Mr. Nestor O.

Dela Cruz
Accounting Teacher
Let us pray:
“Our Father, Who art in heaven,
hallowed be Thy name. Thy Kingdom
come, Thy will be done, on earth as
it is in heaven. Give us this day our
daily bread, and forgive us our
trespasses, as we forgive those who
trespass against us; and lead us not
into temptation, but deliver us from
evil” Amen.
Fundamentals of Accountancy,
Business and Management 1
Accounting Concepts and Principles
 Petness First Petshop

Juan dela Cruz opened his pet shop business called Petness First Petshop.
He opened a bank account for his business and deposited PHP500,000. The
business earned PHP50,000 but he had doubts with the recorded expense
of PHP60,000. He is not sure if he should include
the following items as expenses:

Salary expense 20,000

Rent expense 10,000
Utilities expense (at home) 15,000
Utilities expense (at the store) 10,000
Insurance expense 5,000
Withdrawals 10,000
TOTAL 60,000
What do you think should not be included as
expenses. Then explain why.
 Salary expense – it should be included since it is related to the
operations of the business
 Rent expense – it should be included since the rent is for the business
 Utilities expense (home) – should not be included; it is a personal
expense
 Utilities expense (store) – should be included; it is an expense of the
business
 Insurance expense – should be included since the insurance is for the
business
 Withdrawals – should not be included since the withdrawal is for
personal use
Accounting Principle
 Business Entity Principle
a business enterprise is separate and distinct
from its owner or investor

 Example:
 Ifthe owner has a barber shop, the cash of the barber shop
should be reported separately from personal cash.
 The owner had a business meeting with a prospective client.
The expenses that come with that meeting should be part of
the company’s expenses. If the owner paid for gas for his
personal use, it should not be included as part of the company’s
expenses.
 Going Concern Principle

business is expected to continue indefinitely.

 Example:
 Whenpreparing financial statements, you should
assume that the entity will continue indefinitely
 Time Period Principle

 financial
statements are to be divided into specific
time intervals.

 Example:
 Philippine
companies are required to report financial
statements annually.
 Thesalary expenses from January to December 2015
should only be reported in 2015.
 Monetary Unit Principle
amounts are stated into a single monetary unit

 Example:
 Jollibee should report financial statements in pesos
even if they have a store in the United States.
 IHOP should report financial statements in dollars even
if they have a branch here in the Philippine
 Objectivity Principle
financialstatements must be presented with
supporting evidence.

 Example:
 When the customer paid Jollibee for their order,
Jollibee should have a copy of the receipt to represent
as evidence.
 Whena company incurred a transportation expense, a
voucher should be prepared as evidence
 Cost Principle

accounts should be recorded initially at cost.

 Example:
 When Jollibee buys a cash register, it should record the
cash register at its price when they bought it.
 When a company purchases a laptop, it should be
recorded at the price it was purchased.
 Accrual Accounting Principle
Revenue should be recognized when earned
regardless of collection and expenses should be
recognized when incurred regardless of
payment. On the other hand, the cash basis
principle in which revenue is recorded when
collected and expenses should be recorded when
paid. Cash basis is not the generally accepted
principle today.
Example:
When a barber finishes performing his services
he should record it as revenue. When the barber
shop receives an electricity bill, it should record
it as an expense even if it is unpaid.
 Matching Principle
costshould be matched with the revenue
generated.

Example:
When you provide tutorial services to a customer
and there is a transportation cost incurred related
to the tutorial services, it should be recorded as
an expense for that period
 Disclosure Principle

allrelevant and material information should be

reported.

Example:
The company should report all relevant
information.
 Conservatism Principle
 alsoknown as prudence. In case of doubt, assets and
income should not be overstated while liabilities and
expenses should not be understated.

 Example:
 In case of doubt, expenses should be recorded at a
higher amount. Revenue should be recorded at a lower
amount.
 Materiality Principle
 in case of assets that are immaterial to make a
difference in the financial statements, the company
should instead record it as an expense.

 Example:
A school purchased an eraser with an estimated useful
life of three years. Since an eraser is immaterial
relative to assets, it should be recorded as an expense.
Accounting Equation
Give them an overview regarding the accounting equation

• That the accounting equation is Assets = Liabilities + Equity

• That for every transaction, the accounting equation should
always be balanced.
• That Assets are resources owned by the business. Ask them
to enumerate or give an example of Assets
• That Liabilities are obligations by the business. Ask them
to enumerate or give an example of Liabilities
• Explain that Equity is the residual interest of the
owner of the business. Meaning, any assets left after
paying liabilities is the right of the owner of the
business.
• Explain that there are four elements that affect
equity: (1) Investment; (2) Withdrawal; (3) Revenue,
and; (4) Expenses.
 Connect to a real life situation.
 1. Place the accounting equation at the board.
 2.Ask the learners for an examples of business
transactions
 3.
Prove that for every transaction the accounting
equation should always balance.
Debit and Credit
Business transactions cause increases and
decreases in the accounting values. To record
these changes, a business firm makes use of
accounts.
 Definition of terms:

Account – is an accounting device use to summarize the

increases and decreases in the asset, liability, and
proprietorship or equity of the business.

Debit – amount entered on the left side of the account.

Credit – amount entered on the right of the account.

Equality – the fact of being equal; of having the same value.

 T- Account

A simple form of account looks like a big letter

“T”, thus it is called a “T”-Account”.

It has a left side and a right side. It appears

as follows:
The T-Account

Cash Account Title

Dr. Cr.

LEFT SIDE RIGHT SIDE

Three parts :
1) Account Title – is on top of the “T-account”, example: Cash

2) Debit– which also abbreviated into Dr.

It is an amount entered on the left side of the account.

3)Credit - which also abbreviated into Cr.

It is an amount entered on the right side of the account.
 Debit and Credit

“To debit” and “to credit”, however, should not be

confused with “to increase” and “to decrease”.
To debit and to credit may mean either a
decrease or an increase depending on the
accounts affected.
Thus, the rules of debit and credit must be
followed and remembered:
Rules of Debit and Credit

Assets Liabilities Owner’s

= + Equity

Debit Credit Debit Credit Debit Credit

+ – – + – +
 When we put into words:
Debit to: Credit to:
1. Increase assets 1. Decrease assets
2. Decrease in liability 2. Increase liability
3. Decrease proprietorship 3. Increase proprietorship
due to: due to:
a. Withdrawal of assets by a. Investment by the owner
the owner b. Decrease in expenses and
b. Increase in expenses and losses
losses c. Increase in income
c. Decrease in income
 Example:

Paolo Reyes started a delivery service on 2013. The

following transactions occurred during the month of
July.
July 1 - He invested PHP800,000 cash and Cars
amounting to PHP200,000.
 July2 – Reyes borrowed PHP100,000 cash from PNB
for use in his business.
 July7 – Bought tables and chairs from Orocan and
paid PHP45,000 cash.
 July
15 – Various equipment were purchased on
account from Fortune for PHP55,000.
 July18 – Reyes made a cash withdrawal of PHP5,000
for personal use.
 July 20 – The account due to Fortune was paid in cash
 Determining profit through operation

• Accrual basis of accounting vs. Cash basis of accounting –

accrual basis recognizes revenue when earned and
recognizes expenses when incurred
• Under the expense recognition principle, expenses can be
recognized either as: (1) matching; (2) systematic
allocation, or; (3) direct association.
• Profit measures the performance of the company. If the
revenue exceeds expenses, then it is a net profit;
otherwise, it is a net loss.
 July 21 – A customer hired the services of Reyes. Cash of PHP15,000 was
received from the customers.
 July 22 – Cash was paid for the following : gas and oil, PHP500 and car
repairs, PHP1,000.
 July 24 – Another customer hired the services of Reyes and promised to pay
PHP16,000 on July 31.
 July 25 – Paid PHP500 for telephone bill.
 July 27 – Another customer hired the services of Reyes. A bill was issued to
them for PHP20,000, 50% of which was collected.
 July 30 – The customer on July 24 paid 50% of his account in cash.
 July 31 – Paid PHP10,000 for rental of office space, and salaries of PHP9,000
 Debits and Credits Summary

Debits decrease Credits increase

liabilities and equity; liabilities and equity;
Debits increase Credits decrease
assets. assets.
 Debits and Credits

 Debit(dr.) - an entry or balance on the left side of an

account
 Credit(cr.) - an entry or balance on the right side of an
account

 Remember:
 Debit is always the left side!
 Credit is always the right side!