ACCNF01B - Fundamentals in Accounting
Users of Accounting Information
and Business Finance
Topic 1: Introduction to Accounting
I. Definition of Accounting
Accounting – Language of Business:
Quantifies Business Communications
Accounting is a service activity. Its
function is to provide quantitative
information, primarily financial in nature,
about economic entities that are intended
to be useful in making economic
decisions, and in making reasoned
choices among alternative courses of
action. (AICPA).
Business – accumulates financial data
through its various activities
Accounting – processes the financial
data and prepares financial reports
Users – reads the reports and makes
decisions
II. Relevance of Accounting
Accounting is the backbone of
any company because every
business needs reliable data to
make informed decisions
● No business could operate very
long without knowing how much it
was earning and how much it was
spending. Accounting provides
the business with this
information and more.
● It's like the scorecard of the
business, which makes the
accountants the scorekeepers.
● Without accounting a business
couldn’t function optimally. It
wouldn’t know where it stands
financially whether it is making a
profit or not and it wouldn’t know
its financial situation.
III.
Users are also called the stakeholders
Internal users, employed internally, are
- Owner
- Managers
External users, externally employed, are
- Investors
- Creditors
- Customers
- Government
1. Owner – “Is the business
profitable?”
pioneers, established and
capitalized the business
2. Investors – “Is the business
profitable?”
when the business is already
established
3 Types of Investment
1. Money
2. Property
3. Service/ Industry - talent and/or
capacity
3. Customers – “Will the business
be able to continuously supply
goods?”
will the business be able to to
continuously supply goods and
services (window dress)
4. Managers – “Is the business
operating profitably?”
operate effectively and efficiently
- Effectivity means working
directed toward the goals &
objectives of the company
- Efficiency means
operating at the least
possible resources/ cost
5. Lenders/ Suppliers – “Will the
business be able to pay its debt/
account?”
 - Lenders are creditors
which are the banks
- Suppliers provide supplies
usually on account, hence
having the same role as
lenders.
6. Government – “Is the business
paying the right taxes?”
BIR - Bureau of Internal Revenue
SEC - Securities and Exchange
Commission
other government agencies
concerned with taxes
IV. Three Main Types of Business
Service
- Selling people’s time
- Hiring skilled staff and selling their
time
- Examples are barber shops,
airlines, internet shops
Merchandising
- Buying and Selling products
- Buying a range of raw materials
and manufactured goods and
consolidating them, making them
available for sale in locations near
to their customers or online for
delivery
- Examples are shoe store, book
store, drug store
Manufacturing
- Designing products, aggregating
components, and assembling
finished products
- Taking raw materials and using
equipment and staff to convert
them into finished goods
- Examples are food processors,
garment factories, vehicle
assembly
V. Forms of Business
Organizations
Sole Proprietorship
- The single owner called the
proprietor who generally is also the
manager, receives all profits
absorbs all losses, and is solely
responsible for all debts of the
business
Partnership
- Operated by two or more persons
who bind themselves to contribute
money, property, or industry to a
common fund, with the intention of
dividing the profits among
themselves
Corporation
- A business owned by its
stockholders is an artificial being
created by operation of law, having
the rights of succession and the
powers.
VI. Types of Financial Statements
Statement of Financial Position
(Balance Sheet)
- shows how the wealth of the
business stands by enumerating
the assets, liabilities, and net
worth of the business.
Income Statement
- shows how wealth is produced by
listing the revenues earned and
expenses incurred by the business
Statement of Owner’s Equity
- shows why the net worth changed
by listing the activities that caused
it to increase or decrease.
Statement of Cash Flows
- shows what happened to the cash
by enumerating the activities of
cash received and cash used by
the business.
VII. The Accounting Equation
Balance Sheet: Assets = Liabilities +
Owner’s Equity
Assets – resources controlled by the
enterprise
Liabilities – present obligation of the
enterprise
Owner’s Equity – residual interest in the
assets
Income Statement: Profit = Revenue -
Expense
Revenue > Expenses = Profit
Revenue < Expense = Loss
Topic 2: The Accounting Equation
The Account
- The basic summary device of
Accounting
- A separate account is maintained
for each element that appears in
the balance sheet and income
statement account. Thus an
account may be defined as a
detailed record of the increase and
decrease of each element
Abbreviations:
BS – Balance Sheet
IS – Income Statement
T – T-Account
Dr – Debit
CR – Credit
Rules of Debit and Credit
1. The account title is placed on the
topmost part of the T- Account
2. Debits are always on the left side,
and credits are always on the right
side.
3. Assets
- The increase is on the debit
side and the decrease is on
the credit side.
4. Liabilities and Owner’s Equity
- The increase is on the
credit side and the
decrease is on the debit
side.
5. Expenses
- The increase is on the debit
side and the decrease is on
the credit side.
6. Revenue
- The increase is on the
credit side and the
decrease is on the debit
side.
Normal Balance of an Account
- The normal balance of an account
usually (but not at all times) is
dependent on the increase of an
account.
- Therefore,
Assets - Debit side
Liabilities - Credit side
Owner’s equity - Credit
side
Revenue - Credit side
Expenses - Debit side
- The only exception is the
withdrawal; although withdrawals
are under owner’s equity, its
normal balance is on the debit
side.
Topic 3: The Accounts
Balance Sheet Accounts
Assets
Current Assets
1. Cash – any medium of exchange
that a bank will accept for deposit.
2. Cash Equivalents – short-term,
highly liquid investments that are
readily convertible into cash.
3. Notes Receivable – a written
pledge that the customer will pay
the business entity a fixed amount
of money at a certain date.
 4. Accounts Receivable – claims
against the customers arising from
the sale of services or goods on
credit term.
5. Inventories – These are assets
that are held for sale in the
ordinary course of business.
6. Supplies – assets that are
acquired by the business for their
use in their day-to-day operation.
7. Prepaid Expenses – expenses
paid in advance by the business.
Non-Current Assets
1. Property, Plant, and Equipment
– These are tangible assets that
are held by the enterprise for the
use in the production or supply of
goods or services that are
expected to be used for more than
one period.
2. Accumulated Depreciation –
contains the sum of the periodic
depreciation charges.
3. Intangible Assets – identifiable,
nonmonetary assets without
physical substance held for use in
the production or supply of goods.
(Ex. Patent, copyrights,
franchises, trademarks).
Liabilities
Current Liabilities
1. Accounts Payable – By accepting
the goods or services, the
business entity agrees to pay them
on account or in the near future.
2. Notes Payable – the party making
the notes is the business entity, we
are the one who promises to pay
the other party a specified amount
of money on a specified date.
3. Unearned Revenues – when the
business receives payment before
providing the item or service.
Non-Current Liabilities
1. Mortgage payable – a long-term
debt of the business for which the
business entity has pledged a
certain asset as a security to the
creditor.
2. Bonds payable – obtain for
substantial amount of money from
lenders to finance the acquisition
of equipment and other needed
assets.
Owner’s Equity
1. Capital – This is used to record
both the original and additional
capital invested by the owners.
2. Withdrawals – used when the
owner withdraws cash or other
property from the business.
Income Statement Account
Revenues
1. Service Revenues – revenues
earned by performing services for
a customer or client.
2. Sales – revenues earned as a
result of the sale of merchandise.
Expenses
1. Cost of Sales – cost incurred to
purchase or to produce the
products sold to customers during
the period.
2. Salaries and Wages Expenses –
includes all payments as a result of
an employer-employee
relationship.
3. Utility Expenses – expenses that
are related to the use of
telecommunications facilities, and
consumption of electricity, fuel, and
gas.
4. Rent Expenses – Expenses that
are paid for space, equipment, and
other asset rentals
5. Supplies Expenses – expenses of
using the supplies of the business.
 6. Insurance Expenses – portion of
premium paid on insurance
coverage.
7. Uncollectible Accounts
Expenses – These are the
receivables that are already
doubtful of collection.
8. Interest Expenses – An expense
related to the use of borrowed
funds
Topic 4: Accounting Business
Transactions
Business Transactions
- occurrence of an event or a
condition that affects financial
position and can be reliably
recorded
Topic 5: Recording Business
Transactions
The Journal (noun), also called the book
of original entry, is a chronological record
of the entity’s transactions.
A journal entry (noun) shows all the
effects of business transactions in terms of
debits and credits.
Two Types of Journal Entry
1. Simple Entry – only two accounts
are affected – one is debited, and
one is credited
Three special rules in recording double
entry system
● Two or more accounts are
affected by each
transaction.
● The sum of the debits for
every transaction equals
the sum of the credits,
● The equality of the
accounting equation is
always maintained.
2. Compound Entry – more than two
accounts are affected – one is
debited, the other two are credited,
or vice versa.
Journalizing (verb) is the process of
recording all business transactions
Format: The standard contents of the
General Journal are as follows:
1. Date – The year and month are not
rewritten for every entry unless the
year or month changes or a new
page is needed; important
component because the journal
states the chronological order of
business transactions.
2. Account Titles & Explanation –
The account to be debited is
entered at the extreme left of the
first line while the account to be
credited is entered slightly
indented on the next line.
Example:
Cash
Account Payable
3. Debit – The debit amount for each
account is entered in this column.
4. Credit – The credit amount for
each account is entered in this
column.