Basic
Accounting for
NonAccountants
Learning Objective
1. Describe the nature of a business and the
role and purpose of accounting in business
2. Describe the accounting concepts and
principles and constraints
3. State the accounting equation and dene
each element of the equation.
4. Introduction to debit and credits
5. Introduction to the accounting process
What is a Business?
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A business is an organization in which
basic resources (inputs), such as ateria!s
an" !abor, are asseb!e" an" processe" to
provi"e goo"s or services (outputs) to
custoers#
The obecti!e of most businesses is to
earn a prot.
"rot is the di#erence bet$een the
amounts recei!ed from customers for
goods or ser!ices and the amounts
paid for the inputs used to pro!ide
the goods or ser!ices.
$he %o!e of Accounting in
Business
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Accounting can be "e&ne" as an
inforation s'ste that provi"es
reports to users about the econoic
activities an" con"ition of a business#
What is AON$*N+?
is a service activit'#
*ts function is to provi"e
uantitative
inforation,
priari!' &nancia! in nature,
about econoic entities, that
is inten"e" to be usefu! in
aing econoic "ecision#
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Accounting .tan"ar"s ounci!
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Accounting is the
process of
/easuring
*nterpreting
ounicating
&nancia!
inforation to support
interna! an" e0terna!
business "ecision aing#
1urpose of Accounting
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*t gives 'ou an e0ce!!ent gauge of how we!!
'our business is "oing
Accounting a!so provi"es &nancia!
inforation throughout the 'ear so 'ou
can test the success of 'our business
strategies an" ae course corrections to
ensure that 'ou reach 'our 'ear-en" pro&t
goa!s#
Acccounting can becoe 'our best s'ste
for anaging 'our &nancia! assets an"
testing 'our business strategies
$he Nee" for
Accounting
/anagers,
/anagers, investors, an" other interna! groups
want the answers to two iportant uestions2
3ow we!! "i"
the organization
perfor?
Where "oes
the organization
stan"?
Accountants answer these uestions
with three ajor &nancia! stateents2
*ncoe
stateent
Ba!ance
sheet
.tateent of
cash 4ows
sers of 5inancia!
*nforation
Accounting
oncepts an"
$erino!ogies
Accounting oncepts2 n"er!'ing
Assuptions
%&&'(%
)
*ncoe
is recognize" when earne"
regar"!ess of when receive"
60pense is recognize" when incurre"
regar"!ess of when pai"
$he e7ects of transactions are recognize"
when the' occur
$he business wi!! continue in operationa!
e0istence for the foreseeab!e future
5inancia! stateents shou!" be prepare" on
a going concern basis un!ess anageent
either inten"s to !iui"ate the enterprise or
to cease tra"ing,
$he business an" its owner(s) are two
separate entities
*+I,*
&+,&-'
,
&+,&-"
(SI,-S
T
S -,TIT/
&+,&-" An' private an" persona! incoes an"
e0penses of the owner(s) shou!" not be
T
treate" as the incoes an" e0penses of
the business
Accounting oncepts2 n"er!'ing
Assuptions
TI0"-'I+D
$he
!ife of an entit' is sub"ivi"e" into
tie perio"s which are of eua! !ength
for the purpose of aing &nancia!
reports
sua!!'
twe!ve onths
0+,-T%'/Assets, !iabi!ities, capita!, incoe an"
e0penses shou!" be state" in ters of a
(,IT
unit of easure (1hi!ippine 1eso)
$he
purchasing power of the 1eso is
stab!e8constant
Accounting oncepts2 Business
6ntities
Sole
Proprietorship
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Partnership
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Corporation
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A proprietorship is owne" b' one
in"ivi"ua!#
$he' are eas' an" cheap to
organize an" resources are !iite"
those of the
Ato
partnership
is owner#
sii!ar to a
proprietorship e0cept that it is owne"
b' two or ore in"ivi"ua!s#
obines the si!!s an" resources of
ore than one person#
A corporation is organize" un"er
state statutes as a separate !ega!
ta0ab!e entit'#
Accounting oncepts2 9ua!itative
haracteristics
'ele!ance
'eliabilit
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$he capacit' of inforation to
in4uence a "ecision
$he "egree of con&"ence users p!ace
upon the truthfu!ness of the
representations in the &nancia!
stateents
$he ua!it' of inforation that assures
users that the inforation is free fro
bias
error
an" faithfu!!'
aithful
$hean"
actua!
e7ects
of the represents
it purports
to represent
transaction
shou!"
be proper!'
'epresentat what
accounte" for an" reporte" in the
ion
&nancia! stateents
Substance
$ransactions shou!" be accounte"
in accor"ance with their
o!er orm
substance in rea!it' an" not
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Accounting oncepts2 9ua!itative
haracteristics
,eutralit
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&onser!atis
m or
"rudence
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&ompletene
ss
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*nforation in the 5inancia!
.tateents ust be free fro
bias
:fairness;
are an" caution ust be
e0ercise" when "ea!ing with
uncertainties in the easureent
process
$he %evenues an" pro&ts are not
anticipate"# On!' rea!ize" pro&ts
with reasonab!e certaint' are
recognize"
in the pro&t
an"be
!oss
%e!evant inforation
ust
account
presente" in a wa' that faci!itates
un"erstan"ing an" avoi"s
erroneous ip!ication
Accounting oncepts2 9ua!itative
haracteristics
(nderstandab
ilit
&omparabil
it
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5inancia! inforation ust be
coprehensib!e or inte!!igib!e if it
is to be usefu!
*nforation ust be coparab!e
with sii!ar inforation of
previous perio"s or with
inforation of another entit'
Accounting oncepts2 Accounting
onstraints
TI0-)I,-S
S
&+ST
-,-IT
0%T-'I%)I
T/
'-)-%,&!s
'-)I%I)IT/
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*nforation ust be avai!ab!e or
counicate" ear!' enough when a
"ecision is to be a"e
$he bene&t "erive" fro the inforation
shou!" e0cee" the cost incurre" in
obtaining the inforation
An ite is ateria! if now!e"ge of it
wou!" a7ect or in4uence the "ecision of
the infore" users of the &nancia!
stateents
$here is a tra"eo7 between re!evance
(reporting inforation in a re!evant
anner) an" re!iabi!it' (ensuring that the
inforation is re!iab!e)
$36 AON$*N+ 69A$*ON
Assets
< Liabi!ities
The resources
owned by a
business
The rights of
creditors are the
debts of the
business
= 6uit'
The rights of the
owners
Accounting $erino!ogies
T'%,S%&TI
+,
%&&+(,
T
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a business event having a onetar'
ipact on the &nancia! stateents of a
business
*t is recor"e" in the accounting recor"s
of the business
A recor" in the genera! !e"ger
that is use" to co!!ect an" store
sii!ar inforation
$'pes of
Accounts
are va!uab!e resources that
%SS-T
are owne" b' a &r#
%&&+(,
T
)I%I)IT present ob!igations of the
/ &r#
%&&+(,
T -(IT/
%&&+(
,T
represents the owners>
resi"ua! interest in the assets
of the business#
%esi"ua! interest is another
nae for owners> euit'#
I,&+0%&&+(,
T
the
pa'ent 'ou receive for 'our
tie, services 'ou provi"e, or the
use of 'our one'
60ap!es inc!u"e coissions, tips,
"ivi"en" incoe fro stocs, an"
interest incoe fro ban accounts#
-6"-,S- one' 'ou spen" to
goo"s or
%&&+(,T purchase
services provi"e" b'
soeone e!se
60ap!es inc!u"e rent,
e!ectricit', an" !ight
e0penses
&7%'T
+
%&&+(,
TS
T
%&&+(,TS
a
!isting of the naes of the
accounts that a copan' has
i"enti&e" an" a"e avai!ab!e for
recor"ing transactions in its general
ledger
An infora! ter for a set of &nancia! recor"s that
use "oub!e-entr' booeeping#
*f a !arge !etter $ were "rawn on the page, the
account tit!e wou!" appear just above the $, "ebits
wou!" be !iste" un"er the top !ine of the $ on the !eft
si"e an" the cre"its wou!" be !iste" un"er the top
!ine of the $ on the right si"e
,+'0%
)
%)%,&
D-I
T
&'-DI
T
$he su of the increases in an
account is usua!!' eua! to or
greater than the su of the
"ecreases in the account# $hus,
the nora! ba!ance of an account
is either a "ebit or a cre"it
"epen"ing on whether increases
in the account are recor"e" as
"ebits or cre"its#
An accounting entr' that
resu!ts in either an increase in
assets or a "ecrease in euit'
or !iabi!ities on a copan'>s
ba!ance sheet or in 'our ban
account#
An accounting entr' that either
"ecreases assets or increases
!iabi!ities an" euit' on the
copan'>s ba!ance sheet#
ebits an" re"its
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@ou just nee" to un"erstan" that "ebit an" cre"it are
two actions that are opposite in nature#
An e!eent (account) that is e7ecte" b' an accounting
transaction is either "ebite" or cre"ite" (with an
aount that is re4ecte" in the transaction) "epen"ing
on the nature of the account an" the ru!e app!icab!e to
it#
6ntries to the !eft si"e of the an account are "ebits
(%), an" accounts with !eft si"e" ba!ances (asset
accounts an" e0pense accounts) are "ebit accounts#
6ntries to the right si"e of the an account are cre"its
(%), an" accounts with right si"e" ba!ances (!iabi!it'
accounts, owners> euit' accounts, an" revenue an"
pro&t accounts) are cre"it accounts# n"erstan"ing
"ebit an" cre"it is essentia! for booeeping an"
ana!'sis of ba!ance sheets#
ebit an" re"it %u!es
6B*$
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%6*$
An accounting
entr' that2
*ncreases
an asset
account
*ncreases an
e0pense account
ecreases a
!iabi!it' account
ecreases a
revenue account
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An accounting
entr' that2
ecreases
an
asset account
ecreases an
e0pense account
*ncreases a
!iabi!it' account
*ncreases a
revenue account
Summar of Debits and
&redits
$he Accounting
1rocess
$he Accounting 1rocess
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.'steatic recor"ing of the
&nancia! operations of a
business or of an in"ivi"ua!
Before an accounting s'ste
can be starte", the owner of a
business ust &n"2
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What the business owns (assets)
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What the business owes (!iabi!ities)
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What the business is worth (euit')
.ing!e-entr' vs oub!e-entr'
.ing!e
One account entr' for each
transaction
oub!e
$wo account entries for
each transaction
One "ebit an" one cre"it
3'bri"
s'stes
/a' not atch incoe with e0penses
/a' not "istinguish cash, chec, or cre"it
oub!e-entr' Accounting
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A process b' which accounting transactions are
entere"
each in"ivi"ua! transaction a!wa's has an o7setting
transaction#
"oub!e-entr' booeeping gets its nae because
'ou enter a!! transactions twice
One account wi!! receive a C"ebitC entr', eaning
the aount wi!! be entere" on the left si"e of that
account# Another account wi!! receive a Ccre"itC
entr', eaning the aount wi!! be entere" on the
right si"e of that account# $he initia! cha!!enge with
"oub!e-entr' is to now which account shou!" be
"ebite" an" which account shou!" be cre"ite"#
%u!es of ebit an" re"it Nora! Ba!ances of
Accounts
Accounting /etho"s
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%ccounting methods "ictate how the
copan'>s transactions are recor"e" in the
copan'>s &nancia! boos
ash-basis accounting
copanies recor"
e0penses in &nancia! accounts when the cash is
actua!!' !ai" out, an" the' boo revenue when the'
actua!!' ho!" the cash
Accrua! accounting
copanies recor" revenue
when the actua! transaction is cop!ete" (such as
the cop!etion of wor speci&e" in a contract
agreeent between the copan' an" its custoer),
not when the' receive the cash# opanies recor"
an' e0penses when the'>re incurre", even if the'
have not pai" for the supp!ies 'et
Accounting 1rocess