NOELLA A.
MEDINA FABM FINAL REVIEWER
ACCOUNTING
Accounting
 PROCESS of identifying, measuring, and
communicating financial information to allow
users to make informed judgments and decisions
(American Accounting Association, 1966).
 ART of recording, classifying, and summarizing
transactions and events which are financial and
are quantifiable in terms of money. (American
Institute of Certified Public Accountants,
1956)
Bookkeeping, where financial information is recorded in
journals (books of original entry) and ledgers (books
of final entry).
 record or journalize the identified financial
information into the accounting books.
This crucial function in communicating
financial information is why accounting is also
considered the universal language of business.
 Bookkeeper is responsible for developing and
maintaining accounting records.
 Accountant supplies financial information to
make informed judgments and better decisions.
Therefore, the essence of accounting is
“decision-usefulness.”
Accounting involves three main processes: Identifying
or Analyzing, Recording and Journalizing, and
Communicating financial data.
HISTORY OF ACCOUNTING
Luca Pacioli (14th Century)
 Father of accounting
 Double-entry system (debit and credit)
Mesopotamian Era (3500 B.C.)
 Informal recording of money and trade
 Use of stone tablets to record commercial
transactions.
Industrial Revolution (17th and 18th Century)
 Emphasized the importance and relevance.
 Development of machines for mass production.
 System of check and balances to monitor the
process and expenses of production.
Queen Victoria (19th Century)
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 The first recorded accounting standards were
attributed to the British Empire’s Queen Victoria
reign.
NATURE OF ACCOUNTING:
As an information system, It organizes relevant data into
reports, which are used by executives and managers in
crafting resolutions and plans.
- measures, analyzes, and reports relevant data to
decision-makers.
As a service activity, ensuring that concerned parties
benefit from the financial information.
- accountants do their job primarily for the benefit of all
concerned units in an organization.
As a process, each stage needs to be accomplished
before proceeding to the next step.
- do not skip any steps; first one is sorting and
identifying.
As an art and a discipline, businesses and their
accountants could still devise their own tactics on how to
go through the rigorous process,
Accounting deals with financial information. The data
that accountants work with is financial in nature. If
accounting information is useful, it must be expressed as
a common financial denominator. Therefore, accountable
economic transactions and
events have monetary values.
“Keeping systematic records of transactions”
The primary function of accounting is auditing to make
sure records are up to date. Correctness of data is crucial
to the company.
- to determine the discrepancies or issues.
“Communicating results to various parties”
Communicating financial information through financial
statements and reports; state of revenue, expenses, profit,
and loss.
“Meeting legal requirements”
Meet legal standards set forth by the government laws
and regulations.
ACCOUNTING SYSTEMS
 Generally Accepted Accounting Principles
(GAAP)
 International Financial Accounting
Standards (IFRS).
 Philippine Financial Accounting Standards
(PFRS),
NOELLA A. MEDINA FABM FINAL REVIEWER
RANCHES OF ACCOUNTING
1) Cost Accounting is a sub-branch of management
accounting.
- provides information about the cost of
doing business.
2) Financial Accounting is producing or the
preparation financial statements that adhere to
accounting standards.
3) Tax Accounting help companies legally reduce
taxes.
- Tax Evasion, the act of non-declaration
of income.
4) Managerial/Management Accounting produce
information for internal members of the
organization.
5) Auditing deals with evaluating fairness and
validity of financial reports.
6) Government Accounting deals with how
government funds are spent.
7) Accounting Education develops a school
curriculum that produce effective and
competitive accountants.
- applying principles and theories.
8) Accounting Research is concerned with
regulatory bodies to revise current accounting
standards with new ones to address issues and
trends in accounting practice.
GOVERNMENT AGENCIES
 Department of Budget Management (prepares
the budget),
 Bureau of Treasury
(disburses cash to the different government
agencies),
 Commission on Audit
(monitors the use and allocation of public
funds).
 Bureau of Internal Revenue
(collect taxes from individuals and businesses)
 Securities and Exchange Commission
(regulates capital market: registrations,
licensing, certifications)
 Certified Public Accountants
USERS OF ACCOUNTING
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Internal Users are the primary users of financial
information because their decisions directly impact the
organization.
External Users are the secondary users because they are
not directly involved in management or operation.
Internal Users:
 Owners and stockholders – provide financial
assets and resources to the company. They
benefit from company shares.
- Owners of sole proprietorship businesses,
partners in partnership businesses, and
shareholders in a corporation belong to this
group of users.
 Management – people who administer tasks in
the organization. They set goals, plans, monitor,
and make decisions.
 Employees – work under a contract of
employment. They look for stability and
security.
External Users:
 Creditors – give credit or lend loans or funds in
exchange for interest earnings. Assess
company’s ability to pay back.
 Government legislate and enforce laws and tax
policies.
 Potential Investors – interested in buying stocks.
DECISIONS OF EXTERNAL AND INTERNAL
USERS
Decisions of Internal Users:
 Decisions by Management – responsible for
day-to-day business operations. (budgeting,
forecasting, analysis of management accounting
reports, and other management accounting
decisions.
 Decisions by Owners - legal stakeholders of
business interest, monitoring their investment in
the company and evaluating its returns.
 Decisions by Employees - people hired by
businesses
Decisions of External Users:
 Decisions by Potential Investors - interested in
putting capital into a company
NOELLA A. MEDINA FABM FINAL REVIEWER
 Decisions by Lenders - extend credit to
individuals or businesses who need additional
capital.
 Decisions by Regulatory and Tax Authorities -
Government agencies regulating the operations
of businesses
 Decisions by Customers - interested in buying
goods or services
 Decisions by Suppliers - check whether clients
are liquid enough to pay their current
obligations. It also helps them to agree on an
applicable credit limit and payment terms with
their customers.
 Decisions by Public – uses accounting
information in diverse ways as consumers.
 liquidity or ability of the business to
pay its current obligations,
 solvency or ability of the business to
pay its long-term maturing obligations,
and
 profitability or the ability of the
business to generate profit.
TYPES OF ACCOUNTING INFORMATION
Statement of Profit or Loss – where business financial
performance is presented.
 Net Profit - revenues are greater than the
expenses
 Net Loss - revenues are less than the
expenditures
Statement of Financial Position
 Financial condition of current balances of the
assets, liabilities, and equity of the business.
 Balance sheet
Statement of Cash Flow
 shows the cash receipts and disbursements from
the operating, investing, and financing activities
 Cash flow from operating activities refers to any
source or use of cash from business activities.
 Cash flow from investing activities includes the
sources and uses of cash from various
investments.
 Cash flow from financing activities are sources
from investors or banks, including the uses of
cash paid to shareholders.
FORMS OF BUSINESS ORGANIZATION
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Sole proprietorship is a form of business organization
that is owned and controlled by only
one person who is hands-on in managing the business’s
day-to-day activities.
 Sole proprietor
Partnership is a form of business organization that two or
more persons own.
 Partners
Corporation is organized as a separate legal entity under
the corporation law, with the ownership divided into
transferable shares.
 Shareholders
Cooperative is an independent association of persons
who voluntarily join together to
achieve their economic, social and cultural objectives.
 Members
TYPES OF BUSINESS ACTIVITIES
Service Business sells intangible products by providing
professional skills, advice, and
consultation to customers.
Merchandising Business involves buying wholesale and
later selling the products at retail.
Manufacturing Business buys raw materials and uses
them in making a new product.
ACCOUNTING CONCEPTS AND PRINCIPLES
Accounting concepts and principles serve as rules and
guidelines that businesses must follow when preparing
their financial reports.
1) business entity concept states that the business’s
financial transactions must be recorded
separately from those of its owners and other
businesses.
2) monetary unit concept states that a business only
records transactions expressed in terms of a
currency.
3) going concern principle is the assumption that a
business entity would continue its operations
indefinitely.
4) time period principle states that businesses
should report their financial transactions over a
standard period.
5) objectivity principle states that financial reports
must be based on solid evidence such as income
statements and business documents.
NOELLA A. MEDINA FABM FINAL REVIEWER 11 ABM FABELLA
6) cost principle states that acquired assets,
liabilities, and equity investments should be  Drawings are the money withdrawn from the
recorded at their original cost. business account for personal use

7) accrual accounting emphasizes recording EXPANDED ACCOUNTING EQUATION:

revenue and expenses when they are earned or
incurred
- Revenue should be recorded if product
or service had been rendered even if not
paid.
- used but unpaid; utility expenses,
advancements
8) revenue recognition principle guides businesses
on how and when revenue is to be recognized.
9) matching principle states that a business should
report revenues together with the related
expenses in the same reporting period.
10) full disclosure principle states that financial
reports should include all relevant and necessary
information
11) materiality principle states that companies deal
with significant information
- measures how important the information
is: material or immaterial.
o Calendar Year – Start at January 1,
ends at December 31
o Fiscal Year – Start at any month of the
year
ACCOUNTING EQUATION
Assets= liabilities – owner’s Equity
Liabilities= assets - owner’s equity
 Assets are resources with financial value owned
by an entity.
 Liabilities are financial obligations that arise
from previous business transactions.
Assets = liabilities + capital + revenue - expenses -
drawings
NORMAL BALANCE (INCREASE)
DEBIT CREDIT
Assets Liabilities
Drawings Capital
Expenses Revenue
Real or Permanent Accounts: Assets, Liabilities, and
Capital
- statement of financial position/balance sheet
Temporary or Nominal Accounts: Revenue and
Expenses
- statement of comprehensive income/income statement
Cash Inflow from Investment or Sales
 Cash inflow, either due to the owner's
investment or sales from a service rendered,
increases the assets and the equity of a business.
Item Purchase on Cash Basis
 In some cases, a transaction can cause an
increase and a decrease within the same major
account.
Purchase of an Item on Account/Credit
 You now understand that any property or
resource with monetary value that is acquired by
a company increases the entity’s assets.
Paid Debts
 Paying off debts can decrease a company’s
resources and at the same time decrease its
liabilities.
Paid Obligations
 Paying off obligations, on the other hand, also
decreases the asset but at the same time the
owner’s equity.

 Equity is the value of the owner’s investment in Simple Assets Liabiliti Equity
the business after subtracting the liabilities. Transactions es
o the percentage of the business that Owner invested cash increase n/e increase
belongs to the owner or shareholders. Received cash from increase n/e increase
sales
 Capital or paid-in capital are the investments Purchased items in decrease n/e n/e
made by the investor cash increase
Purchased items on increase increase n/e
 Revenues are income or earnings account
Paying off debts decrease decrease n/e
 Expenses are expenditures incurred in the course Paying short term decrease n/e decrease
of business operations.
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obligations 2) Rent expense
3) Salaries expense
ACCOUNTS 4) Wages expense
Accounts refer to accounting records of a business’s 5) Taxes and licenses
financial activities. 6) Supplies expense
7) Doubtful-accounts expense
Balance Sheet - reveals what a company owns and owes. 8) Depreciation expense: property, plant, or
 ASSETS: current, noncurrent, contra equipment
 LIABILITIES: current, noncurrent, contingent
 OE: MAIN BOOKS OF ACCOUNTS
Books of accounts are used to record events transpiring
Income Statement - financial statement that presents a in the course of the business.
business’s performance within a specified period. It
indicates whether the business gained profits or incurred Journalizing is the process of recording the business
losses. transactions to the general journal,
1) Revenue and Expenses
Posting is the process of transferring or summarizing the
ASSETS transactions from the general journal to the general
Current Assets ledger.
1) Cash
2) Accounts receivable Journal is a record of the business’s transactions in
3) Notes receivable chronological order using the principle of debit and
4) Supplies credit.
5) Prepaid rent  book of original entry
Noncurrent Assets:  record in the journal, journal entry.
1) Equipment  one debit and one credit, single journal entry.
2) Furniture and fixtures  more than one debit or credit, compound journal
3) Building entry.
4) Land Ledger is a book of financial accounts that reflects the
Contra Assets: Credit economic effects of the business organization’s
1) allowance for doubtful accounts, transactions after they are posted or recorded to the
2) Accumulated depreciation various journals.
 book of final entry
LIBILITIES
Current Liabilities: TRIAL BALANCE
1) Accounts payable
2) Notes payable Trial Balance lists all the debit and credit balances of the
3) Utilities payable accounts from the general ledger.
4) Loans payable
5) Advertisement payable 1) Name of the Business
6) Advances from customers 2) Type of financial document being prepared, Trial
Noncurrent Liabilities: Balance
1) Bonds payable 3) Accounting period covered; Month, Day, Year
2) Mortgage payable
Contingent Liabilities: lawsuit ADJUSTING
Adjusting Entries are prepared and recorded at the end
OWNER’S EQUITY: Capital Accounts of the accounting period to update account balances.
1) Capital  Revenue Recognition - recognize revenue
2) Drawings whether earned or unearned.
REVENUE:  Expense Recognition – record expenses whether
1) Service Revenue paid or not.
2) Interest Income  Matching Principle - expenses should
3) Professional Fees: Legal fees match their related revenues in the same
accounting period.
EXPENSES:
1) Utilities expense
NOELLA A. MEDINA FABM FINAL REVIEWER
Adjusted Trial Balance has updated account balances,
meaning the adjustments of the accounts are reflected in
the balances.
 used to prepare the financial statements.
Depreciation refers to the decrease in the value of a fixed
asset, e.g. building, vehicle, furniture, equipment,
machinery, and the like as they become worn and torn
because of usage and passage of time.
The amount of depreciation of a depreciable asset is
recorded as Depreciation Expense.
 business must recognize depreciation as an
expense because income is generated when an
asset is used. (matching principle)
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Fixed assets are resources purchased for long term use in
the business and are not likely to be sold for cash within
12 months.
 property, plant, and equipment
 Fixed assets are typically used by a business to
generate income
Deferrals involve advance payments made by the
company for future expenses or advance payments of a
company’s client for future services.
 Paid but unused
When a business pays expenses in advance, this refers to
Prepayments.
 Deferred Expenses or Prepaid Expenses.

Historical Cost or Cost refers to the acquisition cost of a

fixed asset

The value of an asset once it is sold to third parties at the

end of its useful life refers to
Salvage Value.
 scrap value or residual value.

The difference between the cost of the fixed assets and

the salvage value refers to Depreciable
Cost.
 The depreciable cost is allocated to depreciation
expense every accounting period throughout the
fixed asset’s life.

Estimated Useful Life is the number of years a fixed

asset can be used in the Business.

Book value is the difference between the asset's cost and

the accumulated depreciation.
 The book value of the fixed asset is the net
amount presented on the Statement of Financial
Position.

Accruals refer to revenue earned by the business but will

be collected at a future date or expenses already incurred
but payable on a future date.
 Used but unpaid

Accrued Revenues are unrecorded revenues that the

company has earned but remain
uncollected.

Accrued Expenses are expenses that have been incurred

by the business but are yet to be
recorded and yet to be paid.