SIR CHUA’S ACCOUNTING TUTORIAL (NOTES)

BRANCHES
INTRODUCTION: 1. FINANCIAL ACCOUNTING – (recording of business transactions) accounting
“Accounting is a service activity. Its function is to provide quantitative information, process; record – classified – summarized – financial statements (output of FA); a
primarily financial in nature, about economic entities that is intended to be useful in making branch of accounting wherein we communicate the financial results of a business
economic decisions, and in making reasoned choices among alternative courses of action” – entity through a tool which we call financial statements. [totality]
Accounting Standards Council 2. MANAGEMENT ACCOUNTING – “to be used by the management”, making
 Accounting is a service activity. management reports for decision-making; Revenue – Expenses = Net Income/Loss
 The function of accounting is to provide quantitative information, primarily financial [flexible – go further into details]
in nature. (how much?) 3. COST ACCOUNTING – literally talks about the ‘cost’ and expenses of the
 About economic entities. company; the overlapped between FA and MA is CA; provides all the costs and
 Intended to be useful in making economic decisions. sacrifices a company has incurred; FA – Income Statement; MA – management
reports for decision-making
NATURE: 4. GOVERNMENT ACCOUNTING – deals with receipts and disposition of public
 Art (designed process) funds; should be able to show to the public how government funds are being used for
 Financial the public.
5. AUDITING – checking and verification; two kinds (1) internal – checking the
 Process (step-by-step procedure)
operations of the company if it’s in line with the management policies; inside the
 Information System
company – internal auditors are employed inside the company; (2) external –
checking the financial statements if it’s correct so that users will be confident in
FUNCTIONS:
reading the financial reports; Audit – FS – Users; a third party accountant will be
 Maintenance of systematic records involved.
 Financial results of an entity can be communicated 6. TAX ACCOUNTING – all about taxes. Deals with the computation of taxes, filing,
 Meeting legal requirements etc., deals with the totality of the process of taxation.
 Protecting assets of a business 7. ACCOUNTING EQUATION – teaching accounting, finance and other technical-
 Assistance to management related subject. CPA engaged in teaching
8. ACCOUNTING RESEARCH – two kinds (1) Academic – being applied in the
HISTORY: academe (2) Economic/Industrial – being applied in the industry.
 Accounting can be traced to ancient civilizations
 Accounting records dating back more than 7,000 years have been found in USERS OF ACCOUNTING INFORMATION:
Mesopotamia. Accounting Information – Resources Financial
 The Roman Empire had access to detailed financial information as seen in “The Obligations Position
Deeds of the Divine Augustus” Profitability – Financial Performance (I/S)
 The merchants during the Goryeo Dynasty of Korea kept track of their businesses Capital – Equity
and trades through record-keeping methodologies. Cash flow – Cash flow
1. INTERNAL USERS (inside the company)(MA – decision-making)
LUCA BARTOLOMEO DE PACIOLI - Are the ones to make decisions?
 Father of Accounting  Owners – They provide capital to the business and they assess if
 An Italian mathematician and Franciscan friar it needs funding.
 Summa de arithmetica, geometria, proportioni,et proportionalita (1994)  Managers – They need financial information because they plan and
 The Double Entry Bookkeeping System – In every business transactions, two organize the firm.
accounts are always affected – the left side and the right side [debit and credit] 2. EXTERNAL USERS (FA)
  Investors – “should I invest in this company or not?”
 Creditors – “can they pay their obligations when they fall due?
*including the interest
 Customers – Those dependent with the firm are curious about business
continuity.
 Employees – “Is the company I am working for stable?”
 Suppliers – “Can they pay for the goods and service I provided?”
 Tax authorities – “Are they compliant? Do they pay the right amount of
taxes?” *tumutugon
 Government – “Do they follow rules and regulations?”
 General Public – “what are the new business trends?”
3. CORPORATION – A corporation is an artificial being (it works like a person)
FORMS OF BUSINESS ORGANIZATIONS
created by operation of law, having the right of succession and the powers, attributes,
1. SOLE PROPRIETORSHIP – A sole proprietorship also referred to as a sole trader
and properties expressly authorized by law or incidental to its existence.
or proprietorship, is an unincorporated business that has just one owner. Owned by
Shareholders.
one person. The only owner of the business. Easy to establish and dismantle, due to a
lack of government involvement, making them popular with small business owners
and contractors.

4. COOPERATIVES – Are people-centered enterprises owned, controlled and run by

and for their members to realize their common economic, social, and cultural needs
and aspirations. Big build, there is only a common goal.

2. PARTNERSHIP – By the contract of partnership two or more persons bind

themselves to contribute money, property, or industry to a common fund, with the
intention of dividing the profits among themselves. Two or more persons may also
form a partnership for the practice of a profession; example: accounting firms, law
TYPES OF BUSINESS ACCORDING TO ACTIVITIES
firms. If there’s no contract, there is no partnership.
 SERVICE – service business generates income by providing services (for a fee);
examples: barber shop, massage therapy/spas, travel and tours services, IT
Solutions firm, legal services/law firm, Accounting services/accounting firms.
 MERCHANDISING – Buying and selling of goods. A company purchases
goods from a supplier, in which these goods will be sold to customers.
Examples: grocery store, fashion boutiques.
 MANUFACTURING – A company that purchases raw materials, in which these
raw materials will undergo a process, until it becomes finished goods to be sold to
customers. Example: ice cream manufacturing company, car manufacturing
company.

Indirect Cost/Overhead – anything that is not really related to the car, but is related to
the production process. Example: rent of factory plant or salaries of factory janitor.

Three kinds of costs which pertains to the cost of the goods: (1) Materials, (2) Labor, (3)
Overhead.
 ACCOUNTING CONCEPTS AND PRINCIPLES
Generally Accepted Accounting Principles (GAAP) – refer to a common set of accounting
principles, standards, and procedures issued by the Financial Accounting Standards Board
(FASB).
…as applied in the Philippines
Philippine Financial Reporting Standards (PFRS)
Philippine Accounting Standards (PAS)
- These two are the guiding principle on how to record transactions.
ACCOUNTING CONCEPTS
 Economic Entity or Accounting Entity – the personal transactions of the owner are
separate from that of the business he/she owns.
 Accrual Basis of Accounting – Revenue is recorded when earned. Expenses are
recorded when it happens. Regardless of when cash is received or paid.
 Going Concern – the company will continue operating indefinitely until the
foreseeable future, and that company closure is not imminent.
 Monetary Unit – transactions are express in a monetary unit of measure.
 Time Period – transactions are summarized and reported at regular time intervals.
 Calendar Year (January 1 – December 31)
 Fiscal Year (Any starting point + 12 months)
ACCOUNTING PRINCIPLE
 Cost Principle – amounts shown in financial reports are historical costs.
 Full Disclosure Principle – sufficient information for informed judgments. *sundin
mo kung ano yung sinasabi sa accounting standards.
 Matching Principle – matching revenues with expenses to know the profit of the
business.
 Revenue Recognition Principle – recognize revenue when goods are sold or
services are rendered, regardless of the cash receipt.
 Materiality – In accounting, materiality refers to the impact of an omission or
misstatement of information in a company’s financial statements on the user of those
statements. If it is probable that users of the financial statements would have altered
their actions if the information had not been omitted or misstated, then the item is
considered to be material.
 Conservatism – if there are two acceptable alternatives in a situation, choose the
alternative that will result in lesser income or resource.
 Objectivity – recording and reporting process should be performed with
independence which is free from bias.
QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION
An item is relevant if it affects you.
VCUT – Verifiability, Comparability, Understandability, Timeliness
Intracomparability – comparing the company to the company itself
Intercomparability – comparing the company to the other companies in its own field.
THE ACCOUNTING EQUATION
A=L+C
[Assets = Liability + Capital/Equity]
ASSETS – is a resource controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity. Assets are the resources of the
company that are used for business operations. Something that a business owns. Example:
cash, land, building, automobile, machinery, office supplies, etc. Employees are not
considered asset in accounting.

LIABILITIES – a present obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow from the entity of resources embodying economic
benefits. Utang.

CAPITAL/EQUITY – equity is the residual interest in the assets of the entity after
deducting all its liabilities. Residual – matitira.

RESIDUALS = CLAIMS

CLAIMS OF CREDITORS
Unearned Revenue – when the client/customer paid in advance before the service are
RESIDUALS = +
rendered. Utang to the client.
CLAIMS OF THE OWNER
Accruals – expenses within the period pero next period pa mababayaran. Accrued
expenses.
LIABILITIES
ASSETS = +
CAPITAL

A=L+C;L=A–C;C=A–L

TYPES OF MAJOR ACCOUNTS (ELEMENTS OF FINANCIAL STATEMENTS)

Current – within 1 year

Noncurrent – Long-term
Intangible – not physical
Utilities – water, electricity, internet
Representation – mga pakain ng company kapag may meetings

CHART OF ACCOUNTS – a chart of accounts is a listing of the names of the accounts that
a company has identified and made available for recording transactions.

BOOKS OF ACCOUNTS

General Journal – a book of account where all transactions are recorded. It is also
called the Book of Original Entry.
General Ledger – a book of account where all transactions are classified based on
their account titles. It is also called the Book of Final Entry.
 Special Journals – are journals designed for transactions that are repetitive
and recurring, in which the use of a general journal would be inefficient.
 Subsidiary Ledgers – are ledgers that support the main general ledger account.

RULES OF DEBIT AND CREDIT

Left Side of the Account – Debit

Right Side of the Account – Credit
  Matching Principle

Depreciation – a decline in the value of an asset due to wear and tear obsolescence and
passage of time.
Residual Value – is the value expected in the asset after its useful life.

Financial Statements – are structured representation of the entity’s financial position,

financial performance, and cash flows of an entity that is useful to a wide range of users in
making economic decisions.

1. Statement of Financial Position – Balance Sheet. Presents the entity’s assets,

ADJUSTING ENTRIES
 Entries made at the end of the accounting period before closing procedures to update
balances of asset, liability, revenue, and expense accounts to make their balances
ready for the preparation of financial statements.
KINDS:
1. Prepaid Expenses – expenses that was paid for in advanced by the company. Prepaid
Rent, Prepaid Insurance. Asset (na-e-expired) – Expense
2. Deferred Revenue – the company received a payment in advance from the clients but
the service is still not yet rendered. Liability (once we rendered the service it
becomes revenue) – Revenue
3. Accrued Revenue – The Company has already rendered the service but still hasn’t
collected the payment. Na-earn na ang revenue pero wala pang payment. Receivable
4. Accrued Expenses – Expenses were already incurred but there is still no payment.
Payable
5. Asset Depreciation – kapag naluluma or nasisira yung mga malalaking machines,
equipments etc. monetary amount
6. Uncollectible Accounts – Receivable na baka hindi na ma-receive. Bad Debts
7. Subsequent Measurements of asset and liability accounts
liabilities, and capital as of the period.
2. Statement of Comprehensive Income – Income Statement. Presents the entity’s
revenues and expenses during an accounting period that tells users on
whether the entity enjoyed profit or suffered a loss during the period.
3. Statement of Changes in Equity – Capital Statement. Presents the changes in equity o
the owner due to investments, additional contributions, net income or loss,
and personal withdrawals.
4. Statement of Cash Flows – Presents the entity’s cash inflows and outflows on three
major activities: operating, investing, and financing.
 Operating Activities include cash activities related to net income. For
example, cash generated from the rendering of services and cash paid
for expenses are operating activities because revenues and expenses
are included in net income.
 Investing Activities include cash activities related to noncurrent
assets. Noncurrent assets include long-term investments and
property, plant, and equipment.
 Financing Activities comes from conducting financing activities for
the business. In other words, financing cash flow includes obtaining
or repaying capital, be it equity or long term debt.

Adjusting entries adhere to:

 Comprehensive
 Freedom from error
 Timeliness
 Accrual basis
 Revenue Recognition
 2. Journalize and post-closing entries – After these adjusting entries are journalize
and posted formally, the updated balances in the ledger should be equal to the
adjusted trial balance column of the worksheet.
3. Prepare a Post-Closing Trial Balance – Closing entries are entries that close the
balances of drawing, revenue, and expense accounts to zero to prepare them for the
next accounting period.

Real Accounts – balances will continue – cumulative

Nominal Accounts – will not continue – brought back to zero

5. Notes and Disclosures

CLOSING PROCEDURES

Wrapping-up the accounting process

1. Journalize and post adjusting entries – Adjusting entries were already prepared
and its effects were included in the worksheet and ultimately, in the financial
statements. However, these accounting entries are not yet journalized and posted
formally in the book of accounts.
 Reversing Entries is an optional step in the accounting cycle. However, it is useful in
facilitating the recording asset, liabilities, revenues, and expenses in the usual manner. They
are journalized and posted at the beginning of the new accounting period.

Adjusting Entries that are recommended to undergo Reversing Entries

1. Prepayments under expense method
2. Deferrals under revenue method
3. Accrued revenues
4. Accrued expenses

MERCHANDISING OPERATIONS