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CB LECTURE 101

FUNDAMENTALS
OF
ACCOUNTING
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Accounting
Definition:
➢ Accounting is a process of identifying,
recording, and communicating
information that is useful in making
economic decisions.

➢ Key Points:
✓ Accountable
1. Identifying X Not accountable
2. Recording Journalizing & Posting

3. Communicating Financial Reporting

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Bookkeeping
Definition:

➢ Refers to the process of recording

transactions of the entity

ICPAR-ACTI CB Program
a. Fundamentals of Accounting
b. Accounting Cycle:
i. Recording Phase
ii. Summarizing Phase
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“Accounting is the language of business”
C Accounting
WHAT O
M information
M
U
FOR WHOM N Interested
I users
C
A
T Financial
HOW I
O Reports (FS)
N
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Users of Financial information
External Users – users outside the entity
Examples:
i. Investors
ii. Lenders & Creditors
iii. Government
iv. Public
Internal Users – users inside/within the entity
Examples:
i. Owners
ii. Board of Directors
iii. Managers
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Forms of Business Organization
Ownership Formation/
Registration
1. Sole proprietorship One individual
➢ DTI
(sole proprietor)

2. Partnership More than one ➢ contractual

(Partners) agreement
➢ SEC

3. Corporation More than one ➢ Operation of

(shareholders) law
➢ SEC
4. Cooperative More than one ➢ Cooperative
(members) Code
➢ CDA

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Types of Business according to activities

1. Service Business
➢ Offers services professional skills, expertise, & other
similar services

2. Merchandising Business
➢ Buys & Sells goods w/o changing their physical form

3. Manufacturing Business
➢ Buys product and use them to produce a new product

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 CLASSIFICATION OF ACCOUNTS

A L E I E

ASSETS LIABILITIES EQUITY INCOME EXPENSE

INCOME
BALANCE SHEET
STATEMENT
The Accounting Equation

ASSETS = LIABILITIES + EQUITY

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ASSETS

➢ Key Points:
1. Control exclusive right to enjoy benefits

2. Resulted from past event

3. Can provide economic benefits

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LIABILITIES

➢ Key Points:
1. Present Obligation
2. Resulted from past event

3. Requires you to give up economic resources

when settling them

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EQUITY

➢ Key Points:
1. What the owner owns
2. Assets – Liabilities = Equity

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Accounting Equation
ASSETS = LIABILITIES + EQUITY

Mr. Pogi decided to put up a Milk Tea business and have

estimated that he need 5,000 as start-up capital. He
withdrew and invested all his savings from the bank
amounting 3,000. Also, Mr. Pogi asked Mr. DJ Bombay to
lend him 2,000.

ASSETS = LIABILITIES + EQUITY

3,000 = 0 + 3,000

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Accounting Equation
ASSETS = LIABILITIES + EQUITY

After singing Hush hush, DJ Bombay finally lent Mr. Pogi.

ASSETS = LIABILITIES + EQUITY

5,000 = 2,000 + 3,000

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The Expanded Accounting Equation

ASSETS = LIABILITIES + EQUITY +

INCOME - EXPENSES

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Income
Types of Income
1. Revenue – income arises from the ordinary
activities of a business

2. Gain– income arises from activities other

than from the ordinary activities of a business

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Expenses
Types of Expenses
1. Expenses – arises from the ordinary
activities of a business

2. Loss– expense arises from activities other

than from the ordinary activities of a business

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Asset Accounts
Cash
- includes money or its equivalent that is readily available for
unrestricted use (e.g. Cash on hand and Cash in bank)

Accounts Receivable
- receivables supported by oral or informal promises to pay

➢ A customer bought a milk tea worth 1,000 from

Mr. Pogi and told that he will pay for it next
week

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Asset Accounts
Notes Receivable
- receivables supported by written or formal promises to pay
in the form of promissory notes
➢ A customer bought a milk tea worth 1,000 from
Mr. Pogi and he wrote a promissory note that he
will pay for it within 30 days.
Inventory
- Represents the goods that are held for sale by a business

➢ Mr. Pogi purchased milk worth 3,000 to be used

as ingredient for his milk tea business

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Asset Accounts
Equipment
- Consist of various assets such as machineries, vehicles,
furniture & fixtures to be used in the business
➢ Mr. Pogi purchased a sealing machine worth
5,000.

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Liability Accounts
Accounts Payable
- Obligations supported by oral or informal promises to pay by
the debtor
➢ Mr. Pogi bought ingredients worth 3,000 from a
supplier and told that he will pay for it next
week.
Notes Payable
- obligations supported by written or formal promises to pay
by the debtor in the form of promissory notes
➢ Mr. Pogi borrowed money from the bank and he
wrote a promissory note that he will pay for it
within 5 years.
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Equity Accounts
Owner’s Capital/Owner’s Equity
- The residual amount of assets after deducting liabilities

➢ Mr. Pogi invested 3,000 for his milk tea business

Owner’s Drawing
- this account is used to record the temporary withdrawals of
the owner during the period.

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Income Accounts
Service Fees
- Revenues earned from rendering services
➢ Ex. Services of salon, bookkeeping service, etc.
Sales
- Revenues earned from sale of goods
➢ Ex. Sale of milk tea
Gains
- Income earned that are not classified as revenues
➢ Ex. Gain from sale of old sealing machine

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Expense Accounts
Cost of Goods Sold
- Represents the value of inventories that have been sold
➢ Ex. The cost of the milk tea that was sold for
1,000 is 800.
Freight-out
- Represents the sellers’ cost of delivering goods to customers
➢ The total cost of gasoline used in delivering milk
tea to customer amounted to 1,000

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Expense Accounts
Salaries Expense
- Salaries earned by employees for the services they have
rendered in the business
➢ Ex. Mr. pogi hired a cashier and her salary for the
month is 5,000

Rent Expense
- Represents the rentals that have been used up

➢ Ex. Mr. pogi rent a space for his milk tea business.
The rent is 2,000 per month.

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Activity
Accounts Receivable →ASSETS
Building →ASSETS
Notes Payable →LIABILITIES
Rent Expense →EXPENSE
Owner’s Equity →EQUITY
Interest Income →INCOME
Cash →ASSETS
Computer Equipment →ASSETS
Utilities Payable →LIABILITIES
Freight-out →EXPENSE
Rent Income →INCOME
Taxes & Licenses →EXPENSE
Furniture Fixtures →ASSETS

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Activity
Supplies Expense →EXPENSE
Interest Expense →EXPENSE
Inventory →ASSETS
Land →ASSETS
Accounts Payable →LIABILITIES
Notes Receivable →ASSETS
Rent Payable →LIABILITIES
Computer Equipment →ASSETS
Sales →INCOME
Interest Receivable →ASSETS
Transportation Equipment →ASSETS

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Normal Balance of Accounts
The normal balance of an account is on the side
where an increase in the account is recorded. The
following are the normal balances of accounts:

Type of Account Normal Balance

ASSET DEBIT
LIABILITY CREDIT
EQUITY CREDIT
INCOME CREDIT
EXPENSES DEBIT

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Activity
Accounts Receivable →DEBIT
Salaries Expense →DEBIT
Building →DEBIT
Service Fees →CREDIT
Utilities Payable →CREDIT
Unearned Income →CREDIT
Equipment →DEBIT
Interest Receivable →DEBIT
Owner’s Capital →CREDIT
Freight-out →DEBIT
Inventory →DEBIT

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