accounting terms with their definitions
in as far as your personal knowledge is concerned.

ACTIVITY 1:

SOME BASIC FINANCIAL CONCEPTS :

-banks

- banking types of bank accounts

-types of loans credit

- credit cards

-credit scores

- philanthropy

- charity

Borrowing money
THE BORROWER

- The person requesting money that will pay the loan back with interest.

- THE LENDER

-The person offering money to the borrower and

Charges interest on the amount loaned

Out people.

SMALL LOANS

- Small amounts of money.

- Used to purchase furniture and to pay off credit cards.

PAYDAY LOANS

- Borrowers take out small loans to pay expenses until the next paycheck. They agrees to pay the
whole at the next paycheck.

TITLE LOANS

- Borrowers offer a car or any valuable things as a collateral. If ever the borrower did not fulfill the
money, the lender can keep the cars.

MEDIUM LOANS

- Purchase cars, jewelry and emergencies.

LARGE LOAN

- Used to pay a big amount of money like home mortgage, tuition fees

THE TWO MAIN TYPES OF LOANS;

Are secured and unsecured loans

SECURED LOAN means the lender has the right to take possession of assets offered as collateral . For
example a mortgage loan is secured by the home purchased the bank will take possession of a home. if
the mortgage payments are not paid the home is the collateral

UNSECURED LOAN means there is no lateral offered by the borrower the lenders decision to loan
money out to the borrower is based solely on the borrower’s creditworthiness a person with bad credit
is usually not offered loans or is charged a higher interest rate to make up for the higher risk unsecured
loans in general carry higher interest rates compared to secured loans

To enhance the definitions provided, surf the net for additional meanings of the following terminologies
below:

Accountant

~ a person whose job is to keep, inspect, and analyse financial accounts.

Assets

~Assets are categorized as either real, financial, or intangible.

-An asset can often generate cash flows in the future, such as a piece of machinery, a financial security,
or a patent.

Bank

-A bank is a financial institution licensed to receive deposits and make loans.

Banking

~ the business activity of accepting and safeguarding money owned by other individuals and entities

Bank Account

~an account with a bank created by the deposit of money or its equivalent and subject to withdrawal of
money (as by check or passbook) thought it wise to put his savings in a bank account.

Bookkeeper

~ A bookkeeper is an accounting professional primarily responsible for maintaining a detailed record of

purchases, sales, and other financial transactions.

Budget

~A budget is a financial plan for the future concerning the revenues and costs of a business.
ELEVATE:

Just like any other field of study, an understanding of bookkeeping concepts starts with an
understanding of some terms that you would encounter every now and then in the field of accounting,

They are as follows, arranged in alphabetical order:

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. The person who performs this job is called the Accountant. 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 decision.

The Accounting equation is assets equals liabilities plus equity. (A = L+ E).

Accounting Manual is a document prepared to provide bookkeepers with direction and guidance in
connection with those bookkeeping requirements of entities

Accounting Period/year is a period of 12 consecutive months chosen by an entity as its accounting

period which may or may not be a calendar year.

Accounts Payable are amounts due to creditors for the goods or services brought on credit

Account is a formal record that represents, in words, money or other unit of measurement, certain
resources, claims to such resources, transactions or other events that result in changes to those
resources and claims. It can also be defined as a detailed record of the increases, decreases and balance
of each statement that appears in the financial statements. The simplest form of the account is the “T”
Account. It Is the basis for journal entry in accounting. T-accounts have three basic elements: a title, a
left side (debit), and a right side (credit).

Adjusting Journal Entries are accounting entries to account for a periods changes, omissions or other
financial data required to be reported in the books”
Adjusting Journal Entries are accounting entries to account for a periods changes, omissions or other
financial data required to be reported “in the books”

Adjusted Trial Balance reflects totals after the adjusting entries are posted to the general ledger.

Assets are a company’s resources (things that a company owns). Examples are cash, accounts receivable,
inventory, supplies, investments, land, building, equipment and goodwill. As per Philippine Accounting
Standards, assets should be classified into two

1. Current assets are assets which are expected to be realized within one year or intended to sell
or consume it in its normal operating cycle. Examples are

1.1 Cash is a medium of exchange that a bank will accept for deposit ot face value.

1.2 Cash Equivalents are short term, highly liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of changes in value.

1.3 Accounts receivables are claims against customers arising from sale of services or goods on credit.

14 Notes Receivables are a written pledge that the customer will pay the business a fixed amount of
money on a certain date.

1.5 Inventories are assets which are (a) held for sale in the ordinary course of business; (b) in the process
of production for such sale; or (c) in the form of materials or supplies to be consumed in the production
process or in the rendering of service,

1.6 Prepaid Expenses are expenses paid for by the business in advance

2. Non-current assets are all other assets which are not classified as current. Examples are:

2.1 Property, Plant and Equipment (PPE) are tangible assets that are held by an enterprise for use in
the production or supply of goods or service or for rental to others, or for administrative
purposes and which are expected to be used during more than one period 2.2 Accumulated
Depreciation is a contra account that contains the sum of the periodic depreciation charges. The
balance in this account is deducted from the cost of the related asset to obtain book value.
2.2

Balance is the sum of debit entries minus the sum of credit entries in an account. If positive, the
difference is called a debit balance, if negative, a credit balance.
A balance sheet (statement of financial position) presents the financial position of the entity at a given
date(end of the quarter or year). It comprises three elements: assets, liabilities and owner’s equity.

A bank is a place where the business can keep its money safe until it is

Banking is a financial service from banks whereby they receive a business’s money and make it available
when they need to use it.

A bank account is sometimes called a current bank account. It is used daily to deposit money and pay
business accounts or expenses.

Bookkeeping is the recording of all financial transactions undertaken by a business (or an individual). A
bookkeeper (or book-keeper), sometimes called an accounting clerk, is a person who keeps the books of
an organization. The organization might be a business, a charity or even a local sports club, Bookkeeping
is the work or skill of keeping account books or systematic records of money transactions, Bookkeeping
is procedural and largely concerned with development and maintenance of accounting records.

A bookkeeper is a person who records the accounts or transactions of a business

A budget is a plan of expected income and expenditure for the month.

A capital is money and other assets which can be used to start a business It is also called equity.

Cash usually refers to money in the form of liquid currency, such as banknotes or coins

Cash Payments Journal is a book used to record all payments made in cash such as for accounts payable,
merchandise purchases, and operating expenses, also termed cash disbursements journal.

Cash Receipts Journals is a book used to record all collections made in cash such as for accounts
receivable, merchandise sold, and interest income.
A credit is an accounting entry that either increases a liability or equity account, or decreases an asset or
expense account

A current assets are temporary assets that can be converted into cash within a year

Current Liabilities are credits that need to be paid within a year, such as a bank overdraft and creditors

Debit is an accounting entry that either increases an asset or expense account, or decreases a liability or
equity account. It is positioned to the left in an accounting entry.

Expenses refer to the amount of money needed for running the business. Financial records are formal
record of the financial activities of a business.

Financial statements (or financial report) is a formal record of the financial activities of a business,
person, or other entity. Relevant financial information is presented in a structured manner and in a form
easy to understand.

Fixed assets are possessions acquired by the business to use for longer than a year i.e. property,
vehicles, land and buildings.

Income is the total amount of money earned and received over a periodof time

The income statement, also referred to as the profit and loss statement reports the company’s financial
performance in terms of net profit or net loss over a specified period Income statement is composed of
two elements income and expense

Investments The International Accounting Standards Committee (IASC), defines Investment as an asset
held by an entity for the accretion of wealth through capital distribution, such as interest, royalties,
dividends and rentals, for capital appreciation or for other benefits to the investing entity such as those
obtained through trading relationships.

Intangible Assets are identifiable, nonmonetary assets without physical substance held for use in the
production or supply of goods or services for rental to others, or for administrative purposes.
A journal is a first recording of financial transactions as they occur in time, so that they can then be used
for future reconciling and transfer to other official accounting records such as the general ledger

A journal entry is the logging of transactions into accounting journal items. The journal entry can consist
of several recordings, each of which is either a debit or a credit. The total of the debits must equal the
total of the credits, otherwise, the journal entry is said to be “unbalanced”.

A ledger account is an account or record used to sort and store balance sheet and income statement
transactions

Liabilities are the company’s debts or financial obligations (amounts that a company owes). Examples of
liabilities are notes or loans payable, accounts payable, salaries and wages and interest payable.
According to the revised Philippine Accounting Standards, an entity shall classify a liability as current
when:

1. It holds the liability primarily for the purpose of trading;

2. The liability is due to be settled within 12 months after the reporting period; or

3. The entity does not have an unconditional right to defer settlement of the liability for at least 12
months after the reporting period.

All other liabilities should be classified as non-current liabilities.

There is loss when the business expenses are higher than the business income.

Net Loss is the deficiency of revenue over expenses for an accounting period.

Net income is the excess of revenue over expenses for an accounting period.

Non-current liabilities are debts that are paid over a longer period than a year

Notes or loans payable. These are amounts due to creditors which are supported by a promissory note
Owner’s equity or shareholder’s equity is the amount left over after all liabilities are deducted from the
assets. It also reports the amounts invested into the company by the owners plus the cumulative net
income of the company that has not been withdrawn or distributed to the owners.

There is profit when the income is higher than expenses.

A profit and loss statement (Income Statement) reports the company’s financial performance in terms of
net profit or net loss over a specified period. Income statement is composed of two elements: income
and expense.

Recording is the process of capturing information about business.

Revenues are inflows of assets resulting from sale of goods and services.

Savings is the part of an income that is kept for future use.

The statement of changes in equity (Statement of Retained Earnings) details the movement in owner’s
equity over a period.

A source document is any form of paper record that is produced as a direct consequence of a financial
transaction, and as a result, is an evidence that the transaction has taken place. Accounting source
documents come in many different forms. Examples are receipts for goods purchased with cash, receipts
for cash received, sales invoices, purchase invoices, suppliers’ statements, bank statements, cash
register tapes, bank deposit slips/forms, cheque stubs, credit card receipts and payroll records.

A transaction is any activity where money or items of value are exchanged between people. A
transaction is recorded on a source document using headings such as Date, Amount, Items purchased,
Amount paid etc.

A Bookkeeper or an Accountant?
Before you get confused on why we started with a lesson on basic accounting concepts instead of basic
bookkeeping concepts, you have to understand the relationship and difference between a bookkeeper
and an accountant.

The terms bookkeeper and accountant can be used interchangeably to a certain degree, so let us focus
on the literal job roles Many bookkeepers start acting as a data entry clerk or entry level bookkeeper for
a business. They grow, through experience and merit into being a go to person for the day-to-day
financial recording. The term bookkeeper is literal the bookkeeper keeps the books and retains
documentation for transactions.

An experienced or certified bookkeeper may eventually move into being an accountant An accountant
may focus on reporting, business analysis and processes, and possibly advice Many times a bookkeeper
and accountant work in tandem, with the bookkeeper operating as a “feet on the ground professional”,

Promoting a stronger relationship between an accountant and a business owner. Generally, a

bookkeeper is a person without a college degree in accounting who performs much of the data entry
tasks. This includes entering the bills from suppliers, paying bills, processing payroll data, preparing sales
invoices, mailing statements to customers, etc.

The accountant is likely to have a college degree with a major in accounting and takes over where the
bookkeeper leaves off. The accountant will prepare adjusting entries to record expenses that occurred
but are not yet entered by the bookkeeper. Examples include interest on bank loans since the last loan
payment, wages earned by employees that will be processed next week, etc. Other adjustments to
accounts include the calculation and recording of depreciation, establishing allowances for uncollectible
accounts, etc. After making the adjusting entries, the accountant prepares the company’s financial
statements (income statement, balance sheet, statement of cash flows) The accountant also assists the
company’s management to understand the financial impact of its past and future decisions.