MODULE A C C O U N T I NG

1 CYCLE REVIEW
Accounting is the language
of business
-Warren Buffet

In this Module
 Introduction to Accounting
 Financial Statement

Accounting is called the “language of business”, it is a means of

communicating information about a business. It involves the use of generally
accepted accounting principles, analysis and interpretation of bookkeeping
records in order that income and financial position will be stated fairly. It
encompasses both the maintenance of accounting records and also the
preparation of various financial statements that enable businesses to evaluate
profitability and solvency. All of these pieces of information are provided by
the accounting process and as business students who are expected to work in
the field of business or engage in business itself, it is imperative for you to
study the basic concepts and principles of accounting.

At the end of this module, you should be able to

1. Recall the basic concepts and principles in basic accounting.
2. Apply some of the steps in accounting cycle.
3. Prepare financial statements
 OBJECTIVES

 Define accounting
 Discuss the basic types of financial statements.
 Identify the accounting principles and the basic elements of Financial
Statements.
 Examine the rules of debit and credit.
 Analyze financial transactions and its effect in the accounting
equation.
 Prepare journal entries, post transactions to the general ledger (T-
account) and preliminary trial balance

INTRODUCTION

Welcome to Lesson 1 of Module 1! This lesson will provide you with

the rationale and the basic concepts of accounting. Series of activities and
learning tasks are designed for you to review your understanding of the
previous subject. There are exercises that will require you to define
accounting, discuss the basic elements and types of financial statements,
review the rules of debit/credit and other important accounting principles.
Lastly, required problem is included for you to apply some of the steps in
accounting cycle. Get started, enjoy and keep learning!
 Definitions of Accounting

Accounting is a service activity. Its function is to provide quantitative

information, primarily financial in nature, about economic entities that is
intended to be uselful in making economic decision
- Accounting Standards Council
Accounting is the process of identifying , measuring and communicating
economic information to permit informed judgements and decisions by
users of the information
- American Accounting Association
Accounting is the art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and event which
are, in part or at least, of financial character, and interpreting the results
thereof
- American Institute of Certified Public Accountants

BASIC ACCOUNTING EQUATION

Assets = Liabilities + Equity

Accounting equation is a tool that is used in order to arrive
financial statements. This equation presents the resources controlled
by the enterprise (Asset), the present obligations of the enterprise
(Liability), and the residual interest in the assets (Equity).
 USERS OF FINANCIAL STATEMENTS

1. Investors- An investor is any person or other entity (such as a firm

or mutual fund) who commits capital with the expectation of
receiving financial returns
2. Employees- a person employed for wages or salary, especially at
nonexecutive level.
3. Lenders- lender is an individual, a public or private group, or a financial
institution that makes funds available to another with the
expectation that the funds will be repaid
4 Suppliers- is a person or business that provides a product or service to
an entity
5. Customers- a person or organization that buys goods or services from
a store or business
6. Government -the political system by which a country
or community is administered and regulated.
7. Public- relating to, or affecting all the people or the whole area of
a nation or state

THEORY AND RULES OF DEBIT AND CREDIT

Debit – Left side or the “value received”

Credit – Right side or the “value parted with”

DEBIT = CREDIT
The amount entered on the debit side of an item’s account will always
have a corresponding amount entered on the credit side on the credit side.
Left will always equal to right
There are six (6) financial statements based on the Philippine Accounting
Standards.
Balance Sheet
Income Statement
Statement of Changes in Equity
Statement of Cash Flows
Notes to Financial Statements
Is a statement which shows the
financial position or condition of
an entity by listing the assets,
liabilities, and owner’s equity as at
a specific date. The information
needed for this statement are the
net balances at the end of the
period, rather than the total for the
period as in the income statement
Is a statement showing the
performance of the enterprise for
a given period of time. It
summarizes the revenues earned
and expenses incurred for that
period of time.
It summarizes the changes that
occurred in owner’s equity. This
statement is now a required
statement as per revised by the
Philippine Accounting Standards.
Changes in an enterprise’s equity
between two balance sheet dates
reflect the increase in its net
assets during the period.
Provides information about the
cash receipts and cash payments
of an entity during a period. It is
formal statement that classifies
cash receipts ( inflows) and cash
payments (outflows) into
operating, investing, and
financing activities.
The notes to the financial
statements are a required,
integral part of a
company's external financial
statements. They are required
since not all relevant financial
information can be communicated
through the amounts shown (or
not shown) on the face of the
financial statements. The notes
are also referred to as footnote
disclosures. Generally, the notes
 are the main method for a
company to comply with the full
disclosure principle.

Comparative Financial Statement Financial statements that show

more than the current year's
amounts. For example, it is
generally accepted that a
corporation's income statement
will show the most recent three
years of results. This provides the
reader with two years of past
amounts as a frame of reference
for the most recent year.
Comparative balance sheets
typically show the most recent
two years.

ELEMENTS OF FINANCIAL STATEMENTS

ASSETS
Current Assets  are assets that can be realized (collected,
sold, used up) one year after year-end
date. Examples include Cash, Accounts
Receivable, Merchandise Inventory,
Prepaid Expense, etc
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 Receivables  are amounts due from clients
supported by promissory notes.
Inventory  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  are the investments made by the
investments 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. Examples include
Property, Plant and Equipment
(equipment, furniture, building, land), long
term investments, etc.
Property, Plant and  are long-lived assets which have
Equipment 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
substance. Examples include franchise
and copyright.
LIABILITIES
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.
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 year-end date. Examples include
Notes Payable, Loans Payable, Mortgage
Payable, etc.
OWNER’S EQUITY  is the residual interest of the owner from
the business. It can be derived by
deducting liabilities from assets.
Account Titles used for Equity Account.
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  is the Increase in resources resulting from
performance of service or selling of goods.
Example of Income Accounts. Service
revenue for service entities, Sales for
merchandising and manufacturing
 companies
Expense  refers to the money spent and the costs
incurred by a company in pursuing revenue.

ACCOUNTING CYCLE

Step 1
Journalizing

Posting Step 2

Trial Balance Step 3

Adjustments Step 4

Worksheet
Step 5

Financial
Statements Step 6

Closing Entries Step 7

Post-Closing Trial Step 8

Balance

Step 9
Journalizing
STEPS IN THE ACCOUNTING CYCLE
Only the steps 1-3 are discussed here

Through the use of specialized journals (such

as those for sales, purchases, cash receipts,
and cash disbursements) and the general
Step 1 - Preparation journal, transactions and events are entered into
of Journal Entries the accounting records. These are called the
books of original entry.
 Debits and Credits are an integral part of the
journalization process. In accounting, debits
or credits are abbreviated as DR and CR
respectively.
 When to Debit and when to Credit: An
increase in an asset account is called a debit
and an increase in a liability or equity account
is called a credit. Likewise, if we decrease an
asset account we credit that account. On the
other side of the equation, if if we decrease a
liability or equity account we debit those
accounts.

Rules on Debits and Credits

• The name of the account to be debited is
always listed first. The debited account is
listed on the first line with the amount in the
left side of the register.
• The credited account is listed on the second
line and is usually indented. The credited
amount is recorded on the right side of the
register.
• The total amount of debit should always equal
the total amount of credit. Other side of the
equation, if we decrease a liability or equity
account, we debit those accounts.

Application of rules of Debit and Credit

(Business transactions are analyzed from the view
point of business)

Example:

Juveliza Manliguis bought a car for cash, P850,000

 The value received is the “car”
The value parted with is the “Cash

Debit: Car, P850,000

Credit: Cash P850,000

Another example:

Jandy Abanto sold a car for cash, P600,000

The value received is the “cash”

The value parted with is “cash”

Debit : Cash P600,000

Credit: Car P600,000

Step 2 – Posting The summary of individual transactions (in the

general journal) are then posted from the journals to
the general ledger. Nothing should ever get posted
to the ledgers without first being entered in a journal.

Step 3 - Unadjusted At the end of an accounting period (for example, one

Trial Balance month or one year) the working trial balance is
prepared. This involves copying each account name
and account balance to a worksheet (working trial
balance). The resulting first two columns of the
worksheet are called the unadjusted trial balance. In
the preparation of the unadjusted trial balance, the
balances in all the general ledgers at the end of the
reporting date are forwarded to the appropriate
column.
Sample of Financial Statements

Kapalong Laundry Services

Income Statement
For the year ended, Dec. 31, 2021

Revenue
Laundry Income P80,000

Operating Expenses
Uncollectible Accounts P 350
Depreciation Expense 2,500
Salaries Expense 10,000
Rent Expense 5,000
Utilities Expense 12,000
Laundry Supplies Expense 20,000
Taxes and Licenses 4,000
Advertising Expense 3,000
Interest Expense 1,000 57,850
Profit (loss) P22,150

Kapalong Laundry Services

Balance Sheet
As of Dec. 31, 2021

ASSETS
Current Asset:
Cash in Bank P743,000
Accounts Receivable P35,000
Less:: Est. Uncollectible Accounts 350 34,650
Laundy Supplies 70,000
Total Current Assets 847,650
Non-Current Assets
Property and Equipment
Laundry Equipment 150,000
Less: Accumulated depreciation 2,500
Total Non-Current Assets P147, 500
TOTAL ASSETS P995,150
 Continuation of Balance Sheet

LIABILITIES
Current Liabilities:
Notes Payable P100,000
Accounts Payable 30,000
Accrued Advertising 3,000
Total Current Liabilities P 133,000

OWNER’S EQUITY
Santos, Capital 862, 150
Total Liabilities and Owner’s Equity P995,150

Kapalong Laundry Services

Statement of Changes in Owner’s Equity
For the year-ended Dec. 31, 2021

S, Santos, Owner’s Equity- Jan 1, 2021 P850,000

Add: Additional Investment
Profit P22,150 22,150

Total 872,150
Less: Withdrawals 10,000

S. Santos, Owner’s Equity- Dec. 31, 2021 P862,150

(Note! Only three out of six financial statements are given emphasized
and discussed here. Remaining statements will be discussed in higher
year subject.

Congratulations! That was tough! But as expected, you managed to

complete all the activites and learning tasks for Lesson 1 of Module 2.
Hopefully, concepts and key ideas presented will be retained in mind for the
succedding lessons to accomplish!
You are now prepared to proceed to the next lesson. Keep working !
Accounting is the art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and event which are,
in part or at least, of financial character, and interpreting the results thereof

The basic accounting equation is Assets= Liabilities and Equity

Debit is the value received and credit and the value parted with

Steps in Accounting Cycle: Journalizing, Posting, Trial Balance,

Adjustments, Worksheet, Financial Statements, Closing entries, Post
Closing Trial Balance, Reversing Entries
Financial Statements include: Balance Sheet, Income Statement, Changes
in Equity, Cash Flows, Notes to Financial Statements

Asset What the business owns

Credit Value parted with

Debit Value received

Financial Statement Set of statement of accounts of the business

Liabilities What the business owes

Equity Residual interest of assets after minus liabilities

 Ballada, W., et al (2014-2015). Partnership and Corporation
Accounting.
Manila, Philippines
 Lopez, R. (2013-2015). Partnership and Corporation (Simplified
Procedural Approach). Ma-a, Davao City. Lopez Publishing.

 Soriano, F. (2011). Partnerships and Corporations (Law Application) for

Business Students. GIC Enterprise & Co.Inc., Recto Avenue,
Manila, Philippines

 Valencia, E., et al (2004). Partnership and Corporation Accounting.

Valencia Educational Supply. Baguio City, Philippines

 Chua Jr., . (2004). Fundamentals of Accounting Principles: Partnership

Corporation and other Related Accounting Topics.