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TAGUIG CITY UNIVERSITY

Gen. Santos Ave. Upper Bicutan

Taguig City

MODULE 1

FUNDAMENTALS OF ACCOUNTING 1 AND 2

Chapter 1 : INTRODUCTION TO ACCOUNTING

a. LEARNING OBJECTIVES
The learners should be able To:
1. Define accounting.
2. Describe the nature of accounting.
3. Explain the functions of accounting in business.
4. Narrate the history/origin of accounting

b. LESSON PROPER
• Definition of Accounting: Accounting is a process of identifying, recording and communicating
economic information that is useful in making economic decisions.
• Essential elements of the definition of Accounting
• Identifying – The accountant analyzes each business transaction and identifies whether
the transaction is an “accountable event” or “non-accountable event.” This is because
only “accountable events” are recorded in the accounting books. “Non-accountable
events” are not recorded in the accounting books.
• Recording – The accountant recognizes (i.e., records) the “accountable events” he has
identified. This process is called “journalizing.” After journalizing, the accountant then
classifies the effects of the event on the “accounts.” This process is called “posting.”
• Communicating – At the end of each accounting period, the accountant summarizes the
information processed in the accounting system in order to produce meaningful reports.
Accounting information is communicated to interested users through accounting
reports, the most common form of which is the financial statements.
• Nature of Accounting
• Accounting is a process with the basic purpose of providing information about economic
activities intended to be useful in making economic decisions.
• Types of Information provided by accounting
• Quantitative information
• Qualitative information
• Financial information
• Functions of Accounting in Business
• To provide external users with information that is useful in making investment and
credit decisions; and
• To provide internal users with information that is useful in managing the business.
• Accounting as a managerial tool
Accounting provides information that helps a business manager perform the following
management functions:
• Planning
• Organizing
• Staffing
• Directing
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• Controlling
• Brief History of Accounting
• Accounting can be traced as far back as the prehistoric times, perhaps more than 10,000
years ago.
• Archaeologists have found clay tokens as old as 8500 B.C. in Mesopotamia which were
usually cones, disks, spheres and pellets. These tokens correspond to commodities like
sheep, clothing or bread. They were used in the Middle West in keeping records. After
some time, the tokens were replaced by wet clay tablets. During such time, experts
concluded this to be the start of the art of writing. (Source:
http://EzineArticles.com/456988)
• Double entry records first came out during 1340 A.D. in Genoa.
• In 1494, the first systematic record keeping dealing with the “double entry recording
system” was formulated by Fra Luca Pacioli, a Franciscan monk and mathematician. The
“double entry recording system” was included in Pacioli’s book titled “Summa di
Arithmetica Geometria Proportioni and Proportionista,” published on November 10,
1494 in Venice.
• The concept of “double entry recording” is being used to this day. Thus, Fra Luca Pacioli
is considered as the father of modern accounting.

c. ACTIVITY /TEST

Instruction: Before each statement, write TRUE if the statement is correct or FALSE if
the statement is incorrect.
1. Only accountable events are recorded in the accounting books.
2. Accounting is a service activity.
3. Although bookkeeping and accounting are interrelated, they are not the same.
4. The purpose of accounting is to provide information that is useful in making economic
decisions.
5. Accounting is often referred to as the “language of business” because it is fundamental
to the communication of financial information.
6. Marketing is the process of establishing common objectives, coordinating efforts
towards those objectives, and efficiently and effectively utilizing available resources in
order to achieve certain goals.
7. Accounting can be traced as far back as the prehistoric times.
8. Directing involves motivating, communicating, guiding and encouraging personnel.
9. Accounting is as old as civilization and has evolved in response to economic and social
needs of men.
10. Fra Luca Pacioli is the mother of modern accounting.

Answer to Activity/Test
1. True 6. False, management
2. True 7.True
3. True 8.True
4. True 9.True
5. True 10. False, father

Chapter 2 : BRANCHES OF ACCOUNTING

a. LEARNING OBJECTIVES
The learners should be able To:
1. Differentiate the branches of accounting.
2. Explain the kind or type of services rendered in each of the branches of accounting.
3. Define external users and give examples.
4. Define internal users and give examples.

b. LESSON PROPER
 Common Branches of Accounting
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 Users of Accounting Information

1. Internal users – those who are directly involved in managing the business. Examples:
• Business owners who are directly involved in managing the business
• Board of directors
• Managerial personnel
  
1. External users – those who are not directly involved in managing the business.
Examples:
• Existing and potential investors (e.g., stockholders who are not directly
involved in managing the business)
• Lenders (e.g., banks) and Creditors (e.g., suppliers)
• Non-managerial employees
• Public

c. ACTIVITY /TEST

Instruction: Before each statement, write TRUE if the statement is correct or FALSE if
the statement is incorrect.
1. Financial accounting is the branch of accounting that deals with the specific needs of
an entity’s management.
2. The internal users of accounting information include management, owners, and
customers.
3. The external users of accounting information include potential and existing investors
and lenders and other creditors.
4. Government accounting is the branch of accounting that deals with the analysis of
the costs of products and services.
5. Erroneous financial statements can lead to bad financial decisions.
6. External users of financial information refer to the entity’s management personnel.
7. Cost accounting refers to the branch of accounting that deals with tax
computations, filing of tax returns, and tax planning.
8. Accounting education is the branch of accounting that deals with the teaching of
accounting and related subjects in order to produce competent and responsible
business professionals.
9. Management needs accounting information primarily to assess the ability of the
business to pay dividends.
10. Financial accounting is the branch of accounting that deals with the preparation of
general-purpose financial statements.

Answer to Activity/Test

1. False, Management accounting 4. False, Cost accounting

2. True 5. True
3. True 6. False
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7. False, Tax accoting 9. False, investors, not management

8. True 10. True

Chapter 3 : BUSINESS ORGANIZATIONS

a. LEARNING OBJECTIVES
The learners should be able To:
1. Differentiate the forms of business organization.
2. Identify the advantages and disadvantages of each form of business organization.
3. Compare and contrast the types of business according to activities.
4. Identify the advantages, disadvantages, and business requirements of each type of business
organization.

b. LESSON PROPER
 Forms of Business Organizations
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 Types of Business According to Activities

2. Service Business
3. Merchandising (Trading)
4. Manufacturing
 Advantages and Disadvantages of Type of Business
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Chapter 4 : ACCOUNTING CONCEPTS AND PRINCIPLES

a. LEARNING OBJECTIVES
The learners should be able To:
1. Explain the varied accounting concepts and principles.
2. Solve exercises on accounting principles as applied in various cases.

b. LESSON PROPER
 Basic Accounting Concepts
1. Separate entity concept
2. Historical cost concept
3. Going concern assumption
4. Matching
5. Accrual Basis
6. Prudence (or Conservatism)
7. Time Period
8. Stable monetary unit
9. Materiality concept
10. Cost-benefit
11. Full disclosure principle
12. Consistency conce

 Philippine Financial Reporting Standards (PFRSs)

The PFRSs are Standards and Interpretations adopted by the FRSC. They consist of the
following:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations

 Qualitative Characteristics
1. Fundamental Qualitative Characteristics
i. Relevance (Predictive Value, Confirmatory Value, Materiality)
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ii. Faithful Representation (Completeness, Neutrality,

Free from error)
2. Enhancing Qualitative Characteristics
i. Comparability
ii. Verifiability
iii. Timeliness
iv. Understandability

Chapter 5 : THE ACCOUNTING EQUATION

a. LEARNING OBJECTIVES
The learners should be able To:
1. Illustrate the accounting equation.
2. Perform operations involving simple cases with the use of accounting equation.

b. LESSON PROPER
 THE ACCOUNTING EQUATION
Assets = Liabilities + Equity
 Essential Elements of an Asset
a. Control
b. Past Events
c. Future Economic Benefits
 Essential Elements of a Liability
a. Present obligation
b. Outflow of economic benefits
c. The EXPANDED ACCOUNTING EQUATION
Assets = Liabilities + Equity + Income - Expenses

Chapter 6 : TYPES OF MAJOR ACCOUNTS

a. LEARNING OBJECTIVES
The learners should be able To:
1. Discuss the five major accounts.
2.Cite examples of each type of account.
3. Prepare a Chart of Accounts.

b. LESSON PROPER
 The Account
An 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 T-Account
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 The Five Major Accounts

1. ASSETS – are the resources you control that have resulted from past events and can
provide you with future economic benefits.
2. LIABILITIES – are your present obligations that have resulted from past events and
can require you to give up resources when settling them.
3. EQUITY – is assets minus liabilities.
4. INCOME – are increases in economic benefits during the period in the form of inflows
or enhancements of assets or decreases of liabilities that result in increases in equity,
other than those relating to investments by the business owners.  
5. EXPENSES – are decreases in economic benefits during the period in the form of
outflows or depletions of assets or increases of liabilities that result in decreases in
equity, other than those relating to distributions to the business owners.

 Classification of the Five Major Accounts

 Chart of Accounts
A chart of accounts is a list of all the accounts used by a business.
 Common Account Titles

 BALANCE SHEET ACCOUNTS

ASSETS
a. Cash
b. Accounts receivable
c. Allowance for bad debts
d. Notes receivable
e. Prepaid supplies
f. Prepaid rent
g. Prepaid insurance
h. Land
i. Building
j. Accumulated depreciation - Building
k. Equipment
l. Accumulated depreciation - equipment
LIABILITIES 
a. Accounts payable
b. Notes payable
c. Interest payable
d. Salaries payable
e. Utilities payable
f. Unearned
EQUITY
a. Owner’s capital (or Owner’s equity)
b. Owner’s drawings

 INCOME STATEMENT ACCOUNTS

INCOME
a. Service fees
b. Sales
c. Interest income
d. Gains
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EXPENSES
a. Cost of sales (or Cost of goods sold)
b. Freight-out
c. Salaries expense
d. Rent expense
e. Utilities expense
f. Supplies expense
g. Bad debt expense
h. Depreciation expense
i. Advertising expense
j. Insurance expense
k. Taxes and licenses
l. Transportation and travel expense
m. Interest expense
n. Miscellaneous expense
o. Losses

Chapter 7 : BOOKS OF ACCOUNTS AND DOUBLE-ENTRY SYSTEM

a. LEARNING OBJECTIVES
The learners should be able To:
1. Identify the uses of the two books of accounts.
2. Illustrate the format of general and special journals.
3. Illustrate the format of general and subsidiary ledgers

b. LESSON PROPER
 The Books of Accounts
1. Journal (General and Special)
2. Ledger (General and Subsidiary)
 JOURNAL
The journal, also called the “book of original entries,” is the accounting record where
business transactions are first recorded.
1. Special Journal – is used to record transactions with similar nature (e.g., Sales
journal, Purchases journal, Cash receipts journal, and Cash disbursements journal)
2. General Journal – All other transactions that cannot be recorded in the special
journals are recorded in the general journal.

 LEDGER
The ledger is used to classify the effects of business transactions on the accounts. It is
also called the “book of final entries.”
1. General ledger – contains all the accounts appearing in the trial balance.
2. Subsidiary ledger – provides a breakdown of the balances of controlling accounts.
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 Format of the General Journal

 Formats of the Ledgers

 Double-entry System

Concept of duality – each transaction is recorded in two parts – debit and credit
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Concept of equilibrium – each transaction is recorded in terms of equal debits and

credits.

 Normal Balance of Accounts

 Rules of Debits and Credits

 Contra and Adjunct Accounts

Contra accounts are presented in the financial statements as deduction to their
related accounts.
Adjunct accounts are presented in the financial statements as addition to their
related accounts.
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Chapter 8 : BUSINESS TRANSACTIONS AND THEIR ANALYSIS

a. LEARNING OBJECTIVES
The learners should be able To:
1. Describe the nature and give examples of business transactions.
2. Identify the different types of business documents.
3. Analyze common business transactions using the rules of debit and credit.

b. LESSON PROPER
 Steps in the Accounting Cycle
1. Identifying and analyzing
2. Journalizing
3. Posting
4. Unadjusted trial balance
5. Adjusting entries
6. Adjusted trial balance (and/or Worksheet)
7. Financial statements
8. Closing entries
9. Post-closing trial balance
10. Reversing entries

 Identifying and Analyzing transactions and events

a. Only accountable events are recorded. Accountable events are those that affect the
assets, liabilities, equity, income or expenses of the business.
b. Accountable events are normally identified from source documents, such as sales
invoice, official receipts, delivery receipts, and the like.

 Types of Events
1.External events – are transactions that involve the business and another external
party.
2. Internal events – are events that do not involve an external party.
 JOURNALIZING
Journalizing refers to recording an identified accountable event in the journal by
means of a journal entry.

 Simple and Compound Journal Entries

o Simple journal entry – contains a single debit and a single credit element.
o Compound journal entry – contains two or more debits or credits
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Chapter 9 : ACCOUNTING CYCLE OF A SERVICE BUSINESS

a. LEARNING OBJECTIVES
The learners should be able To:
1. Describe the nature of transactions in a service business.
2. Record transactions of a service business in the general journal.
3. Post transactions in the ledger.
4. Prepare a trial balance.
5. Prepare adjusting entries.
6. Complete the accounting cycle.

b. LESSON PROPER
 POSTING
Posting, the third step in the accounting cycle, is the process of transferring
data from the journal to the appropriate accounts in the ledger.

Example of Posting
Transaction: Jan. 8 - Services worth ₱30,000 were rendered for cash.

Journalizing:

Posting:

 TRIAL BALANCE
A trial balance is a list of general ledger accounts and their balances. It is
prepared to check the equality of total debits and total credits in the ledger.

 TYPES OF TRIAL BALANCE

1. Unadjusted trial balance – this is prepared before adjusting entries are made.
2. Adjusted trial balance – this is prepared after adjusting entries but before the
financial statements are prepared.  
3. Post-closing trial balance – this is prepared after the closing process.

 ADJUSTING ENTRIES
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Adjusting entries are entries made prior to the preparation of financial

statements to update certain accounts so that they reflect correct balances as of the
designated time.

 PURPOSE OF ADJUSTING ENTRIES

1. To take up unrecorded income and expense of the period.
2. To split mixed accounts into their real and nominal elements.

 REAL, NOMINAL AND MIXED ACCOUNTS

a. Real Accounts (Permanent accounts) – accounts that are not closed at the end of the
accounting period. These accounts include all balance sheet accounts, except the
“Owner’s drawings” account.
b. Nominal Accounts (Temporary accounts) – accounts that are closed at the end of the
accounting period. These accounts include all income statement accounts, drawings
account, clearing accounts and suspense accounts.
c. Mixed accounts – accounts that have both real and nominal account components.
These accounts are subject to adjustment.

 METHODS OF INITIAL RECORDING OF INCOME

1. Liability method – under this method, cash receipts from items of
income are initially credited to a liability account. At the end of the
period, the earned portion is recognized as income while the unearned
portion remains as liability.
2. Income method – under this method cash receipts from items of
income are initially credited to an income account. At the end of the
period, the unearned portion is recognized as liability while the earned
portion remains as income.

 METHODS OF INITIAL RECORDING OF EXPENSES

1. Asset method – under this method cash disbursements for items of
expenses are initially debited to an asset account. At the end of the
period, the incurred portion (‘used up’ or ‘expired’) is recognized as
expense while the unused portion remains as asset.
2. Expense method – under this method, cash disbursements for items of
expenses are initially debited to an expense account. At the end of the
period, the unused portion (‘not yet incurred’ or ‘unexpired’) is
recognized as asset while the incurred portion remains as expense.

 WORKSHEET
A worksheet is an analytical device used to facilitate the gathering of data for
adjustments, the preparation of financial statements, and closing entries.
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 FINANCIAL STATEMENT
The financial statements are the end product of the accounting process.
Information from the journal and the ledger are meaningless to most users unless they
are summarized and communicated through the financial statements.

 THE MAJOR PROCESSES IN ACCOUNTING ARE SUMMARIZED BELOW:

 FINANCIAL STATEMENTS
 Statement of financial position (or Balance sheet) – shows information on
assets, liabilities and equity.
 Statement of profit or loss (or Income statement) – shows information on
income and expenses, and consequently, the profit or loss for the period.

 CLOSING ENTRIES
Closing entries are entries prepared at the end of the accounting period to “zero
out” all nominal accounts in the ledger. This is done so that the transactions during the
period will not commingle with the transactions in the next period
 CLOSING ENTRIES ARE PREPARED AS FOLLOWS:
a. All income accounts are debited and all expense accounts are credited. The
resulting balance is recorded in a clearing account called the “Income summary.”
b. The balance of “Income summary” is closed to the “Owner’s capital” account.
c. Any balance in the “Owner’s drawings” account is closed to the “Owner’s capital”
account.
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 REVERSING ENTRIES
Reversing entries are entries usually made on the first day of the next
accounting period to reverse certain adjusting entries made in the immediately
preceding period.

 REVERSING ENTRIES THAT MAY BE REVERSED

1. Accruals for income or expense
2. Prepayments initially recorded using the expense method
3. Advanced collections initially recorded using the income method
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Requirement (c): Unadjusted Trial Balance

Entity A

Unadjusted Trial Balance

December 31, 20x1

  Dr. Cr.

Cash 520,000

Accounts receivable 60,000

Inventory 60,000

Equipment 250,000

Accumulated depreciation -
equipment 25,000

Accounts payable 20,000

Owner's capital 1,000,000

Owner's drawings 70,000

Sales 400,000

Cost of sales 120,000

Utilities expense 60,000

Salaries expense 280,000

Depreciation expense 25,000

Totals 1,445,000 1,445,000

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LESSON 10

ACCOUNTING CYCLE OF A MERCHANDISING BUSINESS

a. LEARNING OBJECTIVES

The learners should be able to:

1. Describe the nature of transactions in a merchandising business.

2. Record transactions of a merchandising business in the general and special

journals.

3. Post transactions in the general and subsidiary ledgers.

4. Prepare a trial balance.

5. Prepare adjusting entries.

6. Complete the accounting cycle of a merchandising business.

7. Prepare the Statement of Cost of Goods Sold and Gross Profit.

b. TOPIC DISCUSSION

MERCHANDISING BUSINESS

A merchandising business is one that buys and sells goods,in

their original form and without any further processing. Those goods are

referred to as merchandise inventory (or simply, inventory).

 INVENTORY SYSTEMS

a. Perpetual inventory system – under this system, the “Inventory”

account is updated each time a purchase or sale is made. Thus, the

“Inventory” account shows a continuing or running balance of the

goods on hand.

b. Periodic inventory system – under this system, the “Inventory” account

is updated only when a physical count is performed. Thus, the

amounts of inventory and cost of goods sold are determined only

periodically.


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ACCOUNTS USED UNDER PERIODIC SYSTEM

a. Purchases – the account used to record purchases of inventory under

the periodic system.

b. Freight-in (Transportation-in)– the account used to record the shipping

costs incurred on purchases of inventory under the periodic system.

c. Purchase returns – the account used to record returns of purchased

goods to the supplier.

d. Purchase discounts – the account used to record cash discounts

availed of on the purchased good

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Sales – include both cash sales and credit sales.

o Sales returns – the account used to goods sold but were returned

by customers.

o Sales discounts – the account used to record cash discounts

given to and taken by customers.

STATEMENT OF COST OF GOODS SOLD AND GROSS PROFIT

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REFERENCE:

Rodiel C. Ferrer and Zeus Vernon B. Millan

Fundamentals of Accountancy, business and management

Part I. 2nd Edition. 2018.

Prepared and Submitted by: Noted by

VERLITA M. MERCULLO, CPA DR. CARLITO OSTRIA

EM COORDINATOR Dean, College of Business Management