ACCOUNTING
1. about quantitative information
2. the info is of financial in character
3. usefulness of info in decision making
Four (4) Functions of Accounting
Figure1: The Accounting Cycle
ACCOUNTING: LANGUAGE OF BUSINESS
Business and the owner are being separated;
financial statements – bridge of communication
Accounting Standards Council (ASC)
Accounting – a service activity
defined in Statement of Financial Accounting
Standards (SFAS) no.1
- to provide a quantitative information about
economic entities
- intended to be useful in making economic
decisions
American Accounting Association (AAA)
comprises of accounting educators who
sponsored the Accounting Education Change
Commission
Accounting – a process
- identifying, measuring, and communicating
economic information
American Institute of Certified Public
Accountants (AICPA)
AICPA’s Committee on Accounting Terminology
formulated the widely accepted definition of
accounting
Accounting – an art
- recording, classifying, summarizing, and
interpreting
1. Recording
- writing down the business transactions
and events in the books of accounts in a
chronological manner (Journalizing)
- before recording; first, they should be
identified, analysed, and measured
a. Identifying – basis of determining
- only transactions with
financial bearing are
recognized
b. Analyzing – “dual effect”
- value received (debit)
- value parted with (credit)
c. Measuring – assigning monetary
value
- Peso – financial denominator
2. Classifying
- sorting/grouping of similar transactions
and events
o Posting: 𝐽𝑜𝑢𝑟𝑛𝑎𝑙 → 𝐿𝑒𝑑𝑔𝑒𝑟
3. Summarizing
- the completion of the financial statements
and accounting requirements
4. Interpreting
- involves analytical and interpretative
works
- then communicated to those interested
parties
Nature of Accounting
Accounting is an art – by mere preparing
financial statements
Accounting is a service activity – to draw sound
economic decisions
Accounting is a process – involves various steps
Brief History of Accounting (Luca Pacioli)
-
Luca Pacioli
Franciscan monk and mathematician
regarded as the father of double-entry
system, although he did not claim that the
art of bookkeeping was invented by him
Everything about Arithmetic, Geometry,
Proportions and Proportionality
- published in Venice of early November
1494
- includes “Details of Calculation and
Recording” which described the doubleentry system of bookkeeping
- Purpose of bookkeeping – to give info on
assets and liabilities, without delay
ACCOUNTING CONCEPTS
- foundations of Generally Accepted Accounting
Principles
- uniformity in the practice of accounting
1. Accounting Entity Concept
- also known as Business Entity Concept
- distinction between business transactions
and personal affairs
2. Continuity Concept
- the assumption that business has a
continuous life of existence
- will continue to operate for an indefinite
period of time
3. Time-Period Concept
- Accounting Periods / equal periods
wherein at the end of each period,
financial statements are prepared
a. Monthly Basis – end of every month
b. Quarterly Basis –…three months
c. Semi-Annual Basis –…six months
d. Annual Basis –…twelve months
i. Calendar Year – Jan1-Dec31
ii. Fiscal Year – 1stday of any month
except January, until last day of 12th
month
e. Fiscal Period – less than a year
- Interim financial statements
TYPES OF MAJOR ACCOUNTS
Account Titles – brief description of items that fall
to the same kind, class, or nature
Measurement of financial condition:
- Assets
- Liabilities
- Owner’s Equity
Measurement of performance:
- Income / Revenue
- Expenses
ASSETS – what it owns
- things of value that are owned and used by the
enterprise in its operations
(10) Current Assets – consumed within the
enterprise’s normal operating cycle
-Cash
-Cash Equivalents – short term; changes in values
-Petty Cash Fund – separately placed money
-Notes Receivable – non/interest promissory note
-Accounts Receivable – amounts collectible
- Estimated Uncollectible Accounts – loss
4. Unit of Measure Concept
- also known as Stable Monetary Unit
Concept
- not affected by inflation rate of Peso
-Advances to Employees – cash advances
-Inventories – supplies to be consumed
- Unused Supplies
5. Accrual Basis Concept
 Accrual Basis – recognized regardless of
when cash is received or paid
 Cash Basis – recognized only when cash
is received and/or paid
-Prepaid Expenses – not yet incurred expenses
that are paid in advance
(6) Non-current Assets – subject to
Depreciation, except Land
- Property & Equipment – for use in production
- Land
THE CHART OF ACCOUNTS
-
arranged from Assets, Liabilities, Owner’s
Equity, Income, and Expenses
prepared beforehand
- Building – finished construction
- Equipment – office/store/delivery equipment
- Furniture & Fixtures
- Accumulated Depreciation – deduction
LIABILITIES – what it owes [debts]
Income & Expense Summary – temporary account
(4) Current Liabilities – expected to be settled
(5) INCOME / REVENUE
- Accounts Payable – oral promise to pay debt
- Service Income – used for all types
- Notes Payable (short-term) – promissory note
- Accrued Expenses – not yet paid expenses
- Unearned Income – income collected but not yet
rendered
- Professional Income – earned while practicing a
profession
- Rental Income – earned on properties being
rented
- Interest Income – arising from borrowed money
- Miscellaneous Income
(2) Non-current Liabilities
- Notes Payable (long-term) – more than a year
payment is required
- Mortgage Payable – tangible property to be
pledged as a collateral to ensure payment
(12) EXPENSES
- Supplies Expense
- Rent Expense
OWNER’S EQUITY – left for the business
- Repairs and Maintenance
- Withdrawal – “name, Personal/ Drawing”
- Salaries Expense
Increased = Profit
Decreased = Loss/Withdrawal
Initial Capital – the amount of money put by the
proprietor into the business to start
- Uncollectible Accounts – anticipated loss
- Depreciation Expense – expired fixed assets
- Taxes and Licenses
- Insurance Expense – expired paid insurance
- Utilities Expense – telephone, light and water
bills
- Interest Expense – incurred from borrowed
money
- Miscellaneous Expense – not significant
expense
- Gas & Oil
(for quick reviewer, see next page)
Accounting Standards Council – service activity
American Accounting Association – process
American Institute for Certified Public Accountants – an art
4 Functions of Accounting:
1. Recording – journalizing
a. identifying – basis
b. analyzing – dual effect
c. measuring – monetary value
2. Classifying – similar transactions
i. Posting
3. Summarizing – completion
4. Interpreting – then communicated
Luca Pacioli – “father” of double-entry system


Franciscan monk & mathematician
Summa de Arithmetica, Geometria, Proportioni et Proportionalita
o (Everything about Arithmetic, Geometry, Proportions and Proportionality)
 Details of Calculation and Recording – double-entry system
 Bookkeeping – give trader without delay the information as to his assets/liabilities
5 Accounting Concepts
1. Accounting Entity Concept – separation between business transactions and personal affair
2. Continuity Concept – indefinite time of operation
3. Time-Period Concept –equal periods wherein at the end of each period, financial statements are prepared
a. Monthly Basis – end of every month
b. Quarterly Basis – 3 months
c. Semi-Annual Basis – 6 months
d. Annual Basis – 12 months
i. Calendar Year – Jan.1-Dec.31
ii. Fiscal Year – 1st day of any month (except Jan.) until last day of the 12th month
e. Fiscal Period – less than a year = interim financial statements
4. Unit of Measure Concept – stable value of the peso; not affected by inflation rate
5. Accrual Basis – regardless of when cash is received or paid (otherwise, it’s Cash Basis)
Assets – what it owns

Current Assets – consumed within operating cycle
1. Cash – Cash on Hand/ Cash in Bank
2. Cash Equivalents
3. Petty Cash Fund – small expenses
4. Notes Receivable – promissory note
5. Accounts Receivable
a. Estimated Uncollectible Accounts – possible losses; a deduction from Accounts Receivable
6. Advances to Employees – cash advances; as a consequence, deducted against their salaries
7. Inventories – in the process of production items
a. Unused Supplies
8. Prepaid Expenses – paid in advance
a. Prepaid Rental
b. Prepaid Insurance
c. Prepaid Interest
d. Prepaid Advertising

Non-Current Assets
o Property and Equipment – tangible assets for use in production
 Accumulated Depreciation – deduction from property and equipment (except Land)
1. Land
2. Building
3. Equipment
4. Furniture & Fixtures
Liabilities – what it owes


Current Liabilities – expected to be settled in normal operating cycles
1. Accounts Payable
2. Notes Payable (short-term) – issued with promissory note
3. Accrued Expenses – not yet paid incurred expenses
a. Rent payable
b. Salaries payable
c. Interest payable
d. Taxes payable
4. Unearned Income – advance collected income but the services have not been rendered yet
Non-Current Liabilities
1. Notes Payable (long-term) – more than a year payment is required
2. Mortgage Payable – tangible property to be pledged as a collateral to ensure payment
Owner’s Equity / Capital – owner’s claim/ what is left for the business
⸙
⸙
Increased when there is profit or additional contributions
Decreased when there is Loss or withdrawal by the owner
Income / Revenue

Service Income – derived from rendering of services, such as:
1. Professional Income – earned from the practice of the profession
a. Auditing Fees Income
b. Legal Fees Income
c. Dental Fees Income
d. Medical Fees Income
2. Rental Income – earned on properties being rented out by the business
3. Interest Income – received by the business from an amount of money borrowed
4. Miscellaneous Income – earned which is not the main line of the business’ activity
Expenses – gross outflow
1. Supplies Expense – supplies that were used
2. Rent Expense – amount paid for use of property
3. Repairs and Maintenance
4. Salaries Expense – given to the employees
5. Uncollectible Accounts – anticipated loss
6. Depreciation Expense – expired fixed assets
7. Taxes and Licenses – for business permits, licenses and other government dues except Income Tax
8. Insurance Expense – expired portion of the insurance premium paid
9. Utilities Expense – for telephone, light and water bills
10. Interest Expense – incurred from borrowed money
11. Miscellaneous Expense – not significant expenses paid
12. Gas & Oil – for company vehicles
The Accounting Equation (Expanded Accounting Equation)
Value
received
(debit side)
ASSET
Asset
CASE 1
CASE 2
CASE 3
CASE 4
CASE 5
Value parted with (credit side)
OWNER’S EQUITY
= LIABILITIES +
=
Liabilities
ASSETS
P 350 000
P ___________
P 680 000
P ___________
P 275 000
+
=
Capital
−
LIABILITIES
P 195 000
P 250 000
P _______
P 650 000
P 85 000
Withdraw/
Drawing
+
CAPITAL
P ___________
P 350 000
P 450 000
P 320 000
P ___________
Capital
Supplies Inventory
Notes Receivable
Petty Cash Fund
Accounts Payable
Accounts Receivable
Prepaid Insurance
Estimated Uncollectible Accounts
Cash in Bank
Salaries Payable
Office Equipment
Accumulated Depreciation-Office Equipment
TOTAL ASSETS
P 1,000,000
15,000
60,000
2,000
10,000
80,000
20,000
1,000
30,000
15,000
90,000
5,000
_________
Capital
Taxes and Licenses
Accrued Salaries Expense
Cash on Hand
Accounts Payable
Uncollectible Accounts
Supplies Expense
Notes Payable
Petty Cash Fund
Bank Loan Payable
Unearned Rent Income
TOTAL LIABILITIES
P 350,000
30,000
25,000
75,000
50,000
5,000
10,000
80,000
1,000
50,000
8,000
P________
TOTAL OWNER’S EQUITY
P 100,000
15,000
75,000
10,000
30,000
P________
Capital
Rent Expense
Professional Income
Taxes and Licenses
Withdrawal
+
(next page for answer key)
Income
−
Expenses
ASSET
=
LIABILITIES
+
Asset
=
Liabilities
+
+ Cash
+ Cash Equivalents
+Petty Cash Fund
+Notes Receivable
+Accounts Receivable
− Estimated
Uncollectible Accounts
+Advances to
Employees
+Inventories
+Prepaid Expenses
+Property & Equipment
−Accumulated
Depreciation
+Land
+Building
+Equipment
+Furniture & Fixtures
OWNER’S EQUITY
Capital
−
Withdraw/
Drawing
+
+Accounts Payable
+Notes Payable
+Accrued Expenses
+Unearned Income
+Mortgage Payable
CASE 1
CASE 2
CASE 3
CASE 4
CASE 5
Income
+Service Income
+Professional Income
+Rental Income
+Interest Income
+Miscellaneous Income
ASSETS
P 350 000
P 600 000____
P 680 000
P 970 000____
P 275 000
=
LIABILITIES
P 195 000
P 250 000
P 230 000____
P 650 000
P 85 000
+
CAPITAL
P 155 000____
P 350 000
P 450 000
P 320 000
P 190 000____
Capital
P 1,000,000
Supplies Inventory ⸎
15,000
Notes Receivable ⸎
60,000
Petty Cash Fund ⸎
2,000
Accounts Payable
10,000
Accounts Receivable ⸎
80,000
Prepaid Insurance ⸎
20,000
1,000
−Estimated Uncollectible Accounts ⸎
Cash in Bank ⸎
30,000
Salaries Payable
15,000
Office Equipment ⸎
90,000
5,000
−Accumulated Depreciation-Office Equipment ⸎
TOTAL ASSETS P__291,000
Capital
P 350,000
Taxes and Licenses
30,000
Accrued Salaries Expense ⸎
25,000
Cash on Hand
75,000
Accounts Payable ⸎
50,000
Uncollectible Accounts
5,000
Supplies Expense
10,000
Notes Payable ⸎
80,000
Petty Cash Fund
1,000
Bank Loan Payable ⸎
50,000
Unearned Rent Income ⸎
8,000
TOTAL LIABILITIES P__213,000
Capital ⸎
P 100,000
15,000
−Rent Expense ⸎
Professional Income ⸎
75,000
10,000
−Taxes and Licenses ⸎
30,000
−Withdrawal ⸎
TOTAL OWNER’S EQUITY P__120,000
−
Expenses
−Supplies Expense
−Rent Expense
−Repairs & Maintenance
−Salaries Expense
−Uncollectible Accounts
−Depreciation Expense
−Taxes and Licenses
−Insurance Expense
−Utilities Expense
−Interest Expense
−Miscellaneous Expense
−Gas & Oil