Accounting - a systematic and comprehensive way a particular entity to transfer assets or provide

of recording the business’ financial transactions. It is services to other entities in the future as a result of
the process of past transaction or events.
recording,classifying,summarizing,reportin g and
Equity – is the residual interest in the assets of an
interpreting information about the economic activities
entity that remains after deducting it liabilities. In a
of an organization.
business enterprise, the equity is the ownership
Bookkeeping - Is the recording part of accounting interest
that uses systematic procedures In listing
Basic Components of an Income Statement
transactions.
 Revenue
Bookkeeper - is the one who handles the basic
 Expenses
accounting functions of a business that may include
 Net Income
recording of the various transactions.
Income Statement - captures revenue, expenses,
Identifying -This involves selecting economic events
and net income over a period of time.
that are relevant to a particular business transaction.
The economic events at an organization are referred Important elements of an income statement:
to as transactions.
1. Revenue - is the monetary compensation
Recording – refers to the process of making records given to the organization in exchange for
of all the transactions that the business made in a goods and services provided
certain period of time 2. Expenses - are the cost incurred by the
organization in providing the goods and
Summarizing - It is the process that involves
services to its customers.
grouping of various accounts referred to the
3. Net Income (Losses) - is the difference
classifying process where the accounts are grouped
between income and expenses, depending on
into assets, liabilities, owner’s equity, revenue, cost
which is greater
and expenses taken from the general ledger.
Cash Flow Statement – shows how changes in
Reporting - is the process wherein the management
balance sheet counts, shows how income affects cash
presents reports to the company investors as to
and cash equivalents and breaks the analysis down to
where the invested money is going.
operating,investing and financing activities
Analyzing – is the process of drawing out both the
Accounting Equation – Assets = Liabilites +
positive and negative points so that the financial
performance of the company will be improved
and where profit , sales and cash are being
compared to be able to draw the needed
conclusions within the given period of time.

Components of Financial Statements

Balance Sheet – It reports the financial position

of the business at particular point of time.

Income Statement – It reports financial

performance of business over a period and
comprise of Revenue, Expenses.

Cash Flow Statement – It shows changes in

financial position of business from perspective of
movement of cash into and from business

Elements of the Balance

Assets – are probable future economic benefits Owner’s Equity

obtained or controlled by a particular entity as a result
History and Origin of Accounting
of past transactions or events

Liabilities - are probable future sacrifices of

economic benefits arising from present obligations of
  The earliest accounting records were found
amongst the ruins of ancient Babylon, Assyria
and Sumeria, which date back more than
7,000 years
External Users – Lenders, Investors, Government,
Consumer Groups, External Auditor, Customers
Internal Users – Managers, Officers, Internal
Auditors, Sales Staff, Employees, Owners
Generally Accepted Accounting Principle
(GAAP)
1. BUSINESS ENTITY PRINCIPLE - In this
principle, there is a separation and distinction
of transactions between the business
enterprise and its owner or investor.
2. Going-Concern Principle - This means that
the business is expected to continue
indefinitely
3. Time Period Principle - The financial
statements are usually divided into specific
time intervals. The business should report the
financial statements appropriate to a specific
period
4. Monetary Unit Principle - Any amount
involved in the business is stated into a single
monetary unit.
5. Objectivity Principle - In this concept,
financial statements of an organization must
be presented with supporting solid evidence
and the intent behind this principle is to keep
the management and the department of
accounting from making financial statements
that are affected by their opinions and biases
6. Cost Principle - This is an accounting
principle wherein accounts should be recorded
initially at cost as well as assets at their
respective cash amounts at the time the asset
was purchased
7. Accrual Accounting Principle - In this
principle, revenue should be recognized when
earned regardless of collection. Same goes
with expenses which are recorded when
incurred regardless of payment. But in the
Cash Basis Principle, revenue is logged when
collected, and expenses should be recorded
when paid. A Cash Basis is not generally an
accepted principle today
8. Matching Principle - In this principle, cost
should be matched with the revenue
generated. It requires that the expenses
incurred during a period be recorded in the
same period in which the related revenues are
earned
9. Disclosure Principle - All necessary,
relevant, and material information should be
reported in this principle for transparency.
10.Conservatism Principle - This is also known
as prudence. Assets and income should not be
overstated while liabilities and expenses
should not be understated. In case of doubt,
expenses should be recorded at a higher
amount. Revenue should be recorded at a
lower amount.
11.Materiality Principle - This includes all
assets that are immaterial to make a
difference in the financial statements which
the company should record as an expense.
Four elements that affect equity:
a. Investment - is an asset or item acquired with
the goal of generating income or appreciation.
b. Withdrawal - occurs when funds are removed
from an account for personal use.
c. Revenue - is the total amount of income
generated by the sale of goods or services related
to the company’s primary operations.
d. Expenses - is the cost of operations that a
company incurs to generate revenue.
To maintain this equation, transactions
affecting financial position accounts may have
the following effects:
1. Increase in Assets = Increase in Owner’s
Equity
Example: (Assets invested by the owner )
2. Increase in Assets = Increase in
Liabilities
Example: (Assets purchased on account)
3. Increase in one Asset = Decrease in
another Asset
( No effect in total assets)
Example: The asset purchased for cash
4. Decrease in Assets = Decrease in
Liabilities
Example: Payment of liability
5. Decrease in Assets = Decrease in
Owner’s Equity Example: Cash withdrawal
by the owner
6. Increase in Liabilities = Decrease in
Owner’s Equity Example: ( Accrual of
expenses)
Current Assets - are assets that can be collected,
sold, and even used up to one year after year-end
date.
Examples of Current Assets are:
 1. Cash - is money on hand, or in banks, and
other items considered as a medium of
exchange in business transactions.
2. Accounts Receivable - are amounts due
from customers arising from debts. Amounts
due from customers arising from credit sales
or credit services
3. Notes Receivable - are amounts due from
clients supported by a written note or promise.
4. Inventories - are assets held for resale in the
course of the business.
5. Supplies - are items purchased by an
enterprise that is unused as of the reporting
date.
6. Prepaid Expenses - are advance payment
for expenses. Ex . Prepaid rent and insurance
7. Accrued Income - is an income or revenue
earned by the firm but not yet collected.
8. Short-term Investments - are the
investments made by the company that is
intended to be sold immediately.
Non-current Assets - are assets that cannot be
collected, sold, and even used up to one year after
year-end date.
Examples of Non-Current Assets
1. Land - Real property owned and in use in the
normal operation of business
2. Building - Physical structure on land. These
are used in business
3. Accumulated Depreciation –Building -
Cumulative part of the cost of the building that
has been recognized as expense.
4. Property, Plant, and Equipment - are long-
lived assets that have been acquired for use in
operations. Accumulated Depreciation -
Equipment
5. Long term Investments - are the
investments of the firm made for long term
purposes.
Tangible Assets - are physical assets in the form of
cash, furniture and fixtures, and supplies.
Intangible Assets - are non-physical assets in the
form of trademarks and patent
Current Liabilities - are those that reach its due
date for payment (paid, recognized as revenue) within
one year after year-end date.
Examples of Current Liabilities
1. Accounts Payable - are amounts due or
debts to the suppliers for goods purchased or
for services received on account.
2. Notes Payable - are amounts due to third
parties supported by a written note or promise
3. Accrued Expenses - are treated as liabilities
since these are the expenses that are incurred
but not yet paid (e.g. salaries payable, taxes
payable).
4. Unearned Income - is cash or payment
collected in advance
Non-current Liabilities - are those that do not
reach its due date for payment, (paid, recognized as
revenue) within one year after year-end date.
Examples of Non Current Liabilities
1. Loans Payable - is a contract wherein the
owner of the property gives the right to use it
to another party in exchange for an interest
payment and gives back the property at the
end of their contract.
2. Mortgage Payable - is the liability of a
property owner to pay a loan that is secured
by property and from the borrower’s point of
view. The mortgage is considered as long-
term liability.
Equity or Owner’s Equity - is the owner’s claims in
the business. It is part of the total assets that the
owners of the company fully own.
There are two (2) important elements that
comprised the equity:
 Capital - is the worth of cash and other
assets invested in the business.
 Drawing - is an account debited for assets
withdrawn by the owner for personal use from
the business.
Revenue or Income - is the money that the
company earns from its regular sales of products or
services. This is earned by the company through sales
of products or services.
Expenses - are the money that the company spends
to produce the goods or services it sells.
Examples of expense accounts are:
 Cost of Sales / Cost of Services - The
direct cost of the products sold or for he
services rendered by the entities.
 Salaries expense - Salaries for services
rendered by the employees
 Interest expense - interest on debts or
monetary obligations
 Utilities expense - Includes telephone, water
and electricity used
 Transportation expense - Fare for trips and
travels. Cost of gasoline and oil used for
company vehicles.
  Depreciation Expense - The portion of the
cost of building and equipment allocated to
one accounting period.
 Representation Expense -Amount paid to
restaurants, hotels for treating customers and
others.

Chart of Account - is a listing of all accounts used

by companies in their financial records

Books of Accounts - serve as a company’s financial

memory and comprise of every single business
transactions and financial information of a company.

-is a set of books used by accountants to record

transactions and events that are financial in nature

Journal - is the “book of original entry” where

you can find the initial record of the transactions of a
firm

-is a chronological record of company’s transactions

listed by date

Journalizing - Entering transaction data in the

journal

Ledger - is “the book of final entry” contains the

total or balance of each account.

Posting - The process of recording in the ledger

Two types of Journal

1. General Journal - is the most basic journal.

It is composed of spaces for dates, account
titles and explanations, references, and two
columns for the amount.
2. SPECIAL JOURNAL - designed for recording
specific types of transactions of a similar
nature

Cash Receipts - journal records all cash collections.

Cash Disbursement - journal records all cash

payments.

Purchase Journal - records all merchandise bought

on account.

Sales journal/Service Journal - records all

merchandise sold on account.

General Ledger – is grouping of all accounts used in

the preparation of financial statements.

Subsidiary Ledger

 Accounts Receivable Subsidiary Ledger -

is a set up ledger page for each customer.
 Accounts Payable Subsidiary Ledger - is a
set up ledger page for each creditor, where
you write supplier’s name and address,
assigning a page number or reference.