Introduction

A. Definition of Accounting
B. Types and Forms of Business
C. The four (4) phases of accounting
D. The five (5) elements of the Financial Statements
E. The five (5) basic Financial Statements
F. Basic Accounting Equation
G. Rules of Debit and Credit
Accounting is the language of business.
 Bridge of communication (of financial
data/information)
 Two-way communication (Business to Users of financial
information)

Defined by the American Institute of Certified Public

Accountants (AICPA):

It is the art of recording, classifying, summarizing

in a significant manner and in terms of money,
transactions, and events which are, in part at
least, of a financial character, and interpreting
the results thereof.
1. Service-Oriented Business – its product is the service
rendered, skills, knowledge or expertise.
2. Merchandising or Trading Business – it sells finished
products which the business buys.
3. Manufacturing Business - it processes inputs to form
finished goods which they sell later.
4. Agriculture Business – this business are those who do
the actual planting of the produce, do the fishing, raise
poultry or cattle, piggery, etc. and sell whatever their
produce.
5. Hybrid Business – the business which has two or more
types of business ex. Bake Shop which produce their
pastries (manufacturing) and sells soda or other drinks
(merchandising).
1. Sole Proprietorship – owned by one person called
the Proprietor. It is also the easiest to form.
2. Partnership – owned by two or more persons called
the Partners. It can be formed formally (with a
written agreement) or informally (may be formed
even with a mere handshake).
3. Corporation – owned by share- or stockholders
with shares of stock as evidence of their ownership.
There are also Corporations that does not issue
shares of stocks ad these are called Non-Stock
Corporation (ex. USJ-R, INC.) and their owners are
called members.
4. Cooperative – an organization which intention is to
help the members to augment their livelihood. The
owners are called members and they joined the
organization voluntarily.
1. Recording. This involves the routine and mechanical
process of writing down the business transactions
and events in the books of accounts in a
chronological manner called Journalizing.

2. Classifying. This involves sorting or grouping of

similar transactions and events into their
respective kind and classes. This is the actually the
process of transferring the entries from the
journal to the ledger called Posting.
3. Summarizing. This involves the completion of the financial
statements and accounting requirements as well. This
includes preparation of the trial balance, worksheet, financial
statements, closing entries, post-closing trial balance and
reversing entries.

4. Interpreting. This involves the “analytical and interpretative

works”. It is then, that when financial statements are
analyzed, interpreted and are communicated to those
interested parties where these could be of great help to
management as a basis for making a sound decision.
In order to enhance the quality of information
in financial statements, business transactions
are grouped in different classes or categories
on the basis of their economic characteristics.
The broad classes or categories are called
elements of financial statements. These
elements help measure the business’
financial position and performance.
I. The elements that are directly related to the measurement of
financial position in the Balance Sheet of the business are -

Assets.
 These are valuable resources owned by the business.

 Their characteristics are:

1. Controlled by the business.

2. These are the results of past events (either it is bought,
donated, invested or traded).
3. These can provide future economic benefits for the business.
Example: Cash, Accounts Receivables, Inventory, Property,
Plant and Equipment
Liabilities.
 This element is the obligation of the business to outside
parties who have furnished resources (or what the business
owed).
 Its characteristics are:

1. The represents the business obligations.

2. It signifies transfer of economic benefit (this could be a
transfer of cash or other property).
3. Like assets, these are the results of past events.
4. There is a complementary nature of assets and liabilities
(like mirror images of each other – meaning if there is an
effect on assets, there has to be in any way affect on
liabilities.
Owners’ Equity.
It is defined as the residual interest in the assets of the
business after deducting all its liabilities (or also known as
the net assets).
This may pertain to the following:

Sole Proprietorship and Partnership – capital (or investment net

of withdrawal) of the proprietor and/or partners.
Cooperative – members’ contribution.
Corporation – stockholders’ equity.

In a way, this is also an obligation of the business to the

owner(s).
This element is influenced with the profit or loss of the business.
For a corporation, the stockholders’ equity is also affected with
the dividend that the business declares during the period.
II. The elements that are directly related to the measurement of
the performance in the Income Statement of the business are –
 
Income.
 It increases in economic benefits during the accounting period

in the form of inflows or enhancements of assets or decreases

of liabilities that result in increases in equity.
 This encompasses both revenue (income that arises in the

course of the ordinary activities of a business) and gains

(increase in economic benefits that is not from the ordinary
course of the business).

Example – Sales, Revenue from services rendered, income on

room accommodation, etc.
Expenses.
 It decreases in economic benefits during the accounting
period in the form of outflows or depletion of assets or
incurrence of liabilities that result in decrease in equity,
other than those relating to distributions to equity
participants.
 This encompasses the expenses that arise in the course
of the ordinary activities of the business, losses that
represent other items that is not in the ordinary course
of the business and cost of goods sold or services
rendered.
 
Example – selling expenses, cost of sales, advertising
expenses, etc.
Financial Statements are the final results or
output of Accounting.
They contained the financial information/data
processed by Accounting which are relayed to
the different users for whatever use they are
to the latter.
The proper sequence in the preparation of the
Financial Statements is as follows:
1. Income Statement
2. Statement of Changes in Owner’s Equity
3. Balance Sheet
4. Statement of Cash Flows
5. Notes to the Financial Statements
The Income Statement (otherwise known as
Statement of Comprehensive Income for the
Period) presents a summary of the revenues or
income and expenses of an entity for a specific
period. It therefore shows the results of the
business’ operations, which may be –
Profit (Revenue or Income > Expenses)
Loss (Revenue or Income < Expenses)
Breakeven (Revenue or Income=Expenses)

NOTE: In Accounting, Loss is written with a parenthesis.

The Statement of Changes in Owner’s Equity
summarizes the changes that occurred in the
owner’s investment or Capital to the
business. The Owner’s Equity can be affected
by the following:
1. Results of the Operations of the Business:
 Profit (+)
 Loss (-)
 Breakeven (no effect)
2. AdditionalInvestments (+)
3. Withdrawals or Drawing of the owners (-)
The Balance Sheet is otherwise known as the
Statement of Financial Position. It also discloses
the financial position or condition or net worth of
the Business by listing its total Assets, Liabilities
and Owner’s Equity.
It may be presented through Report Form wherein
the Assets, Liabilities and Owner’s Equity are
simply listed in a vertical sequence. Or through
Account Form where in the Assets are listed on
the left side of the report and the Liabilities and
Owner’s Equity are on the right side of the
report.
The Statement of Cash Flows provides the
information about the total cash receipts and
cash payment of the Business during a period. In
the Statement, the cash receipts are classified as
Inflows while the cash payments are the
Outflows.
There are three (3) activities disclosed in this
Statement –
1. Operating
2. Investing
3. Financing
It indicates the net increase and decrease in cash
during the period and the cash balance at the
end of that specific period.
The Notes to the Financial Statements or
otherwise known as Disclosures is the only
narrative report which includes the
explanations of what are the significant
information that relates to the different
statements.
BASIC ACCOUNTING EQUATION:
 
Assets = Liabilities + Owner’s Equity

EXPANDED ACCOUNTING EQUATION:

Assets=Liabilities + Owner’s Equity (-Drawing

+ Income – Expenses)
DEBIT – Value Received or the left side of the T-Account.
CREDIT – Value Parted With or the right side of the T-
Account.

ELEMENT DEBIT CREDIT NORMAL BALANCE

Assets + - DEBIT
Liabilities - + CREDIT
Owner’s Equity - + CREDIT
Income - + CREDIT
Expense + - DEBIT