MODULE 1 - ACCOUNTING: AN OVERVIEW

Lesson 1: Accounting

A. What is Accounting?

Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions
and events which are in part, at least, of a financial character, and interpreting the results thereof. (AICPA)

Accounting is the process of identifying, measuring and communicating economic information to permit informed
judgements and decisions by users of information. (AAA)

Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about
economic entities, that is to be useful in making economic decisions. (FRSC)

B. Bookkeeping as a Field of Accounting

Bookkeeping involves those mechanical and repetitive recording and classifying procedures related to the business
activities of a natural or artificial person, until the voluminous financial information is summarized and reported in the form
of financial statements.

Bookkeeping is only a part of the wider field of accounting.

C. Accounting as a Tool for Business Decisions

 Primary Responsibilities of Management:

 Planning and organizing the activities of the business enterprise
 Investing and financing activities
 Controlling and assessing the performance of the business enterprise
 These managers would depend on the useful financial information provided by the accounting system.

D. Role of Accounting in Business

 It helps the owner/s or managers in making plans and decisions.

 It reports and analyzes business transactions thru the financial statements.
 It communicates financial information to all interested parties.

Lesson 2: Business

A. What Is a Business Enterprise?

Business Enterprise exists when a person or group of persons makes an investment or contributes its resources in order to
sell products or render services to others, for the ultimate purpose of making profit.

B. Objectives of a Business Enterprise

Businesses are generally formed to make profit

Profit-oriented Organizations

o “Business Enterprise”
o the main activities of a business enterprise is to make profit

Non-profit Organizations

o established not for profit but to render services and meet the needs of the members of the community

C. Business’ Liquidity and Solvency

 Liquidity is the ability of a business enterprise to pay its currently maturing financial obligations.
 Solvency is the ability of a business enterprise to meet its long-term financial obligations.
 In contrast, a business enterprise that cannot meet its obligations as they fall due is said to be insolvent.
D. Other Objectives of a Business

 To provide jobs to the community

 To protect the environment
 To create new and better products for the consumers
 To render useful services at competitive prices

4.1. Types and Forms of Business

A. Types of Business

 Service Enterprise — This type of business provides various forms of services, not tangible products, to its
customers or clients.
 Merchandising Enterprise — This type of business entity is in the “buy and sell” business. A trading or
merchandising enterprise buys ready-to-use products then sells these products at higher prices.
 Manufacturing Enterprise — this involves the conversion of raw materials into finished product, which will be
sold at a higher price than the production cost.

B. Forms of Business Ownership

 Single Proprietorship — a business owned by one person, called entrepreneur or proprietor.

 Partnership - has two or more owners called partners.
 Corporation — is a business that has its ownership capitalization divided into hundreds or
thousands of transferable shares of stock. The corporation must have at least five owners or investors
called stockholders or shareholders.

C. Characteristics of the Different Forms of Business Enterprises

Unlimited liability — lf the business has unpaid debts which it can no longer pay, the creditors can run after the owner and
attach his properties to satisfy their claim.

Limited liability — the liability of the partner, shareholders or members is limited only up to the extent of their paid up
capital.

Lesson 3: Accounting as a Profession

A. Accounting as a Profession

In terms of career opportunities, the field of accounting may be divided into two broad disciplines: public accounting and
private accounting:

1. Public Accounting

A certified public accountant (CPA) is a professional who is licensed to perform an independent audit of business
enterprises or to render other forms of special accounting services to his clients.
Certified Public Accountants (CPA) may offer the following services:

 Auditing — it is the careful study of the client’s accounting information and gathering of evidences both from
within the business enterprise and from other sources

Based on these gathered evidences, the CPA expresses a professional opinion regarding the fairness and reliability of the
financial statements.

 Tax Services — the CPA may be hired by his client to perform the latter’s tax requirements such as settlement of
tax case, tax planning, tax consulting, etc.
 Management Advisory Services — the CPA may be consulted of a certain business problem and recommends
new policies and procedures that are needed as a solution.

Other Services

 preparation of financial forecasts or feasibility studies

 assessment of the present cost accounting system
 computation of the confidential payrolls and compensations
 installation of the accounting information system
 in-house trainings and personal development
 keeping the client’s stock and transfer records

2. Private Accounting

An accountant who is in a private accounting when he is employed by one particular enterprise to perform accounting-
related tasks.

 Controller — the chief accounting officer of a business enterprise

Among the more important areas of private accounting are: Financial Accounting, Management Accounting, and Internal
Auditing.

 Financial Accounting — the branch of accounting that is primarily concerned with the preparation and
presentation of general-purpose financial statements of a business enterprise
 Management Accounting — provides specific information needs of the internal data-users, principally the
management
 Internal Auditing — Internal Auditors have the responsibilities of evaluating the efficiency of operations
and determining whether the business’ policies are being followed in all organizational levels of
operations in order to achieve the organization’s objectives.
 MODULE 2 - ACCOUNTING CONCEPTS AND PRINCIPLES

Lesson 1: Generally Accepted Accounting Principles

Generally Accepted Accounting Principles (GAAP)

Philippine Financial Reporting Standards (PFRS) and PFRS for Small and Medium-sized Entities
the accounting principles and processes, standards of recognition, measurement methods, and basic assumptions that
have gained international acceptance in the business world and the accountancy profession that are used in the
preparation and presentation of basic financial statements.
Sources:

 Financial Reporting Standards Council (FRSC) – the authoritative body that establishes and promulgates GAAP and
standards in the Philippines
 International Accounting Standards Board (IASB) – Its main objective is to create a semblance of uniformity in the
accounting practices among the different nations of the world.
 International Financial Reporting Standards – reporting standards carried out by the IASB.

Lesson 2: Basic Accounting Concepts

Basic Accounting Concepts

 Accrual Basis - the amount of profit or loss is determined by deducting the total expenses incurred (whether they
are already paid for or not) during the period from the total income earned (whether they are collected or not) for
the same time frame.
 Going Concern Assumption - under this assumption, also known as continuity assumption, the primary financial
statements of a business enterprise are prepared on the assumption that the normal operations of the enterprise
will continue indefinitely.
 Business Entity Principle – assumes that the business and its owner are separate and distinct entities.
 Periodicity Concept – the assumption that the operating life of the business may be divided into time-periods.
 Concept of Equality of the Value Received and Value Given Up – for every value received, there is an equal value
given up.
 Monetary Concept – the assumption that the business transactions can be objectively measured or quantified in
terms of “peso”
 Matching Concept – the assumption that the results of business operations could be measured if there is a proper
matching of income and expenses within a reporting period.
 MODULE 3 - ACCOUNTING ELEMENTS AND ACCOUNT TITLES

Lesson 1: Financial Statements

A. OBJECTIVES OF FINANCIAL STATEMENTS

Reporting Periods:
 Calendar Year – 12-month reporting period that begins on January 1 and ends on December 31
 Fiscal Year – 12-month reporting period that ends on a date other than December 31
 Natural Business Year –12-month period which ends in the month business activities are at their lowest

B. USERS OF THE FINANCIAL STATEMENTS

 Management – All these financial statements and internal reports serve as management’s feedback tools,
and at the same time aid the managers in making decisions as to what future actions to take.
 Investors – The financial information made available to the investors could help them decide whether they
should buy, hold or sell their investment in the business enterprise.
 Trade Creditors – A trade creditor wants to know whether his present or prospective customer is capable of
settling his financial obligations within a short period of time
 Banks and Other Lenders – A lender needs information that will help in assessing the safety of his
investment, or the risk involved in his lending exposure.
 Government and Its Agencies – The government wants to know how the business enterprise is contributing
to the needs of the community and to the economy as a whole.
 Employees and Labor Unions – This group needs to know how stable and profitable its employer is.
 Customers and Clients – The customers of the enterprise are interested to know whether their supplier is
capable of continuously supplying their needs for raw materials, spare parts, services, and even technological
information.
 General Public – The other external data-users need financial data related to the operations of a business for
varied reasons.

C. COMPLETE SET OF FINANCIAL STATEMENTS

1. Balance Sheet
2. Income Statement
3. Statement of Changes in the Owners’ Equity
4. Statement of Cash Flows
5. Notes, comprising of the summary of significant accounting policies and other explanatory notes

3.1. Balance Sheet

BALANCE SHEET (Statement of Financial Position)
- This shows the financial condition of a business enterprise, which is assumed to be a going concern, as of a
particular date
- This statement will show the assets, liabilities, and owner’s equity of the business as of a given date.
- All accounts appearing in this statement are called real accounts in the sense that they are more or less
permanent in nature and their balances are carried forward from period to period.
A.1. Accounting Elements in the Balance Sheet
A.2 EXAMPLE

CLASSIFICATIONS OF ASSETS
 Current Assets – cash and other assets that are expected to be converted to cash or consumed within
one year from the accounting period or the normal operating cycle of the business whichever is longer
 Noncurrent Assets – other assets of the business that are not classifiable as current such as fixed assets.
CLASSIFICATIONS OF LIABILITIES
 Current Liabilities – financial obligations of the business which are payable within one year from the end
of an accounting period.
 Noncurrent Liabilities - financial obligations of the business which are payable for more than one year
from the end of an accounting period.
3.2. Income Statement
A. INCOME STATEMENT
- This shows the results of the operations of a business enterprise for a certain period of time or reporting period
- This statement summarizes the different revenues and expenses of the business to arrive at the net income.
- All accounts appearing in this statement are called nominal accounts in the sense that they are merely temporary
accounts and are not carried forward from period to period.

B.1 Accounting Elements of Income Statement

B.2 EXAMPLE
 MODULE 4 -ACCOUNTING EQUATION AND RULES OF DEBIT AND CREDIT

Lesson 1: The Accounting Equation

A. FUNDAMENTAL ACCOUNTING EQUATION

BALANCE SHEET ELEMENTS:

 Assets – represent those economic resources and/or controlled by the enterprise, and which are
expected to have future usefulness to the business.
 Liabilities – include those economic obligations of the enterprise, and which require future
settlements that are expected to result in outflows of economic resources.
 Equity – the residual interest of the owner or owners over the assets of the enterprise, after
deducting its total liabilities.
B. RESULTS OF OPERATIONS

The income statement is an expanded and detailed expression of the income and expenses in order to arrive at the profit earned or loss
incurred during a given reporting period.

INCOME STATEMENT ELEMENTS:

 Income – used in connection with the inflow of assets and/or outflow of liabilities that is related to the
activities of the business.
 Expenses – used in connection with the outflow of assets and/or inflow of liabilities that is directly or
indirectly related to the activities of the business enterprise.

C. ENDING BALANCE OF THE PROPRIETOR’S EQUITY

The equity of the proprietor may be computed independently from the asset and liability elements, if information about profit and
withdrawals for personal use is available.
 Lesson 2: The Accounting Cycle

Phase 1: Recording and Classifying

Step 1- Compile and arrange the source documents that support the business transactions.
Step 2- Analyze the business transactions and determine their two-fold effects on the accounting
elements.
Step 3- Journalize the business transactions in the books of original entry called journals.
Step 4- Post the journal entries to the books of final entry called ledgers.
Step 5- Prepare the unadjusted trial balance.

Phase 2: Summarizing and Reporting

Step 6- gather the data needed to adjust the accounts.
Step 7- Prepare the worksheet.
Step 8- Journalize and post the adjusting entries.
Step 9- Prepare the financial statements and supplementary schedules.

Phase 3: Closing Process

Step 10- Journalize and post the journal entries.
Step 11- Rule and balance the ledger accounts.
Step 12- Prepare the post-closing trial balance.
Step 13- Journalize and post the reversing entries.

Lesson 3: Classification of Business Transactions

 Business Transactions – activities or events that occur during a period of time, if they affect the
business’ financial condition and are capable of being assigned monetary values.
 Internal business transactions – activities or events that occurred within the business enterprise
with no separate entity involved.
 External business transactions – exchanges of economic consideration with another separate entity,
whether a natural or an artificial entity.
 Reciprocal transactions – every business transaction has two-fold effects. There is reciprocity of
value received and value parted with in every business transaction.
 Non-reciprocal transactions – value is received yet no value is parted with.
 Monetary Transaction – it is assumed that objective and reliable monetary values can be assigned
to the business transactions.
 Non-monetary transactions – are assigned equal-to-cash peso values or fair market peso values that
are agreed upon between parties involved.
 Source Documents – It is necessary that the reported information can be easily traced back to the
supporting evidences.
 MODULE 5 - JOURNALIZING

Lesson 1: Double Entry Bookkeeping

Double Entry Bookkeeping is based on the fundamental accounting assumption that all business transactions
have two-fold effects – that for every value received, there is a corresponding equal value given up.

Account is a sorting device used to record, classify, and summarize the increases and decreases in the balance
of each accounting element as a result of the completed transactions of the business enterprise.

Lesson 2: Rules of Debit and Credit

Lesson 3: Recording and Classifying Process

PROCESS

Step 1. Compile and arrange the source documents that support the transactions.

Step 2. Analyze the business transactions and determine their two-fold effects on the accounting elements.

Step 3. Journalize the business transactions in the books of original entry called journals.

Step 4. Post the journal entries to the books of final entry called ledgers.

Step 5. Prepare the unadjusted trial balance.

Book of Accounts

Business enterprises should keep certain financial records, called books of accounts, where business transactions are
recorded, classified, and summarized.

The most commonly kept books of accounts are grouped into two: journals and the ledgers.

Journals

 book of account where a business transaction is recorded for the first time
 also referred to as books of original entry

Kinds of Journal

 General Journal – all types of business transactions can be recorded in here

 Special Journals – may be used to be able to group specific types of transactions in one book of original entry
(e.g. cash receipts journal, cash payments journal)

Advantages:

 Since the transactions are recorded in the journals in chronological order, it then becomes easier to locate a
transaction.
 The process of classifying and sorting of the financial data is facilitated since both debit and credit account titles
and amounts are clearly and systematically reflected on the same page of the journal.
 The use of journals helps avoid omissions or duplications in the recording and posting process.
 The task of auditing the records becomes less difficult since the auditor could clearly see how the accountant
recorded each business transaction.

Lesson 3: Recording and Classifying Process

5.1. Journalizing the Business Transactions

Journalizing is the process of analyzing and recording or entering a business transaction in a journal.

A journal entry has the following parts:

a) the date when the transaction occurred

b) the effects of the transaction as reflected by the account titles debited and account titles credited
c) the monetary values (debit values and credit values) assigned to each accounting element that is
affected by the transaction
d) a brief and clear explanation
e) the posting references showing the code of the designation ledger account

A journal entry with two or more debits and/or credits is called a compound entry. When an entry involves two or more
debit items, their account titles and amounts must all be recorded ahead of the credit account titles and their amounts.

Manner of recording in the general journal:

1. Write the page number on the upper right hand corner of the general journal.
2. Write the date (month and day) on the DATE column.

3. In the ACCOUNT TITLE/EXPLANATION column, enter the account/s to be debited. The amounts will be entered
on the DEBIT column.

4. Below the debit entry, enter the account/s to be credited. The amounts will be entered on the CREDIT column.

5. Below the credit entry, write a brief explanation of the transaction being recorded.

SAMPLE JOURNAL ENTRY:

Discount

Discount granted on revenue is recorded as follows:

 if the discount is
granted at the time of the transaction, it is netted against the revenue. It means that the revenue is recorded net of
the discount.
 if the discount is
granted after the time of transaction, it is debited either to Service revenue or Service discount account.
 Types of Discount on Asset Purchases

1. Trade discount – discount given in consideration of the volume or the amount purchased. It is an outright
deduction from the list price.

Rule: Trade discount is not recorded in the books of either the seller or the buyer, meaning the
transaction is recorded net of the discount.

2. Cash Discount – a discount given to the buyer for paying within a specified period of time which is usually
earlier than the credit period. Given in consideration of prompt payment.

Rule: Cash discount on asset purchased should be recorded as deduction from the asset account.

Interest
Interest is the cost of using money. It is normally associated with an issuance of a promissory note.

Formula: I = Prt

P – principal, the amount of obligation.

r – rate, expressed in percentage and normally per annum (year) unless stated otherwise.

t – time, the period from the date of the note up to its maturity.

Example: Compute for the interest on a 30-day, 6% note amounting to P100,000.

I = 100,000 x .06 x 30/360

= 500

Note: Interest received by the holder of the note is income while interest paid by the issuer is expense.

60-day 6% Method
This method is useful in mentally computing for interest if the term is 60 days and the rate is 6% and their derivations.

If the term is 60 days and the rate is 6% - move 2 decimal places to the left.

90 days 6% - move 2 decimal places to the left x 150% or 1½.

60 days 9% - move 2 decimal places to the left x 150% or 1½.

90 days 9% - move 2 decimal places to the left x 150% x 150%

120 days 6% - move 2 decimal places to the left then multiply by 200% or 2.

60 days 12% - move 2 decimal places to the left then multiply by 200% or 2.

30 days 6% - move 2 decimal places to the left / 200% or 2.

60 days 3% - move 2 decimal places to the left / 200% or 2.

The derivations are determined by the ratio of the actual term over 60 days or the actual rate over 6%.