BASIC ACCOUNTING
Accounting - is a service activity that
provides quantitative information, primarily
financial in nature, that is intended to be
useful in making concrete decisions among
alternative courses of action.
BRANCHES OF ACCOUNTING
1. Financial Accounting focuses
primarily on the preparation of
financial statements.
2. Management Accounting focuses
on the preparation of financial
reports used by managers on day to
day decision making. Also, they do
not follow International Accounting
Standards (IAS) and International
Financial Reporting Standards
(IFRS).
3. Government Accounting is used
by all government agencies.
4. Auditing is an unbiased
examination and evaluation of the
financial statement.
➔ External Auditing independent opinion outside
the company.
➔ Internal Auditing - opinion
inside the company, from the
company’s auditor.
5. Tax Accounting focuses on the
preparation of tax returns.
6. Cost Accounting is helpful in the
pricing of the goods and services.
7. Accounting Education molds the
future accountants.
8. Accounting Research is
responsible for researching the
effects on the process of accounting.
Luna de Pacioli - philosopher,
mathematician, priest and the Father of
Modern Accounting.
❖ “Summa de Arithmetica”
➔ Also known as “Double
Entry System of
Bookkeeping.”
➔ A value received should be
equal to the value that is
parted with.
USERS OF ACCOUNTING INFORMATION
❖ Internal users (owners, managers,
employees, and accountants)
➔ Users within the
organization.
❖ External users (investors, suppliers,
and customers)
➔ Users outside of the
organization.
FORMS OF ACCOUNTING REPORTS
1. Financial reports are prepared by
financial accountants.
➔ Financial aspect
2. Managerial reports are prepared by
management accountants.
➔ Financial and non-financial
reports
FINANCIAL STATEMENTS
1. Statement of Comprehensive
Income or Income Statement
2. Statement of Change in Equity
3. Statement of Financial Position or
Balance Sheet
4. Statement of Cash Flows
5. Notes to Financial Statements
FORMS OF BUSINESS ORGANIZATION
❖ Sole Proprietorship is owned by
one person wherein the owner is
also the manager.e’
➔ Easy to manage
➔ Single taxation
➔ Limited in size
➔ Unlimited liability (meaning
the liability of the company
extends up to the personal
assets of the owner)
❖ Partnership is owned by two or
more people.
➔ Unlimited liability
➔ Limited life
➔ Mutual agency (one partner
can bind the partnership)
➔ Co-ownership of the property
❖ Corporation is owned by
stockholders.
➔ Limited liability
➔ Unlimited life
➔ Separate legal personality
(juridical person)
➔ Double taxation
➔ Transferable ownership right
“The higher the risk, the higher the reward.”
ACCOUNTING CONCEPTS AND
PRINCIPLES
1. Reliability - users can depend on
the financial statement to be
accurate and faithfully represented.
2. Timeliness - accounting information
should be passed on time.
3. Neutrality - free from bias.
4. Faithful Representative - every
transaction must be accounted for in
its substance rather than legal form.
5. Completeness - financial
statements can only be reliable if
they’re complete.
6. Understandability - financial
statements should be easy to
understand by the users.
7. Going Concern - the company will
continue to operate in an indefinite
period of time (may forever sa
accounting :) ehehe).
8. Materiality - financial statement
should be without any material
omission or misstatement.
9. Prudence - exercising caution in
some degree like income shouldn’t
be overstated and expenses
shouldn’t be understated).
10. Accrual Concept - all revenues
earned and expenses incurred this
year must only be recorded this
year.
11. Matching Principle - the revenues
earned should be charged with their
corresponding expenses.
12. Business Entity - the transactions
of the owner are separated from the
transactions of the business.
13. Periodicity - the indefinite life of the
company is divided into certain
periods.
TYPES OF BUSINESS ACTIVITIES
❖ Service is the business activity
wherein it provides services.
❖ Merchandising - they buy and sell
like retailer.
❖ Manufacturing - they buy, process
and sell like factories.
THE ACCOUNTING EQUATION
(ALOE)
Assets =
Liabilities +
> controlled
but not
owned
> with
economical
use
> hindi pa
nagagamit,
may
pakinabang
pa
> claims of
the creditor
> utang
> things or
money that
needs to be
paid back
by the
creditor
> owed
Owner’s Equity
> claims of the
owner/s
> owned
The account titles under assets,
liabilities and owner’s equity:
ASSETS
LIABILITIES
OWNER’S
EQUITY
Cash
Accounts
Payable
Capital
(investment)
Accounts
Receivable
Notes
Payable
(promissory
note)
Income
(earned)
Supplies
Expense
(incurred,
used or
consumed)
Inventory
(held for sale)
Withdrawal
(for personal
use)
Equipment
Furniture &
Fixtures
TYPES OF MAJOR ACCOUNTS (ALCIE)
1. Assets
a. Current Assets - consumed/
sold/ used within one year.
● Cash: cash on hand
and cash in bank
● Accounts Receivable:
right to collect
● Notes Receivable:
with promissory note
● Inventory: cost of
unsold merchandise
owned and bought for
reselling
● Prepaid Expense:
expenses paid but not
yet incurred that is
applicable in supplies
prepaid rent and
prepaid insurance
b. Non-Current Assets - more
than a year.
● Equipment
● Furniture and Fixtures
● Automobile
● Land
● Building
2. Liabilities - obligations
a. Current Liabilities - pay within 1 year
● Accounts Payable: obligation
to pay
● Notes Payable
● Unearned Revenues:
revenues collected but not
yet earned
b. Non-Current Liabilities
● Mortgage Payable
● Loans Payable
3. Capital
● Capital: investments of the owner
● Withdrawal or Drawing:
contra-capital account
4. Income - earned
● Service Revenue
● Sales
5. Expenses - incurred
● Salaries Expense
● Utilities Expense: meralco, maynilad,
sky cable and PLDT
● Rent Expense
● Insurance Expense
THE ACCOUNTING PROCESS OR
CYCLE
1.
2.
3.
4.
5.
6.
7.
8.
9.
Analyzing transactions
Journalizing entries
Posting to the ledger
Unadjusted trial balance
Adjusted trial balance
Financial statements
Closing entries
Post-closing trial balance
Reversing entries
JOURNALIZING ENTRIES
Rules of Debit and Credit:
Left= Debit (Dr)
Right= Credit (Cr)
Increase
Decrease
A
Dr
Cr
L
Cr
Dr
C
Cr
Dr
I
Cr
Dr
E
Dr
Cr
POSTING TO THE LEDGER
➔ Transferring records from journal to
ledger
➔ Summarize the balances per
account
T-accounts - representation of ledger
UNADJUSTED TRIAL BALANCE
➔ A listing of the ledger accounts and
their balances that aids improving
the equality of a debit and credit.
6. Bad Debts/ Uncollectible
Accounts/ Doubtful Accounts receivable which is unlikely to be
collected.
Depreciation = Cost - Salvage Value
Useful life
●
Salvage value is also called
Residual value and Scrap value.
❖ PREPAID EXPENSE
● Asset Method (Normal
method)
* In this method, you will record the USED.
ADJUSTING ENTRIES
➔ These are accounts to be adjusted.
1. Prepaid Expense - expenses paid
but not yet incurred. This is an Asset
account.
2. Accrued Expense - expenses
incurred but not yet paid. This is a
Liability account.
3. Unearned Revenue - revenues
collected but not yet earned. This is
a Liability account.
4. Accrued Revenue - revenues
earned but not yet collected. This is
an Asset account.
5. Depreciation - is the allocation of
the cost of such over its useful life.
●
Expense Method
* In this method, you will record UNUSED.
❖ UNEARNED REVENUE
● Liability Method (Normal
Method)
* In this method, you will record EARNED.
●
Income Method
* In this method, you will record the
UNEARNED account.
❖ ACCRUED EXPENSE
Expense will increase (↑) and
Accounts Payable will also increase
(↑).
Depreciation = Cost - Salvage Value
Useful life
Net Book Value = COST - AD
Machinery
P 100,000
Accumulated D.
(4,948)
NET BOOK V.
P 95,052
❖ BAD DEBTS
Bad Debts Expense
is an Expense account while
the Allowance for Bad Debts
is a Contra-asset account.
* Interest expense (I = PRT), Utilities
expense and Salaries expense are
applicable here.
❖ ACCRUED REVENUE
Receivable will increase (↑)
and Revenue will also increase (↑).
* Interest Revenue is also applicable
here with the formula: I = PRT.
❖ DEPRECIATION
Depreciation Expense is an
Expense
account
while
the
Accumulated Depreciation is a
Contra-asset account. The formula
used is called the STRAIGHT LINE
METHOD.
Net Receivable= RECEIVAB. - ALLOW.
Receivable
P 10,000
Allowance
(1000)
Net Receivable N.
P 9,000
●
●
FINANCIAL STATEMENT
Income Statement or
Comprehensive Income is for
INCOME and EXPENSE.
Financial Position or Balance Sheet
is for Asset, Liability and Capital.
CLOSING ENTRIES
➔ The nominal accounts must be equal
to zero. There is a principle stating
that nominal accounts must be be
zero before proceeding to the next
year.
NOMINAL
ACCOUNTS/
TEMPORARY
ACCOUNTS
REAL
ACCOUNTS/
PERMANENT
ACCOUNTS
●
Income
●
Assets
●
Expense
●
Liabilities
●
Withdrawal
●
Capital
ACTUAL CLOSING ENTRY ACCOUNT:
Service Revenue ----------- XX
Income Summary------ XX
Income Summary------------ XX
Expense--------- XX
Income Summary---------- XX
Capital------------ XX
Capital------------------ XX
Withdrawal------- XX