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FABM1 (1)

Table of Contents
Chapter 1………………………………………………...Accounting Overview
Chapter 2……………………………………………......Journalizing
Chapter 3………………………………………………..Posting
Chapter 4………………………………………………..Adjusting Entries
Chapter 5…………..……………………..Completion of the Accounting Style
Chapter 6…………………………………………….....Merchandising
Chapter 7………………...…………..Special Journals and Subsidiary Leader
technical subject which requires analysis and data-interpretation concerning
financial activities needed for decision-making. This Module 1 in Basic
Accounting will help students understand the accounting cycle with the
purpose of preparing the income statement for the operation of the business
entity and the balance sheet for the condition of enterprise.
This joined effort of the authors is prepared to be an efficient learning
reference for students and teachers as well. The basic presentation is
designed to complement readers in knowledge-skills development in
comprehensive manner.
The importance of Records: The human brain can store a huge
amount of information, however remembering all the day to day transactions
would be very difficult, if not impossible. As a result, written records must be
kept to monitor all significant activities. Just like historians who record
valuable events of the past, any person dealing with money needs records or
past information so that he may have reliable basis regarding his way of
spending or his actions in the debts on time.
By keeping records, he will have the ability to assess which
transactions provided him income and which transactions resulted to
expenses. He can also assess if he will have the ability to pay his debts on
Records may be done at the option of an individual person or by a
compulsory requirement of the government. A mother may choose to make a
family budget through a record keeping method, that is, at her own initiative.
A businessman is required by law to prepare some records for tax and
regulatory purposes.A business entity may put all its plans in writing to be
used as a guide in the actual operation of the business, either for short-range
or long-range.Short-range planning usually reflects the activities for a year.
Long-range planning is more dynamic as it involves forecast of the results of
future operation, usually three to five years. In business planning, data from
the past plays a significant role to anticipate the future of the business.
Even our government is required to make records in order to account
on how they use the money being paid by the people.
In the business arena, accounting is the language. It would not be easy
to account for economic transactions without records. The records will tell the
story concerning the progress and position of the business. By means of
written data, a businessman can take steps to correct some errors within his
company and improve his operations.
The basic accounting courses will open your eyes to the story behind
the basics of recording economic transactions. It will widen your grasp on
how to assess the company’s condition and performance.
The present law that governs the accounting in the Philippines is
Republic Act No. 9298, known as the Philippine Accountancy Act of 2004.
As a whole, accountants use rules, procedures, practice and
standards followed in the preparation and presentation of financial statements
known as Generally Accepted Accounting Principles (GAAP). The
accounting standards promulgated by the Financial Reporting Standards
Council (FRSC) constitute the GAAP in the Philippines. Standards created by
the FRSC are currently known as Philippine Accounting Standards (PAS) and
Philippine Financial Reporting Standards (PFRS).
Accounting Defined
Authorities in accounting define “accounting” as:
“The process of identifying measuring and communicating economic
information to permit informed judgment and decision by users of the
Accounting Elaborated
From the definition of accounting, it covers three functions as follows:
IDENTIFYING is the process of recognition and nonrecognition of business
activities as “accountable” events. Accountable events occur when it affects
an entity’s assets, liabilities and equity. In accounting, activities such as hiring
of employees, death of a company officer, inquiring inventory prices, placing
an order, etc. are not accountable because they cannot be quantified or
expressed in terms of a unit of measure.
MEASURING is the process of assigning of peso amounts to the
accountable economic transactions and events. In the Philippines, Philippine
peso is the unit of measuring accountable economic transactions.
COMMUNICATING is the process of preparing and disturbing accounting
reports to possible users of accounting information.
Implicit in the communication process are the recording, classifying and
summarizing aspects of accounting.
a) Recording. Another name for recording is bookkeeping or
journalizing. It refers to writing business data such as economic
transactions and events on the books of the business
b) Classifying. Similar items are grouped under a common
characteristic: assets (mga pagmamay-ari), liabilities (mga
utang), capital (halagang inilgay sa negosyo), revenue (benta)
and expenses (gastos). Sub- groupings within these major
categories are also possible. For example, sales may be sorted
by each department likes Sales-Men’s Dept., Sales-Women’s
Dept., and Sales-Children’s Dept. In listing the accounts, it is
suggestive to arrange them according to their liquidity or
permanent nature or if they are operating or non-operating.
c) Summarizing. This is the preparation of financial statements
which include: the balance sheet income statement, cash flow
statement, statement of changes in equity or statement of
recognized gains and losses and notes to financial statements.
This kind of work is usually performed by an accountant.
1.4 Forms of Business Organization
There are three common forms of business organization. These are
as follows:
a) Single Proprietorship. This is the simplest form of
business as it is owned solely by an individual. The owner
may be a one-army man, that is, he is the general
manager, salesman, and cashier at the same time.
b) Partnership. If two or more persons owned jointly a business
organization, it is called a partnership. Of course, the owners
must agree on their capital contribution, profit or loss
distribution and other relevant matters. Once, a partnership is
formed, according to law, it has a separate identity from the
c) Corporation. When five or more persons register a business
entity to the Securities and Exchange Commission (Philippines)
and ownership, in general, is evidenced by readily transferable
shares of stock, such entity shall acquire an artificial legal personality
distinct and specific from the owners. This kind of business
organization is called a Corporation.
Forms of Business
Usually, business organizations may enter into a business such as:
a) Service Provider- this business gives their customers
services instead of tangible products. Examples of this
business are: advertising company, repair shops, spa
houses, graphic designing, barber shops, restaurants,
b) Merchandising- commonly known as buy and sell or
trading business. The purchased products and the
products being sold are the same. Common buy and sell
businesses are: Rice retailing, Sari- sari stores, Books
shops, etc.
c) Manufacturing- this kind of business buys raw materials
and transforms it into finished products. Common
manufacturing businesses are: Dole, Universal Robina,
Furniture shops, etc.
In chapter 1 to 5, accounting for single proprietorship providing
service will be illustrated.
Accounting Assumptions
These are the basic notions of fundamental premises on which
the accounting process is based. Accounting assumptions are also
known as postulates. The Financial Reporting Standards Council
conceptual framework mentions two assumptions, namely ACCRUAL
and GOING CONCERN. However, basic assumptions such as
accounting entity, time period and monetary unit are implicitly
included in accounting.
● Accrual accounting means that income is recognized when
earned regardless of when received and expense is recognized
when incurred regardless of when paid.
This assumption looks on a business that it will continue its
for the foreseeable future.
● Under this assumption, the business enterprise is separate from the
owners, managers, and employees who comprise the firm.
remaining accounts are totaled to reflect equal debits and credits
Remaining accounts are called permanent accounts. These
are reflected in the Balance Sheet.
9. Reversing Entries- At the beginning of the next period, some
entries are reversed to facilitate normal recording.
● This postulate requires that a business must present its
financial reports on financial position, performance and cash
flows for a “one-year period”.
Calendar Year- is one year period that starts from January 1 and ends up
December 31.
Fiscal Year- is one year period of any consecutive months. (e.g. June 30July 1)
Natural Year- is a one-year period that ends when business operations are
at their lowest level of annual cycle.
Elements of Financial Statements.
In accounting parlance, transaction can be defined as any exchange of
economic value that must be recorded. Value is anything susceptible of
monetary estimate that can affect the elements of financial statements.
a) Assets (Balance sheet account) are defined as “resources
by the enterprise as a result of past transactions or events and from
which future economic benefits are expected to flow to the
enterprise”.. To cite examples, cash, inventory, land, machinery,
equipment, patents, copyrights are called assets.
b) Liabilities ( Balance sheet account) are “present obligations of
enterprise arising from past transactions or events, the settlement of
which is expected to result in an outflow from the enterprise of
resources embodying economic benefits”. In actual business,
liabilities are often called payables.
c) Capital or Equity (Balance sheet account) is the “residual interest
the assets of the enterprise after deducting all its liabilities. Other
names for capital are proprietorship, owner’s equity, net worth, or
d) Drawings (Balance sheet account) are withdrawals made by an
owner from the enterprise. Drawings decrease total owner’s equity.
This account is used only in Sole proprietorship, owner’s equity, net
worth, or equity.
e) Income (Income statement account) is the inflow of future
benefits that increase equity, other than contributions or investments
from owners. Income encompasses both revenues and gains.
f) Expenses (Income statement account) are the outflows o
consumption of future economic benefits that decrease equity, other
than distributions or dividends paid to owners. Expenses also include
Sometimes, financial statements are made less than one year (semiannually
or quarterly) for internal uses or government requirements. This is called
interim reporting which uses interim period.
Monetary unit imposes that financial statements must be stated in the
Philippine peso, any changes in the value of peso may be ignored.
Accounting Process.
The accounting processes also known as the accounting cycle defined above
can be expanded into the following detail:
1. Analyzing- transactions are checked if it affects the elements of
financial statements and if it can be measured reliably.
2. Journalizing- economic transactions are recorded in Journals
3. Posting- Recorded transactions are classified and balances are
4. Unadjusted Trial Balance- All account balances are totaled to
equal debits and credits.
5. Adjusting Entries- Some account balances are updated to reflect
true balances.
6. Financial Statement (FS) Preparation- To communicate to
uses, financial statements are prepared to show the company’s
condition and performance.
7. Closing Entries- All income Statement accounts are closed. This
why income statement accounts are also called temporary accounts.
8. Post- Closing Trial Balance- After the closing entries are posted,
Fundamentals of Bookkeeping
As defined, bookkeeping is the systematic and chronological
recording of business transactions or events. Transaction means exchange of
values. Values referred to are “value received” and “value parted with”. The
value received refers to the left-side entry called debit, usually abbreviated as
“dr”. The value parted with is the right-side entry called credit usually
abbreviated as “cr”.
Double- entry bookkeeping is the common method of recording. It requires
every economic event to be recorded with debit ad credit. In reason, every
economic event result to a value received and value parted with. To illustrate,
when purchasing a car in cash amounting P100,000 a person receives an
automobile and pays cash. Thus, automobile is debited, and cash is credited:
This will be discussed thoroughly in Chapter 2.
Accounting Equation
The basic accounting equation is:
Algebraically, the following formulas can be derived:
Accounting Equation Illustrated.
PNB is assumed by the business. The accounting equation is:
Proprietorship = Assets = P60, 000 Proprietorship = P55,000
1.12 Financial Statements are the means by which the information
accumulated and processed in financial accounting is periodically
communicated to the users. In other words, the financial statements are the
end product or main output of the financial accounting process.
The objective of general purpose financial statements is to provide
information about the financial position, financial performance and cash flows
of an entity that is useful to a wide range of users in making economic
decisions. Financial statements also show the outcome of management’s
stewardship of the wealth entrusted to it.
The complete set of basic financial statements includes the following
1. Income statement
2. Balance sheet
3. Statement of changes in equity or statement of recognized gains and
4. Cash flow statement
5. Notes, comprising a summary of significant accounting policies and
explanatory notes.
Case 1. Assume that Mr. Emer Patiu invested P10,000 cash as initial capital
for a vulcanizing business called Patiu vulcanizing Shop. The business also
took charge of the P2,000 payable of the furniture and equipment it is using.
Accounting equation then is:
Year- end financial statements must be prepared, although interim
statements or statements of less than one year may be prepared for internal
purposes. Usual interim statements are quarterly financial statements or for a
period of three months.
The financial statements are prepared to cater to its users. Typically, users
of financial statements are:
Case 2. Assume that Mr. Ruben Viray invested assets worth P50,000 for
handicraft business. However, actual assets he invested is only P40,000.
Accounting equation will be:
Liabilities = Assets
= P50,000
Liabilities = P10,000
Case 3. Assume that Mr. Nick Ligon gave cash and goods for a buy-and-sell
business amounting to P60,000. However, a P5,000 notes payable by him to
a) Investors- they use the financial statements to decide whether they
will put in money to the business, hold or withdraw their capital.
b) Employees- they are interested in information regarding how the
company provide remuneration/salary, retirement benefits and
employment opportunities.
c) Lenders- Lenders are keen on data that provides them information
that will help them assess whether their loans and accompanying
interest will be paid on time.
d) Suppliers and other trade creditors- these users use financial
information regarding the promptness of the company to pay their
liabilities.e) Customers- customers are interested in information on how will
the enterprise operate, especially when there is a long-term involvement or
dependency on the business.
f) Government and their agencies- financial statements are
mandated by the government to regulate business entities, determine
taxation policies and as a basis for national statistics for economic
g) Public- generally, a business may affect the public in different
aspects like employment, community development, business
opportunities, etc.
1.13 Income Statement
An income statement is a formal statement showing the financial
performance of the enterprise for a given period of time. The income the
statement presents income and expenses. Accounts in the income statement
are called nominal or temporary accounts. These accounts are all closed at
the end of the period. Thus, no income statement account can be seen at the
books every start of the next period.
To illustrate an income statement, consider that Mr. Chit Manlunas
established an advertising business on December 1, 2008. For the whole
month of December, below are the pertinent data:
1. Total service revenues for the month is
2. The following are the expenses:
a) Advertising expense
b) Rent expense
c) Salaries expense
d) Other expenses
Net Income
To illustrate a balance sheet, assume that Mr. Chit Manlunas has the
following information in his journal as of December 31, 2008
1. Total Cash
2. Receivable from customer
3. Delivery equipment for business
4. Table, chairs, and other fixtures
5. Payable to Cyrex Commercial
6. Initial capital of P22,000 decrease
by personal withdrawal of
7. Profit for the month
P5, 225
Accounts Receivable
Delivery Equipment
Furniture & Fixture
_ 500
P5, 235
16, 500
1, 950
Balance Sheet
As of December 31, 2008
Income Statement
For the Period December 31, 2008
Service Revenues
Less: Expenses:
Advertising Expenses
Rent Expenses
Salaries Expenses
Other expenses
1.14 Balance Sheet
A balance sheet is a formal statement showing the financial position of the
enterprise as of a particular date. The balance sheet reflects the three
elements of financial position, namely assets, liabilities and capital. All
accounts in the balance sheet are called real or permanent accounts. These
accounts are not closed at the end of the period.
P3, 185
The heading of an income statement is composed of a name of a business or
an owner's name of statement, and date for a given period. The body of the
income statement is composed of the service revenue above and the
expenses deducted from revenues to arrive at net income or loss. The effect
of the income statement will be forwarded to the balance sheet.
Total Assets
Liabilities and Proprietorship
Accounts Payable-Cyrex
Manlunas, Capital
Less: Withdrawal
Add: Net Profit
Total Liabilities and Proprietorship
P5, 235
16, 500
1, 950
P 24, 435
P24, 435
The heading balance sheet is composed of the name of the owner or
business owners, the name of the statement, and the date of the
statement. It should be noted that a balance sheet is as of a given date.
COMMUNICATING – occurs through the preparation and distribution of
financial and other accounting reports. Financial statement is the most popular
accounting report.
The body of a balance sheet is composed of the assets, liabilities and
proprietorship. Other names for balance sheet are “statement of Assets
and Liabilities”, “Statement of financial Position”, or “Statement of
Financial Condition”.
There are numerous successful businesses both locally and
internationally. Some top – of – mind companies include Microsoft, Apple,
Coca– Cola and Procter and Gamble. Here in the Philippines, surging
businesses include Puregold, Petron, Globe and many others.
Obviously, these businesses offer products which are distinct from one
another. Have you ever wondered about the secret formula for a company’s
success? This discussion can go on for days without yielding definite
answers.Nonetheless, there is a common factor among these businesses that
contribute to their success – ACCOUNTING.
According to Accounting Theory “Accounting is a systematic
recording of financial transactions and the presentation of the related
information to appropriate persons.” Based on this definition we can derive the
following basic features of accounting:
Accounting is a service activity. Accounting provides assistance
to decision makers by providing them financial reports that will guide
them in coming up with sound decisions. Accounting is a link
between business activities and decision makers. It measures
business activities by recording data about them for future use. Then
through data processing, the data is stored and processed to
become useful information. Lastly the information is communicated,
through reports like financial statements, income statements and
cash flow statements to those who can use it in making decisions.
Accounting is a process: A process refers to the method of
performing any specific job step by step according to the objectives
or targets. Accounting is identified as a process, as it performs the
specific task of collecting, processing and communicating financial
information. In doing so, it follows some definite steps like the
collection, recording, classification, summarization, finalization, and
reporting of financial data.
Accounting is both an art and a discipline. Accounting is the art
of recording, classifying, summarizing and finalizing financial data.
The word ‘art’ refers to the way something is performed. It is
behavioral knowledge involving a certain creativity and skill to help
us attain some specific objectives.Accounting is a systematic method
consisting of definite techniques and its proper application requires
skill and expertise. So by nature, accounting is an art. And because
it follows certain standards and professional ethics, it is also a
Accounting deals with financial information and transactions:
Accounting records financial transactions and data, classifies these
and finalizes their results given for a specified period of time, as
needed by their users. At every stage, from start to finish, accounting
deals with financial information and financial information only. It does
not deal with non-monetary or non-financial aspects of such
Accounting is an information system: Accounting is recognized
and characterized as a storehouse of information.
“Accounting is the process of IDENTIFYING, RECORDING, and
COMMUNICATING economic events of an organization to interested
users.” (Weygandt, J. et. al)
IDENTIFYING – this involves selecting economic events that are relevant to
a particular business transaction
The economic events of an organization are referred to as transactions.
Examples of economic events or transactions - In a bakery business:
● sales of bread and other bakery products
● purchases of flour that will be used for baking
● purchases of trucks needed to deliver the products
REMEMBER: To be identified as a relevant economic event there should
RECORDING – this involves keeping a chronological diary of events that are
measured in pesos. The diary referred to in the definition are the journals and
ledgers which will be discussed in future chapters.
For example: Source documents are the original business documents
that are used to track business transactions. Documents like invoices,
purchase orders, and receipts all track and keep a record of the original
transaction; Information processors, like computers and software
programs, take the raw data from the input devices and post it to ledgers,
journals, and reports that can be used by decision makers. As a service
function, it collects processes and communicates financial information of
any entity. This discipline of knowledge has evolved to meet the need for
financial information as required by various interested groups.
Why accounting is considered the language of business.?
Accounting is the means by which business information is communicated to
business owners and stakeholders. The role of accounting in business is to
provide information for managers and owners to use in operating the
business. In addition, accounting information allows business owners to
assess the efficiency and effectiveness of their business operations. Prepared
accounting reports can be compared with industry standards or to a leading
competitor to determine how the business is doing. Business owners may also
use historical financial accounting statements to create trends for analyzing
and forecasting future sales.
Accounting helps the users of these financial reports to see the true picture
of the business in financial terms. In order for a business to survive, it is
important that a business owner or manager be well-informed.
Let us now discuss the function of accounting in business.
The American Accounting Association (AAA) defines accounting as the
process of identifying, measuring and communicating economic information
to permit informed judgements and decisions by the users of information.
Meanwhile, the American Institute of Certified Public Accountants
(AICPA) defines as the art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and events which are
part at least of a financial character and interpreting the results thereof.
From the foregoing definitions, the main functions of accounting can be
summarized as follows:
1. Keeping systematic records of business transactions
● Records should be systematic enough to enable easy
understanding of readers
● No matter how comprehensive the records are, if they are not
produced systematically, then they provide little to no value.
2. Protecting properties of the business
● Records serve as the evidence that properties of a business do
exist or how much of a particular resource does a company have.
● Helps in preventing employee fraud and misappropriation of
company resources
3. Communicating results to various parties in or connected with
the business
● Used by the management in their decision-making function as
well as External users (e.g., potential investors, government
4. Meeting legal requirements
● In the Philippines, the government requires some companies
particularly those with public accountability to provide
financial reports quarterly, semi – annually or annually. This
procedures aim to protect the public by providing them the
necessary information to make sound decisions.
For example:
Mr. Juan is a retired government employee who is good at baking. One
day he decides to put up a bakery shop in your barangay. He renovates a
portion of his house to serve as the area for the production of bread. He
purchases baking equipment and raw materials to produce five different
types of bread. Mr. Juan also hires Jose to help him with the baking and,
at the same time, to be in-charge of sales. Mr. Juan pays Jose on a weekly
basis. Every day, Mr. Juan’s wife deposits the daily cash sales in their
bank account at XY Savings Bank. With the help of accounting, what
possible decisions or questions of Mr. Juan can accounting provide an
answer to?
Possible Answers:
a. Is my business earning? (profitability)
b. How much daily or monthly sales do I need in order to
recover my fixed cost? (break-even)
c. Do I need to hire additional workers to help me with my
d. Can I afford to set up a new store in another place? Where
Do I get the funds?
e. Can I afford to pay a bank loan?
Accounting is as old as civilization itself. It has evolved in response to various
social and economic needs of men. Accounting started as a simple recording
of repetitive exchanges. The history of accounting is often seen as
indistinguishable from the history of finance and business.
Following is the evolution of accounting:
The Cradle of Civilization. Around 3600 B.C., record-keeping was
already common from Mesopotamia, China and India to Central
and South America. The oldest evidence of this practice was the
“clay tablet” of Mesopotamia which dealt with commercial
transactions at the time such as listing of accounts receivable and
accounts payable.
14th Century - Double-Entry Bookkeeping. The most important
event in accounting history is generally considered to be the
dissemination of double entry bookkeeping by Luca Pacioli (‘The
Father of Accounting’) in 14th century Italy. Pacioli was much revered
in his day, and was a friend and contemporary of Leonardo da Vinci.
The Italians of the 14th to 16th centuries are widely acknowledged
as the fathers of modern accounting and were the first to commonly
use Arabic numerals, rather than Roman, for tracking business
accounts. Luca Pacioli wrote Summa de Arithmetica, the first book
published that contained a detailed chapter on double-entry
19th Century – The Beginnings of Modern Accounting in Europe
and America .The modern, formal accounting profession emerged
in Scotland in 1854 when Queen Victoria granted a Royal Charter to
the Institute of Accountants in Glasgow, creating the profession of
the Chartered Accountant (CA).
The Present - The Development of Modern Accounting
Standards and Commerce. At present times, accounting standards
are already available to guide accountants in their practice of the
profession. Some of these standards include the PFRS (Philippine
Financial Reporting Standard) and the PAS (Philippine Accounting