STARTING UP A BUSINESS

INTRODUCTION
Business transactions go through a long process
of recording, classifying, summarizing and
reporting. Accounting follows an orderly manner
of processing financial data which ends
with the preparation of financial reports. The
topics will cover the basic elements of
accounting, recording of transactions and
preparation of statement of financial position
THE ACCOUNTING STRUCTURE OF A
BUSINESS ORGANIZATION
Assets - economic resources owned by the business
Three features :
1. it is a resource obtained from a past event
2. the company has control over it
3. future economic benefits will be received from its
use; the first assets or business resources come from
investors ( sole proprietor, partner or shareholder) and
secondarily from creditors ( bank for loan and
suppliers for goods and services) Assets are therefore
claimable by two parties: creditors and investors
Liabilities – economic obligations or debts of the
business owing to outside parties
Three features:
1. there is a present obligation
2. arose from a past event
3. settlement is expected in the future in the
form of outflow of resource usually Cash but
may also be paid in the form of property or
service
Owner’s Equity – the residual right or interest of
the owner in the assets.
ACTIVITY 1
 ACTIVITY 2

What are assets? Give five examples of assets of

a bakery, a school, a clinic, and travel agency.
What are liabilities? Give five examples of
liabilities of a school, travel agency, hotel and
restaurant.
 BUSINESS TRANSACTIONS AND THE
ACCOUNTING VALUES
1. Business transactions are events or activities
that take place in a business and involve
exchanges of values between two parties in
terms of money .
Features:
a. exchange of values between two parties;
values are assumed to be always equal
b. measurement in terms of money- economic resources
(assets) and economic obligations (liabilities) must be
recognized and measured using one common denominator -
money

Example is when you buy a book from a store, you have to

pay this either in cash or credit card.
If the amount of the book is P500, then you should pay
P500,

The value received = the value parted with

A book was added to your asset, asset increased +P500
Cash was paid for the book, asset decreased - P500
c. dual effect – this give rise to the bookkeeping
system called
Double Entry Bookkeeping or the Venetian
Model
In this example, the specific transaction is called
“Purchase on one hand” and a “Payment on the
other hand”
2. Transactions not considered financial in nature
there being no exchange of values
should not be recorded in the books of the entity.
Examples:
a. Vi Tupaz hired tourist guides for a salary of
P20,000.
b. A lease contract was signed for the use of an
office space at a monthly rental of P15,000.
c. An order for office supplies was placed with
National Bookstore amounting to P4,500.
 THE ACCOUNT
Names are assigned to transactions involved in an exchange of values.
This is called Account. It is a device to record the changes (increase or
decrease in the accounting Elements. For the Assets , accounts used are :
Cash
Accounts Receivable
Notes Receivable
Merchandise Inventory
Supplies
Land
Building
Furniture
Equipment
Accounts for Liabilities are identified by the word
Payable :
Accounts payable
Notes payable
Taxes payable
Utilities payable
Loans payable
Mortgage Payable
 ACTIVITY 3
Place a check mark to indicate the proper classification of each
account :
ASSETS = LIABILITIES + OWNER’S EQUITY
1. Cash
2. Accounts receivable
3. Mortgage payable
4. Salaries Payable
5. Land
6. Prepaid rent
7. X, Capital
8. Notes Payable
9. Office Supplies
10. X, Drawing
 ACTIVITY 4

a. Group the items into assets and liabilities.

b. Total the assets and liabilities and determine
the owner’s equity.
 Answer - Sogo Hostel
ASSETS LIABILITIES AND OWNER’S EQUITY

Cash P200,000 Accounts Payable P 360,000

Accounts Receivable 180,000 Bank Loan 450,000
Food Inventory 20,000 Total Liabilities P 810,000
Equipment 500,000
Furniture and Fixtures 155,000 Owner’s Equity ?
Car 920,000
TOTAL LIABILITIES
AND OWNER’S
TOTAL ASSETS P1,975,000 EQUITY P1,975,000
THE ACCOUNTING EQUATION
Angelo borrowed cash ,P800,000 from a bank
for use in the business:
Assets = Liabilities + Owner’s Equity
Cash 800,000 = Loan Payable + 0
P800,000
 ILLUSTRATION E
July 1 Ann Rich invested cash P100,000. She has
two cars worth P1.0M but decided to invest
only one car worth P650,000.
3 Rich borrowed P50,000 cash from Security
Bank for use in business.
6 Bought tables and chairs from SM and paid
cash of P30,000.
July 13 Various equipment were purchased on
account from Octagon for P55,000.
19 Rich made a cash withdrawal of P5,000
for personal use.
25 The account due to Octagon was paid in
cash, P55,000.
Note that the accounting equation was
maintained all throughout because of the dual
effect of the transactions in the accounting
elements:
1. On July 1, the increase in assets carried a
corresponding increase in owner’s equity.
2. On July 3 and 13 , since the assets and
liabilities are affected , there is an increase in
the Assets with a corresponding increase in
liabilities.
3. On July 6, since only one accounting value is
affected, the accounting equation will not
change since the increase in one asset item
carries a corresponding decrease in another
Asset item.
4. On July 19, the decrease in assets with it a
corresponding decrease in owner’s equity.
5. On July 25, the decrease in assets carried a
corresponding decrease in liabilities.
 ANN RICH TRAVEL AGENCY
STATEMENT OF FINANCIAL POSITION
JULY 25,2021

ASSETS LIABILITIES AND EQUITY

CASH P 60,000 LOANS PAYABLE P 50,000
CAR 650,000 TOTAL LIABILITIES P 50,000
FURNITURE 30,000
EQUIPMENT 55,000 RICH,CAPITAL 745,000

TOTAL ASSETS P795,000 TOTAL LIABILITIES AND EQUITY P795,000

 ANN RICH TRAVEL AGENCY
Statement of Changes in Equity
JULY 25,2021

ANN CAPITAL, BEGINNING P 0

ADDITIONAL INVESTMENT 750,000
TOTAL P750,000
LESS DRAWINGS 5,000
ANN CAPITAL, END JULY 25 P 745,000
 Activity 5
Assets Liabilities Capital
1. Invested cash + NA +
2.Purchased pieces of furniture on account
3. Paid salaries of employees.
4. Received cash from cash customers.
5. Received cash from customers on account.
6. Withdrew cash for personal use.
7. Billed a customer for service rendered.
8. Received a bill for electric consumption.
9. Bought equipment and issued a promissory note
10.Paid ½ of the account in no. 2
11. Received promissory note for service rendered.
12. Paid 50% of the promissory note in no.9.
instruction:
Indicate the effect of the transaction on Assets,
Liabilities and Capital by writing a plus sign + to
indicate an increase; a minus sign – to indicate a
decrease and NA for no effect.
Transaction no.1 was answered for you.
 Activity 6
Write BT if business transaction , and NBT if not a business transaction.
1. Received cash for room accommodations.
2. Investment of kitchen equipment in a restaurant business.
3. Purchased food and beverage s on credit.
4. Paid suppliers.
5. Promotion of a supervisor to a managerial position.
6. Billed clients for use of conference facilities.
7. Withdrew cash from business for family use.
8. Hired new employees.
9. Received loan proceeds to upgrade hotel facilities.
10. Paid taxes and other business permits.
Accounting Concepts and Principles
Business Entity Concept was applied on July 1
since the business is considered separate
entity from the owner. Assets increased only
with the investment of one car
even when Ann Rich owned two cars. The other
car does not belong to the business.
This concept was also applied on July 19 when
cash was withdrawn
by Ann Rich for personal use .
Exchange Price or Cost Concept was applied on
July 3 and 13 when cash prices of the
Furniture and Equipment bought were P30,000
and P55,000 ,respectively.
Supported by purchase invoices for proper
documentation to be
processed by the accountant.
 Going Concern Concept
Supporting the Exchange Price/Cost Concept= it
is expected that the business will continue to
exist indefinitely. Properties are intended to be
used for a long period of time and therefore
should be recognized at cost without regard to
changes in their market values.
Example: Land acquired in 2012 at a cost of P1M
has a current market value of P1.8M. The Land
must still be presented at its cost of P1M.
 Accrual Concept
Assets, Liabilities , Revenues, and Expenses
should be recognized based on the time period
they relate or based on the occurrence of the
transaction rather than on whether Cash is
received or paid.
Ex: Bought medical equipment on March 8 but
paid for it on June 24. When will the transaction
be recorded?
Answer: On March 8, when the asset was
purchased. You don’t have to wait for the cash
to be paid in June before recording the
transaction.
 Objectivity Concept
Assets acquired must be verifiable and
substantiated by documents such as invoices,
vouchers or official receipts. This principle
supports the cost principle since valuation of
resources at cost is definite as it represents the
actual price of acquiring them. Current market
value is subject to constant change and usually is
based on estimate which is a matter of
judgment.
 Disclosure Concept
The value of financial information may be enhanced
to help users make informed judgment when
additional notes/explanations are given. Adequate
disclosure may be presented in the financial
statement itself or in its accompanying notes.
Ex. Cash of P2M as one account only in the statement
of financial position must show a breakdown: Cash
on Hand – P800,000 , Current Account – P1.2M
 Time Period
Since statement users need financial
information on a regular basis, the life of the
business has to be divided into specific time
intervals called Accounting Period . The usual
accounting period is one year. However, interim
reports may be prepared for shorter period of
time- monthly, quarterly or semi-annually.
Unit of Measure and Measurement in Terms
of Money
All business transactions are measured and
recorded using only one unit of measurement.
Since MONEY is used as a medium of exchange,
it is therefore the most practical unit of
measure. Remember that only financial data
measurable in terms of money are recognized
and recorded in the books of the business.
 ACTIVITY 7
Identify whether the following accounts are
assets, liabilities, capital, revenue or expense:
1. Professional fees 6. Rent expense
2. Food inventory 7. Taxes payable
3. Accounts receivable 8. Catering income
4. Loans payable 9. Building
5. Rooms revenue 10. Cash
11. Furniture and fixtures
12. Office supplies
13. Notes receivable
14. Utilities payable
15.Mortgage payable
16.Kitchen equipment
17.Car repair and maintenance
18. Delivery truck
19. Tuition fees
20. Prepaid Insurance
 Describe each of the transactions with their
amounts.
Transac CASH OFFICE OFFICE ACCOUNTS NOTES LAZO,
tions SUPPLIES FURNITUR PAYABLE PAYABLE CAPITAL
1 50,000 50,000
2 - 5,000 + 5,000
3 + 25,000 +25,000
4 - 8,000 - 8,000
5 - 2,000 - 2,000
6 - 10,000 + 10,000

7 - 1,000 - 1,000
8 + 20,000 +20,000
 ACTIVITY 8
The balances of the accounts giving effects to
the transactions of Spa Center owned by Zy Lo
are identified by letters. Describe briefly the
transactions. Compute for the total assets,
deduct liabilities and prove the owner’s equity
which is a final balance of P2,074,000.
 CASH MEDICAL 0FFICE FURNITRE ACCOUNT NOTES MAR,
EQUIPT SUPPLIES FIXTURES PAYABLE PAYABLE CAPITAL

1. 500,000 1,500,000 0 0 0 0 2,000,000

2. 500,000 1,500,000 15,000 0 15,000 0 2,000,000
3. 495,000 1,500,000 15,000 25,000 15,000 20,000 2,000,000
4. 495,000 1,580,000 15,000 25,000 15,000 20,000 2,080,000
5. 475,000 1,580,000 15,000 25,000 15,000 0 2,080,000
6. 470,000 1,580,000 15,000 25,000 15,000 0 2.075,000

7.470,000 1,580,000 14,000 25,000 15,000 0 2,074,000

8. 470,000 1,580,000 14,000 25,000 0 15,000 2,074,000
 Assignment
COPY CLEAR started its operation on Jan.2,2018
The owner , Kier Gelo invested cash of P20,000 and
equipment worth P48,000. Additional transactions
for the month follow:
Jan. 5 Bought furniture and fixtures worth
P6,000 on account.
7 Bought additional photocopying machine
for P20,000. Terms: 50% down, balance on
account to be paid at the end of the month.
Jan. 8 Hired a helper on commission basis, based
on 10% of sales , to operate the machine.
10 Mr. Gelo withdrew P1,500 cash for
personal use.
19 Bought supplies costing P3,000 for cash.
23 Paid the account of Jan.5 from his
personal cash.
31 Mr. Gelo issued a promissory note for the
account of Jan.7
Instruction:
Using a table format, write down the effects of
these transactions on the accounts under each
of the accounting elements. Determine the
balances after every transaction. Prepare the
statement of financial position as of January 31.
 Accounting Matters to Stakeholders

Stakeholder – a person or entity who has a stake

or interest in the economic performance of a
business:
1. Owner or investor – puts in capital (money or
property) in a business endeavor in order to
earn profit; the investor assesses the risk of
investing in the busines by finding out the
answers to these questions:
a. Is the business PROFITABLE and earning a
satisfactory return on investment (ROI) ?
b. Is the business solvent?
c. Has it accumulated sufficient financial wealth
to remain stable?
Manager – responsible for organizing, planning ,
directing and controlling the operation of the
business; a manager must be a good steward ,
protecting the business resources and helping it
grow in value; financial reports make it possible
for one to evaluate performance of the business
and assess the quality of management of the
officers and supervisors.
Lender - assesses the ability of the business-
borrower to pay the principal debt and an
additional charge called interest
Can the business repay the money on maturity
date? Does it have liquid assets?
The paying ability of the business-borrower can
be obtained by reviewing its financial position.
Supplier – offers goods or merchandise on cash
basis or on credit term depending on the paying
ability of the business
Will it be able to pay its account on the date it
becomes due?
The accounting information to determine the
credit worth of the business is also based on its
financial position
Government – uses the accounting reports in
several ways ; as tax collector , it investigates tax
returns and tax liability; as a regulatory body, it
verifies if one is complying with its rules and
regulations
Employee – wants higher wages , benefits , good
working conditions and security of tenure
A review of the company’s financial reports will
enable one to assess the ability of the business
to grant these demands.
The company cannot afford to grant higher
salaries and more benefits if the business is
losing as reflected in its financial performance.
Customers – assess the company’s ability to
continuously supply the goods they need at the
right price and quality
The fairness o the price is reflected in the
financial performance.
The ability to ensure continuous supply could be
determined from its financial position.
Financial Reports and Financial Information

1. Income Statement – shows how wealth is

produced by listing the Revenues earned and
Expenses incurred by the business for a given
period of time
2. Statement of Financial Position – shows the
wealth accumulated by listing the Assets,
Liabilities and Net Worth of the business as
of a given time
3. Statement of Owner’s Equity – show why the
Net Worth changed by listing the activities
that caused it to increase or decrease
4. Statement of Cash Flows – shows what
happened to the CASH by enumerating the
activities of cash inflows and cash outflows
 Accounting Cycle
1. Analyzing the business documents or
transactions – determine the impact of the
transactions on the financial position as
represented by the basic equation assets
equal liabilities plus equity
2. Journalizing – the process of recording the
transactions in a journal
3. Posting – transfer of transactions as classified
and recorded in the journal in the appropriate
accounts in the general ledger and subsidiary
ledger (Recording Phase)
4. Preparing the unadjusted trial balance
5. Preparing the adjusting entries
6. Preparing the financial statements
7. Preparing the closing entries
8. Preparing a post-closing trial balance
9. Preparing the reversing entries
(Summarizing Phase)
Optional – post closing trial balance
reversing entries
worksheet