BASIC

BOOKKEEPING

Ms. Eden C. Cabrera

ACCOUNTING

Accounting is a service activity. Its

function is to provide quantitative
information primarily financial in
nature about economic entities that is
intended to be useful in making
economic decisions.
FORMS OF BUSINESS
ENTITIES

– Sole Proprietorship
– Partnership
– Corporation
TYPES OF BUSINESS
OPERATIONS

– Service
– Merchandising
– Manufacturing
USERS OF ACCOUNTING
INFORMATION

Owners and Potential Investors

Creditors
Suppliers
Customers
Government Agencies
Employees
Others
INFORMATION FLOW

Business Documents evidencing

transaction
Journals
Ledgers
Trial Balance
Reports or Financial Statements
BASIC CONCEPTS &
PRINCIPLES

Entity Concept
Exchange Price or Cost Concept
Going Concern Concept
Accrual Concept
Objectivity Concept
Disclosure Concept
Reporting Period/Periodicity Concept
Unit of Measure
THE ACCOUNTING
EQUATION

ASSETS = LIABILITIES + EQUITY

 ASSETS

A resource controlled by the entity as a result

of past events and from which future
economic benefits are expected to flow to the
entity. Examples

Cash Accounts Receivable Supplies

Inventory Land Building

Equipment Furniture and Fixtures Patents

 LIABILITIES

A present obligation of the entity arising from

past events, the settlement of which is expected
to result in an outflow from the entity of
resources embodying economic benefits.
Examples

Accounts Payable Notes Payable

Loans Payable Salaries Payable

 EQUITY

The residual interest in the assets of the

entity after deducting all its liabilities.
Sole Proprietorship Owner’s Equity

Partnership Partners’ Equity

Corporation Shareholders’ Equity

FACTORS AFFECTING
EQUITY

Factors Effect on Equity

Investment Increase
Withdrawal Decrease
Revenue Increase
Expense Decrease
 FACTORS AFFECTING EQUITY
AS SHOWN ON A FINANCIAL
STATEMENT
Revenues 500,000
Expenses 350,000
Cruz Repair Services
Statement of Changes in Equity Net Income 150,000
For the year ended December 31, 2012

Cruz, Capital – January 1 100,000

Additional Investment 50,000
Net Income 150,000
Withdrawals 25,000
Cruz, Capital – December 31 275,000
 REVENUES

Inflow of cash or other assets coming from

clients/customers for service rendered or for
merchandise sold to them.
Type of Business Source of Revenue Account
Operation Revenue

Service Business Services Rendered Service Revenue

Merchandising Sale of Sales Revenue

Merchandise
Manufacturing Sale of Finished Sales Revenue
Goods
 EXPENSES

Assets consumed or services of other businesses

or persons used up in order to earn revenue.
Assets Consumed Services Used Up

Supplies Expense Utilities Expense (MERALCO, PLDT,

Maynilad)
Cost of Goods Sold (Merchandise or Salaries Expense
Finished Goods Sold to Customers)
Depreciation Expense ( decrease in Rent Expense
the ability of the asset to yield
service)
 EXPANDED ACCOUNTING
EQUATION

ASSETS = LIABILITIES + EQUITY

ASSETS = LIABILITIES + (CAPITAL-WITHDRAWAL+REVENUE-EXPENSES)
ASSETS = LIABILITIES + CAPITAL –WITHDRAWAL + REVENUE - EXPENSES
ASSETS+ WITHDRAWAL+ EXPENSES = LIABILITIES + CAPITAL + REVENUE
Left Side (Debit) Right Side (Credit)
Assets Liabilities
Withdrawal Capital
Expenses Revenue
 COMPLETE RULES OF DEBIT
AND CREDIT
ASSETS LIABILITIES
Debit Credit Debit Credit
Increase or (+) Decrease or (–) Decrease or (–) Increase or (+)

WITHDRAWALS CAPITAL
Debit Credit Debit Credit
Increase or (+) Decrease or (–) Decrease or (–) Increase or (+)

EXPENSES REVENUE
Debit Credit Debit Credit
Increase or (+) Decrease or (–) Decrease or (–) Increase or (+)
 WHAT TO REMEMBER IN
TRANSACTION ANALYSIS?

Analyze transaction in the point of view of the business!

Only business transaction will be recognized or For every debit,

recorded on the books of the business… there must be a
corresponding
A business transaction occurs
credit and their
when there is an exchange of
amounts must
values between two parties.
always be equal.

Value Received = Value Parted With

Debit = Credit
 Analyze transactions (1)
(10)Reversing Entries

Journalizing (2) (9)Post-Closing

Trial Balance
The Accounting
Posting (3)
Cycle (8)Closing Entries
Trial Balance (4)
(7)Adjusting Entries
Worksheet (5)
(6) Financial
Statements
The Account

The account is a summary device in

Accounting.

It is where the detailed record of increases,

decreases and balances of each asset,
liabilities, capital, withdrawal, revenues
and expenses is found.
The Chart of Accounts

A listing of the account titles with

corresponding account codes for each
accounting element of asset, liabilities,
capital, withdrawal, revenues and expenses.

These account titles are used in recording

the transactions in the journal.
JOURNALIZING

A journal is the book of original entry:

General Journal
Special Journals
Cash Receipts
Cash Disbursements
Sales Journal
Purchases Journal
POSTING TO THE LEDGER

The Ledger is the book of the final entry.

GENERAL LEDGER
SUBSIDIARY LEDGER (SL)
Examples: Accounts Receivable SL
Accounts Payable SL
Posting is the process of summarizing the effect of
the transactions on each account by transferring
the entries from the journal to the ledger.
TRIAL BALANCE

A listing of accounts with their

corresponding balances as of a given date.

Prepared to check whether total debits

equal total credits.

Usually prepared on a monthly basis.

ADJUSTING ENTRIES

Entries made at the end of the accounting period

to correct and update the balances of the
accounts.
a. To record depreciation for the period
b. To record bad debts
c. To accrue expenses and revenues
d. To adjust prepaid expenses and unearned
revenues
WORKSHEET

A tool used to aid the preparation

of financial statements and
adjusting and closing journal
entries.
FINANCIAL STATEMENTS

1. Statement of Financial Position

• shows the Assets, Liabilities and Equity of
the enterprise as at a given date.
2. Statement of Income
• shows the Revenues and Expenses as well
as the result of operations (either Net
Income or Net Loss) for a given period of
time.
 FINANCIAL STATEMENTS

3. Statement of Changes in Equity

• shows the beginning and ending capital
balances and the factors affecting the capital.
4. Statement of Cash Flows
• shows the beginning and ending cash balances
and the sources (inflows) and uses (outflows) of
cash.
5. Notes to Financial Statement
 CLOSING ENTRIES

Closing Entries are entries made at the end

of the accounting period to clear the
books of nominal or temporary accounts.
Nominal Accounts Real Accounts
Temporary Accounts Permanent Accounts
Closed at the end of the Not closed at the end of the
period period
Revenues, Expenses and Assets, Contra-Assets,
Drawing Accounts Liabilities, Capital Accounts
POST-CLOSING TRIAL
BALANCE

A trial balance prepared after

closing entries are journalized
and posted to check whether
total debits equal total credits.
REVERSING ENTRIES

Reversing entries are entries made at the

beginning of the period to undo (reverse)
selected adjusting journal. This is done for
convenience of recording the succeeding
transactions or to go back to the original
method of recording advance payment of
expenses (expense method) and advance
collection of revenues (revenue method).
HOW ARE FINANCIAL
STATEMENTS USED IN
DECISION MAKING?
Financial statements tell us how the company
performed during a period of time.
It tells us how financially robust and healthy a
company is.
It gives us indicators of the company’s ability to
earn income, to discharge its obligations, and
how efficiently the company has been managed.
FINANCIAL STATEMENT
ANALYSIS

VERTICAL ANALYSIS
HORIZONTAL ANALYSIS
FINANCIAL RATIOS
 VERTICAL ANALYSIS

Recasting of all items on the financial

statement as a percentage of a selected
item on the statement.
Financial Statement Basis
Statement of Financial Total Assets or
Position Total Liabilities and Equity
Statement of Income Net Sales
HORIZONTAL ANALYSIS

A line-by-line comparison of the

company’s accounts for each
accounting period chosen.
 RATIO ANALYSIS

The peso amounts of two items in the financial

statements are compared and expressed in
terms of ratios.
Liquidity ratios
Profitability ratios
Activity ratios
Debt ratios
Market ratios
LIMITATIONS OF FS
ANALYSIS

 Not absolute measures but only indicates degrees of

profitability and financial strength of the firm
 Limitations inherent in the data: consistency in the
application of accounting principles; does not reflect
changes in purchasing power
 Potential to management’s influence in order to
appeal to users of information
 Averages does not take into consideration the timing
of transactions
RESPONSIBILITY OF
MANAGEMENT FOR FINANCIAL
STATEMENTS

Management of an enterprise has

the PRIMARY RESPONSIBILITY for
the preparation and presentation of
the financial statements of the
enterprise.
INTERNAL CONTROL

Internal control is a plan of organization and all the

methods and measures used by a business to:
Safeguard assets
Minimize errors and prevent fraud for reliability
of accounting records
Promote operational efficiency; and
Ensure compliance with laws and established
managerial policies
INTERNAL CONTROLS

Competent and Reliable Personnel

Proper Authorization
Segregation of Duties
Independent Verification
Safeguarding of Assets and Records
Independent Review and Appraisal
Design and Use of Business Documents
INTERNAL CONTROLS FOR
CASH

All cash receipts must be deposited

intact in a bank and all cash
disbursements be made thru
issuance of checks.
 Control of Cash Receipts

1. Separate responsibilities for handling cash,

recording cash transactions and for reconciling
cash balances.
2. Maintain close supervision of handling and
recording functions: routine and surprise cash
counts, internal audits, daily reporting of cash
receipts, disbursements and balances.
 Control Over Cash
Disbursements
1. Separate responsibilities for cash disbursement
documentation, check writing, signing, distribution and
recording.
2. Except for internal cash funds like petty cash, make all cash
disbursements by check.
3. If petty cash funds are employed, develop tight controls
and authorization procedure for their use.
4. Prepare and sign checks only when supported by adequate
documentation and verification.
5. Supervise all cash disbursements and recording functions.
The End