ACCOUNTING

BASICS

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BASIC ACCOUNTING
► Basic accounting refers to the process of recording a company's financial
transactions. It involves analyzing, summarizing and reporting these transactions to
regulators, oversight agencies and tax collection entities.
► Basic accounting is one of the key functions in almost all types of business. It is
typically performed by an accountant or a bookkeeper at a small company, or by
large finance departments with dozens of employees at larger companies.
► Without accounting, it would be impossible to determine which products were
successful, which business decisions were effective and whether the company is
generating revenue or making a profit. It would also be impossible to determine how
much taxes to pay, whether to buy or lease a property or whether to merge with
another company.
Components of Basic Accounting

► System of record-keeping
► Transactions
► Reporting
System of Record-keeping
Companies must have a rational approach to record-keeping before they begin
the accounting process. They have to set up accounts in which to store
information. Accounts fall into the following classifications:

► Assets: These refer to resources or items that the company owns.

Assets have future economic value that can be measured and can be
expressed in monetary terms. Examples of a company's assets
include investments, cash, inventory, accounts receivable, land,
supplies, equipment, buildings and vehicles.
► Liabilities: These refer to the legal financial obligations or debts that
companies incur during business operations. Liabilities can be limited or
unlimited. They are settled over time through the transfer of economic
benefits such as money, services or goods.
► Equity: Equity, also known as shareholder's equity, refers to the amount of
money that a company must return to its shareholders after all of its assets are
liquidated and all of its debt is paid off. Equity is calculated by subtracting a
company's total assets to its total liabilities.

► Revenue: Revenue refers to the income that

► Expenses: Expenses refer to the costs of
operations that businesses incur to
generate revenue. Common expenses
include employee wages, payments to
suppliers, equipment depreciation and
factory leases.
a company generates from its normal
business operations. It includes deductions
and discounts for returned products.
Revenue is the gross income figure from
which costs are subtracted to determine net
income.
The accounting equation is the
proposition that a companyʼs
assets must be equal to the sum
of its liabilities and equity.

ACCOUNTING EQUATION
 limitation of the accounting
Although the balance sheet always balances out, the
equation
accounting equation doesn't provide investors information
as to how well a company is performing. Instead, investors
must interpret the numbers and decide for themselves
whether the company has too many or too few liabilities,
not enough assets, or perhaps too many assets, or is
financing the company properly to ensure long term
growth.
Transactions
The accountant is responsible for generating a number of business transactions, while
others are forwarded to the accountant from other departments of a company. Some
crucial business transactions include:
► Sales: These are transactions in which products/services are transferred from
buyers to sellers for cash or credit.
► Purchases: These are transactions that businesses require in order to obtain
materials and services necessary to accomplish their goals.
► Receipts: These are the transactions that refer to a company getting paid for
providing services or goods to customers.
► Employee’s compensation: This requires information about the number of hours
that employees spent at paid labor, which is then used to generate tax deductions,
gross wage information and other deductions, which result in net pay to employees.
Debits and Credits
Business transactions are events
that have a monetary impact on the
financial statements of an
organization. When accounting for
these transactions, we record
numbers in two accounts, where the
debit column is on the left and the
credit column is on the right.
A debit is an accounting entry that either increases
an asset or expense account, or decreases a liability
or equity account. It is positioned to the left in an
accounting entry.

A credit is an accounting entry that either

increases a liability or equity account, or
decreases an asset or expense account. It is
positioned to the right in an accounting entry.
ABC Corporation sells a product to a customer for
P1,000 in cash. This results in revenue of P1,000 and
cash of P1,000. ABC must record an increase of the
cash (asset) account with a debit, and an increase of the
revenue account with a credit.

DEBIT CREDIT

Cash P1,000

Revenue P1,000
ABC Corporation sells a product to a customer for
P1,000 on credit. This results in revenue of P1,000 and
cash of P1,000. ABC must record an increase of the
cash (asset) account with a debit, and an increase of the
revenue account with a credit.

DEBIT CREDIT

Accounts Receivable P1,000

Revenue P1,000
ABC Corporation also buys a machine for P15,000 on
credit. This results in an addition to the Machinery fixed
assets account with a debit, and an increase in the
accounts payable (liability) account with a credit.

DEBIT CREDIT

Machinery – fixed asset P15,000

Accounts Payable P15,000

ABC Corporation purchases supplies from Malayan
Store worth P8,000 in cash.
DEBIT CREDIT

Supplies Expense P8,000

Cash P8,000

ABC Corporation purchases supplies from Malayan

Store worth P8,000 on credit.
DEBIT CREDIT

Supplies Expense P8,000

Accounts Payable P8,000

ABC Corporation receives P5,000 in payment of an
account receivable.

DEBIT CREDIT

Cash P5,000

Accounts Receivable P5,000

ABC Corporation takes out a loan of P50.000 from a
lending institution.
DEBIT CREDIT

Cash P50,000

Loans Payable P50,000

ABC Corporation repays a loan of P50.000 from a

lending institution.
DEBIT CREDIT

Loans Payable P50,000

Cash P50,000
ABC Corporation pays P24,000 for the salaries of
employees.

DEBIT CREDIT

Salary Expense P24,000

Cash P24,000
Reporting
Once all the company's transactions related to an accounting period have been
completed, the accountant consolidates the information stored in the accounts and
sort it into three documents that are collectively called financial statements. These
statements include:

► Income Statement: This document contains information about the

company's revenues and deducts all expenses incurred to determine the
net profit or loss for the reporting period. It measures the ability of a
company to expand its customer base and operate in an efficient manner.
► Balance Sheet: This document contains information about a company's assets,
liabilities and equity as of the end of the reporting period. It shows the financial
position of an organization as of a point in time and is carefully reviewed to
determine an organization's ability to pay its bills.

► Statement of cash flows: This document contains information about the uses and
sources of cash during the reporting period. It's especially useful when the
amount of net income that appears on the income statement is different from the
net change in cash during the reporting period.