FABM1 ● • 14th Century
MIDTERMS, 2ND SEMESTER
FABM:
“Fundamentals of Accounting, Business, and
Management”
INTRODUCTION TO ACCOUNTING
“Accounting is a process of Identifying, Recording, and
Communicating economic events of an organization to
interested users.” (Weygandt, J.)
Identifying:
- selecting economic events
(transactions).
Recording:
- This involves keeping a chronological
diary of events that are measured in
pesos. (journals and ledgers)
- Record, Classify, and Summarize
Summarize:
- Financial reports / financial statements.
Communicating:
- Occurs through the preparation and
distribution of financial and other
accounting reports.
NATURE OF ACCOUNTING
According to Accounting Theory:
“Accounting is a system recording of financial
transactions and the presentation of the related
information to appropriate people”
Basic Features of Accounting:
1. Accounting is a service activity
2. Accounting is a process
3. Accounting is both an art and discipline
4. Accounting deals with financial information and
transactions
5. Accounting is an information system
HISTORY OF ACCOUNTING
Accounting is an old civilization itself. It has evolved in
response to various social and economic needs of men.
Accounting started as simple repetitive exchanges. The
history of finance and business.
● • The Cradle of Civilization
- Around 3600 B.C., record-keeping was
already common from Mesopotamia,
China and India to Central and South
America. The oldest evidence of this
practice was the “clay tablet” of
Mesopotamia which dealt with
commercial transactions at the time
such as listing of accounts receivable
and accounts payable.
- Double-Entry Bookkeeping; The most
important event in accounting history is
generally considered to be the
dissemination of double entry
bookkeeping by Luca Pacioli (‘The
Father of Accounting’) in 14th century
Italy. Pacioli was much revered in his
day, and was a friend and
contemporary of Leonardo da Vinci.
The Italians of the 14th to 16th centuries
are widely acknowledged as the fathers
of modern accounting and were the first
to commonly use Arabic numerals,
rather than Roman, for tracking
business accounts. Luca Pacioli wrote
Summa de Arithmetica, the first book
published that contained a detailed
chapter on double-entry bookkeeping.
● • French Revolution (1700s)
- The thorough study of accounting and
development of accounting theory
began during this period. Social
upheavals affecting government,
finances, laws, customs and business
had greatly influenced the development
of accounting.
● • The Industrial Revolution (1760-1830)
- Mass production and the great
importance of fixed assets were given
attention during this period.
● • 19th Century
- The Beginnings of Modern Accounting
in Europe and America The modern,
formal accounting profession emerged
in Scotland in 1854 when Queen Victoria
granted a Royal Charter to the Institute
of Accountants in Glasgow, creating the
profession of the Chartered Accountant
(CA). In the late 1800s, chartered
accountants from Scotland and Britain
came to the U.S. to audit British
investments. Some of these accountants
stayed in the U.S., setting up accounting
practices and becoming the origins of
several U.S. accounting firms. The first
national U.S. accounting society was set
up in 1887. The American Association of
Public Accountants was the forerunner
to the current American Institute of
Certified Public Accountants (AICPA). In
this period rapid changes in accounting
practice and reports were made.
Accounting standards to be observed
by accounting professionals were
promulgated. Notable practices such as
mergers, acquisitions and growth of
multinational corporations were
developed. A merger is when one
company takes over all the operations
of another business entity resulting in
the dissolution of another business.
Businesses expanded by acquiring
 other companies. These types of
transactions have challenged
accounting professionals to develop
new standards that will address
accounting issues related to these
business combinations.
● • The Present
- The Development of Modern
Accounting Standards and Commerce
The accounting profession in the 20th
century developed around state
requirements for financial statement
audits. Beyond the industry's
self-regulation, the government also
sets accounting standards, through
laws and agencies such as the
Securities and Exchange Commission
(SEC). As economies worldwide
continued to globalize, accounting
regulatory bodies required accounting
practitioners to observe International
Accounting Standards. This is to assure
transparency and reliability, and to
obtain greater confidence
accounting information used by global
investors. Nowadays, investors seek
investment opportunities all over the
world. To remain competitive,
businesses everywhere feel the need to
operate globally. The trend now for
accounting professionals is to observe
one single set of global accounting
standards in order to have greater
transparency and comparability of
financial data across borders.
- Accounting is standardized.
USERS OF ACCOUNTING
EXTERNAL USERS
- Individuals and organizations outside a
company who want financial information about
the company. These users are not directly
involved in managing and operating the
business.
a. Creditors
b. Tax authorities
c. Investors
d. Customers
e. Regulatory authorities
INTERNAL USERS
- Are the individuals inside a company who plan,
organize, and run the business. These users are
directly involved in managing and operating the
business.
a. Management
b. Employees
c. Owners
ACCOUNTING CONCEPTS AND PRINCIPLES
Generally Accepted Accounting Principles (GAAP)
- Refer to a common set of accounting rules,
standards, and procedures issued by the
Financial Accounting Standard Board (FASB).
- Aims to improve the clarity, consistency, and
compatibility of the communication of financial
information.
1. BUSINESS ENTITY PRINCIPLE
- A business enterprise is separate and
distinct from the owner or investor.
2. GOING CONCERN PRINCIPLE
- Business is expected to continue
indefinitely.
3. TIME PERIOD PRINCIPLE
- Financial statements are to be divided
into specific time intervals.
4. MONETARY UNIT PRINCIPLE
- Amounts are stated into a single
on monetary unit.
5. OBJECTIVITY PRINCIPLE
- Financial statements must be presented
with supporting evidence.
6. COST PRINCIPLE
- Accounts should be recorded initially at
cost.
7. ACCRUAL ACCOUNTING PRINCIPLE
- Revenue should be recognized when
earned regardless of collection and
expenses should be regardless of
collection and expenses should be
recognized when incurred regardless of
payment.
8. MATCHING PRINCIPLE
- Cost should be matched with the
revenue generated.
9. DISCLOSURE PRINCIPLE
- All relevant and material information
should be reported.
10. CONSERVATION PRINCIPLE
- Also known as prudence. In case of
doubt, assets and income should not be
overstated while liabilities and expenses
should not be understated.
11. MATERIALITY PRINCIPLE
- In case of assets that are immaterial to
make a difference in the financial
statements, the company should
instead record it as an expense.
 ACCOUNTING EQUATION
- Is an expression of the relationship among
assets, liabilities, and owner’s equity in a
business.
ASSETS = LIABILITIES + OWNER’S EQUITY
THE FIVE MAJOR ACCOUNTS
1. Assets
2. Liabilities
3. Owner’s equity
4. Income
5. Expense
ASSETS
- Are the resources owned and controlled by the
firm.
- substance. Examples include franchise and
CURRENT ASSETS
- Are the assets that can be realized
(collected, sold, used up) one year after
year-end date.
1. Expected to be realized in, or is
intended for sale or consumption on
the entity’s normal operating cycle.
2. Held primarily for the purpose of being
traded.
3. Expected to be realized within 12
months of the balance sheet date
4. Cash or a cash equivalent unless it is
restricted from being exchanged or
used to settle a liability for at least 12
months after the balance sheet date.
Arranged according to liquidity (how
fast it is to be turned to cash)
● Cash is money on hand, or in banks, and other
items considered as medium of exchange in
business transactions.
● Accounts Receivable are amounts due from
customers arising from credit sales or credit
services.
● Notes Receivable are amounts due from clients
supported by promissory notes.
● Inventories are assets held for resale
● Supplies are items purchased by an enterprise
which are unused as of the reporting date.
● Prepaid Expenses are expenses paid in
advance. They are assets at the time of
payment and become expenses through the
passage of time.
● Accrued Income is revenue earned but not yet
collected
● Short term investments are the investments
made by the company that are intended to be
sold immediately
NON-CURRENT ASSETS
- Are assets that cannot be realized
(collected, sold, used up) one year after
year-end date.
1. Tangible Assets are physical assets
such as cash, supplies, and furniture
and fixtures.
2. Intangible Assets are non-physical
assets such as patents and trademarks
● Property, Plant and Equipment are long-lived
assets which have been acquired for use in
operations.
● Long term Investments are the investments
made by the company for long-term purposes
● Intangible Assets are assets without a physical
copyright.
LIABILITIES
- Liabilities are the debts and obligations of the
company to another entity.
CURRENT LIABILITIES
- Liabilities that fall due (paid, recognized as
revenue) within one year after year-end date.
Examples include Accounts Payable, Utilities
Payable and Unearned Income.
● Accounts Payable are amounts due, or payable
to, suppliers for goods purchased on account
or for services received on account.
● Notes Payable are amounts due to third parties
supported by promissory notes.
● Utilities Payable is an obligation to pay utility
companies for services received from them.
● Accrued Expenses are expenses that are
incurred but not yet paid (examples: salaries
payable, taxes payable)
● Unearned Income is cash collected in advance;
the liability is the services to be performed or
goods to be delivered in the future.
NON-CURRENT LIABILITIES
- are liabilities that do not fall due (paid,
recognized as revenue) within one year after the
year- end date. Examples include Notes
Payable, Loans Payable, Mortgage Payable, etc.
● Loans Payable – is a liability account listing the
amount of any loan debt you’ve taken out and
haven’t repaid.
● Mortgage Payable – is the liability of a property
owner to pay a loan that is secured by property.
● Bonds Payable – is a certificate of indebtedness
under the seal of a corporation, specifying the
terms of payment and the rate or interest to be
charged.
OWNER’S EQUITY
- is the residual interest of the owner from the
business. It can be derived by deducting
liabilities from assets.
● Capital is the value of cash and other assets
invested in the business by the owner of the
business.
● Drawing is an account debited for assets
withdrawn by the owner for personal use from
the business.
INCOME
- Income is the Increase in resources resulting
from performance of service or selling of goods.
Income increases equity.
General Ledger
- It is a control account indicating the total
balance of a particular account.
Subsidiary Ledgers
- These ledgers show the details supporting their
balances which tally with the amount in the
general ledger or the control account.
ACCOUNT
- Is an individual accounting record of increases
and decreases in a specific asset, liability, or
owner’s equity item.
DEBIT (left side)
CREDIT (right side)

EXPENSE Debiting
- is the decrease in resources resulting from the - Act of entering an amount on the left side of an
operations of business. Expenses decrease account
Equity in the accounting equation. Crediting
- Making an entry on the right side.
CHART OF ACCOUNTS
- A chart of accounts is a listing of the accounts NORMAL BALANCE
used by companies in their financial records. - Every account classification has a normal
balance whether it is a debit or credit.
- The chart of accounts helps to identify where
the money is coming from and where it is going. (insert debit/ credit= increase/ decrease depending on
account)
- The chart of accounts is the foundation of the
financial statements. JOURNALIZING

The following are the steps in the preparation of a STEPS IN JOURNALIZING

basic chart of accounts: a. Indicate the date
b. Debit account and its corresponding amount
1. Create two columns. c. Credit account and its corresponding amount
2. Prepare the assets first, then liabilities, then (indent right)
equity, then revenue and expenses. d. Brief explanation
3. List all assets, liabilities, equity, revenue and
expenses accounts in the first column. Ex:
4. On the second column, choose an account 2022
code (discretion of the company).
5. On the third column, write the description for 02/01 cash xx
each account on when to use it. Service income xx
Rendered service on cash
2 BOOKS OF ACCOUNTS
1. JOURNAL T- ACCOUNT
- Is known as the book of original entry; is - It is an informal tool used to analyze the effect
a chronological record of events or of transactions in the assets, liabilities, owner’s
business transactions showing all the equity, revenue, and expenses.
effects of each transaction in terms of
debits and credits. The simplest journal 3 elements of an account:
is the “general journal” 1. Account title
2. LEDGER 2. Debit
- Book of final entry. Group of the 3. Credit
accounts used by the company.
( then the normal balance)
Special Journal
- Are columnar books of original entry for
recording similar transactions. Their design
and use depend on the needs of a specific
business entry.
1. Cash disbursement journal
2. Cash receipts journal
3. Purchase journal
4. Sales journal
 TRIAL BALANCE ESTIMATES:
1. Depreciation
- It is the schedule of all balances to prove the - Allocation of the cost of capital assets
equality of the debit and credit. It is a listing of to expense over its useful life.
all account titles with their respective debit or
credit balances taken from the ledger. Depreciation Expense xx
Accumulated depreciation xx
Possible Errors in the Trial Balance To record depreciation expense
1. Transposition (2 numbers reversed)
2. Transplacement or slide (decimal point 2. Bad debts
has been moved or misplaced) - Uncollectible accounts

ADJUSTING ENTRIES Bad debts Expense xx

Allowance for bad debts xx
To record bad debts
- It is an entry made to assign the right amount
of revenue and expenses to each accounting
period. It updates previously recorded journal
entries so that the financial statements at the
end of the year are accurate and up-to-date.
Prepaid/ Unearned:
1. Find the accrued/ used time (?)
ADJUSTING ITEMS:
ex. 6 months paid - 4 months used = 2 months left
a. Prepayments 2. Get the per month payment of the paid cash
b. Accruals 3. Multiply the monthly payment to the used time
c. Estimates 4. Then record

PREPAYMENTS: Accruals:
1. Prepaid expenses Interest = (price)(rate)(time)
- Expenses paid in cash and recorded as
assets before they are used or Time = N/ 360
consumed.
Bad Debts:
Expenses xx
Prepaid expenses xx Straight Line Method:
To adjust prepaid account
𝑎𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛 𝑐𝑜𝑠𝑡 − 𝑠𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒
2. Unearned revenue 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑙𝑖𝑓𝑒
- Revenues received in cash and recorded
as liabilities before they are earned.

Unearned income xx
Income xx
To adjust unearned income

ACCRUALS:
1. Accrued income
- Income earned but not yet received in
cash on record.

accrued income xx
Income xx
To adjust accrued income

2. Accrued expenses
- Expenses incurred but not yet paid or
recorded

Expenses xx
accrued expenses xx
To adjust accrued expenses