PRINCIPLES OF

ACCOUNTING
DEFINITION
Accounting deals with recording,

classifying, summarizing, interpreting,

and communicating financial information

for the benefit of various interested parties

NATURE OF
ACCOUNTING
NATURE OF ACCOUNTING

1. ACCOUNTING AS A SYSTEMATIC PROCESS

• Process is a series of action that

produce something or lead to a
particular result.
NATURE OF ACCOUNTING

2. ACCOUNTING AS AN ART
• Art is a skill acquired by experience
study or observations
• Accounting requires a skills method and
techniques.
NATURE OF ACCOUNTING

3. ACCOUNTING AS A SERVICE ACTIVITY

• Service is the occupation or function of
serving.
• Activity is something that is done for a
particular purpose.
2 Types of Information in Accounting

1. Quantitative
• Expresses in numbers
• In accounting, Business transactions are
expressed in terms of money
2 Types of Information in Accounting

2. QUALITATIVE
• Non-numeric
• It has no financial characters
• Examples are Events, venue, and
people.
4 ASPECTS OF
ACCOUNTING
4 Aspects of Accounting
1. RECORDING
• Writing down and Keeping records of
business transactions. (Usually done
by bookkeepers)
BOOKKEEPERS VS ACCOUNTANTS

Bookkeepers
• Main function is to record and
maintains accounts and transactions.
BOOKKEEPERS VS ACCOUNTANTS
Accountants
• Classify the recorded items according
to their similarities .
• They also make summary by
translating the data into reports such a
Financial Statements.
4 Aspects of Accounting
2. CLASSIFYING
• In this phase, items are sorted and grouped,
similar items are classified under the same
name.
• They may be classified as ASSET,
LIABILITY, OWNERS EQUITY,
REVENUE, and EXPENSE.
4 Aspects of Accounting
3. SUMMARIZING
• After each accounting period, data recorded
are summarized using final statements.
• These reports are submitted to the
management at the end of accounting
period or as the need arises.
4 Aspects of Accounting

4. INTERPRETING
• After doing financial statements,
accountants need to interpret or analyze
the information in the FS and they also
need to submit analysis report to the
owner or management.
Economic Entity or Business Entity
• Is an organization that uses resources
to achieve its goals and objectives.
2 Types of Business Entity
• Profit Entity
• Non-Profit Entity.
BUSINESS
ORGANIZATION
BUSINESS ORGANIZATION

Business organization can be classified into

two:
1. According to ownership
2. According to nature of Business.
BUSINESS ORGANIZATION

According to Ownership
1. Single or sole Proprietorship
• Owned by one person only
• The owner is also the manager
of the business
BUSINESS ORGANIZATION
According to Ownership
2. Partnership
• A business entity with two or more owners.
• The owners are called partners
• They contribute capital to the business to
divide profit among themselves.
Types of Partners
1. General partners
2. Capitalist Partner
3. Industrial Partner
4. Managing Partner
5. Liquidating Partner
6. Dormant/silent partner
7. Secret Partner
BUSINESS ORGANIZATION
According to Ownership
3. Corporation
• Business organization not less than 5
persons.
• Artificial being created by operation of
laws.
• Investors are called stockholders/
BUSINESS ORGANIZATION
According to Nature of Business.
1. Service Business
• Deals with rendering of services to the
customers.
• Examples: tailoring shop, beauty salons,
laundry shop, firms of CPA’s Lawyers,
Doctors, Dentists and others.
BUSINESS ORGANIZATION
According to Nature of Business.
2. Merchandising or Trading Business
• In this type of business, the seller buy
goods and then sell the goods to generate
profit.
• Examples: Sari-sari stores, grocery stores,
department stores, etc.
BUSINESS ORGANIZATION
According to Nature of Business.
3. Manufacturing Business
• This involves buying raw materials then
converting it into finished products.
• Examples: Bake Shop, textile
manufacturing, candy manufacturing,
sardines manufacturing.
BRANCHES OF
ACCOUNTING
1. FINANCIAL ACCOUNTING
• Primarily concerned with the recording
preparation and presentation of business
transaction in the form of financial
statements to provide business owners a
picture of the operation result.
2. COST ACCOUNTING
• Deals with the measurement and
recording of all the cost incurred in a
business to help the management in
controlling expenses
3. MANAGEMENT ACCOUNTING
• The objective is to provide reports and
information about business transactions
to the internal users.
• Internal users are the people within the
business org. examples are owner,
manager and employees.
OTHER FIELDS OF
ACCOUNTING
TAX ACCOUNTING
• Businesses are also taxpayers.
• Tax accounting is a special type of
accounting that focuses on taxes to ensure
that the business complies with the tax
laws and to minimize business tax
liabilities through legal means.
GOVERNMNET ACCOUNTING
• Concerned with the systematic collecting,
recording, summarizing analyzing, and
interpreting of financial transactions related
to the expenditures and revenues of
government institutions.
• To disclose to the public how funds are
being generated and spent.
AUDITING
• Financial records are carefully examined
to determine the accuracy and fairness of
these records.
• Types of Auditing
• Internal – employee inside the business
• Extenal- third parties/outside the business
ACCOUNTING EDUCATION
• employs accountants as educators and
researchers.
• Improve and develop accounting
curriculum for education.
Activity: Fill in the blanks
____1. validation of financial statement
____2. Preparation of tax returns
____3. Preparation of cost incurred in the
business
____4. Accounting for public funds
____5. recording and presentation of financial
records to external users.
Activity: Fill in the blanks
____6. Accounting to help managers and
owners to plan and manage their business.
____7.develop accounting curriculum in
schools
____8. guidance for compliance of tax
obligations.
USERS OF
ACCOUNTING
INFORMATION
INTERNAL USERS
• Owners
• Managers
• Employees
EXTERNAL USERS
• Creditors
• Investors
• Government and Tax Authorities
• Customers and Consumers
• Competitors
• Lawmakers and Economic Planning
The Basic
Accounting
Equation
 A
Assets
= L + OE
= Liabilities + Owners
Equity
The asset of the business should always be equal to
the total capital plus its total liabilities.
Problem#1.
Given liabilities of P50,000.00 and owners equity of
P150,000.00, find the amount of assets.
Problem#2.
Given assets of P180,000.00 and owners equity of
P110,000.00, Find the liabilities.
EXPANDED ACCOUNTING EQUATION
Assets = Liabilities +
Owners Equity –
Withdrawals + Revenues
- Expenses
4 BASIC FINANCIAL
STATEMENTS AND
THEIR ELEMENTS
WHAT IS FINANCIAL STATEMENT (FS)
• Are formal reports prepared by
accountants
• End product of Accounting.
1. Statement of Financial Position
(Balance Sheet)
• Shows the financial condition of a
business after a specific period of time.
It consist of assets liabilities and capital.
2. Statement of Financial Performance or
Statement of Comprehensive Income.
(Income Statement)
• Shows the financial performance of a business
for a certain period.

• It tells us how much the business has earned

or lost.
3. Statement of Changes in Owners Euity
• Shows the changes in the capital as a result
of additional investment or withdrawals by
the owner plus or minus the net income or
net loss for a specific period.
4. Statement of Cash flow
• Cash – is the most liquid assets of the business.
• Summarizes the cash receipts (inflows) and
cash disbursement (outflows) for the
accounting period. It summarizes the cash
activities of the business by classifying cash
receipts and cash payment into OPERATING,
INVESTING, and FINANCING activities.
 TYPICAL
ACCOUNT
TITLE USED
STATEMENT OF
FINANCIAL
POSITION
(Balance Sheet)
1. ASSETS
• Are economic resources or properties owned
by the business expected for future gain

• Assets can be classified into two: Current or

Non-Current Assets
CURRENT ASSETS
Examples:
• Cash and cash • Accrued Income
equivalents
• Supplies
• Accounts Receivable
• Merchandise Inventory
• Notes Receivable
• Prepaid Rent
• Interest Receivable
• Prepaid Insurance
• Advances to Employees
NON-CURRENT ASSETS
Examples:
Property Plant and Equipment – Tangible assets
• Land
• Building
• Furniture
• Equipment
INTANGIBLE ASSETS
Examples:
• Goodwill • Licenses • Franchise
• Patents • Trademarks
• Copyrights • Brand names
2. LIABILITIES

• Includes debts, obligations to pay and

claims of the creditors on the assets of
business.
CURRENT LIABILITIES
Examples:
• Accounts Payable ACCRUED LIABILITIES
• Notes Payable • Salaries payable
• Loan Payable • Interest payable
• Utilities Payable • Tax Payable
• Unearned Revenues
NON-CURRENT LIABILITIES
Examples:

• Mortgage Payable - with promissory note and

collateral

• Bonds Payable - long term debt

3. OWNERS EQUITY/ CAPITAL
• Refers to the amount of equity of the
business owners.

• The claims of owners in the asset of the

business after deducting all liabilities.
Owners Equity Accounts
1. Capital
is the account bearing the name of the owner representing
the initial and additional investment.
2. Owners withdrawal/ Drawings
Represents the withdrawals of the owner from the
asset of the business.
3. Income Summary
It is a temporary account used at the end of accounting
period to close income and expenses.
 STATEMENT OF
FINANCIAL
PERFORMANCE
(Income Statement)
4. REVENUE/INCOME
Service Revenue - Revenues earned by performing
services for a customer
Examples
• Laundry Revenue • Dental Revenue
• Accounting Revenue
• Photography Revenue • Legal Service Revenue
• Plumbing Service Revenue • Transportation Service
• Medical Revenue Revenue
• Interest Revenue
Sales – Revenues earned as a result of sale of merchandise
5. EXPENSES
Examples: • Rent Expense
• Repairs and Maintenance
• Cost of Sales Expense
• Salaries or Wages • Advertising Expense
Expense • Interest Expense
• Utilities Expense • Tax expense
• Depreciation Expense
• Supplies Expense • Miscellaneous expense
• Insurance Expense • Uncollectible Expense
TRANSACTIONS
• The data that we record in the accounting
books are called transactions.
• These are the economic activities of the
business.
TRANSACTIONS
• In every transaction, there is always a value
received (Debit- tinanggap) and a value
parted with (Credit-Pinalabas).
• Example:
Value Value
Transaction Received Parted with
Purchase office supply for cash Supplies Cash
 Value
Transaction Value Received
Parted with
Right to
Paid Rent occupy the Cash
space
Received cash from customer for
services rendered. cash service
Paid telephone bill Telephone
service
cash
Purchase Equipment on account. Obligation
equipment
to pay
 Value
Transaction Value Received
Parted with

Purchase office supply on credit. Office Obligation

supply to pay

Sold merchandise for cash cash merchandise

Employee
Paid salaries to employees
Service cash
Made a loan from a bank cash Obligation
to pay
 Value
Transaction Value Received
Parted with

Paid cash for advertising service. Advertisin cash

g service
Receive cash from services
rendered cash service
Purchase merchandise for cash merchandise cash
Service
Purchase service vehicle for cash
vehicle
cash
 Value Value Parted
Transaction
Received with

Return merchandise to supplier

that previously bought for cash. cash merchandise

Sold merchandise on customers Accounts merchandise

on credit.
receivable
MAINTAINING
THE BALANCE
A = L + OE
 Mr. A Internet Café Business
Transaction #1
On March 21, Mr. A made an initial
investment of P500,000.00 to start his
business
Transaction #2
On March 23, Mr. A purchase computer
units for cash P200,000.00
Transaction #3
On March 24 Mr. A paid P10,000.00 for the
rent of the place.
Transaction #4-5
On March 26, Mr. A paid P10,000 to
computer technician who set up the network
connection. On the same day he also paid the
internet provider the amount of P15,000 for
the internet connection.
Transaction #6
On March 27, Mr. A Purchased office Supplies
on account amounting to P5,450
Transaction #7
On April 1. Mr. A received an amount of
P300,000.00 as a loan from a bank.
Transaction #8-10
On April 2, Mr. A’s business becomes
operational and he earned the following
income, April 2, P15,000.00, April 3,
P15,540.00 and April 4, 17,675
Transaction #11-12
Aside from computer rentals, Mr. A also offers
graphic design services.
On April 5, he rendered graphic design service and
received P5,000.00 from client. On the same day his
operation revenue is P16,750.
Transaction #13-14
On April 6, Mr. A revenue is P18,455.00 but on the
same day, Mr. A made a withdrawal amounting to
P20,000 for his personal use.
ACTIVITY
Dolores Aguilar Industrial Spray Service Transactions
for the month of April, 2020.
A. Invested cash in the business, P60,000.
B. Bought a service vehicle for P112,500; paying
P22,500 and the balance is payable within 1 year.
C. Bought Spray Equipment on account, P18,000.
D. Paid rent for the month P5,600
E. Paid cash for insurance on service vehicle for the
year. P5,760
F. Received cash for spray services , P21,750.
G. Bought supplies for cash. P5,730
H. Billed customers on account for services
performed P4,440.
I. Paid cash for utilities , P960
J. Received bill for gasoline used by the service
vehicle during the month. P3,270
K. Receive cash from customer for services rendered.
P16,420
L. Aguilar withdrew cash for personal use P10,500
M. Paid Salaries to employees. P20,400
THE DOUBLE
ENTRY
SYSYTEM
The Double Entry System
• Recording transactions in accounting
is based on the double-entry system.
• The transaction has dual effect which
means that every transaction affects
at least 2 accounts.
THE ACCOUNTING
CYCLE
During the accounting period
Step 1
Identification of Events to be recorded
Step 2
Transactions are recorded in the Journal
Step 3
Journal entries are posted to the ledger
At the end of the accounting period.
Step 4
Prepare a trial balance
Step 5
Preparation of the worksheet including
adjusting entries.
 Step 6
Preparation of Financial Statements
Step 7
Adjusting journal entries are journalized
and posted
 Step 8
Closing Journal Entries are journalized
and posted
Step 9
Preparation of post-closing trial balance
At the start of the next period
Step 10
Reversing Journal Entries are
journalized and posted
TRANSACTION ANALYSIS
1. Identify the transaction from source of documents
2. Indicate the accounts – either assets liabilities,
equity, income or expense affected by the transaction
3. Ascertain whether each account is increased or
decreased by the transaction.
4. Using the rules of debit and credit, determine
whether to debit or to credit the account to record its
increase or decrease.
RULES ON DEBIT
CREDIT
RULES ON DEBIT CREDIT
NORMAL Increase/
ACCOUNT Debit/Credit
BALANCE Decrease
Increase Debit
ASSETS DEBIT
Decrease Credit
WITHDRAWAL Increase Debit
DEBIT
S Decrease Credit
Increase Debit
EXPENSES DEBIT
Decrease Credit
RULES ON DEBIT CREDIT
NORMAL
Increase/
ACCOUNT BALANC Debit/Credit
Decrease
E
Increase Credit
LIABILITIES CREDIT
Decrease Debit
OWNERS Increase Credit
CREDIT
EQUITY/CAPITAL Decrease Debit
Increase Credit
REVENUES CREDIT
Decrease Debit
 THE
JOURNAL
The Journal
• The journal is the chronological
records of events or business
transactions.
• It is also called the book of original
entry because transactions are
initially recorded in the journal.
The General Journal
• The general journal is the
simplest journal.
General
Date
Journal
ACCOUNT TITLE/EXPLANATION PR DEBIT CREDIT
2024
1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
10 10
11 11
12 12
13 13
14 14
15 15
A journal entry should contain the following:
1. Date
2. Account title and Explanation
3. P.R. (Posting Reference)
4. Debit amount
5. Credit amount
Example: On January 1, 2024, Mark Reyes invested
P350,000.00 cash in the business.

Entry in General Journal:

Date ACCOUNT TITLE/EXPLANATION PR DEBIT CREDIT
2024
1 Jan 1 Cash 110 350,000.00 1
2 M. Reyes Capital 350,000.00 2
3 To Record investment of the owner 3
4 4
5 5
Simple and Compound Entry
Simple Entry
Only two accounts are affected
Compound Entry
More than two accounts are affected or
required in the journal entry.
TRANSACTION ANALYSIS
1. Identify the transaction from source of documents
2. Indicate the accounts – either assets liabilities,
equity, income or expense affected by the transaction
3. Ascertain whether each account is increased or
decreased by the transaction.
4. Using the rules of debit and credit, determine
whether to debit or to credit the account to record its
increase or decrease.
Activity Problem #1
Accounts Nature of Normal Increase/ Debit
Date
Affected Account Balance Decrease /Credit

Cash A Debit I Debit

Sept 1 M. Reyes
C Credit I Credit
Capital
Cash A Debit D Credit
Sept 2 Rent
E Debit I Debit
Expense
 THE
CHART OF
ACCOUNTS
Chart of Accounts
• Is a list of all account titles used by the
business with their corresponding
account numbers
 THE
T-ACCOUNT
Use of T - Accounts
• The simplest form of the account is the
T-Accounts because of its similarity to
Letter T.
• Is a form of record that summarizes the
increases and decreases of any specific
accounting value.
T-Accounts has 3 parts:
1. Account title
2. Debit – value received “tinanggap”
3. Credit - value parted with
“pinalabas”
 T-Accounts
Account Title/Name
The Left side or The right side or
DEBIT CREDIT
 THE
LEDGER
 LEDGER

• Is the group of accounts used by the

company. It is the book of Final Entry.
• GENERAL LEDGER
• Is the “reference book” of the
accounting system and is use to
classify and summarize transaction
and to prepare data for basic
financial statements.
• The accounts in general Ledger are
classified into two groups:
1. Balance Sheet or Permanent Accounts
(Assets, Liabilities and Owners Equity)

2. Income Statement or temporary or

nominal accounts (income and
expenses)
 THE
TRIAL BALANCE
Trial Balance
• Is a list of all accounts with their
respective debit or credit balances. It is
prepared to verify the equality of debits
and credits in the ledger at the end of
accounting period.
4 Steps in preparing Trial Balance
1. List accounts titles in numerical order
2. Obtain the account balance of each
account from the ledger and enter the
debit balances in the debit column and
the credit balances on the credit
column.
Steps in preparing Trial Balance
3. Add the debit and credit column
4. Compare the column.