WHAT IS ACCOUNTING?

Accounting is the art of recording,

classifying and summarizing in a
Accounting is a service activity. Its
significant manner and in terms of
function is to provide quantitative
money, transactions and events
information, primarily financial in
which are, in part at least, of a
nature, about economic entities that
financial character, and interpreting
is intended to be useful in making
the results thereof (American
economic decisions (Statement of
Institute of Certified Public
Financial Accounting Standards No.
Accountants, "Review and
1, "Basic Concepts and Accounting
Resume", Accounting Terminology
Principles Underlying Financial
Bulletin No. 1 (New York: AICPA,
Statements of Business
1953), par. 9).
Enterprises" (Manila: Accounting
Standards Council, 1983), par. 1).
BASIC ACCOUNTING TERMS
Accounting is an information 1. Assets- Assets are
system that measures, processes everything that your
and communicates financial company owns (controlled).
information about an economic Assets are only classified
entity (Statement of Financial into two: Current Assets &
Accounting Concepts No. 1, Non-current Assets
"Objectives of Financial Reporting .
by Business Enterprises" (Norwalk, *Current assets*
Conn.: Financial Accounting - are those that you can
Standards Board, 1978), par. 9). convert into cash within one
year, such as short-term
investments and accounts
Accounting is the process of receivable. (assets na
identifying, measuring and nagagamit lang within 1 year
communicating economic or sa due date lang niya)
information to permit informed
judgments and decisions by users
Cash and Cash
of the information (American
Equivalents. Cash is any
Accounting Association, "A
medium of exchange that
Statement of Basic Accounting
a bank will accept for
Theory" (Evanston, III.: American
deposit at face value. It
Accounting Association, 1966), par.
includes coins, currency,
1; Accounting Principles Board,
checks, money orders,
Statement No. 4, "Basic Concepts
bank deposits and drafts.
and Accounting Principles
Cash Equivalents.(may
Underlying Financial Statements of
risk sa cash) these are
Business Enterprises" (New York:
short-term, highly liquid
AICPA, 1970), par. 40).
investments that are
readily convertible to
known amounts of cash
and which are subject to
an insignificant risk of
changes in value. (pera
ng business)
Accounts Receivable. is
money that people owe
you for goods and
services. It’s considered
an asset on your balance
sheet. These are claims
against customers arising
from sale of services or
goods on credit. This type
of receivable offers less
security than a assets-until the time
promissory note. (mga
pautang or pinautang)
Notes Receivable. A
note receivable is a
written pledge that the
customer will pay the
business a fixed amount
of money on a certain
date. (mga pautang na
may promissory note)
Inventories. These are
assets which are (a) held
for sale in the ordinary
course of business; (b) in
the process of production
for such sale; or (c) in the
form of materials or
supplies to be consumed
in the production process
or in the rendering of
services.(mga paninda or
mga materials mo para
makagawa ng product
mostly sa mga
manufacturing business)
Prepaid Expenses.
These are expenses paid
for by the business in
advance. It is an asset
because the business
avoids having to pay
cash in the future for a
specific expense. These
include insurance and
rent. These prepaid items
represent future
economic benefits-
these start to contribute
to the earning process;
these, then, become
expenses. (mga gastos
na binayaran in advance)
*Non-current assets*
- are longer-term assets with
a full value that you cannot
recognize until after one
year, such as property and
machinery. (assets na
nagagamit lang longer than 1
year or mas matagal pa sa
due date lang niya)
Property, Plant and
Equipment. these are
tangible assets (assets
na nakikita) that are held
by an enterprise for use
in the production or
supply of goods or
services, or for rental to
others, or for
administrative purposes
and which are expected
to be used during more
than one period. Included
are such items as land,
building, machinery and
equipment, furniture (mga
nagagalaw ex. tables &
chairs) and fixtures (mga
hindi nagagalaw ex.
shelves & cabinets dahil
nakadikit na ito sa pader),
motor vehicles and
equipment.
Accumulated
Depreciation. It is a
contra account that
contains the sum of the
periodic depreciation
charges. The balance in
this account is deducted
from the cost of the
related asset-equipment
or buildings-to obtain
book value. (for example
yung mga machinery,
equipment & vehicles
dahil nga nagagamit ng
business natin ito kapag
tumatagal bumababa
yung value niya, so yung
2. Liabilities- are what a
value ng pagkababa ay
ilalagay as accumulated
depreciation)
Intangible Assets.
these are identifiable,
nonmonetary assets
without physical
substance held for use in
the production or supply
of goods or services, for
rental to others, or for
administrative purposes.
These include goodwill,
patents, copyrights,
licenses, franchises,
trademarks, brand
names, subscription lists
and non-competition
agreements. (mga assets
na hindi nakikita)
Biological Assets- are
assets used by agricultural
business in the production of
goods and services.
(chicken, pig, fruits &
vegetables)
Long-term Investments- an
account a company plans to
keep at least a year such as
stocks, bonds, real estate &
cash. (investment ng
company na long-term)
Allowance for Bad Debts /
Allowance for Doubtful
Accounts- an amount
estimated uncollectable on
receivable. (estimated na
halaga ng utang na hindi
mababayaran sa business)
business owes. It could be
money, goods, or services.
(debt, utang)
Liabilities Per revised
Philippine Accounting
Standards (PAS) No. 1, an
entity shall classify as a
liability current when:
a. it expects to settle the
liability in its normal
operating cycle; b. it holds
the liability primarily for the
purpose of trading;
c. the liability is due to be
settled within twelve months
after the reporting period; or
d. the entity does not have
an unconditional right to
defer settlement of the
liability for at least twelve
months after the reporting
period.
All other liabilities should be
classified as non-current
liabilities.
*Current Liabilities*
Accounts Payable.
Accounts payable is money
that you owe other people
and is considered a liability
on your balance sheet. This
account represents the
reverse relationship of the
accounts receivable. By
accepting the goods or
services, the buyer agrees to
pay for them in the near
future. (ikaw ang may utang /
mga inutang mo or ng
business na dapat bayaran)
Notes Payable. A note
payable is like a note
receivable but in a reverse
sense. In the case of a note
payable, the business entity
is the maker of the note; that
is, the business entity is the
party who promises to pay
the other party a specified
amount of money on a
specified future date.
(umutang ang business
tapos nagbigay ng
promissory note)
Accrued Liabilities. also
referred to as accrued
expenses, are known
expenses that haven't yet
been billed—those a
company knows it must pay
in the future. Amounts owed
to others for unpaid
expenses. This account
includes salaries payable,
utilities payable, interest
payable and taxes payable.
Unearned Revenues. When
the business entity receives
payment before providing its
customers with goods or
services, the
amounts/received are
recorded in the unearned
revenue account (liability
method). When the goods or
services are provided to the
customer, the unearned
revenue is reduced and
income is recognized.
(nagbayad in advance and
may utang tayong goods or
services sakanila)
Current Portion of Long-
Term Debt. These are
portions of mortgage notes,
bonds and other long-term
indebtedness which are to
be paid within one year from
the balance sheet date.

*Non-current Liabilities*
Mortgage Payable. This
account records long-term
debt of the business entity
for which the business entity
has pledged certain assets
as security to the creditor. In
the event that the debt
payments are not made, the
creditor can foreclose or
cause the mortgaged asset
to be sold to enable the
entity to settle the claim.
(kapag may utang aside sa
nagbibigay ng promissory
note nagbibigay ka rin ng
property as collateral,
collateral means something
provided to a lender as a
guarantee of repayment.
Loans Payable. The amount
borrowed by the business
from the bank or financial
institution. (utang sa bangko)
Bonds Payable. A long-term
contract of indebtedness,
payable usually from 5-10
years Business
organizations often obtain
substantial sums of money
from lenders to finance the
acquisition of equipment and
other needed assets. They
obtain these funds by issuing
bonds. The bond is a
contract between the issuer
and the lender specifying the
terms of repayment and the
interest to be charged.
(malaking utang, matagal pa
babayaran, usually mga
government ang gumagamit
nito)
Long-term Notes Payable.
Promissory notes issued by
the company for its
obligations with a maturity of
more than one year. (kapag
notes payable within 1 year
lang, so ito more than 1
year)
3. Equity. is the amount of
money that a company's
owner has put into it or
owns. On a company's
balance sheet, the difference
between its liabilities and
assets shows how much
equity the company has.It is
increased by the amount of
profit earned during the year
or is decreased by a loss.
Cash or other assets that the
owner may withdraw from
the business ultimately
reduce it. (pinapakita nito
ang share ng owner sa
assets ng business)
Capital (from the Latin
capitalis, meaning "property").
Owner’s Equity. For single
proprietorship. (change the owner
sa surname ng owner example
“Quinto’s Equity”)
Partner’s Equity. For partnership.
One capital account per partner.( if
3 ang partner mo, meron silang
kanya kanyang account or equity
example Quinto’s Capital, Rioflorido
Capital & Zulueta Capital)
Stockholder’s Equity. For
corporation. Also called as
‘Shareholder’s Equity’. (kapag
corporation, corporation equity lang
wala ng surname + capital)
Owner’s Drawing. Temporary
accounts, also called a draw, is
when a business owner takes funds
out of their business for personal
use. Business owners might use a
draw for compensation versus
paying themselves a salary.
Owner's draws are usually taken
from your owner's equity account.
(kapag nag withdraw ang may-ari
for personal use)
Income Summary. It is a
temporary account used at the end
of the accounting period to close
income and expenses. This account
shows the profit or loss for the
period before closing to the capital
account.
4.Revenue or Income. It
represents the earnings of the
business from the sales of goods or
service rendered.The total amount
of income generated by the sale of
goods or services related to the
company's primary operations.
Income or net income is a
company's total earnings or profit.
(kita ng business)
Service Income / Revenue. The
earning derived from service
rendered by a servicing business to
a customer. (kapag nagperform ng
service example is laundr,salon,
tutors business)
Sales. a company's revenue
earned from the sales of products
or goods (net sales). An account
used to summarize sale of goods of
a trade or merchandising business
(Consider your local grocery store
or retail clothing store. Both of
these are merchandising firms.)
(sales is kapag nakabenta ng
goods)
Interest Income. The earnings
representing the time value of
money derived from the promissory
notes received by the business.
( kinitang interest sa pautang)
Rent Income. Income earned from
allowing others to use the property
of the business. (kinita mula sa
pagpapaupa)
Gain on sale of other assets.
Income derived from the sales of
assets used. ( kinita mula sa
ibenentang assets example is
cabinet but if bentahan ng cabinet
magiging sales ito dahil ito ay
merchandising business dapat
asset moa ng binenta mo)
5.Expenses. Cost incurred in
conducting the business activity.
Expenses are deducted from
revenue to arrive at profits. (mga
gastos ng business)
Salaries or Wages Expense.
Includes all payments as a result of
an employer-employee relationship
such as salaries or wages, 13th
month pay, cost of living allowances
and other related benefits. (sahod
ng mga employees)
Supplies Expense. Expense of
using supplies (e.g. office supplies)
in the conduct of daily business.
Telecommunications, Electricity,
Fuel and Water Expenses.
Expenses related to use of
telecommunications facilities,
consumption of electricity, fuel and
water. Rent Expense.
1. Debits & Credits
Not to be confused with your
personal debit and credit cards,
debits and credits are foundational
accounting terms to know.
A debit is a record of all money
expected to come into an account.
A credit is a record of all money
expected to come out of an
account. Essentially, debits and
credits track where the money in
your business is coming from, and
where it’s going.
Many businesses operate out of a
cash account – or a business bank
account that holds liquid assets for
the business. When a company
pays for an expense out of pocket,
the cash account is credited,
because money is moving from the
account to cover the expense. This
means the expense is debited
because the funds credited from the
cash account are covering the cost
of that expense.
Here’s a simple visual to help you
understand the difference between
debits and credits:
DEBITS CREDITS
Increase assets Decrease
assets
Decrease liabilities Increase
liabilities
Decrease revenue Increase
revenue
Increase the balance of expense
accounts Decrease the balance
of expense accounts
Decrease the balance of equity
accounts Increase the balance
of equity accounts
2. Accounts Receivable & Accounts
Payable
Accounts receivable is money that
people owe you for goods and
services. It’s considered an asset
on your balance sheet. For
example, if a customer fulfills their
invoice your company’s accounts
receivable amount is reduced
because less money is now owed.
Accounts payable is money that
you owe other people and is
considered a liability on your
balance sheet. For example, let’s
say your company pays $5,000 in
rent each month. Here’s how that
would be recorded in your financial
records before that amount is paid
out.
3. Accruals
Accruals are credits and debts that
you’ve recorded but not yet fulfilled.
These could be sales you’ve
completed but not yet collected
payment on or expenses you’ve
made but not yet paid for.
(Why not wait to record the activity
until the payment is complete? We’ll
answer this question when we
explain the accrual accounting
method later.)
4. Assets
Assets are everything that your
company owns — tangible and
intangible. Your assets could
include cash, tools, property,
copyrights, patents, and
trademarks.
5. Burn Rate
Your burn rate is how quickly your
business spends money. It’s a
critical component when calculating
and managing your cash flow.
To calculate your burn rate, simply
pick a time period (such as a
quarter or a year). Subtract your on-
hand cash amount at the end of
that period from your on-hand cash
at the beginning, then divide that
number by the number of months in
the period (or by your chosen
cadence).
6. Capital
Capital refers to the money you
have to invest or spend on growing
your business. Commonly referred
to as "working capital," capital
refers to funds that can be
accessed (like cash in the bank)
and don’t include assets or
liabilities.
7. Cost of Goods Sold Equity can also be defined as the
difference between your business’s
The cost of goods sold (COGS) or
assets (what you own) and liabilities
cost of sales (COS) is the cost of
(what you owe).
producing your product or delivering
your service.
A business with healthy (positive)
equity is attractive to potential
COGS or COS is the first expense
investors, lenders, and buyers.
you’ll see on your profit and loss
Investors and analysts also look at
(P&L) statement and is a critical
your business’s EBITDA, which
component when calculating your
stands for earnings before interest,
business’s gross margin. Reducing
taxes, depreciation, and
your COGS can help you increase
amortization.
profit without increasing sales.

Accounting terms quote: Equity

Accounting terms quote: Cost of
goods sold
10. Expenses
8. Depreciation Expenses include any purchases
you make or money you spend in
Depreciation refers to the decrease
an effort to generate revenue.
in your assets’ values over time. It’s
Expenses are also referred to as
important for tax purposes, as
"the cost of doing business".
larger assets that impact your
business’s ability to make money
can be written off based on their
There are four main types of
depreciation. (We’ll discuss
expenses, although some expenses
expenses and tax write-offs later
fall into more than one category.
on.)

Fixed expenses are consistent

9. Equity
Equity refers to the amount of
money invested in a business by its
owners. It’s also known as "owner’s
equity" and can include things of
non-monetary value such as time,
energy, and other resources. (Ever
heard of "sweat equity"?)
expenses, like rent or salaries.
These expenses aren’t typically
affected by company sales or
market trends.
Variable expenses fluctuate with
company performance and
production, like utilities and raw
materials.
Accrued expenses are single
expenses that have been recorded
or reported but not yet paid. (These
would fall under accounts payable,
as we discussed above.)
Operating expenses are necessary
for a company to do business and
generate revenue, like rent, utilities,
payroll, and utilities.
11. Fiscal Year
A fiscal year is the time period a
company uses for accounting. The
start and end dates of your fiscal
year are determined by your
company; some coincide with the
calendar year, while others vary
based on when accountants can
prepare financial statements.
Do this by staying on top of your net
profit amount, setting aside some of
your revenue in a separate savings
account, or paying your estimated
taxes every quarter (like employer
withholding).
14. Revenue
Your revenue is the total amount of
money you collect in exchange for
your goods or services before any
expenses are taken out.
15. Gross Margin
Your gross margin (or gross
income), which is your total sales
minus your COGS — this number
indicates your business’s
sustainability.

12. Liabilities
Liabilities are everything that your
company owes in the long or short
term. Your liabilities could include a
credit card balance, payroll, taxes,
or a loan.

13. Profit
In accounting terms, profit — or the
"bottom line" — is the difference
between your income, COGS, and
expenses (including operating,
interest, and depreciation
expenses).

You (or your business) are taxed on

your net profit, so it’s important to
proactively plan for your tax liability.