Ateneo de Zamboanga University

ACCOUNTANCY ACADEMIC ORGANIZATION

A School of Management and Accountancy Student Government

NATURE OF BUSINESS AND ACCOUNTING

1. Nature of Business and Accounting

a. Types of Businesses
● Service – provide services rather than products to customers. (Laundry shops,
Carwash business)
● Merchandising- Sell products they purchase from other businesses to customers.
(Groceries, retail stores)
● Manufacturing- Change basic inputs into products that are sold to customers (Food
factories, car manufacturing businesses)

b. Three Basic Activities of Accounting

- it (1) identifies, (2) records, and (3) communicates the economic events of an organization
to interested users

c. The Role of Accounting in Business- To provide information; Language of business

**Accounting Process

Identify Assess Users’ Design accounting

users Information needs systems

Prepare accounting reports Record economic data

d. Users of Accounting Data

● Internal Users – refer to managers who plan, organize, and run the business. E.g.
marketing managers, production supervisors, finance directors, and company officers.
● External Users – refer to individuals and organizations outside a company who want
financial information about the company. E.g. investors, creditors, taxing authorities,
regulatory agencies, customers, and labor unions.

e. Three Role of Ethics in Accounting and Business- Accountants must behave in an ethical
manner so that the information they provide users will be trustworthy and, thus, useful for decision
making.

2. Generally-Accepted Accounting Principles (GAAP) and Accounting Assumptions

GAAP - common set of standards that are generally accepted and universally practiced.

a. Historical Cost Principle (Cost Principle) – companies must record assets at their costs. This
is true not only at the time the asset is purchased but also over the time the asset is held.

b. Fair Value Principle – states that assets and liabilities should be reported at fair value (the
price received to sell an asset or settle a liability). This principle is usually used in situations
where assets are actively traded.

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 Ateneo de Zamboanga University
ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

c. Revenue Recognition Principle – companies recognize revenue in the accounting period in

which the performance obligation is satisfied

d. Expense Recognition Principle (Matching Principle) – efforts (expenses) should be matched

with results (revenues)

e. Full Disclosure Principle – requires that companies disclose circumstances and events that
matter to financial statement users.

Accounting Assumptions – provides the foundation for the accounting process

a. Monetary Unit Assumption – requires that companies include in the accounting records only
transaction data that can be expressed in money terms. This assumption enables accounting to
quantify (measure) economic events.

b. Economic Entity Assumption (Business Entity Concept)- requires that the activities of the
entity be kept separate and distinct from the activities of its owner and all other economic
entities.

**Forms of business entity

● Proprietorship- owned by one individual

● Partnership- owned by two or more individuals

● Corporation- organized under state or federal statutes

● Limited Liability Company- combines the attributes of partnership and

corporation

c. Time Period Assumption – states that the economic life of a business can be divided into
artificial time periods and that meaningful accounting reports can be prepared for each
period.

d. Going Concern Assumption – states that the company will continue in operation long enough
to carry out its existing objectives and commitments

3. The Accounting Equation

a. Assets- Resources that the business owns. The business uses its assets in carrying out such
activities as production and sales. (i.e delivery trucks, equipment, cash)
b. Liabilities- claims against assets- that is, existing debts and obligations. (i.e. accounts payable,
notes payable, wages payable)
c. Owner’s Equity- The ownership claim on total assets is owner’s equity. This is the residue of
the company’s assets over its liabilities.
*Increase in owner’s equity (investments by owner, revenues)
*Decrease in owner’s equity (drawings, expenses)

BASIC EQUATION: Assets = Liabilities + Owner’s Equity

EXPANDED EQUATION: Assets = Liabilities + Owner’s capital – Owner’s drawings

+ Revenues - Expenses

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 Ateneo de Zamboanga University
ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

4. Business Transactions and the Accounting Equation

Transaction A. Julia Salas deposited P 1,000,000 in a bank account in the name of PitchPerfect.
This transaction increases the asset cash (left side of the equation) by P10,000. To balance the
equation, the owner’s equity (right side of the equation) increases by the same amount.

ASSETS = OWNER’S EQUITY

Cash = Salas, Capital
1,000,000.00 a.
1,000,000.00

Transaction B. PitchPerfect purchased Land for P 120,000.00. The purchase of the land changes the
makeup of the assets, but it does not change the total assets.
ASSETS = OWNER’S EQUITY
Cash + Land = Salas, Capital
1,000,000.00 a.
1,000,000.00
– 120,000.00 + 120,000.00 =
Bal. 1,000,000.00 =
1,000.000.00

Transaction C. PitchPerfect purchased supplies for P 3,000.00 and agreed to pay the supplier in the
near future. The liability created by purchase on account is called accounts payable.
ASSETS = LIABILITIES + OWNER’S EQUITY
Cash + Land + Supplies = Accounts Payable + Salas, Capital
Bal. 900,000.00 + 100,000.00 1,000.000.00
c. + 3,000.00 = + 3,000.00

Bal. 900,000.00 100,000.00 3,000.00 = 3,000.00 1,000.000.00

Transaction D. PitchPerfect received cash of 1,500.00 for providing facial services to customers.
The receipt of cash increases PogiSolutions’ assets and also increases Alvarez’s equity in business.
ASSETS = LIABILITIES OWNER’S EQUITY
Cash + Land + Supplies = Accounts Payable + Salas, Capital + Service Revenue
Bal. 900,000.00 + 100,000.00 + 3,000.00 = 3,000.00 + 1,000,000.00
d. + 1,500.00 = + 1,500.00

Bal. 901,500.00 100,000.00 3,000.00 = 3,000.00 1,000,000.00 1,500.00

Transaction E. PitchPerfect receives a bill for $250 from PerfectPitch for advertising but postpones
payment until a later date
ASSETS = LIABILITIES OWNER’S EQUITY____________________
Cash + Land + Supplies = Accounts Payable + Salas, Capital + Service Revenue – Expenses
Bal. 901,500.00 + 100,000.00 + 3,000.00 = 3,000.00 + 1,000,000.00 + 1000.00
e. +250 -250

Bal. 901,500.00 + 100,000.00 + 3,000.00 = 3,250.00 + 1,000,000.00 + 1,000.00 - 250

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 Ateneo de Zamboanga University
ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

Transaction F. PitchPerfect performs $3500 of programming services for customers. The company
receives cash of $1500 from customers, and it bills the balance of $2000 on account.
ASSETS = LIABILITIES OWNER’S EQUITY____________________
Cash + A/R + Land + Supplies = Accounts Payable + Salas, Capital + Service Revenue – Expenses
Bal. 901,500 +100,000 + 3,000 = 3,250.00 + 1,000,000.00 + 1000.00 - 250
f. 1500 + 2000 +3500

Bal. 903,000.00 + 2000 + 100,000.00 + 3,000.00 = 3,250 + 1,000,000.00 + 4,500.00 - 250

Transaction G. PitchPerfect pays store rent $600 and utilities $200 in cash.
ASSETS = LIABILITIES OWNER’S EQUITY____________________
Cash + A/R + Land + Supplies = Accounts Payable + Salas, Capital + Service Revenue – Expenses
Bal. 903,000 + 2000 +100,000 + 3,000 = 3,250.00 + 1,000,000.00 + 4500.00 - 250
g. - 800 - 600 Rent Expense
-200 Utilities Expense

Bal. 902,200.00 + 2000 + 100,000.00 + 3,000.00 = 3,250 + 1,000,000.00 + 4,500.00 - 1050

Transaction H. PitchPerfect pays the supplier $250 in cash for supplies bought previously.
ASSETS = LIABILITIES OWNER’S EQUITY____________________
Cash + A/R + Land + Supplies = Accounts Payable + Salas, Capital + Service Revenue – Expenses
Bal. 902,200 + 2000 +100,000 + 3,000 = 3,250.00 + 1,000,000.00 + 4500.00 - 1050
h. -250 -250

Bal. 901,950.00 + 2000 + 100,000.00 + 3,000.00 = 3,000 + 1,000,000.00 + 4,500.00 - 1050

Transaction I. PitchPerfect received $600 in cash from customers who had been billed for services
(Transaction F).
ASSETS = LIABILITIES OWNER’S EQUITY____________________
Cash + A/R + Land + Supplies = Accounts Payable + Salas, Capital + Service Revenue – Expenses
Bal. 901,950 + 2000 +100,000 + 3,000 = 3,000.00 + 1,000,000.00 + 4500.00 - 1050
i. + 150 - 150

Bal. 902,100.00 + 1850 + 100,000.00 + 3,000.00 = 3,000 + 1,000,000.00 + 4,500.00 - 1050

Transaction J. Julia Salas withdraws $ 1000 in cash from the business for her personal use.
ASSETS = LIABILITIES OWNER’S EQUITY____________________
Cash + A/R + Land + Supplies = Accounts Payable + Salas, Capital - Salas, Drawings + S.Rev – Expenses
Bal. 902,100 + 1850 +100,000 + 3,000 = 3,000.00 + 1,000,000.00 + 4500 - 1050
i. -1000 - 1000

Bal. 901,100.00 + 1850 + 100,000.00 + 3,000.00 = 3,000 + 1,000,000.00 - 1000 + 4,500.00 - 1050

5. Financial Statements
a. Statement of Comprehensive Income- presents the revenues and expenses and resulting net
income or net loss for a specific period of time.
b. Statement of Changes in Owner’s Equity- summarizes changes in the owner’s equity for a
specific period of time.
c. Statement of Financial Position- reports assets, liabilities, & owner’s equity at a specific date.

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 Ateneo de Zamboanga University
ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

d. Statement of Cash Flows- summarizes information about cash inflows (receipts) and outflows
(payments) for a specific period of time.
e. Interrelationships among financial statements- Financial statements are prepared in the order of
the statement of comprehensive income, statement of changes in equity, statement of
financial position and statement of cash flows. This order is important because the financial
statements are interrelated. The statement of comprehensive income possesses the net
income which is needed in the statement of changes in equity. The statement of changes in
equity also has the total balance of owner’s equity which is needed in the statement of
financial position. On the other hand, the cash stated in the statement of financial position
should be equal to the cash at the end of the period which is stated in the statement of cash
flows.

Ne-Yo Agency
Statement of Comprehensive Income
For the Month Ended December 31, 2015
Revenues
Service Revenues P 4,700
Expenses
Salaries and Wages expense P 900
Rent expense 600
Advertising expense 250
Utilities expense 200 1, 950
Net Income P 2,750
Ne-Yo Agency
Statement of Changes in Owner’s Equity
For the Month Ended December 31, 2015

Owner’s Capital, November 1 P -0-

Add: Investments P 15,000
Net Income 2,750 17,750
17,750
Less: Drawings 1,300
Owner’s Capital, November 30 P16,450

Ne-Yo Agency
Statement of Financial Position
December 31, 2015
Assets
Cash P 8,050
Accounts Receivable 1,400
Supplies 1,600
Equipment 7,000 P 18,050
Liabilities and Owner’s Equity
Liabilities
Accounts Payables P 1,600
Owner’s Equity

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 Ateneo de Zamboanga University
ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

Owner’s, Capital 16,450 P 18,050

Ne-Yo Agency
Statement of Cash Flows
For the Month Ended December 31, 2015
Cash flows from operating expenses
Cash receipts from revenues P 3,300
Cash payments for expenses (1,950)
Net cash provided by operating activities 1, 350
Cash flows from investing activities
Purchase equipment (7,000)
Cash flows from financing activities
Investments by owner P 15,000
Drawings by owner (1,300) 13, 700
Net increase in cash 8,050
Cash at the beginning of the period 0
Cash at the end of the period P 8,050

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