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 dene
each element of the equation.
4. Introduction to debit and credits
5. Introduction to the accounting process
What is a Business?
•
•
•
A business is an organization in which
basic resources (inputs), such as ateria!s
an" !abor, are asseb!e" an" processe" to
provi"e goo"s or services (outputs) to
custoers#
The obecti!e of most businesses is to
earn a prot.
"rot 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.
$he %o!e of Accounting in
Business
•
Accounting can be "e&ne" as an
inforation s'ste that provi"es
reports to users about the econoic
activities an" con"ition of a business#
What is AON$*N+?
is a service activit'#
*ts function is to provi"e
uantitative
inforation,
priari!' &nancia! in nature,
about econoic entities, that
is inten"e" to be usefu! in
aing econoic "ecision#
•
•
•
Accounting .tan"ar"s ounci!
•
Accounting is the
process of
/easuring
*nterpreting
ounicating
&nancia!
inforation to support
interna! an" e0terna!
business "ecision aing#
1urpose of Accounting
•
•
•
*t gives 'ou an e0ce!!ent gauge of how we!!
'our business is "oing
Accounting a!so provi"es &nancia!
inforation throughout the 'ear so 'ou
can test the success of 'our business
strategies an" ae course corrections to
ensure that 'ou reach 'our 'ear-en" pro&t
goa!s#
Acccounting can becoe '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 iportant uestions2
3ow we!! "i"
the organization
perfor?
Where "oes
the organization
stan"?
Accountants answer these uestions
with three ajor &nancia! stateents2
*ncoe
stateent
Ba!ance
sheet
.tateent of
cash 4ows
sers of 5inancia!
*nforation
Accounting
oncepts an"
$erino!ogies
Accounting oncepts2 n"er!'ing
Assuptions
%&&'(%
)
 *ncoe
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! stateents shou!" be prepare" on
a going concern basis un!ess anageent
either inten"s to !iui"ate the enterprise or
to cease tra"ing,
 $he business an" its owner(s) are two
separate entities
*+I,*
&+,&-'
,
&+,&-"
(SI,-S
T
S -,TIT/
&+,&-" An' private an" persona! incoes an"
e0penses of the owner(s) shou!" not be
T
treate" as the incoes an" e0penses of
the business
Accounting oncepts2 n"er!'ing
Assuptions
TI0"-'I+D
$he
!ife of an entit' is sub"ivi"e" into
tie perio"s which are of eua! !ength
for the purpose of aing &nancia!
reports
sua!!'
twe!ve onths
0+,-T%'/Assets, !iabi!ities, capita!, incoe an"
e0penses shou!" be state" in ters of a
(,IT
unit of easure (1hi!ippine 1eso)
$he
purchasing power of the 1eso is
stab!e8constant
Accounting oncepts2 Business
6ntities
Sole
Proprietorship
•
•
Partnership
•
•
Corporation
•
A proprietorship is owne" b' one
in"ivi"ua!#
$he' are eas' an" cheap to
organize an" resources are !iite"
those of the
Ato
partnership
is owner#
sii!ar to a
proprietorship e0cept that it is owne"
b' two or ore in"ivi"ua!s#
obines the si!!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
•
$he capacit' of inforation to
in4uence a "ecision
$he "egree of con&"ence users p!ace
upon the truthfu!ness of the
representations in the &nancia!
stateents
$he ua!it' of inforation that assures
users that the inforation 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! stateents
Substance
$ransactions shou!" be accounte"
in accor"ance with their
o!er orm
substance in rea!it' an" not
•
•
•
•
Accounting oncepts2 9ua!itative
haracteristics
,eutralit
•
•
&onser!atis
m or
"rudence
•
•
&ompletene
ss
•
*nforation in the 5inancia!
.tateents ust be free fro
bias
:fairness;
are an" caution ust be
e0ercise" when "ea!ing with
uncertainties in the easureent
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 inforation
ust
account
presente" in a wa' that faci!itates
un"erstan"ing an" avoi"s
erroneous ip!ication
Accounting oncepts2 9ua!itative
haracteristics
(nderstandab
ilit
&omparabil
it
•
•
5inancia! inforation ust be
coprehensib!e or inte!!igib!e if it
is to be usefu!
*nforation ust be coparab!e
with sii!ar inforation of
previous perio"s or with
inforation of another entit'
Accounting oncepts2 Accounting
onstraints
TI0-)I,-S
S
&+ST
-,-IT
0%T-'I%)I
T/
'-)-%,&!s
'-)I%I)IT/
•
•
•
•
*nforation ust be avai!ab!e or
counicate" ear!' enough when a
"ecision is to be a"e
$he bene&t "erive" fro the inforation
shou!" e0cee" the cost incurre" in
obtaining the inforation
An ite is ateria! if now!e"ge of it
wou!" a7ect or in4uence the "ecision of
the infore" users of the &nancia!
stateents
$here is a tra"eo7 between re!evance
(reporting inforation in a re!evant
anner) an" re!iabi!it' (ensuring that the
inforation is re!iab!e)
$36 AON$*N+ 69A$*ON
Assets
< Liabi!ities
The resources
owned by a
business
The rights of
creditors are the
debts of the
business
= 6uit'
The rights of the
owners
Accounting $erino!ogies
T'%,S%&TI
+,
%&&+(,
T
•
•
•
a business event having a onetar'
ipact on the &nancia! stateents 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
sii!ar inforation
$'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
nae for owners> euit'#

I,&+0%&&+(,
T
the
pa'ent 'ou receive for 'our
tie, services 'ou provi"e, or the
use of 'our one'
60ap!es inc!u"e coissions, tips,
"ivi"en" incoe fro stocs, an"
interest incoe fro ban accounts#
-6"-,S- one' 'ou spen" to
goo"s or
%&&+(,T purchase
services provi"e" b'
soeone e!se
60ap!es inc!u"e rent,
e!ectricit', an" !ight
e0penses
&7%'T
+
%&&+(,
TS
T
%&&+(,TS
a
!isting of the naes of the
accounts that a copan' has
i"enti&e" an" a"e avai!ab!e for
recor"ing transactions in its general
ledger


An infora! ter for a set of &nancia! recor"s that
use "oub!e-entr' booeeping#
*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!!' eua! to or
greater than the su of the
"ecreases in the account# $hus,
the nora! ba!ance of an account
is either a "ebit or a cre"it
"epen"ing on whether increases
in the account are recor"e" as
"ebits or cre"its#

An accounting entr' that
resu!ts in either an increase in
assets or a "ecrease in euit'
or !iabi!ities on a copan'>s
ba!ance sheet or in 'our ban
account#
An accounting entr' that either
"ecreases assets or increases
!iabi!ities an" euit' on the
copan'>s ba!ance sheet#

ebits an" re"its
•
•
•
@ou just nee" to un"erstan" that "ebit an" cre"it are
two actions that are opposite in nature#
An e!eent (account) that is e7ecte" b' an accounting
transaction is either "ebite" or cre"ite" (with an
aount that is re4ecte" in the transaction) "epen"ing
on the nature of the account an" the ru!e app!icab!e to
it#
6ntries to the !eft si"e of the an account are "ebits
(%), an" accounts with !eft si"e" ba!ances (asset
accounts an" e0pense accounts) are "ebit accounts#
6ntries to the right si"e of the an account are cre"its
(%), an" accounts with right si"e" ba!ances (!iabi!it'
accounts, owners> euit' accounts, an" revenue an"
pro&t accounts) are cre"it accounts# n"erstan"ing
"ebit an" cre"it is essentia! for booeeping an"
ana!'sis of ba!ance sheets#
ebit an" re"it %u!es
6B*$
•
%6*$
An accounting
entr' that2
 *ncreases
an asset
account
 *ncreases an
e0pense account
 ecreases a
!iabi!it' account
 ecreases a
revenue account
•
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
•
•
.'steatic 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
•
What the business owns (assets)
•
What the business owes (!iabi!ities)
•
What the business is worth (euit')
.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'stes
 /a' not atch incoe with e0penses
 /a' not "istinguish cash, chec, or cre"it
oub!e-entr' Accounting
•
•
•
•
A process b' which accounting transactions are
entere"
each in"ivi"ua! transaction a!wa's has an o7setting
transaction#
"oub!e-entr' booeeping gets its nae because
'ou enter a!! transactions twice
One account wi!! receive a C"ebitC entr', eaning
the aount wi!! be entere" on the left si"e of that
account# Another account wi!! receive a Ccre"itC
entr', eaning the aount 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  Nora! Ba!ances of
Accounts
Accounting /etho"s
•
•
•
%ccounting methods "ictate how the
copan'>s transactions are recor"e" in the
copan'>s &nancia! boos
ash-basis accounting
copanies recor"
e0penses in &nancia! accounts when the cash is
actua!!' !ai" out, an" the' boo revenue when the'
actua!!' ho!" the cash
Accrua! accounting
copanies recor" revenue
when the actua! transaction is cop!ete" (such as
the cop!etion of wor speci&e" in a contract
agreeent between the copan' an" its custoer),
not when the' receive the cash# opanies recor"
an' e0penses when the'>re incurre", even if the'
have not pai" for the supp!ies 'et
Accounting 1rocess