Fundamentals of AccountancyBusiness and Management 1

Fundamentals of
Accountancy, Business and

Management 1
Quarter 3 - Module 1:
Introduction to Accounting
and Users of Accounting Information
Accounting Concepts and Principles
Accounting Equation; Five Major
Accounts; and Chart of Accounts
Use of Basic and Expanded Accounting
Equation
(DO_Q3_FABM1_GRADE11_MODULE1)
1
Fundamentals of Accountancy, Business and Management 1
Alternative Delivery Mode
Quarter 3 – Module 1: Introduction to Accounting
Users of Accounting Information
Accounting Equation; Five Major Accounts; and Chart of Accounts
Use of Basic and Expanded Accounting Equation
Second Edition, 2021
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Published by the Department of Education
Development Team of the Module
Writers: Richelle M. Orgel, Wawang Pulo National High School

Jackielyn M. Cura, Gen. T. De Leon National High School
Editor: Alfredo Galicia – ESP - MAPEH
Reviewer: Darwin O. Fullo
Illustrator:
Layout Artist: Raphael A. Lopez
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Introductory Message
For the facilitator:
Welcome to the Fundamentals of Accountancy, Business and Management 1

Alternative Delivery Mode (ADM) Module on Introduction to Accounting and Users of
Accounting Information; Accounting Concepts and Principles; Accounting Equation;
Five Major Accounts; Chart of Accounts; and Use of Basic and Expanded Accounting
Equation.
This module was collaboratively designed, developed and reviewed by educators both
from public and private institutions to assist you, the teacher or facilitator in helping
the learners meet the standards set by the K to 12 Curriculum while overcoming
their personal, social, and economic constraints in schooling.
This learning resource hopes to engage the learners into guided and independent
learning activities at their own pace and time. Furthermore, this also aims to help
learners acquire the needed 21st century skills while taking into consideration their
needs and circumstances.
In addition to the material in the main text, you will also see this box in the body of
the module:
Notes to the Teacher

This contains helpful tips or
strategies that will help you in
guiding the learners.
As a facilitator you are expected to orient the learners on how to use this module.
You also need to keep track of the learners' progress while allowing them to manage
their own learning. Furthermore, you are expected to encourage and assist the
learners as they do the tasks included in the module.
3
This module was designed and written with you in mind. It is here to help you master
the nature of Accounting. The scope of this module permits it to be used in many
different learning situations. The language used recognizes the diverse vocabulary
level of students. The lessons are arranged to follow the standard sequence of the
course. But the order in which you read them can be changed to correspond with
the textbook you are now using.
The module is divided into four lessons, namely:

● Lesson 1 – Introduction to Accounting and Users of Accounting Information
● Lesson 2 – Accounting Concepts and Principles
● Lesson 3 – Accounting Equation; Five Major Accounts; and Chart of Accounts
● Lesson 4 – Use of Basic and Expanded Accounting Equation
After going through this module, you are expected to:

1. Define accounting
2. Describe the nature of accounting
3. Narrate the history/origin of accounting
4. Define external users and give examples
5. Define internal users and give examples
6. Explain the varied accounting concepts and principles
7. Solve exercises on accounting principles as applied in various cases
8. Illustrate the accounting equation
9. Discuss the five major accounts
10. Prepare a Chart of Accounts
11. Discuss the use of basic and expanded accounting equation
Perform operations involving simple cases with the use of basic and expanded
accounting equation
Check the appropriate column (YES or NO) depending on your knowledge or

capability to perform based on the questions given.
Can you… Y N
YES NO
1 define accounting?
2 describe the nature of accounting?
3 narrate the history/origin of accounting?
4 define external users and give examples?
5 define internal users and give examples?
6 explain the varied accounting concepts and principles?
6 solve exercises on accounting principles as applied in
various cases?
7 illustrate the accounting equation?
1 (DO_Q3_FABM1_GRADE11_LESSON1)
8 discuss the five major accounts?
9 prepare a Chart of Accounts?
1 discuss the use of basic and expanded accounting
0 equation?
1 perform operations involving simple cases with the use
1 of basic and expanded accounting equation?
1 explain the varied accounting concepts and principles?
2
1 solve exercises on accounting principles as applied in
3 various cases?
1 illustrate the accounting equation?
4
1 discuss the five major accounts?
5
1 prepare a Chart of Accounts?
6
1 discuss the use of basic and expanded accounting
7 equation?
Lesson Introduction to Accounting

1 Users of Accounting Information
This lesson provides information and activities about accounting and users of
accounting information. Upon completion of this lesson, you must be able to define
accounting, describe the nature of accounting, narrate the history of accounting,
define external and internal users of accounting information and give examples for
each.
Directions: Read and Analyze each item. Write the letter of the best answer on the
space provided before each number.
________1. Which of the following refers to a process that helps interpret information
about the economic activities of an organization?
a. Financial Planning c. Accounting
b. Financial Analysis d. Organizing
________2. All of the following are the steps in the accounting process EXCEPT
a. Identification b. communication c. recording d. verification
________3. Which of the following statements describes the accounting process?

a. It involves identifying relevant economic events
b. Recording economic events is an important part of the accounting process
c. The accounting process is not complete if the financial information is not
communicated to interested users.
d. All of the above
________4. Which of the following does NOT show main functions of accounting?
a. Ana prepares monthly financial reports
b. Jose recorded the purchase of supplies in the books of accounts
c. Pam prepared a report to be submitted to the taxing authority
d. Ren canvassed the price of a computer to be used in the company
________5. All of the following are relevant economic events EXCEPT

a. A manager who attended to the concern of a complaining customer
b. A manager who purchase equipment for the company
c. A company which paid its employees for their salaries
d. A company which barrowed Php 1M from a bank
There are popular companies both locally and internationally which offer
products that are different from one another. However, there is a common factor
among these companies that contribute to their success and that is accounting.
Accounting plays a vital role in running a business. It provides information
regarding cost and earnings, profit and loss, assets and liabilities for decision
making, planning and controlling processes within a business. It helps business
owners and managers to make the right decisions for the company. Accounting also
helps investors to understand how resourcefully their capital are being used.
“Accounting is the process of IDENTIFYING, RECORDING, and COMMUNICATING

economic events of an organization to interested users.” (Weygandt, J. et. al)
IDENTIFYING – this involves selecting economic events that are relevant to a
particular business transaction.
The economic events of an organization are referred to as transactions.
Examples of economic events or transactions
● Sale of goods
● Purchase of materials
● Acquisition of machinery
RECORDING – this involves keeping a chronological diary of events that are

measured in pesos. The diary referred to in the definition are the journals and
ledgers.
COMMUNICATING – occurs through the preparation and distribution of financial
and other accounting reports.
Nature of accounting
1. Accounting is a process. A process is composed of multiple steps that lead to a
common end goal. Accounting is a process because it performs the functions of
identifying, recording and communicating events with the end goal of providing
information to internal and external parties.
2. Accounting is an art. Art refers to a way of performing something. It entails
creativity and skills to help us attain some objectives. Accounting is the art of
recording, classifying, summarizing and finalizing financial data. Accounting is a
combination of techniques and its application requires applied skill and expertise.
This is the reason why accounting can be considered as an art.
(Accountingtheory.com)
3. Accounting deals with financial information and transactions: Accounting
records financial transactions and data, classifies these and finalizes their results
given for a specified period of time, as needed by their users. At every stage, from
start to finish, accounting deals with financial information and financial information
only. It does not deal with non-monetary or non-financial aspects of such
information.
4. Accounting is a means and not an end. Accounting is a tool to achieve specific
objectives. It is not the objective itself.
5. Accounting is an information system. Accounting is recognized and
characterized as a storehouse of information. As a service function, it collects
processes and communicates financial information of any entity. This discipline of
knowledge has evolved to meet the need for financial information as required by
various interested groups. (Accountingtheory.com)
Functions of accounting
1. Keeping Systematic Record of Business Transaction. Recording transactions
does not only involve entering the transactions in the accounting books. The record
should be systematic enough to enable easy understanding of readers. No matter
how comprehensive the records are, if they are not produced systematically, then
they provide little to no value.
2. Protecting Properties of the Business. The accounting records serve as the
evidence that properties of a business do exist or how much of a particular resource
does a company have.
3. Communicating Results to Various Parties in Connected with the Business.
The accounting reports at the end of each period are not only used by external parties
(e.g. potential investors, government agencies) but also by the management in their
decision making function. Communication of the results of operations of a company
is essential for all concerned parties to enable them to take well-informed decisions.
4. Meeting Legal Requirements. In the Philippines, the government requires some
companies (particularly those with public accountability) to provide financial reports
quarterly, semi-annually, or annually. This procedure aims to protect the public by
providing them the necessary information to make sound decisions. The government
also requires reports from heavily regulated industries.
History of accounting
Accounting is as old as civilization itself. It has evolved in response to various social
and economic needs of men. Accounting started as a simple recording of repetitive
exchanges. The history of accounting is often seen as indistinguishable from the
history of finance and business.
Following is the evolution of accounting:
• The Cradle of Civilization

Around 3600 B.C., record-keeping was already common from Mesopotamia, China
and India to Central and South America. The oldest evidence of this practice was
the “clay tablet” of Mesopotamia which dealt with commercial transactions at the
time such as listing of accounts receivable and accounts payable.
• 14th Century - Double-Entry Bookkeeping
The most important event in accounting history is generally considered to be the
dissemination of double entry bookkeeping by Luca Pacioli (‘The Father of
Accounting’) in 14th century Italy. Pacioli was much revered in his day, and was a
friend and contemporary of Leonardo da Vinci. The Italians of the 14th to 16th
centuries are widely acknowledged as the fathers of modern accounting and were the
first to commonly use Arabic numerals, rather than Roman, for tracking business
accounts. Luca Pacioli wrote Summa de Arithmetica, the first book published that
contained a detailed chapter on double-entry bookkeeping.
• French Revolution (1700s)
The thorough study of accounting and development of accounting theory began
during this period. Social upheavals affecting government, finances, laws, customs
and business had greatly influenced the development of accounting.
• The Industrial Revolution (1760-1830)

Mass production and the great importance of fixed assets were given attention during
this period.
• 19th Century – The Beginnings of Modern Accounting in Europe and America
The modern, formal accounting profession emerged in Scotland in 1854 when Queen
Victoria granted a Royal Charter to the Institute of Accountants in Glasgow, creating
the profession of the Chartered Accountant (CA).
In the late 1800s, chartered accountants from Scotland and Britain came to the U.S.
to audit British investments. Some of these accountants stayed in the U.S., setting
up accounting practices and becoming the origins of several U.S. accounting firms.
The first national U.S. accounting society was set up in 1887. The American
Association of Public Accountants was the forerunner to the current American
Institute of Certified Public Accountants (AICPA).
In this period rapid changes in accounting practice and reports were made.
Accounting standards to be observed by accounting professionals were promulgated.
Notable practices such as mergers, acquisitions and growth of multinational
corporations were developed. A merger is when one company takes over all the
operations of another business entity resulting in the dissolution of another
business. Businesses expanded by acquiring other companies. These types of
transactions have challenged accounting professionals to develop new standards
that will address accounting issues related to these business combinations.
• The Present - The Development of Modern Accounting Standards and
Commerce
The accounting profession in the 20th century developed around state requirements
for financial statement audits. Beyond the industry's self-regulation, the government
also sets accounting standards, through laws and agencies such as the Securities
and Exchange Commission (SEC). As economies worldwide continued to globalize,
accounting regulatory bodies required accounting practitioners to observe
International Accounting Standards. This is to assure transparency and reliability,
and to obtain greater confidence on accounting information used by global investors.
Nowadays, investors seek investment opportunities all over the world. To remain
competitive, businesses everywhere feel the need to operate globally. The trend now
for accounting professionals is to observe one single set of global accounting
standards in order to have greater transparency and comparability of financial data
across borders.
Users of Accounting
A. External Users
External users are individuals and organizations outside a company who want
financial information about the company. These users are not directly involved in
managing and operating the business. The two most common types of external
users are potential investors and creditors. Potential Investors use accounting
information to make decisions to buy shares of a company. Creditors (such as
suppliers and bankers) use accounting information to evaluate the risks of granting
credit or lending money. Also included as external users are government
regulatory agencies such as Securities and Exchange Commission (SEC), Bureau
of Internal Revenue (BIR), Department of Labor and Employment (DOLE), Social
Security System (SSS), and Local Government Units (LGUs).
External users (Secondary Users) of accounting information include the

following:
1. Creditors: for determining the credit worthiness of an organization. Terms of

credit are set by creditors according to the assessment of their customers'
financial health. Creditors include suppliers as well as lenders of finance such
as banks.
2. Tax Authorities (BIR): for determining the credibility of the tax returns filed on
behalf of a company.
3. Potential Investors: for analyzing the feasibility of investing in a company.
Investors want to make sure they can earn a reasonable return on their
investment before they commit any financial resources to a company.
4. Customers: for assessing the financial position of its suppliers which is
necessary for them to maintain a stable source of supply in the long term.
Regulatory Authorities (SEC, DOLE): for ensuring that a company's disclosure
of accounting information is in accordance with the rules and regulations set in
order to protect the interests of the stakeholders who rely on such information
in forming their decisions.
5. Academe (professors, researchers, students): they utilize financial
statements for academic purposes.
B. Internal Users
Internal users of accounting information are those individuals inside a company who
plan, organize, and run the business. These users are directly involved in managing
and operating the business. These include marketing managers, production
supervisors, finance directors, company officers and owners
Internal users (Primary Users) of accounting information include the following:

1. Management
Information need: income/earnings for the period, sales, available cash, production
cost
Decisions supported: analyze the organization's performance and position and take
appropriate measures to improve the company results. sufficiency of cash to pay
dividends to stockholders; pricing decisions
2. Employees
Information need: profit for the period, salaries paid to employees
Decisions supported: job security, consider staying in the employ of the company or
look for other employment opportunities
3. Owners or Stockholders
Information need: profit or income for the period, resources or assets of the
business, liabilities of the business
Decisions supported: considerations regarding additional investment, expanding the
business, borrowing funds to support any expansion plans.
Accounting information is presented to internal users usually in the form of
management accounts, budgets, forecasts and financial statements. This
information will support whatever decision of the internal users.
Complete the table below.

Define and give example/s for each type of user then state the decision made using
accounting information. The first number is done for you.
Example of Decision made
Type of User Definition User using accounting
information
1.Customers Main source of clients, people Whether or not to

income; acquiring build relationship
acquire goods goods or with the business
and services services
for a fee
2.Employees
3.Potential investors
4.Owners/Stockholders
5.Creditors
Complete the statement below.

The concept from the lesson that I find most interesting is about __________________
_________________________________________________________________________________________
because_________________________________________________________________________________
_________________________________________________________________________________.
Through this lesson, I learned that_______________________________________________
________________________________________________________________________________________.
What kind of information do the following users need that can be answered by
accounting?
1. BIR
2. Banks
3. Suppliers
Directions: Identify the following. Write your answer beside each number.
________1. The process of identifying, recording, and communicating economic
events of an organization to interested users.
________2. The most important event in accounting history.
________3. Mass production and the great importance of fixed assets were
given attention during this period.
________4. The first step in accounting process.
________5. Involves keeping a chronological diary of events
________6. Individuals and organizations outside a company who want
financial information about the company. These users are not
directly involved in managing and operating the business.
________7. Users of accounting information who are involved in planning,
organizing and running the business.
________8. Uses accounting information for determining the credibility of the
tax returns filed on behalf of a company.
________9. External users of accounting who uses accounting information for
academic purposes.
________10. The Father of Accounting.
Directions: Classify each of the following as either external user (E) or internal user
(I). Write your answer beside each number.
________1. Professors ________6. Customer
________2. Creditor ________7. Employees
________3. Government ________8. Owners
________4. Management ________9. Researchers
________5. Potential Investor ________10. Suppliers
Lesson Basic Accounting Concepts

2 and Principles
In this lesson, the learners will explain the varied accounting concepts and
principles and solve exercises of them as applied in various cases.
Juan dela Cruz opened his pet shop business called Petness First Petshop. He
opened a bank account for his business and deposited ₱500,000. The business
earned ₱50,000 but he had doubts with the recorded expense of ₱60,000. He is not
sure if he should include the following items as expenses:
Salary expense ₱20,000

Rent expense 10,000
Utilities expense (at home) 15,000
Utilities expense (at the store) 10,000
Insurance expense 5,000
Withdrawals 10,000
What do you think should not be included as expense of his business?

Accounting concepts and principles (assumptions or postulates) are a set of
logical ideas and procedures that guide the accountant in recording and
communicating economic information.
1. Business Entity Principle - A business enterprise is separate and distinct from
its owner or investor.
• Example: If the owner has a barber shop, the cash of the barber shop should
be reported separately from personal cash.
2. Going Concern Principle – Business is expected to continue indefinitely.
● Example: When preparing financial statements, you should assume that the
entity will continue indefinitely.
3. Time Period Principle - Financial statements are to be divided into specific time
intervals.
● Example: The salary expenses from January to December 2015 should only be
reported in 2015.
4. Monetary Unit Principle - Amounts are stated into a single monetary unit
● Example: Jollibee should report financial statements in pesos even if they have
a store in the United States.
5. Objectivity Principle - Financial statements must be presented with supporting
evidence.
● Example: When the customer paid Jollibee for their order, Jollibee should have
a copy of the receipt to represent as evidence.
6. Cost Principle - Accounts should be recorded initially at cost.
● Example: When Jollibee buys a cash register, it should record the cash register
at its price when they bought it.
7. Accrual Accounting Principle - Revenue should be recognized when earned
regardless of collection and expenses should be recognized when incurred
regardless of payment. On the other hand, the cash basis principle in which
revenue is recorded when collected and expenses should be recorded when paid.
Cash basis is not the generally accepted principle today.
• Example: When a barber finishes performing his services he should record it
as revenue.
8. Matching Principle - Cost should be matched with the revenue generated.
● Example: When you provide tutorial services to a customer and there is a
transportation cost incurred related to the tutorial services, it should be recorded
as an expense for that period.
9. Disclosure Principle - All relevant and material information should be reported.
● Example: The company should report all relevant information.
10. Conservatism Principle – This is also known as prudence. In case of doubt,
assets and income should not be overstated while liabilities and expenses should
not be understated.
● Example: In case of doubt, expenses should be recorded at a higher amount.
Revenue should be recorded at a lower amount.
11. Materiality Principle - In case of assets that are immaterial to make a difference
in the financial statements, the company should instead record it as an expense.
● Example: A school purchased an eraser with an estimated useful life of three
years. Since an eraser is immaterial relative to assets, it should be recorded as
an expense.
Importance of Accounting Concepts and Principles

Accounting concepts and principles provide reasonable assurance that information
communicated to users is prepared in a proper way. They also provide a general
frame of reference by which accounting practice can be evaluated and they serve as
guide in the development of new practices and procedures.
Directions: Identify which accounting concepts and principles as described in the
following situation. Write your answer on the space provided.
1. During the year, you started a business of selling personalized
mugs and T-shirts. You opened a separate bank account for the
business and deposited your initial investment of ₱250,000 to
this account.
2. The business acquired a printing machine. The regular selling

price is ₱100,000; however, you were able to acquire it at a
discounted price of ₱90,000. You will record the machine at its
acquisition cost of ₱90,000 rather that the regular selling price
3. The business acquired initial inventory of mugs and T-shirts for

a total cost of ₱50,000. You will record as an asset (i.e.) inventory
rather than as expense.
4. All the inventory was sold on credit for ₱300,000 (‘sold on credit’
means ‘pinautang’). You will immediately record the credit sales
as account receivable rather than waiting for them to be
collected.
5. Also, you will now record the ₱50,000 cost of the inventory as
expense.
Supply the table below from what you have learned from the previous activities:
From the lesson, I have learned that: I had difficulty and wants to clarify
about:
Give examples of the following given accounting concepts and principles.

1. Cost Principle
2. Objectivity Principle
3. Time Period Principle
4. Materiality Principle
5. Matching Principle
Directions: Encircle the letter of the best answer.

1. The accounting guideline that requires financial statement information to be
supported by independent, unbiased evidence other than someone's belief or opinion
is the:
a. Business entity principle c. Going concern principle
b. Monetary unit principle d. Objectivity principle
2. The principle that requires every business to be accounted for separately and
distinctly from its owner or owners is known as the:
a. Objectivity principle c. Going concern principle
b. Business entity principle d. Materiality principle
3. The rule that requires financial statements to reflect the assumption that the
business will continue operating instead of being closed or sold, unless evidence
shows that it will not continue, is the:
a. Going concern principle c. Accrual accounting principle
b. Cost principle d. Conservatism principle
4. Marian Mosely is the owner of Mosely Accounting Services. Which accounting

principle requires Marian to keep her personal financial information separate from
the financial information of Mosely Accounting Services?
a. Monetary unit principle c. Cost principle
b. Time period principle d. Business entity principle
5. Which of the following accounting principles would require that all goods and services
purchased be recorded at cost?
a. Conservatism principle c. Cost principle
b. Disclosure principle d. Matching principle
Directions: Indicate which principle is violated in the following statements. Write

your answer on the blank provided.
1. The owner-manager bought a computer for personal use. The invoice was given to the
accountant who recorded it as an asset of the business. _____________________________
2. The statement of financial position of a company included an equipment purchased
from Japan for 350,000 yen. It was reported at that amount in the statement of
financial position while all the other assets were reported in Philippine pesos.
_____________________________
3. No financial statements were prepared by Michael Go for his business. He explained
that he will prepare the statements when he closes the business, which he predicts to
take place after 20 years. _____________________________
4. Aside from owning a shoe store, Albert operates a canteen. The assets of the canteen
are reported in the statement of financial position of the shoe store.
_____________________________
5. Purchased a hammer at a cost of ₱500. This was recorded as an asset and expense to
decrease its value by ₱50 per year for 10 years. _____________________________
Lesson Accounting Equation;

3 Five Major Accounts; and
Chart of Accounts
This lesson will provide information, activities and exercises which will lead
the leaners to the concept of accounting equation and its elements, five major
accounts, and chart of accounts and will enhance skills on classifying accounts
according to their category.
Classify the following account titles according to the group they belong. Write your
answer on the space provided.
Accounts Payable Professional Fee Land Gasoline Expense Accounts Receivable
Dental Fee Cash Tan, Capital Office Supplies Utilities Expense
Sy, Withdrawal Unearned Income Rent Expense Accounting Fee Notes Payable
ASSETS LIABILITIES OWNER’S REVENUE EXPENSES

EQUITY
The Accounting Equation

All the process in an accounting system must observe the equality of the
accounting equation. Business transactions affect the assets, liabilities, and
proprietorship of the business. It is expressed by the equation below:
RESOURCE SOURCES
S
ASSETS = LIABILITIES + OWNER’S EQUITY
Cost of Resources supplied by creditors and

resources used
owners
in the business
The Account
Account is 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 Five Major Accounts
The five major accounts, also called the elements of the financial statements,
are actually the items in the expanded accounting equation.
I. ASSETS
● These are the resources owned and controlled by the firm.
● Tangible Assets - These are physical assets such as cash, supplies, and
furniture and fixtures.
● Intangible Assets - These are non-physical assets such as patents and
trademarks.
A. Current Assets
⮚ These are assets that can be realized (collected, sold, used up) one year
after year-end date. Examples are:
Account Title Description
Cash It is the money on hand, or in banks, and other items considered

as medium of exchange in business transactions.
Accounts These are amounts due from customers arising from credit sales
Receivable or credit services.
Notes Receivable These are amounts due from clients supported by promissory
notes.
Inventories These are assets held for resale.
Supplies These are items purchased by an enterprise which are unused as

of the reporting date.
Prepaid Expense These are expenses paid in advance. They
are assets at the time of payment and become expenses through

the passage of time.
Accrued Income It is the revenue earned but not yet collected.
Short-term These are the investments made by the company that are
Investments intended to be sold immediately. Example is Trading Securities.
TRADING SECURITIES - These refer to debt and equity

investments that are purchase with the intent of selling them
within a short period of time, usually less than one year. These
are considered short-term assets.
B. Non-Current Assets
⮚ These are assets that cannot be realized (collected, sold, used up) one
year after year-end date. Examples are:
Property, Plant, & These are long-lived assets which have been acquired for use in
Equipment operations.
Long-term These are the investments made by the company for long-term
Investments purposes.
Intangible Assets These are assets without a physical substance. Examples include
patents, trademark, franchise and copyright.
PATENTS -It is an official document that gives a person or

company the right to be the only one that makes or sells a product
for a certain period of time.
TRADEMARK - It is something (such as a word) that identifies a

particular company’s product and cannot be used by another
company without permission.
FRANCHISE – It is the right to sell a company’s goods or services

in a particular; a business that is given such a right.
COPYRIGHT - It is the legal right to be the only one to reproduce,

public, and sell a book, musical recording, etc., for a certain
period of time.
II. LIABILITIES
• These are obligations of the firm arising from past events which are to be
settled in the future.
• These are the debts and obligations of the company to another entity.
A. Current Liabilities
⮚ Liabilities that fall due (paid, recognized as revenue) within one year after
year-end date.
⮚ Examples are:
Accounts Payable These are amounts due, or payable to, suppliers for goods
purchased on account or for services received on account.
Notes Payable These are amounts due to third parties supported by promissory
notes.
Accrued Expenses These are expenses that are incurred but not yet paid (examples:
salaries payable, and taxes payable).
Unearned Income It is a cash collected in advance; the liability is the services to be

performed or goods to be delivered in the future.
B. Non-Current Liabilities
⮚ These are liabilities that do not fall due (paid, recognized as revenue)
within one year after year-end date.
⮚ Examples are Loans Payable, Mortgage Payable, and Bonds Payable
III. OWNER’S EQUITY

● These are the owner’s claims in the business. It is the residual interest in the
assets of the enterprise after deducting all its liabilities.
A. Capital - It is the value of cash and other assets invested in the business by
the owner of the business.
B. Drawing - It is an account debited for assets withdrawn by the owner for
personal use from the business.
IV. INCOME
● It is the increase in resources resulting from performance of service or
selling of goods.
● Income increases equity.
● Examples - Service revenue for service entities; and Sales for merchandising
and manufacturing companies
V. EXPENSES
● Expense is the decrease in resources resulting from the operations of
business.
● Expenses decreases equity.
● Examples - Salaries Expense; Interest Expense; and Utilities Expense
CHART OF ACCOUNTS
• It is a list of all account titles used by the company with their corresponding
account numbers. Account numbers are assigned to the accounts to facilitate
recording, cross-referencing, and retrieval of information.
• The first digit in the 3-digit numbering refers to the major types of accounts:
Major types of accounts Assigned number
ASSETS 1
LIABILITIES 2
OWNER’S EQUITY 3
INCOME 4
EXPENSES 5
• Account titles are arranged in financial statement order.

• Balance sheet accounts which include assets, liabilities, and owner’s equity
come first.
• Account titles in the income statement which include revenue and expenses
follow.
• Below is an example.
J&J Art Gallery

Chart of Accounts
Balance Sheet Accounts Income Statement Accounts
Assets Income
110 Cash 410 Painting Revenue
120 Accounts Receivable
130 Art Supplies
140 Prepaid Rent Expenses
160 Office Equipment 510 Salaries Expense
165 Accum. Depreciation: Office Equipment 520 Art Supplies Expense
530 Rent Expense
Liabilities
210 Accounts Payable
220 Notes Payable
230 Salaries Payable
260 Unearned Painting Revenue
Owner’s Equity
310 J&J, Capital
320 J&J, Drawing
Classify the following Account Titles whether it is an ASSET, LIABILITY, OWNER’S EQUITY,
INCOME, and EXPENSE. Put an check ( / ) to its appropriate column.
ACCOUNT TITLE ASSET LIABILITY OWNER’S INCOME EXPENSE

EQUITY
1. Notes Payable
2. Utilities Expense
3. Accrued Income
4. Property, Plant, &
Equipment
5. Drawing
6. Service Revenue
1. The basic accounting equation is _________ = ___________ + __________.

2. ___________ are the resources owned and controlled by the firm.
3. ___________ are the obligations of the firm arising from past events which are to be
settled in the future.
4. _____________ are the owner’s claims in the business. It is the residual interest in the
assets of the enterprise after deducting all its liabilities.
5. _____________ is the increase in resources resulting from performance of service or
selling of goods.
6. ____________ is the decrease in resources resulting from the operations of business.
7. The expanded accounting equation is: Assets = Liabilities + Equity + _______ –
________.
8. _____________ is a list of all account titles used by the company with their
corresponding account numbers. Account numbers are assigned to the accounts to
facilitate recording, cross-referencing, and retrieval of information.
Imagine that you just started your own business. Create your business name
and make your own Chart of Accounts.
Identify the following statements then write your answer on the blank provided.
___________ 1. It is something (such as a word) that identifies a particular
company’s product and cannot be used by another company
without permission.
___________ 2. It is the revenue earned but not yet collected.
___________ 3. It is a cash collected in advance; the liability is the services to be
performed or goods to be delivered in the future.
___________ 4. These are items purchased by an enterprise which are unused as
of the reporting date.
___________ 5. It is an official document that gives a person or company the
right to be the only one that makes or sells a product for a
certain period of time.
Direction: Encircle the letter of the correct answer.
1. A chart of accounts is ________
a. flow of chart of all transactions
b. a list of account titles used by a firm
c. a group of account
2. What decreases equity?
a. Income b. Assets c. Expenses d. Liability
3. It is the value of cash and other assets invested in the business by the owner of the
business.
a. Capital b. Cash c. Accounts Receivable d. Accounts
Payable
4. These are amounts due, or payable to, suppliers for goods purchased on account or for
services received on account.
a. Unearned income b. Accounts Payable c. Accounts Receivables d. Expenses
5. It is the legal right to be the only one to reproduce, public, and sell a book, musical
recording, etc., for a certain period of time.
a. Franchise b. Patent c. Trademark d. Copyright
Lesson Use of Basic and Expanded

4 Accounting Equation
This lesson will provide information, activities and exercises which will lead
the leaners to the concept of basic and expanded accounting equation and will
enhance skills on determining the effects of business transactions on the accounting
equation.
Write the account titles that are affected in each transaction accordingly.
Transactions ASSETS LIABILITIES OWNER’S REVENUE EXPENSE
EQUITY
1. Purchased equipment
by paying cash.
2. Paid monthly rent.
3. Bought supplies on
credit.
4. Personal withdrawal
of owner.
5. Received cash for
dental services
rendered.
The accounting equation is the formula used to capture the effect of the
relationship of financial activities within a business. It is the relation between the
assets, liabilities and equity of a business. It states that at any point of time, the
value of assets of a business is equal to sum of the value of its liabilities and its
shareholders' equity.
The Basic Accounting Equation
ASSETS = LIABILITIES + OWNER’S

EQUITY
This equation is known as the accounting equation. It is usual to place

liabilities before owner’s equity in the accounting equation because creditors have
first rights to the assets.
Illustrations of the Basic Accounting Equation

Transaction Aug. 1 – Mr. Gomez opened a motor repair shop and invested ₱150,000 cash.
1:
Equation 1: ASSET = LIABILITY + OWNER’S EQUITY
Account Titles
Cash = - + Gomez, Capital
Affected:
Effects: Increase = No Effect + Increase
Cash ₱150,000 = 0 + Gomez, Capital ₱150,000
Analysis: The Asset – Cash is increased by ₱150,000.

The Owner’s Equity – Gomez, Capital is also increased by ₱150,000.
Transaction Aug. 3 – He purchased repair supplies worth ₱30,000 on credit from Tan Trading.
2:
Equation 2: ASSET = LIABILITY + OWNER’S EQUITY
Account Titles
Repair Supplies = Accounts Payable +
Affected:
Effects: Increase = Increase + No Effect
Repair Supplies = Accounts Payable + 0

₱30,000 ₱30,000
Analysis: The Asset – Repair Supplies is increased by ₱30,000.

The Liabilities – Accounts Payable is also increased by ₱30,000.
Transaction Aug. 12 – Paid Tan Trading (Transaction 2).
3:
Equation: ASSET = LIABILITY + OWNER’S EQUITY
Account Titles
Cash = Accounts Payable + -
Affected:
Effects: Decrease = Decrease + No Effect
Cash (₱30,000) = Accounts Payable + 0

(₱30,000)
Analysis: The Asset – Cash is decreased by ₱30,000.

The Liabilities – Accounts Payable is decreased by ₱30,000.
The Expanded Accounting Equation
We can expand the basic accounting equation by including two more elements
– income and expenses. The expanded accounting equation shows all the financial
statement elements.
ASSETS = LIABILITIES + OWNER’S EQUITY + INCOME - EXPENSES
Notice that income is added while expenses are deducted in the equation.
These are because income increases equity while expenses decrease equity.
Transaction Aug. 17 – Rendered repair service to various clients, ₱18,000.

4:
Account Titles
Cash = - + Service Revenue
Affected:
Effects: Increase = No Effect + Increase
Cash ₱18,000 = 0 + Service Revenue ₱18,000
Analysis: The Asset – Cash is increased by ₱18,000.

The Owner’s Equity – Service Revenue is also increased by ₱18,000.
Transaction Aug. 20 – Paid the salary of the assistant, ₱3,000.

5:
Account Titles
Cash = - + Salaries Expense
Affected:
Effects: Decrease = No Effect + Decrease
Cash (₱3,000) = 0 + Salaries Expense ₱3,000
Analysis: The Asset – Cash is decreased by ₱3,000.

The Owner’s Equity – Salaries Expense is also decreased by ₱3,000.
I. Identify the effects of following business transactions in the accounting equation.
Write INC-increase, DEC – decrease, and NE – no effect.
Transaction ASSETS LIABILITIES OWNER’S
EQUITY
1. Owner invests cash.
2. Owner invests equipment.
3. Renders services for cash.
4. Renders services on credit.
5. Collects account in transaction #4
II. Paolo Reyes started a delivery service on July 1, 2013. The following transactions
occurred during the month of July. Identify the specific account titles being
affected and their corresponding amount. See July 1 as an example.
D Transaction ASSETS LIABILITIES OWNER’S EQUITY
Date
He
J invested ₱800,000 Cash 800,000 Reyes,
July cash and Cars Cars 200,000 Capital 1,000,000
amounting
1 to
₱200,000.
Reyes
2 borrowed
₱100,000 cash from
PNB for use in his
business.
Bought
7 tables and
chairs from Orocan
and paid ₱45,000
cash.
Various
1 equipment
5 were purchased on
account from Fortune
for ₱55,000.
Reyes
1 made a cash
8 withdrawal of ₱5,000
for personal use.
The
2 account due to
0 Fortune was paid in
cash.
Balances
1. The basic accounting equation is ____________ = ____________ + _____________.

2. In every business transaction, there are _________________ accounts affected.
3. The _______________ accounting equation is Assets = Liabilities + Owner’s
Equity + Income – Expenses.
4. Income is ___________ while expenses are _____________ in the equation.
These are because income _______________ equity while expenses
____________ equity.
Selected transactions from Ogly Skin Clinic are presented below. Write the account
affected and give the effect of the following transactions on the accounting equation. Write
INC – Increase, DEC – Decrease, and NE – No Effect. Look at the example on the first line
for your reference.
Assets Liabilities Owner’s Equity

Transactions Account Account
Amount Amount Account Title Amount
Title Title
Ex. Mr. Toad invested
INC Toad, INC
₱600,000 in the Cash NE
600,000 Capital 600,000
business.
Dr. Dy invested
1. ₱200,000 cash in the
business.
Purchased ₱20,000
2. worth of furniture
from Ace on account.
Dr. Dy withdrew
3. ₱15,000 cash for
personal use.
4. Bought computer
costing ₱65,000 on
account.
5. Paid P2,000 interest
on bank loan.
Balances
On the transaction summary table below, indicate the effect of each transaction on
each account. Put “” if the account has increased or “-“ if the account has decreased. Put
the amount of increase or decrease for each account
Assets Liabilities Owner’s Equity

Transaction CAccounts Notes Office Accounts Loan Reyes, Reyes,
Income Expense
Cash Receivable Receivable Equipment Payable Payable Capital Drawing
Ex. Mrs. Santos
invested + +
₱60,000 in the 6 6
business. 0,000 0,000
Reyes invested
1.
₱650,000 cash.
Bought office
2. equipment
cash, ₱10,000.
Rendered
services to Mr.
3.
Go on account,
₱10,000.
Cash service to
4.
clients, ₱22,000
Bought
₱30,000 worth
5. of office
equipment on
account.
Balances
Compute the correct answer.
1) A business has total liabilities of ₱220,000 and equity of ₱90,000. How much is the
total assets? _________________
2) A business has total assets of ₱380,000 and equity of ₱129,000. How much is the
total liabilities? ___________________
3) A business had ending assets of ₱89,000, ending total liabilities of ₱36,000 and
beginning equity of ₱18,000. If total income for the period amounts to ₱57,000,
how much is the total expenses? ___________________
4) A business had total assets of ₱67,000, total liabilities of ₱15,000, and equity is
₱8,000. If the total expenses for the period amount to ₱29,000, how much is the
total income? ___________________
5) A business had a beginning equity of ₱52,000. If the total income for the period is
₱87,000 while the total expenses are ₱63,000, how much is the ending balance of
equity? ___________________
Joselito G. Florendo (2016). Fundamentals of Accountancy, Business and
Management I
CHED in Collaboration with the Philippine Normal University. Teaching Guide for
Senior High School (2016). Fundamentals of Accountancy, Business and
Management I.
Rodiel C. Ferrer & Zeus Vernon B. Millan (2018). Fundamentals of Accountancy,
Business and Management 1
Amelia M. Arganda, et. al. (2005). Accounting Principles 1 Third Edition
Flocer Lao Ong (2016). C& E Publishing Company. Fundamentals of Accountancy,

Business and Management 1
Rodiel C. Ferrer, et. al. (2018). Fundamentals of Accountancy, Business &

Management Part 1 2nd Edition.
For inquiries or feedback, please write or call:

Department of Education – SDO Valenzuela
Office Address: Pio Valenzuela Street, Marulas, Valenzuela City
Telefax: (02) 8292-4340
Email Address: sdovalenzuela@deped.gov.ph
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Fundamentals of

Accountancy, Business and

Published by the Department of Education

Development Team of the Module

Writers: Richelle M. Orgel, Wawang Pulo National High School

Printed in the Philippines by ________________________

Department of Education – National Capital Region – SDO VALENZUELA

Office Address: Pio Valenzuela St., Marulas, Valenzuela City

Welcome to the Fundamentals of Accountancy, Business and Management 1

Notes to the Teacher

The module is divided into four lessons, namely:

After going through this module, you are expected to:

Check the appropriate column (YES or NO) depending on your knowledge or

Lesson Introduction to Accounting

________3. Which of the following statements describes the accounting process?

________5. All of the following are relevant economic events EXCEPT

“Accounting is the process of IDENTIFYING, RECORDING, and COMMUNICATING

RECORDING – this involves keeping a chronological diary of events that are

• The Cradle of Civilization

• The Industrial Revolution (1760-1830)

External users (Secondary Users) of accounting information include the

1. Creditors: for determining the credit worthiness of an organization. Terms of

Internal users (Primary Users) of accounting information include the following:

Complete the table below.

1.Customers Main source of clients, people Whether or not to

Complete the statement below.

Through this lesson, I learned that_______________________________________________

Lesson Basic Accounting Concepts

Salary expense ₱20,000

What do you think should not be included as expense of his business?

Accounting Concepts and Principles

Importance of Accounting Concepts and Principles

2. The business acquired a printing machine. The regular selling

3. The business acquired initial inventory of mugs and T-shirts for

Give examples of the following given accounting concepts and principles.

Directions: Encircle the letter of the best answer.

b. Monetary unit principle d. Objectivity principle

b. Business entity principle d. Materiality principle

b. Cost principle d. Conservatism principle

4. Marian Mosely is the owner of Mosely Accounting Services. Which accounting

b. Time period principle d. Business entity principle

b. Disclosure principle d. Matching principle

Directions: Indicate which principle is violated in the following statements. Write

Lesson Accounting Equation;

ASSETS LIABILITIES OWNER’S REVENUE EXPENSES

The Accounting Equation

Cost of Resources supplied by creditors and

Cash It is the money on hand, or in banks, and other items considered

Inventories These are assets held for resale.

Supplies These are items purchased by an enterprise which are unused as

Prepaid Expense These are expenses paid in advance. They

are assets at the time of payment and become expenses through

Accrued Income It is the revenue earned but not yet collected.

TRADING SECURITIES - These refer to debt and equity

PATENTS -It is an official document that gives a person or

TRADEMARK - It is something (such as a word) that identifies a

FRANCHISE – It is the right to sell a company’s goods or services

COPYRIGHT - It is the legal right to be the only one to reproduce,

Unearned Income It is a cash collected in advance; the liability is the services to be

III. OWNER’S EQUITY

• Account titles are arranged in financial statement order.

J&J Art Gallery

Balance Sheet Accounts Income Statement Accounts

1. The basic accounting equation is ___ = _ + ______.

1. The basic accounting equation is = + _.