LESSON 1

INTRODUCTION
TO

BASIC ACCOUNTING
LEARNING OBJECTIVES

At the end of this lesson, you should be able to learn the ff:

• Definition and importance of Accounting

• Forms of business organizations
• Activities in business organizations
• Users of financial statements and their information needs
• Fundamental concepts and basic principles in accounting
• Elements of Financial Statements
• The account and The Accounting Equation
DEFINITION

ACCOUNTING is the process of

identifying, measuring and
communicating economic information
to permit informed judgments and
decisions by users of the information.
(American Accounting Association)
PURPOSE

• The very purpose of accounting is to provide

quantitative information for making economic
decision.
- How much profit do I make?
- Which item is more profitable?
- Should I expand?
- Should I borrow money from the
bank?
Three (3) components of Accounting

Identifying Measuring Communicating

- Only accountable and

- Information are - Preparing and distributing
quantifiable events are
recognized expressed in Peso accounting reports which
amounts we call the “financial
- . Only economic statements” to users of
activities are accountable - Measurement bases are accounting information
such as Purchase of historical cost, current
merchandise from a cost, realizable value
supplier, borrowing
and present value.
money from a bank, sale
of merchandise to
customer, paying salaries
to employees, etc.
FORMS OF BUSINESS ORGANIZATIONS

According To Ownership According To Types Of Goods Or

Services They Offer

Sole Proprietorship
Service

Partnership
Merchandising

Corporation
Manufacturing
ACCORDING TO OWNERSHIP

Sole Proprietorship
• has a single owner called the proprietor who generally is
also the manager.
• Owner receives all profits, absorbs all losses and is solely
responsible for all debts of the business.
ACCORDING TO OWNERSHIP

Partnership
• Owned and operated by two or more persons who bind
themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits
among themselves.
• Each partner is personally liable for any debt incurred by the
partnership
ACCORDING TO OWNERSHIP

Corporation
• Owned by its stockholders.
• It is an artificial being created by operation of law having the
rights of succession and the powers, attributes and attributes
expressly authorized by law or incident to its existence.
• The stockholders are not personally liable for the corporation’s
debts
ACCORDING TO TYPES OF GOODS OR SERVICES THEY OFFER

Service
• Companies perform services for a fee (ex. Law firms, beauty
salon and recruitment agencies)
ACCORDING TO TYPES OF GOODS OR SERVICES THEY OFFER

Merchandising

• Companies purchase goods that

are ready for sale and then sell
these to customers (car dealers,
clothing stores, supermarkets)
ACCORDING TO TYPES OF GOODS OR SERVICES THEY OFFER

Manufacturing

• Companies buy raw materials, convert

them into products and then sell the
products to other companies or to final
customers (car and gadget manufacturers)
ACTIVITIES IN BUSINESS ORGANIZATIONS

Financing Investing Operating

• obtaining financial • acquiring long term • use of resources to
resources from resources such as design, produce,
owners and creditors land, equipment, distribute and
such as banks and buildings that will market goods and
suppliers. be used to develop, services
• Repaying the produce and sell
creditors and paying goods and services.
a return to the
owners
USERS OF FINANCIAL STATEMENTS
B uy
,
or s hold
ell?

Customers

Banks
Investors

Public

Employees Suppliers Government

FUNDAMENTAL CONCEPTS IN ACCOUNTING

• entity is separate from the owners

ENTITY CONCEPT • the transactions of the entity shall not be merged with
the transactions of the owners

• accounting periods (calendar year or a fiscal year)

PERIODICITY • equal length for the purpose of preparing financial
CONCEPT reports

STABLE • should be stated in terms of Philippines Peso

MONETARY UNIT • purchasing power of the peso is stable or constant.
CONCEPT
ELEMENTS OF FINANCIAL STATEMENTS
Financial Financial
Position Performance

ASSETS Income

LIABILITIES Expenses

EQUITY
ASSETS
- In simple terms, assets are valuable resources owned by the
entity.
- Per framework, it is a resource controlled by the enterprise
as a result of past events and from which future economic
benefits are expected to flow to the enterprise.
- Assets include cash, cash equivalents, notes receivable, accounts
receivable, inventories, prepaid expenses, property, plant and
equipment, investments, intangible assets and other assets.
LIABILITIES
– are obligations of the entity to outside parties who have furnished
resources.
Per framework, liability is a present obligation of the enterprise arising
from past events, the settlement of which is expected to result in an
outflow from the enterprise of resources embodying economic
benefits.
• Liabilities include notes payable, accounts payable, accrued liabilities,
unearned revenues, mortgage payable, bonds payable and other
debts of the enterprise.
EQUITY
– is the residual interest in the assets of the enterprise after deducting all
its liabilities.
• In sole proprietorship, only one Owner’s equity account
• In partnership, one owner’s equity account for each partner
• In corporation, stockholder’s equity consist of share capital, retained
earnings and reserves
Income
– is increases in economic benefits during the accounting period in the
form of inflows or enhancements of assets or decreases of liabilities the
result in increases in equity.

• Income includes revenue and gains

Expenses
– are decreases in economic benefits during the accounting period in the
form of outflows or depletion of assets or incurrences of liabilities that
result in deceases in equity.

• Expenses includes costs of services rendered or goods sold,

distribution or selling expenses, administrative expenses, etc.
 THE ACCOUNT
- detailed record of the increases, decreases and balance of
each element that appears in an entity’s financial statements
- basic summary device of accounting
- the simplest form is known as the “T” account which has 3
parts
THE ACCOUNTING EQUATION

- presents the resources controlled by the enterprise,

the present obligations of the enterprise and the
residual interest in the assets

ASSETS = LIABILITIES + OWNER’S EQUITY