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Basic Accounting

for Non-
Accountants
Learning Objective
1. Describe the nature of a business and the role and
purpose of accounting in business
2. Describe the accounting concepts and principles
and constraints
3. State the accounting equation and define each
element of the equation.
4. Introduction to debit and credits
5. Introduction to the accounting process

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What is a Business?
• A business is an organization in which basic
resources (inputs), such as materials and labor,
are assembled and processed to provide goods
or services (outputs) to customers.
• The objective of most businesses is to earn a
profit.
• Profit is the difference between the amounts
received from customers for goods or
services and the amounts paid for the inputs
used to provide the goods or services.

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The Role of Accounting in
Business
• Accounting can be defined as an information
system that provides reports to users about
the economic activities and condition of a
business.

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What is ACCOUNTING?
• is a service activity.
• Its function is to provide
quantitative information, primarily
financial in nature, about economic
entities, that is intended to be
useful in making economic decision.
• Accounting Standards Council

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•Accounting is the process of
Measuring
Interpreting
Communicating financial
information to support
internal and external
business decision making.

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Purpose of Accounting
• It gives you an excellent gauge of how well your
business is doing
• Accounting also provides financial information
throughout the year so you can test the success of
your business strategies and make course
corrections to ensure that you reach your year-end
profit goals.
• Accounting can become your best system for
managing your financial assets and testing your
business strategies

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The Need for Accounting
Managers, investors, and other internal groups
want the answers to two important questions:

How well did


the organization
perform? Where does
the organization
stand?
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Accountants answer these questions
with three major financial statements:

Income Balance
statement sheet

Statement of
cash flows

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Users of Financial Information

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Accounting Concepts
and Terminologies

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Accounting Concepts: Underlying Assumptions
ACCRUAL Income is recognized when earned regardless of when
received
Expense is recognized when incurred regardless of
when paid
The effects of transactions are recognized when they
occur
GOING The business will continue in operational existence for
the foreseeable future
CONCERN Financial statements should be prepared on a going
CONCEPT concern basis unless management either intends to
liquidate the enterprise or to cease trading,
BUSINESS The business and its owner(s) are two separate
entities
ENTITY
CONCEPT Any private and personal incomes and expenses of
the owner(s) should not be treated as the incomes
and expenses of the business
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Accounting Concepts: Underlying Assumptions
TIME PERIOD The life of an entity is subdivided into time
periods which are of equal length for the purpose
of making financial reports
Usually twelve months

MONETARY Assets, liabilities, capital, income and expenses


UNIT should be stated in terms of a unit of measure
(Philippine Peso)
The purchasing power of the Peso is
stable/constant

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Accounting Concepts: Business Entities
Sole Proprietorship
• A proprietorship is owned by one individual.
• They are easy and cheap to organize and
resources are limited to those of the owner.

Partnership • A partnership is similar to a proprietorship


except that it is owned by two or more
individuals.
• Combines the skills and resources of more
than one person.
Corporation
• A corporation is organized under state
statutes as a separate legal taxable entity.
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Accounting Concepts: Qualitative Characteristics
Relevance • The capacity of information to influence a
decision
Reliability • The degree of confidence users place upon the
truthfulness of the representations in the
financial statements
• The quality of information that assures users that
the information is free from bias and error and
faithfully represents what it purports to represent
Faithful • The actual effects of the transaction
Representation should be properly accounted for and
reported in the financial statements
Substance over • Transactions should be accounted in
Form accordance with their substance in reality
and not merely their legal form
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Accounting Concepts: Qualitative Characteristics

Neutrality • Information in the Financial Statements


must be free from bias
• “fairness”

Conservatism • Care and caution must be exercised when


dealing with uncertainties in the
or Prudence measurement process
• The Revenues and profits are not
anticipated. Only realized profits with
reasonable certainty are recognized in the
profit and loss account
Completeness • Relevant information must be presented
in a way that facilitates understanding
and avoids erroneous implication
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Accounting Concepts: Qualitative Characteristics

Understandability • Financial information must be


comprehensible or intelligible if it is to be
useful

Comparability • Information must be comparable with


similar information of previous periods or
with information of another entity

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Accounting Concepts: Accounting Constraints
TIMELINESS • Information must be available or communicated
early enough when a decision is to be made

COST- • The benefit derived from the information should


exceed the cost incurred in obtaining the
BENEFIT information

MATERIALITY • An item is material if knowledge of it would affect


or influence the decision of the informed users of
the financial statements

RELEVANCE vs • There is a tradeoff between relevance (reporting


RELIABILITY information in a relevant manner) and reliability
(ensuring that the information is reliable)
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THE ACCOUNTING EQUATION

Assets = Liabilities + Equity

The resources The rights of The rights of the


owned by a creditors are the owners
business debts of the
business

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Accounting Terminologies
TRANSACTION • a business event having a monetary
impact on the financial statements of a
business
• It is recorded in the accounting records
of the business

ACCOUNT • A record in the general ledger that is


used to collect and store similar
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Types of Accounts
ASSET are valuable resources that are
ACCOUNT owned by a firm.

LIABILITY present obligations of the firm.


ACCOUNT

EQUITY  represents the owners' residual


interest in the assets of the
ACCOUNT business.
Residual interest is another name
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INCOME the payment you receive for your
time, services you provide, or the use
ACCOUNT of your money
Examples include commissions, tips,
dividend income from stocks, and
interest income from bank accounts.

EXPENSE money you spend to


purchase goods or services
ACCOUNT provided by someone else
Examples include rent,
electricity, and light
expenses

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CHART OF a listing of the names of the accounts
that a company has identified and made
ACCOUNTS available for recording transactions in its
general ledger

T-ACCOUNTS  An informal term for a set of financial records that use double-
entry bookkeeping.
 If a large letter T were drawn on the page, the account title
would appear just above the T, debits would be listed under the
top line of the T on the left side and the credits would be listed
under the top line of the T on the right side
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NORMAL  The sum of the increases in an account
is usually equal to or greater than the
BALANCE sum of the decreases in the account.
Thus, the normal balance of an
account is either a debit or a credit
depending on whether increases in
the account are recorded as debits or
credits.

DEBIT  An accounting entry that results in


either an increase in assets or a
decrease in equity or liabilities on a
company's balance sheet or in your
bank account.
CREDIT  An accounting entry that either
decreases assets or increases liabilities
and equity on the company's balance
sheet.
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Debits and Credits
• You just need to understand that debit and credit are two
actions that are opposite in nature.
• An element (account) that is effected by an accounting
transaction is either debited or credited (with an amount
that is reflected in the transaction) depending on the nature
of the account and the rule applicable to it.
• Entries to the left side of the an account are debits (DR), and
accounts with left sided balances (asset accounts and
expense accounts) are debit accounts. Entries to the right
side of the an account are credits (CR), and accounts with
right sided balances (liability accounts, owners' equity
accounts, and revenue and profit accounts) are credit
accounts. Understanding debit and credit is essential for
bookkeeping and analysis of balance sheets.
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Debit and Credit Rules

D E B IT CR E D I T

• An accounting entry • An accounting entry


that: that:
Increases an asset Decreases an asset
account account
Increases an expense Decreases an expense
account account
Decreases a liability Increases a liability
account account
Decreases a revenue Increases a revenue
account account

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Summary of Debits and Credits

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The Accounting Process

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The Accounting Process
• Systematic recording of the financial
operations of a business or of an
individual
• Before an accounting system can be
started, the owner of a business must
find:
• What the business owns (assets)
• What the business owes (liabilities)
• What the business is worth (equity)
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Single-entry vs Double-entry
Single – One account entry for each
transaction
Double – Two account entries for each
transaction
• One debit and one credit

Hybrid systems
• May not match income with expenses
• May not distinguish cash, check, or credit

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Double-entry Accounting
• A process by which accounting transactions are entered
• each individual transaction always has an offsetting
transaction.
• double-entry bookkeeping gets its name because you enter
all transactions twice
• One account will receive a "debit" entry, meaning the
amount will be entered on the left side of that account.
Another account will receive a "credit" entry, meaning the
amount will be entered on the right side of that account.
The initial challenge with double-entry is to know which
account should be debited and which account should be
credited.
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Rules of Debit and Credit – Normal Balances of Accounts

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Accounting Methods
• Accounting methods dictate how the
company's transactions are recorded in the company's
financial books
• Cash-basis accounting  companies record expenses in
financial accounts when the cash is actually laid out, and
they book revenue when they actually hold the cash
• Accrual accounting  companies record revenue when the
actual transaction is completed (such as the completion of
work specified in a contract agreement between the
company and its customer), not when they receive the cash.
Companies record any expenses when they're incurred,
even if they have not paid for the supplies yet

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Accounting Process

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