Professional Documents
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What is Accounting?
Accounting is the process of identifying, measuring and communicating economic information to
permit informed judgment and decisions by users of information. Accounting is vital to any
business organization. It is equally essential to the successful operation of non-profit organization,
governments units or agencies and to non-government organization.
Accounting according to American Institute of Certified Accountants, is the art of recoding,
classifying and summarizing in a significant manner and in terms of money, transactions and
events which are in part or at least of financial character and interpreting the results thereof.
Accounting is a service activity. Its function is to provide quantitative information, primarily
financial in nature about economic entity that is intended to be useful in making economic
decisions.
Phases of Accounting
Recording means putting into writings business transactions in chronological order, thru the
double entry bookkeeping method, in the journal and ledger books
Classifying is the sorting or grouping of similar transactions or items. Classification reduces the
effects of numerous transactions into useful groups or categories.
Summarizing is done at the end of the accounting period thru the preparation of Financial
Statements or financial reports
Interpreting. Is the analytical portion of accounting. Financial Statement will be meaningful and
beneficial to management if duly analyzed and interpreted.
Career Opportunities
1. PUBLIC PRACTICE
2. COMMERCE AND INDUSTRY
3. EDUCATION/ACADEME
4. GOVERNMENT
Branches of Accounting
1. BOOKKEEPING
2. FINANCIAL ACCOUNTING
3. MANAGEMENT ACCOUNTING
4. COST ACCOUNTING
5. FINANCIAL MANAGEMENT
6. GOVERNMENT ACCOUNTING
7. AUDITING
8. TAXATION
9. ACCOUNTANCY RESEARCH
10. FORENSIC ACCOUNTING
11. INTERNATIONAL ACCOUNTING
Forms of Business Organization
Sole Proprietorship. This business organization is owned by one person called the
proprietor who generally is the manager. The owner receives all profits and absorbs all
losses and is solely responsible for the debt of the firm.
4. Statement of Cash Flow. This provides information about cash inflows (receipts) and
cash outflows (payments) of an entity for a given period of time which are being
classified into : a) Operating Activities ; b) Investing Activities ; and c) Financing
Activities.
8. Management. They utilize information to set goals for their organization, to evaluate
results of past economic decision and to control activities of the entity. Managers use
financial information for planning, controlling and for decision-making purposes.
Account Titles
Account Titles are identifications or brief descriptions of items that fall to some kind , class
or nature. In recording business transactions, the elements of financial statements are to be
assigned with their individual names called “account titles”
Classification of Account Titles:
a) Balance Sheet Accounts- (financial position), referred to as real accounts
b) Income Statement Accounts- (performance), referred to as nominal or temporary
Accounts
ASSETS-are classified only into two, namely current assets and non-current assets.
Current Assets- refer to all assets that are expected to be realized, sold or consumed within the
enterprise’s normal operating cycle. Operating cycle is the interval of time from the date of
acquisition of merchandise inventory; sell inventory to customers and the ultimate collection of
cash from the sale.
Cash- the account title used to describe money, either in paper or in coins and money substitutes
like checks, postal money orders, bank drafts and treasury warrant. “Cash on Hand” is the account
title used when cash is within the premise of the business and “Cash in Bank” if deposited in the
bank.
Notes Receivable- this is a promissory note that is received by the business from the customer
arising from rendering of services, sale of merchandise, etc.
Accounts Receivable- the account title for amounts collectible arising from services rendered to
a customer or client on credit, or sale of goods to customers on accounts.
Allowance for Bad Debts- this is an “asset offset” or a “contra-asset” account. It provides for
possible losses from uncollected accounts. Though this is not actually an asset, it is classified as
such because it is shown as a deduction from the Accounts Receivable which is a Current Asset
Account.
Accrued Interest Income- the amount of interest earned on a Notes Receivable which is not yet
collected. (If the note is interest-bearing)
Advances to Employees- the account title for amounts collectible from employees for allowing
them to make cash advances which are deductible against their salaries or wages.
Inventories- are assets which are: held for sale in the ordinary course of business; in the process
of production for such sale; or in the form of materials or supplies to be consumed in the
production process or in the rendering of services.
Prepaid Expenses- account title for expenses that are paid in advance but are not yet incurred
or have not yet expired such as Prepaid Rental, Prepaid Insurance.
Unused Supplies- an account title for cost of stationery and other supplies purchased for use
but are left on hand and still unused.
Non-Current Assets. - are all other assets not classified as current assets.
Land- an account title for the site where the building used as office or store is constructed.
Building- account title for a finished construction owned by the business where operations and
transactions took place.
Equipment- includes calculators, typewriters, adding machine, computers, steel filing cabinets
and the like. If these are used in the office, the account title is “Office Equipment” and if used in
the store, “Store Equipment”. Trucks, jeeps, vans, automobiles and other kinds of motor vehicles
bear the account title as “Transportation Equipment” and if some vehicles are used exclusively
for delivering goods, the account title is “Delivery Equipment”
Furniture & Fixtures- includes chairs, tables, counters, display cases and the like.
Accumulated Depreciation- this is an “asset offset” or “contra-asset” account. This is called a
“Valuation Account” which is shown as a deduction from property and equipment or cost of the
fixed assets.
LIABILITIES- are classified only into two, namely: current liabilities and non-current liabilities.
Current Liabilities- are financial obligations of the enterprise which are (a) expected to be settled
in the normal course of the operating cycle, (b) due to be settled within one year from the balance
sheet date.
Accounts Payable- an account title for a financial obligation of an enterprise that constitutes an
oral or verbal promise to pay.
Notes Payable (short -term) - same as Accounts Payable in nature but only the obligation is
evidenced by a promissory note. The enterprise is the one who issued the note.
Accrued Expenses- these are expenses incurred by the enterprise but are not yet paid. This
normally occurs when the accounting period ended such as rent, salaries, interest, taxes payable,
etc.
Pre-collected or Unearned Income- this is an account title for an income collected or received
in advance and are not yet considered as “earned”
Non-current liabilities- are financial long term obligations of an enterprise which are due and
payable for more than one year. This usually occurs in a corporate form of business organization.
Notes Payable (long term)- same nature with that of Notes Payable 9short-term) but only, this
requires payment for more than a year.
Mortgage Payable- a financial obligation of the enterprise which requires a fixed or tangible
property to be pledged as a collateral to ensure payments.
OWNER’S EQUITY
Capital- this is the center of the owner’s concern because this may increase or decrease at
anytime as a result of business operations. In the normal course of operation, owner’s equity will
be increased by “income” and decrease by “ expenses”.
Withdrawal (Drawing or Personal)- refers to the amount or cash value of the property that the
owner has invested in the enterprise but later withdrawn for personal use.
Income & Expense summary- this is a temporary account created at the end of the accounting
period where Income and Expenses are temporarily closed to this account.
INCOME or REVENUE
Sales- in general, this represent revenue derived from the sale of merchandise.
Service Income- in general , this is the account title used for all types of income derived from
rendering of services. Sometimes the account title used is “Service Revenue”. Other specific
income account titles used are:
Professional Income- the account title generally used by professionals for income earned from
the practice of their profession or may be specified as “Accounting or Auditing Fees Income” for
accountants, Legal Fees Income” for Lawyers, “Dental Fees Income” for Dentists, “Medical Fees
Income” for doctors, etc.
Rental Income- for income earned on buildings, space or other properties owned and rented out
by the business as the main line of its activity.
Interest Income- for income received by the business arising from an amount of money borrowed
by a customer and is usually covered by a promissory note. This is typical in a lending institution.
Miscellaneous Income- for income earned by the business which is not the main line of its
activity and could not be clearly classified.
EXPENSES
Cost of Sales or Cost of Goods Sold - cost to produce and sell the goods.
Rent Expense- for the amount paid or incurred for use of property or premises.
Repairs and Maintenance- for expenses incurred in repairing or servicing the buildings,
machineries, vehicles, equipment, etc., which are owned/used by the business.
Office Supplies Expense- the stationery, envelopes, clips, fastener, etc, used in the office will
bear the account title as “Office supplies”; if use in the store “Store supplies”.
ACCOUNT TITLE
The difference between the total debit and total credit of an account is called an “Account
Balance”. If the total of the debit side exceeds the total of the credit side, the account is said to
be in a “Debit Balance”. Conversely, if the total of the credit side exceeds the total of the debit
side, the account is said to be in a “Credit Balance”. If the debit total equals with that of the credit
total, the account is said to be “In-Balance” or “Closed Account”.
Accounting Equation
The accounting equation is the most basic tool of accounting. This equation presents the
resources controlled by the enterprise, the present obligations of the enterprise and the residual
interest in the assets. It states that the assets must always equal liabilities and owners’ equity
which also implies that the Assets of the business was provided by the creditors and the owners.
The basic accounting model is:
Additions and subtractions in the recording process are done by “side positioning”.
Account with normal balance of debit, such as Asset, is increased by entering the amount on the
debit side and is decreased by entering the amount on the credit side. Account with normal
balances of credit such as Liabilities & Owner’s Equity are increased by entering the amount on
the credit side, while it is being decreased if entered on the debit side . Thus the rule of debit and
credit is stated as follows:
Effects of Transactions
A business transaction has a dual but self-balancing effect on the accounting equation . The
effect of a transaction to the equation may be grouped into nine types as follows:
1) Increase in Assets= Increase in Liabilities
2) Increase in Assets= Increase in Owner’s Equity
3) Increase in One Asset= Decrease in another Asset
4) Decrease in Assets = Decrease in Liabilities
5) Decrease in Assets = Decrease in Owner’s Equity
6) Increase in Liabilities = Decrease in Owner’s Equity
7) Increase in One Liability = Decrease in another Liability
8) Increase in Owner’s Equity = Decrease in Liabilities
9) Increase in One Owner’s Equity = Decrease in another Owner’s
EXERCISES
1. Set up “T” accounts for each of the following : Cash on Hand, Accounts Receivable,
Photographic Supplies Inventory, Photographic Equipment, accounts Payable, Siena Go Capital,
Siena Go, Drawing, Service Income, Utilities Expense, Rent Expense and salary expense.
June 1- The owner, Siena invests P160,000 cash and photographic Equipment P
100,000.
3- Rendered photographic services on account, P20,000.
4- Purchase photographic supplies on account P 30,000.
9- Collected P 16,000 cash from a customers ‘ account.
10- Paid light and water P 7,000.
14- Withdrew P 10,000 for personal use.
18- Rendered photographic services for cash P 30,000.
20- Paid P 12,000 cash on the June 4 account.
23- Paid rental fee for the month , P 6,000.
30- Paid salaries to employees, P 16,000.
2. On the space provided, indicate a checkmark as to the effect on the balances of the following
accounts.
Increased Decreased
Sample: Rent Expense account was debited ___/_____ _________
1. Accounts Payable account was debited. ________ _________
2. Notes Receivable account was debited. ________ _________
3. Cash in Bank account was credited ________ _________
4. Prepaid Insurance account was credited ________ _________
5. Truce , Drawing account was debited ________ _________
6. Petty Cash Fund account was debited. ________ _________
7. Professional Income account was credited ________ _________
8. Utilities Expense account was debited. ________ _________
9. Truce , Capital account was credited ________ _________
10. Accounts Receivable was credited. ________ _________
3. The formation of an Accounting equation is presented below: Fill in the amounts in each of the
Accounting Value affected by the given transactions. For your guide, the “Balances” of each value
is already given and transaction. No. 1 is answered. Use a parenthesis sign for the decrease.
3. Using the guide presented below, analyze every transaction by indicating the change(+or-)
before each amount. Business transaction a was done as an example . Show the totals after the
last transaction. Judy Santamaria opened a ladies dormitory which she named Judy House.
During the first month of operations, she had the following transactions:
a. Judy invested P 150,000 to start her business venture.
b. She paid P 70,000 to cover one year rental of two big rooms
c. She purchased beds and cabinets on accounts, P 38,000
d. She received advance rental deposits of P 30,000
e. She received proceeds of bank loan intended for room improvements P 30,000.
f. She paid cash for utilities expense P2,000.
g. She withdrew cash of P 4,000 for personal use.
h. She paid half of bank loan.
4. Arief Aerobics Studio conducts aerobics classes. Presented below are transactions during its
first month of operations:
Required: Record all necessary journal entries based on the transactions above.
6. Fred McCarthy started his company, Cheapo Tours to take customers to the Grand Canyon
from Las Vegas. The company began operations in March. The following transactions occurred
during the company’s first month:
Required: Record all necessary journal entries based on the transactions above.
7. In August, Maria Chen started her new taxidermy business: The Right Stuff Inc. The business
focused on preserving family pets after they passed away. The following transactions occurred
during August:
August 1 Maria invested $1,000 cash in exchange for 250 common shares.
August 1 Rented work space. Paid $600 for the month of August.
August 2 The company borrowed $5,000 in the form of a long-term bank loan. The money was
planned to purchase much of the equipment that would be needed.
August 5 Purchased equipment: $4,000. Paid $1,000 with the rest payable at the end of August.
August 10 Received and completed first taxidermy job – a poodle named Rex. Received $400
cash.
August 12 Purchased supplies on account: $200.
August 13 Completed second taxidermy job: A chocolate Labrador retriever named KitKat: $600
on account.
August 14 Maria took a cash dividend of $500 to pay for personal expenses.
August 19 Received and paid the utilities bill, $200.
August 20 Paid for the August 5 equipment purchase.
August 21 Received a telephone bill: $200. Did not pay yet.
August 24 Received payment for the August 13th job.
August 27 Completed third taxidermy job: A calico cat named Spot: $250. Received payment.
August 31 Paid salaries of $1,000.
Required:
a.) Record all necessary journal entries based on the transactions above.
b.) Post the transactions to T-Accounts.
8. Lucky Carpet Cleaner had been operating for several years. On March 1, the company had the
following account balances: Cash $5,000; Accounts Receivable $300; Equipment (net) $3,000;
Accounts Payable $500; Bank Loan $2,000; Lucky, Capital.
Required:
a.) Record all necessary journal entries based on the transactions above.
b.) Post the transactions to T-Accounts
9. Freida’s Ferns is a Landscaping Business. The company had the following account balances
entering February: Cash $1,000; Accounts Receivable $500; Supplies $1,500; Equipment
$12,000; Accumulated Depreciation – Equipment $7,000; Accounts Payable $400; Bank Loan
$2,600; Freida, Capital.
Required:
a.) Record all necessary journal entries based on the transactions above.
b.) Post the transactions to T-Accounts
10. Check (/) the appropriate column to determine whether the statement is TRUE or FALSE.
___________3. Posting reference (PR) facilitates cross-referencing between the journal and the ledger.
___ ______4. A complete record of information about a particular business transaction is initially recorded
in the ledger.
___________6. Posting refers to the process of transferring data from the ledger to the journal.
___________10. The chart of accounts shows the account titles a particular company uses.
___________15. There is no indention for the accounts debited and credited in a journal entry.