Brief History of Accounting ‘Accounting traces its roots to the Middle East region, where as early 8500 BC, tradesmen use clay objects to represent commodities such as flocks of sheep, jars of spices and oil, and other goods. Some archaeologists later unearthed clay tablets marred with symbols and other writings and interpreted to mean records of goods sold and other statistics kept at that time. The ancient civilizations of Babylon, Greece and Egypt also used clay tablets (in later years, papyri were used as the medium for record keeping). These records show wage payments, material requisitions and costs of labor, which only shows that accounting has already been in use even during Biblical times. In 1494, Friar Luca Pacioli wrote a book which contains discussions on the double entry bookkeeping system. The book was ented Summa de Avithmetica, Geometria, Proportioni et Proportionalita (Everything about Arithmetic, Geometry, Proportions and Proportionalty) and it summarizes the existing mathematical knowledge at the time. Friar Luca Pacioli was considered the father of Double-Entry Bookkeeping, In the mid-18th to the mid 19th centuries, the Industrial Revolution altered the way goods are Produced from the artisan/craftsman method to the assembly-line method. Cost accounting, the specialized field of accounting which deals with the assignment of costs to products emerged during this period The corporate form of business organization was created to accommodate the need for increasingly large amounts of funds which are required to finance the expansion of business during the period.ACCOUNTING ‘= Accounting is a service activity. ts function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions. ‘= Accounting is the art of recording, classifying measuring and summarizing business activities ina significant manner, and in terms of money, transactions and events which are in part at least ofa financial character, and interpreting the results thereof. Basic Purpose of Accounting The basic purpose of accounting is to supply financial information to users to help them make informed judgments and better decisions. Accounting is the language of business. Accounting is the language used to communicate financial information to interested parties such as business ‘owners, creditors, employees, government, etc. Accounting and Bookkeeping Bookkeeping is the mechanical aspect of accounting, It involves update and maintenance of ‘accounting records. Bookkeeping is an accounting support function that involves the systematic recording of business transactions in financial term. May be done even by property trained non- accountants. ‘Accounting goes beyond bookkeeping. It includes interpretation of financial information recorded under bookkeeping. Specialized Accounting Fields ‘+ Public Accounting ~ Accountants either individual practitioners or accounting firms who render independent professional accounting services to the public on a fee basis. Examples of services provided by CPAs are: ‘= Auciting — involves independent examination of financial statements for the purpose of expressing an opinion on the faimess ofthese statements. ‘+ Tax Services - includes preparation of tax retums and tax planning for different clients. '* Management Advisory Services — involves providing services to clients on matters relating to the accounting records, budgeting, cost accounting, marketing, organizational planning, personnel and recruiting and many other areas. 2Private Accounting (Commerce and Industry) ~ Accountants employed by a business fir in various positions such as vice presidents for finance, chief accountant (controler), cost accountant, intemal auditor or budget officer Accountants assist in planning and controling a company's operations, Education - This field employs accountants as instructors, professors, reviewers or researches. Only Certified Public Accountants can engage inthis field of endeavor Government — Accountants may be hired as auditor, budget officer, consultants or staffs in ‘any government units lke Commission on Audit, Bureau of Internal Revenue, Department of Budget and Management, Local Government Units, etc ‘Users of Accounting Information intemal Users - Management ofthe business enterprise Extemal Users - Those with direct interest such as owners and creditors and with indirect interest such as goverment agencies, customers and labor unions. Fields of Accounting Financial Accounting - preparation and presentation of general-purpose financial statements to meet the needs of extemal users Management Accounting ~ concerned primarily with financial reporting for internal users like management. Cost Accounting - help management in controling expenses by means of measuring business’ costs. Tax Accounting - compliance to tax laws and minimizing tax bill legal ways. Government Accounting - analyzing, classifying, summarizing and communicating all government transactions involving receipt and disposition of goverment funds. Business AA business (also known as enterprise or fim) is an organization engaged in the trade of goods, services, or both to consumers. Profit-oriented businesses are businesses administered to eam profit to increase the wealth of owners. Non-profit organization is an organization that uses income to achieve its specific goals rather than distribute them.Business Transaction - is an economic event or condition that directly changes an entity's financial condition or directly affects its results of operations. Types of Business Operations + Service Business — the simplest form of business. This business offers services to clients or customers in exchange for a fee. Examples are lawyers, accountants and educational institutions, + Merchandising Business — or trading business buys goods from suppliers and sells them at a profit without making any alterations. Examples are sari-sari stores, drugstores and supermarkets + Manufacturing Business - This business is quite similar to a merchandising business. The difference is that a manufacturing business actually produces the goods that it sells to its customers. The most complex type because of the conversion of the raw materials into finished goods. Forms of Business Organization + Single or Sole Proprietorship — has only one owner (proprietor). The most basic and easiest form of business organizations. Less complicated to operate and decisions are made faster since only one owner decides and al profits will go to one owner only. + Partnership ~ An association of two or more persons who bind themselves to contribute ‘money, property or industry to @ common fund with the intention of dividing profits among themselves. Partnerships are govemed by the Civil Code of the Philippines. * Corporation - Our Corporation Code defines a corporation as an artificial being created by ‘operation of law, having the right of succession and the powers and attributes expressly authorized by law or incident to its existence. COMMON EXAMPLES OF ACCOUNT TITLES USED 1. ASSETS ACCOUNTS Asset - an asset is an economic resource. Anything tangible or intangible that is capable of being ‘owned or controlled to produce value and that is held to have positive economic value is considered an asset.‘A. Current Asset These represents the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business Cash ~ Cash includes: currency and coins, checks, money orders, bank drafts and demand deposit accounts. Account Receivables - These are claims against costumers arising from sale of service or goods on credit, Notes Receivable — A note receivable is a written pledge that the costumer will pay the business a fixed amount of money at a certain date. Inventories - These are assets which are (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; (c) in the form of materials or supplies to be consumed in the production process or inthe rendering of services. Prepaid Expenses - These are expenses paid for by the business in advance. Examples are Prepaid Rent and Prepaid Insurance. Prepaid expenses are assets when they are paid for ‘Subsequently, they become expenses. B. Non-Current Assets - A company's long-term investments, in the case that the full value will ‘ot be realized within the accounting year Noncurrent assets are capitalized rather than expensed, ‘meaning that the company allocates the cost of the asset over the number of years for which the asset will be in use, instead of allocating the entire cost to the accounting year in which the asset was purchased. Long-term Investments ~ An investment is an asset held by an enterprise for the accretion of ‘wealth through capital distribution, such as interest, royalties, dividends and rentals, for capital appreciation or for other benefits tothe investing enterprise such as those obtained through trading relationships. Investments are classified as long term when they are intended to be held for long periods of time. Property, Plant and Equipment - These are tangible assets held by an enterprise for use in the production or supply of goods or services, or for rental to others, or for administrative purposes and which are expected to be used during more than one accounting period. Examples are land, building, rnocicaamcsipr lces,Aare nd BO machinery and equipment. not part OF FRE 5Accumulated Depreciation — It is a contra account that contains the sum of the periodic depreciation charges. The balance in this account is deducted from the cost ofthe related asset — equipment or buildings to obtain book value. Intangible Assets — These assets are identifiable, non monetary assets without physical substance. ‘These include patents, copyrights, licenses, franchises and trademarks. 2. LIABILITY ACCOUNTS Liability - A company’s legal debts or obligations that aise during the course of business operations Liabilities are settled overtime through the transfer of economic benefits including money, goods or services. Accounts Payable - This account is the opposite of accounts receivable. Examples include purchasing goods or receiving services for which the buyer agrees to pay inthe near future. Notes Payable - A note payable is like a note receivable, except that this time the enterprise is the ‘one who promises to pay (not the one who receives the promise) ‘Accrued Liabiliies - These are amounts owed to others for unpaid expenses. They are similar to accounts payable, except that accounts payable are for items which have already been consummated (such as the purchase of goods), while accrued expenses are for items which are Continuing in nature (such as ullity services like electricity and water). Examples are salaries payable, interest payable, taxes payable and accruais for utility expenses. Uneamed Revenues ~ Sometimes the enterprise receives payment before providing its customers with goods or services. This creates an obligation on the part of the enterprise to deliver goods or provide services. Once the enterprise complies with what is required of it, the advance collections. from customers are already eamed and become part of income. Morigage Payable - This account is used for recording long-term debi(s) of an enterprise for which the company has pledged certain assets as security forthe debt (collateral). Bonds Payable - A bond is a contract between the issuer and the lender specitying the terms of repayment as well asthe interest tobe paid. 3. EQUITY ACCOUNTS‘Capital - is used to record the original and additional investments of the owner of the business entity. Capital is increased by net income earned during the year Conversely, a net loss decreases capital Withdrawals - When the proprietor (ora partner in a partnership) withdraws cash or others assets for non business use, such withdrawals are reflected in the “withdrawals" account. Some accounting references use the term “drawings” or ‘personal’ instead of *withdrawals” Income Summary ~ itis temporary account used to summarize all income and expenses fora given period. If total income is greater than total expenses, a net income results. If the opposite happens, a net loss was sustained by the business. Some accounting references use the term “Profit or Loss Summary’ instead of “Income Summary" 4. INCOME ACCOUNTS: Service Income or Fees Income ~ Revenues eamed by performing services for customers. Sales - Revenues eamed as a result of sale of merchandise. 5. EXPENSE ACCOUNTS Cost of Sales - the cost incurred to purchase or to produce the products sold to customers during the period. For a service business, any expense which could be directly attributed to the provision of services is called cost of services. Salaries and Wages Expense - Includes all payments as a result of an employer-employee relationship such as salaries and wages, 13th mo. pay and other related employee benefits tities Experise (Telephone, Electricity, Fuel and Water Expenses) - Expenses related to use of communication facilities, the consumption of electricity and water Rent Expense - Expense for leased office space, equipment, or other assets rented from others ‘Supplies Expense - The account used for recording the usage of supplies (e.g. office supplies) n the normal course of business. Insurance Expense — Portions of premiums paid on insurance coverage which has expired.Depreciation Expense — The portion ofthe cost of a tangible asset allocated or charged as expense during the accounting period. Bad Debts Expense - The amount of receivables estimated to be uncollectible and charged as ‘expense during an accounting period. Also known as “Uncollectible Accounts Expense” Interest Expense — An expense related to use of borrowed funds. Also known as finance cost. The Basic Accounting Equation Analysis of business transactions can be done through this accounting equation: Assets = Liabilities + Equity Double Entry Accounting System Under this accounting system, each transaction must be recorded with atleast two accounts, one debit and one credit, in such a way that the total peso amount of debits and credits equal each other The accounting equation must always be maintained. Basic Accounting Equation illustrated: Juan dela Cruz established a sole proprietorship and set up his own printshop. During October 2012, the frst month of operations, the following transactions occurred: October 1 Investment of P100,000 in a bank account in the name of Juan Printshop. Asset = Liabilities + Equity Cash Penaco, Capital Nov.1 100,000 = 100.000 The Financial transaction is analyzed as follows: + An Economic resource — cach of P100,000is invested inthe business entity. The source of ths asset s the contribution made by the owner, which represents owner's equity The owner's equity account is Dela Cruz, Capital ‘+ The Dual nature of the transaction is that cash is invested and owner's equity created. The effects ofthis transaction on the accounting equation are as follows: increase in asset — ‘cash from zero to P100,000 and increase in owner's equity from zero to P100,000. ‘+ Atthis point, the entity has no liabilities, and assets equal to owner's equity.October 3 Purchase of equipments necessary for the business for P75,000. Asset = Liabilities + Owner's Equity Cash + Equipment = P 100,000 . (3) (75,000) + 75,000 = 25000 + 75,000 P 100,000 abilities + Dela Cruz, Capital 100,000 100,000 400,000 This Transaction decreases the asset ~cash by 75,000 and increases another asset- Equipment by 75,000. Note that the sums of the balances on both sides of the equation are equal. This equality must always exist. 7 Purchase of office supplies, P10,000, on account. Asset Cash + Office Supplies Equipment 1 P_ 100,000 3 (75,000) + 75,000 10,000 25,000 + 10,000 + 75,000 P_ 110, 000 + Owner's Equity Dela Cruz, + Capital P 100,000 Assets don't have fo be purchased in cash. It can also purchased on credit. Acquiring supplies with 2 promise to pay the amount later is called buying on account. Ths transaction increases both office supples and account payable. Additional Transactions: Oct. 10 Collection of P10,000 from various customers for services rendered. 15 Payment of P3,000 for utilities expense. 7 Partial payment of P5,000 for office supplies purchased on account last October 7 18 Billing amounting to P30,000 to customers for services already rendered but still uncollected as of October 18. 19 Withdrawal of cash by Juan dela Cruz, P1,500 from the business for personal use. 23 Collection from customers amounting to P15,000 for billing dated October 18. 25 Receipt of billing from Uncle Sam Repairs for 2,500 for the repair of equipment. 0 Payment of salary of Juan's assistant for P8,000. 9Asset = Liabilities + Owner's Equity Dela Cruz, Cash + Accounts Office = Liabilities Capital Receivable Supplies Equipment 1 P 100,000 100,000 3 (75,000) 75,000 7 410,000 10,000 Ba. 25,000 + 0 + 10,000 75,000 = 10,000 100,000 10 40,000 410,000 Bal 35,000 + 0 + 10,000 75,000 = 10,000 110,000 15 (3,000) (3,000) Bal 32,000 + 0 + 10,000 75.000 = — 10,000 107,000 7 (6,000) (6,000) Ba. 27,000 + 0 + 10,000 75.000 = 5,000 407,000 18 30,000 30,000 Bal 7,000 + 30,000 + 10,000 75.000 = 5,000 137,000 19 (1,500) (1.500) Bal 25500 + 18,000 + 10,000 75.000 = 5,000 135,500 2B 15,000 (15,000) Bal 40500 + 15,000 + 10,000 75000 = 5000 435,500 B 2,500 (2,500) Bal 40,500 + 15,000 + 10,000 75.000 = 7,500 133,000 30 (€,000) (8.000) 32,500 + 15000 10,000 75000 = 7,500 425,000_ P_132,500_ = _P132,500Problem #1 Sesan Alegoria is the owner of the Olongapo Repairs Specialist. On Jan. 1, 2005, the ‘sss, liabilities and proprietor’s capital of the business were: Cash, P20,000; Accounts Aeceivable, P4,000; Supplies, 5,000; Equipment, P60,000; Accounts Payable, P9,000; Sesan Alegoria, Capital, P80,000. The transactions for the month of January were as fellows: ‘Accounts Tesoanis —Aiegoria. Cash + Receivable + Supplies + Equipment = Payable Capita sexce P20,000_+ P4000 _+ 5,000 + P60.000_= 9.000 _+ _Ps0,000. 8 ET Paid P3,000 of the outstanding accounts payable. Received P1,000 on account (part payment) from customers. Purchased P2,500 worth of supplies on account (on credit). Returned a defective piece of equipment that was purchased last month aud received a cash refund of P12,000. Borrowed P10,000 from a supplier, to repay the loan in 30 days. Paid creditor P2,000 on account (part payment). Purcitased equipment for P8,000, giving P2,000 cash and promising to pay the balance in 60 days. Bought supplies, paying P6S0 cash Received a P2,500 check from customer on account. whe Ne Sequired: Record the transactions using a financial transaction worksheet. BryProblem #2 ‘On April 1, 2005, Helen Ruiz established a business to manage rental properties. She ‘completed the following transactions during the month: £ “ 6 ie a ye a ver popes ‘Opened a business bank account with a deposit of P100,000 from personal funds. Purchased supplies on account, P1 1,500. Received cash on fees earned for managing rental property, P45,000. Paid rent on office and equipment for the month, P25,000. Paid some accounts, P6,750. Billed property owners for fees earned for managing rental property, P32,500. Paid telecommunications expenses for month, P9,800, and miscellaneous ‘expenses, P7,750. Paid office salaries, P15,000. Determined that the cost of supplies on hand was P2,150. Withdrew cash for personal use, P10,000. ct "Accounts ‘Supplies Accounts Ruiz, Cash + Receivable + = Payable + Capital Sign Company on Oet. 1, 2005. He deposited 250,000 under the name of the new business entity " During the month of October following transactions occurred: Acquired a service vehicle in the amount of P195,000 on account. supplies for cash, PS7,000. Withdrew P25,000 for personal use. Collected P35,000 from Cagayan Company. Paid salaries of P57,000 for the month. 30 ~ Paid BayanTel P7,500 for communication services for tke month. Paid a bill from AdAsia for P5,500 of advertising for the month, ‘Establish the following accounts in a financial transaction worksheet: Cash; Accounts | Receivable; Supplies; Service Vehicle; Accounts Payable; and Penaco, Capital. Record [pte worksheet the transactions listed above