Talisayan National High School - Senior High School

San Jose, Talisayan, Misamis Oriental

Accountancy, Business and Management (ABM) Strand

Subject: Fundamentals of Accountancy Business and Management

(FABM) 1

What is Accounting?

Accounting defined as an 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. (by: American Institute of Certified Public
Accountants (AICPA)

4 Phases of Accounting Process

1. Recording – this is the phase of accounting which involves the

routine and mechanical process of writing down the business
transactions and events in the books of accounts in a chronological
manner called journalizing.
2. Classifying - this is the phase of accounting which involves sorting
or grouping of similar transaction and events into their respective
kind and classes.
3. Summarizing – this is the phase of accounting which involves the
completion of financial statements and the accounting
requirements as well.
4. Interpreting – this is phase of accounting which involves the
“analytical and interpretative works”.

What is the difference between Accounting and Bookkeeping?

Bookkeeping is the process of recording systematically the business

transactions in a chronological manner. It is systematic because it follows
certain procedures and principles and chronological because the
transactions are recorded in order of the date of occurrence.

Accounting on the other hand, requires complete and accurate

bookkeeping records necessary in the performance of its responsibility
which is the analysis and interpretation of the financial reports.

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Business Transactions and Events:

Business transactions and events are considered accountable if it

can be quantified and can be expressed in terms of unit of measure or
financial denominator and the occasional occurrence in the life of a
business.

Business transactions on the other hand are exchanges of equal

monetary values.

What is Book of Accounts?

Book of Accounts are records that should be kept by the business.

What have been recorded in the books of accounts are data that are
financial in character which are processed and transformed into a
report form called financial statements.

2 types of Books of Accounts

1. Journal - known as the book of original entry

2. Ledger - known as the book of final entry

Types of Accounting Information

1. Financial Accounting – concerns primarily in describing the

financial resources, obligations, and activities of an economic
entity resulting to the preparation of general-purpose financial
reports on financial position and operating results.
2. Auditing – concerns with the established accounting procedures
are being followed throughout the year and determines strict
adherence to management policies and measures the efficiency of
operations.
3. Management Accounting – primarily concern with the design,
installations and improvements of accounting system intended
specifically to help management in running the business.
4. Tax Accounting – involves the preparation of income tax returns
and the determination of correct amount of taxes due to the
government.
5. Financial Management – this is a new type of accounting
information wherein its primary concern is to set up a financial
planning objectives including the sources and application of its
resources beneficial to the economic entity.
6. Cost Accounting – concerns primarily on cost collection, allocation,
and control of producing goods and services.
7. Government Accounting – deals primarily on the proper custody of
public funds in both national and local government.

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NATURE OF BUSINESS:

1. Service Concern – this business derives its income from services

rendered to clients
2. Merchandising – this business engages in buying goods or
commodities or any form of finished products and sells these at a
profit
3. Manufacturing – this business engages in buying raw materials and
supplies to be processed or manufactured converting them into
finished products for sale at a profit
4. Agriculture – this business engages in planting of crops, and sells its
products either in raw or finished form at a profit.
5. Hybrid – this business engages in more than one type of activity which
are manufacturing, merchandising and services.

FORMS OF BUSINESS ORGANIZATION:

1. Single Proprietorship – this is the simplest form of business

organization where capital is owned and provided by one person.
2. Partnership – the capital of the business is owned and provided by two
or more persons.
3. Corporation – this is the biggest and most complicated form of
business organization
4. Cooperatives – is an autonomous association of persons who
voluntarily cooperate for their mutual, social, economic and cultural
benefit.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLE (GAAP):

1. Cost Principle – this principle requires that assets should be recorded

at original or acquisition cost.
2. Objectivity Principle – this principle requires that accounting records
should be based on reliable and verifiable data as evidence of
transactions.
3. Materiality Principle – this principle dictates practicability to rule over
theory in determining the valuation of an item.
4. Matching Principle – this is the combined concept of Revenue
Recognition and Expense Recognition Principle. Revenue should
be recognized when earned and corresponding expense should be
recognized when incurred during the same period as revenue is
earned.
5. Consistency Principle – this principle requires that accounting
methods should be applied on a uniform basis from period to period
to achieve comparability in the financial statements.

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 6. Adequate Disclosure Principle – this principle requires that financial
statements should be free from any material misstatement, that if
there is any proper disclosure should be made.

BASIC ACCOUNTING ASSUMPTIONS:

 Accounting Entity – this assumes that from the accounting

point of view, the business is considered as “an entity that is
separate and distinct from the owner or management”.
 Going concern – the business has a continuous life of
existence. When it starts, it is assumed that it will continue to
operate for an indefinite period of time.
 Time Period Assumption – the life of the business is divided
into equal periods wherein at the end of each period, financial
statements are prepared

 Unit of Measure – under the assumption, peso is considered to

have a stable value which means that the purchasing power of
the peso is steady regardless of inflation rate.

 Accrual Basis Assumption – this assumes that the recording of

income and expense follow the accrual basis of accounting

QUALITIES THAT FINANCIAL STATEMENT SHOULD POSSESS:

Understandability
Reliability
Relevance
Comparability
Consistency

USERS OF FINANCIAL STATEMENTS:

 Investors
 Employees
 Lenders
 Suppliers and other trade creditors
 Customers
 Government and their agencies
 Public

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FINANCIAL STATEMENT DEFINED:

Financial Statements are accountant’s report to the proprietor which

are considered the “end product” of the accounting process. The objective of
financial statement is to provide information about the financial condition
and operating results of an enterprise that is vital in making sound
economic decision.

BASIC FINANCIAL STATEMENTS FOR SINGLE PROPRIETORSHIP:

1. Balance Sheet – is a statement that show the financial condition of

the enterprise as of a particular date.
2. Income statement – is a statement which shows the result of
operation of the business for a given period of time.
3. Statement of Changes in Owner’s Equity – is a statement that
summarizes the changes in equity for a given period of time.
4. Statement of Cash Flow – this is a financial statement which
provides information about the details of changes in cash position
during a given period.

ELEMENTS OF FINANCIAL STATEMENT:

1. Asset – resources controlled by the enterprise as a result of past

transactions and events and from which future economic benefits are
expected to flow to the enterprise.
2. Liabilities – present obligation of an enterprise arising from past
transactions and events, the settlement of which is expected to result
in an outflow from the enterprise resources embodying economic
benefits.
3. Owner’s Equity or Capital – is the residual interest in the assets of the
enterprise after deducting all its liabilities
4. Revenues and Gains – gross inflow of economic benefits during the
period arising in the course of ordinary activities of an enterprise
when those inflows result in increase in equity, other than those
relating to contributions from owners.
5. Expenses and Losses – gross outflow of economic benefits during the
period arising in the course of ordinary activities of an enterprise
when those outflow results in decrease in equity other than those
relating to distribution to owners.

ESSENTIAL CHARACTERISTIC OF AN ASSET:

Asset is controlled by the enterprise

Asset is a result of a past transaction or event
Asset provides future economic benefits
The cost of the asset is reliably measured

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ESSENTIAL CHARACTERISTIC OF A LIABILITY:

Liability is the present obligation of a particular enterprise

Liability arises from past transaction or event
The settlement of liability requires an outflow of resources embodying
economic benefits

WITHDRAWAL OR DRAWING ACCOUNT DEFINED:

Withdrawal or Drawing Account refers to the amount of cash or value

of property that the owner has invested in the enterprise but later
withdrawn for personal use.

Basic Accounting Equation:

ASSETS = LIABILITIES + CAPITAL OR OWNER’S EQUITY

Expanded Accounting Equation:

ASSETS = LIABILITIES + CAPITAL (+ REVENUE – EXPENSES)

ACCOUNT TITLE DEFINED:

Account title are identification or brief description of items that fall to

same kind, class or nature.

THREE MAJOR COMPONENTS OF A BALANCE SHEET FOR SINGLE

PROPRIETORSHIP:

 Assets
 Liabilities
 Owner’s Equity or Capital

THREE MAJOR COMPONENTS OF INCOME STATEMENT FOR SINGLE

PROPRIETORSHIP:

 Revenue and Income

 Cost and Expenses
 Profit or Loss

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TWO CLASSIFICATIONS OF ASSETS:

1. Current Assets – refers to all assets that are expected to be realized,

sold or consumed within enterprise’s operating cycle.
2. Non-Current Assets or Fixed Assets – are tangible assets which are
held by the enterprise for use in production or supply of goods or
services for rental to others or for administrative purpose and are
expected to be used during or more than one period. Assets that are
classified as fixed asset are called depreciable assets and are
subject to depreciation except land

OPERATING CYCLE DEFINED:

Operating cycle is the interval of time from the date of acquisition of

merchandise inventory, sell the inventory to customers and the ultimate
collection of cash from sale.

THREE ACCOUNTING PERIODS FOR THE OWNER OR MANAGEMENT

TO CHOOSE FROM:

 Calendar Year – the accounting period will begin on January 1 and

will end on December 31 of the same year.
 Fiscal Year – the accounting period will begin on the first day of any
month of the year except January and will end on the last day of the
twelfth month completing the one year period.
 Natural Business Year – is a twelve-month period that ends on any
month when the business is at the lowest or experiencing slack
season.

KINDS OF CURRENT ASSETS:

1. Cash – the account title to describe money, either in paper or in coins

and money substitutes like check, postal money order, bank drafts,
and treasury warrants.
2. Petty Cash Fund – the account title for money placed and set aside for
petty or small expenses.
3. Accounts Receivable – the account title for amounts collectible arising
from services rendered to a customer or client on credit or sale of
goods to customers on account.
4. Notes Receivable – this is a promissory note that is received by the
business from the customer arising from rendering of services sale of
merchandise etc.
5. Estimated Uncollectible Accounts (Allowance for Bad Debts)– this is
an asset offset or a contra asset account. It provides for possible
losses from uncollected accounts.
6. Accrued Income – the amount of income earned but not yet collected.

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 7. Advances To Employees – the account title for amounts collectible
from employees for allowing them to make cash advances which are
deductible against their salaries or wages.
8. Inventories – these are assets which are held for sale in the ordinary
course of business; in the process of production for such sale; or in
the form of materials or supplies to be consumed in the production
process or in the rendering of services.

9. Prepaid Expenses – account title for expenses that are paid in advance
but are not yet incurred or have not yet expired such as Prepaid
Rental, Prepaid Insurance, Prepaid Interest, Prepaid Advertising etc.
10. Unused Supplies – an account title for cost of stationery and
other supplies purchase for use but are left on hand and still unused.
11. Office Supplies – an account use for office use such as bond
papers, stationeries, paper clips, puncher, calculators, pencils, pens,
scotch tapes etc.

KINDS OF NON-CURRENT OR FIXED ASSETS:

1. Land – an account title for the site where the buildings are
constructed.
2. Building – account title for finished construction owned by the
business where operations and transactions took place.
3. Office Equipment – an account use for office machines that includes
typewriters, adding machine, computers, steel filing cabinets,
photocopy machine.
4. Machinery and Equipment – includes elevators, standby generators,
airconditioning units.
5. Delivery Equipment – an account use for delivery use exclusively
includes, trucks, vans, and other kinds of motor vehicle.
6. Furniture and Fixtures – includes chairs, tables, display cabinets,
lights, electric fans and the likes.
7. Accumulated Depreciation – this is an asset offset or cornea asset
account. This is called a valuation account which is shown as a
deduction from property and equipment.

KINDS OF CURRENT LIABILITIES:

1. Accounts Payable – an account title for a financial obligation of an

enterprise that constitutes an oral or verbal promise to pay.
2. Notes Payable – the same in Accounts Payable in nature but only the
obligation is evidenced by a promissory note. The enterprise is the one
who issued the note.

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 3. Accrued Expenses – these are expenses incurred by the enterprise but
are not yet paid. This normally occurs when the accounting period
ended such as rent, salaries, interest, taxes payable etc.
4. Pre-collected or Unearned Income – this is an account title for an
income collected or received in advance and is not yet considered as
earned.

KINDS OF LONG-TERM LIABILITIES:

1. Long-term Notes Payable – same nature with that of Notes Payable but
only this requires payment for more than a year.
2. Mortgage Payable – a financial obligation of the enterprise which
requires a fixed or tangible property to be pledged as a collateral to
ensure payment.

INCOME & EXPENSE SUMMARY DEFINED:

Income & Expense Summary is a temporary account created at the

end of the accounting period where Income and Expense are temporarily
closed to this account.

REVENUE OR INCOME DEFINED:

Revenue or Income denotes money or proceeds from services rendered

by a servicing company or income from use by other entities of the resources
of the enterprise.

COST AND EXPENSES DEFINED:

Cost and Expenses denotes the benefit received by the business from
its use which has helped in carrying out its operation.

PROFIT (LOSS) DEFINED:

The excess of revenues over expenses is called “profit” while the excess
of expenses over income is called “loss”.

KINDS OF INCOME ACCOUNTS:

1. Sales – in general this represents revenue derived from the sale of

merchandise.
2. Service Income – an account use for all types of income derived from
rendering of services.
3. Professional Income – an account title generally used by professionals
for income earned from the practice of their profession.

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 4. Rent Income – for income earned on buildings, space or other
properties owned and rented out by the business as the main line of
its activity.
5. Interest Income – for income received by the business arising from an
amount of money borrowed by a customer and is usually covered by a
promissory note.
6. Miscellaneous Income – for income earned by the business which is
not the main line of its activity and could not be clearly classified.

KINDS OF EXPENSE ACCOUNTS:

1. Cost of Sales or Cost of Goods Sold – cost to produce and sell the
goods.
2. Interest Expense – an expense incurred from borrowed money.
3. Rent Expense – for the amount paid or incurred for use of property or
premises.
4. Repairs & Maintenance Expense – for expenses incurred in repairing
or servicing the buildings, machineries, vehicles, equipment etc.
which are owned by the business.
5. Office Supplies Expense – supplies used in the office such as
stationeries, bond papers, paper clips, fasteners, envelopes etc.
6. Store Supplies Expense – office supplies in nature but usually used in
the store.
7. Salaries Expense – for compensation given to employees of a business.
8. Uncollectible Accounts or Bad Debts – for the anticipated loss that the
business may incur arising from uncollectible accounts.
9. Depreciation Expense – for the allocated portion of the cost of property
and equipment or fixed assets.
10. Taxes & Licenses Expense – for the amount paid for business
permits, licenses and other government dues except the Income Tax
paid which is not allowable by law as a deduction.
11. Insurance Expense – account title for the expired portion of the
insurance premium paid.
12. Utilities Expense – the account title for telephone, light and
water bills, gasoline, lubricants and oil.
13. Miscellaneous Expense – any amount paid as expense which is
not significant enough to warrant a particular classification.

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 Theories of Debit and Credit

RULES ON DEBIT/CREDIT ACCOUNTS:

Debit are any value received by the business while Credit are any
value parted with by the business.

VALUE RECEIVED = VALUE PARTED WITH

Or

DEBIT = CREDIT

“Take” = “Give”

(The amount entered on the debit side of an items account will

always have a corresponding amount entered on the credit side
of another items account. Hence the amount of debit will always
equal to the amount of credit.)

DEBIT
Increase in Assets
Increase in Expenses
Decrease in Liabilities
Decrease in Capital
Decrease in Income
CREDIT
Decrease in Assets
Decrease in Expense
Increase in Liabilities
Increase in Capital
Increase in Income

ACCOUNTS NORMAL BALANCES:

ACCOUNTS NORMAL BALANCES

Assets Debit
Liabilities Credit
Capital Credit
Income Credit
Expense Debit

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 This serves as your reference materials and reviewer.

Reminders:
1. One of the requirements of this subject is the memorization of the
definition of accounting and the chart of accounts.
2. Familiarization and application of all accounting principles.
3. Oral recitation and demonstration of accounting process.

Grading System:

40% Written Examination ( Accounting Theories )

60% Performance Task ( Oral recitation and Actual Bookkeeping)

Good luck, Enjoy and Welcome to ABM

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