FUNDAMENTALS OF

ABM I
Session Objectives:

At the end of the session, participants will be able to:

demonstrate knowledge and understanding about the basic

accounting concepts and principles;
identify the classification and normal balances of accounts
including its effect in the accounting equation; and
apply the rules of debit and credit in analyzing business
transactions.
What is Accounting?

l It 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 decisions.
Branches of Accounting

l Financial Accounting – concerns primarily in

describing the financial resources, obligations, and
the preparation of general-purpose financial reports on financial
position and operating results.
Branches of Accounting ( cont. )

l Auditing – is classified into two: internal and external

auditing.
Internal auditing – sees to it that the established
accounting procedures are being followed throughout the year.
It is usually performed by entity’s own employees or staff.
External auditing – examines the book of accounts
and renders an opinion on the fairness of financial statements
 being examined. It is performed by an independent
professional accountant.
Branches of Accounting ( cont. )

Management Accounting – is primarily concern with the

designs, installation and improvements of accounting system
intended specifically to help management in running the
business.

Tax Accounting – involves the preparation of income tax

returns and the determination of correct amount of taxes due
Branches of Accounting ( cont. )

Cost Accounting – concerns primarily on cost

collection, allocation and control of producing goods
and services.

Government Accounting – deals primarily on the

proper custody of public funds in both national and
local government, such as cities, provinces,
municipalities and barangays.
Branches of Accounting ( cont. )

Accounting Education –means that education which

teaches recording and maintaining books of accounts.

Accounting Research – is research on the effects of

economic events on the process of accounting, and the
effects of reported information on economic events.
Users of Accounting Information
USERS INFORMATION NEEDS
Investors Help them determine whether they should buy, hold or sell.

Employees Enables them to assess the ability of the enterprise to provide

remuneration, retirement benefits and employment opportunities.

Lenders Enables them to determine whether their loans and interest thereon
will be paid when due.
Users of Accounting Information
( cont. )

USERS INFORMATION NEEDS

Suppliers and Enables them to determine whether amounts owing to them will
Other Trade be paid on maturity.
Creditors

Customers Enables them to assess the continuance of an enterprise especially

when they have a longterm involvement with or are dependent on
the enterprise.
Users of Accounting Information
( cont. )

USERS INFORMATION NEEDS

Government and Enables them to regulate the activities of the enterprise,

their agencies determine taxation policies and as a basis for national income
and similar statistics.

Public Enterprises affect members of the public in a variety of ways.

Forms of Business Organizations

Sole Proprietorship
Partnership
Cooperatives
Corporations
Sole Proprietorship – the simplest form of business
organization where capital is owned and provided by one
person called “proprietor” who manage the business by
himself or hire another person to do so.
Partnership – the capital of the business is owned or provided
by two or more person called “partners” who should set forth
agreements among themselves.
l Corporation – the biggest and the most complicated form of
business organization. This is organized by at least five but not
more than fifteen persons called “incorporators”.
l Cooperatives – operates similar to a corporation. However,
while number of voting shares in a corporation is based on
shareholdings, in a cooperative, it is on a “one-man, one
vote” basis. Moreover, patronage refunds are given to
cooperative members who patronized their business activities.
Nature of Business

Service concern
Merchandising
Agriculture
Hybrid companies

l Manufacturing
Service concern – the business derived its income
from services rendered to clients.

Merchandising – the business is engaged in buying

goods or commodities or any form of finished
products and sells these at a profit.

Manufacturing – the business is engaged in buying

raw materials and supplies to be processed or
manufactured, converting them into finished products
Agriculture – the business is engaged in
planting crops and sells its products either
in raw or finished form at a profit.

Hybrid companies – are those involve in

more than one type of activity which are
manufacturing, merchandising and service.
Generally Accepted Accounting Principles (GAAP)

l Are uniform set of accounting rules, procedures,

practices and standards that are followed in preparing
the financial statements.

-Cost Principle - Matching Principle

-Objectivity Principle - Consistency Principle
-Materiality Principle - Adequate Disclosure
Principle
Cost Principle – requires that assets should be recorded at
original or acquisition cost.

Objectivity Principle – requires that accounting records

should be based on reliable and verifiable data as evidence of
transactions.
Materiality Principle – dictates practicability to rule over
theory in determining the valuation of an item.

Matching Principle – this is a combined concept of Revenue

Recognition and Expense Recognition Principles.
Consistency Principle – requires that
accounting methods and procedures should be
applied on a uniform basis from period to period
to achieve comparability in the financial
statements.

Adequate Disclosure Principle – requires that

financial statements should be free from any
material misstatement; that if there is any, proper
disclosure should be made.
Basic Accounting Assumptions

Accounting Entity
Going-concern
Time-period
Unit of Measure
Accrual Basis
Accounting Entity – this assumes that from the accounting
point of view, the business is considered as
“an entity that is separate and distinct from the owner or
management”.

Going-concern – means that the accounting entity is viewed as

continuing in operation indefinitely in the absence of evidence
to the contrary.
Time-period – requires that “the indefinite life of an entity is subdivided into time periods or accounting
periods which are usually of equal length for the purpose of preparing financial reports.
Unit of Measure or Stable Monetary Unit – peso is considered to have a
stable value which means that the purchasing power of the peso is steady

regardless of inflation rates.

l Accrual Basis – means to recognize
revenue or income earned regardless of
when it is collected (Revenue recognition
principle) and to record expense incurred
whether paid or not (Expense recognition
Financial Statements

Considered the “end products” of the

accounting process.
Are the means by which the information
accumulated and processed in financial
accounting are periodically communicated
to the users.
Balance Sheet (Statement of Financial
Position)
Income Statement (Statement of
Comprehensive
Income)
Statement of Changes in Equity
Statement of Cash Flows
• Accounting Policies and Notes to Financial
Statements
l Balance Sheet – shows the
financial position of an
enterprise as of a particular date.
It consists of three sections:
-Assets
-Liabilities
-Owner’s Equity
Basic Accounting Equation

Assets = Liabilities + Owner’s Equity

Basic Financial Statements

Income Statement –
shows the performance of the enterprise for
a given period of time. It consists of:
•Revenue
•Expenses
Basic Financial Statements

l Statement of Changes in Equity –

summarizes the changes in equity for a given
period of time. The beginning equity of the
owner is:
-increased by the additional investment & profit
-decreased by withdrawal & loss
Statement of Cash Flows – shows the movement of
cash transactions-cash receipts and cash
disbursements of an enterprise for a given period of
time.

Accounting Policies & Notes to Financial

Statements
Elements of Financial Statements

Assets
Liabilities
Owner’s Equity
Revenue
Expense
Elements of Financial Statements

l Assets – are resources controlled by the enterprise as

result of past transactions and events and from which
future economic benefits are expected to flow the
enterprise.
classified into:
- Current assets
- Non-current assets
l Liabilities – are present obligations of an enterprise
arising from past transactions or events, the
settlement of which is expected to result in an
outflow from the enterprise of resources embodying
economic benefits.
classified into:
- Current liabilities
- Non-current liabilities
Owner’s Equity – is the residual interest in the
assets of the enterprise after deducting all its
liabilities.

Revenue or Income – defines as the “gross inflow

of economic benefits during the period arising in
the course of ordinary activities of an enterprise
when those inflows result in increase in equity,
other than those relating to contributions from
owners”.
l Expenses – are the “gross outflow of
economic benefits during the period arising
in the course of ordinary activities of an
enterprise when those outflow result in
decrease in equity, other than those relating
to distribution to owners”.
Books of Accounts

Book of Original Entry

Journal:

-General Journal & Special Journal

Book of Final Entry

Ledger: General Ledger & Subsidiary Ledger
Business Transactions & Events

Are accountable business activities which affect assets,

liabilities and owner’s equity.

Classified into two:

-External transactions
-Internal transactions
Business transactions are exchanges of equal
monetary values

Debit, Value Received = Credit, Value Parted With

Business transactions are analyzed from the

view point of the business.
The T-account

l An accounting device that summarizes the

effect of changes in assets, liabilities and
owner’s equity.
Normal Balance of Accounts

Is the increased side in each of the accounting elements.

DEBIT CREDIT

Assets Liabilities

Drawing Owner’s Equity

Expenses Revenue/Income
Accounting Cycle

1. Journalizing
2. Posting to the Ledger
3. Trial Balance
4. End of the Period Adjustments
5. Worksheet
6. Financial Statements
7. Closing Entries
8. Post-closing Trial Balance
9. Reversing Entries
1. Journalizing – is the act of recording business transactions in the
Journal.

2. Posting to the Ledger – the process of transferring entries from the

journal to the ledger.

3. Trial Balance Preparation – copying carefully of what has been

footed in the ledger.
- summarizes the debit and credit entries of each account in the general
ledger.

- 2 forms: Trial Balance of Balances

Trial Balance of Totals
4. End-of-the Period Adjustments –
adjusting entries are prepared for the
following reasons:

-to bring records or balances of accounts

updated
-to properly match revenues against
expenses during the period
Types of Adjusting Entries

Accruals
-Accrued Income
-Accrued Expense

Deferrals
-Pre-collection of Income
- Prepayment of Expenses
Methods of Recording (Deferrals)

Pre-collection of Income
--- Income Method
--- Liability Method

Prepayment of Expenses
--- Expense Method
--- Asset Method
Types of Adjusting Entries ( cont. )

Provision for Depreciation of PPE

Provision for Estimated Uncollectible Accounts

Adjustment on Inventories – this is typical in

merchandising and manufacturing concern

Correction of Erroneous Journal Entries

Accounting Cycle

5.Worksheet
6.Financial Statements
-Income Statement
-Balance Sheet
-Statement of Changes in Equity