FINACC SESSI0N 1 LECTURE
INTRODUCTION
SOURCE: VCIBARRA ACCOUNTING 15 WORKBOOK; ATENEO PRESS
DEFINITION OF ACCOUNTING
Traditional: the art of recording, classifying, and summarizing, in terms of money,
transactions, and events which are, in part at least, financial character, and interpreting the results
thereof.
Managerial: is the art of interpreting, measuring, and communicating results
of economic activities. Accounting is called the language of business.
PURPOSE OF ACCOUNTING. To provide decision-makers with information useful in
making economic decisions. Terms to be familiar with:
Financial accounting – refers to information describing the financial resources,
obligations and activities of an economic entity to assist investors and creditors.
Financial position – entity’s financial resources and obligations at one point in time.
Results of operations – financial activities during the year.
Management accounting – involves the development and interpretation of accounting
information intended specifically to aid management in running the business.
Financial reporting – supplying general-purpose financial information about a business to
people outside the organization. These outsiders include investors, financial analysts,
investment advisors, creditors, labor unions, government agencies and the public.
ACCOUNTING ASSUMPTIONS
1. Monetary-unit assumption. All business transactions are recorded in terms of money.
Record only facts that can be expressed in monetary units. Money is both the common
factor of all business transactions and the only feasible unit of measurement that can be
employed to achieve uniformity of financial data.
2. Time Period or Accounting Period. During the life of the business, many decisions
regarding the business must be made by management and interested outsiders throughout
the period the business existence. It becomes necessary for the managers, owners, and
lenders to know the operations of the business whether it is making profit or not. It is,
therefore, necessary to prepare periodic reports on operations. The life of the business
must be divided into short accounting periods of equal length (a year, a quarter, a month,
etc.).
3. Business Entity. Accounts are kept for entities, as distinguished from persons associated
with these entities. This concept advocates that a business enterprise is separate and
distinct from the persons who supply the assets.
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The accounting equation, ASSETS = LIABILITIES + OWNER’S EQUITY is an
expression of the entity concept. That is, the business owns the assets and owes the
various claimants, the creditor or the owner.
4. Going Concern. Accounting assumes that an entity will continue to operate indefinitely
unless there is evidence to the contrary. It is customary to assume that a business entity
has a reasonable expectation of continuing in business at a profit for an indefinite period
of time. This going-concern concept provides much of the justification for recording
plant assets at acquisition cost and depreciating them in a systematic manner without
reference to their current realizable values.
FINANCIAL STATEMENTS: The principal means of reporting general-purpose financial
information to persons outside a business organization is a set of accounting reports called
financial statements. A complete set of financial statements includes:
A. Balance Sheet – it shows at a specific date the financial position of the company by
indicating the resources that it owns, the debts that it owes, and the amount of the
owner’s equity (investment) in the business.

Listing the types and amounts (money) of important assets, liabilities, and equity.
 Total amounts on each side of the balance sheet are equal
Assets = Liabilities + Equity
B. Income Statement – indicates the profitability of the business over the preceding year (or
other accounting period).
Net income (loss) = revenues – expenses
 Lists the types and amounts of important revenues earned and expenses incurred by the
company.
 Helps in understanding and predicting company’s performance
Revenues – inflows of assets in exchange for products and services as part of
operations.
Expenses – outflows of assets in providing products and services to
Customers.
C. Statement of Changes in Owner’s Equity, or Statement of Retained Earnings – explains
certain changes in the amount of the owner’s equity or stockholders’ equity in the business.


Owner investments – assets the owner put into the business
Owner withdrawals – assets the owner takes from the business
D. Statement of Cash Flows – summarizes the cash receipts and cash payments of the business
over the same period of time covered by the income statement. Describes the services
(inflows) and uses (outflows) of cash for a reporting period. Shows cash at the beginning and
at the end of a period
Cash flow statement includes:
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

Operating Activities
Helps assess how much income is in the form of cash
Investing activities
Describes how a company is preparing for its future
Overspend or productive assets – cash shortage
Selling productive assets – downsizing
Financing activities
ACCOUNTING EQUATION:
Accounting equation: ASSETS = LIABILITIES + EQUITY
OR ASSETS – LIABILITIES = EQUITY
OR ASSETS – EQUITY = LIABILITIES
Terms: Assets are resources with future benefits that are owned by the company.
Liabilities are what the company owes to its creditors.
Equity or owner’s equity or capital refers to claims of owners to the assets of
the company.
Transaction is the exchanged of goods or services for a certain sum of money.
Accounting system consists of the personnel, procedures, devices, and records used by an
entity in developing accounting information and in communicating this information to
decision makers
ASSETS are what the company owns; example Cash, Receivable, Prepayments, Supplies,
Fixed assets (Land, equipment, furniture and fixtures).
LIABILITIES Are what the company owes, mostly shown as a payable, or accrued
EQUITY: owners’ contribution to the company in the form of investments, and any
revenues generated by the operation of the business less expenses.
Account titles: are established “names” taken from the chart of accounts
Accounting Equation exercises: Source: textbook
1.
On June 30 of the current year, the assets and liabilities of Heat Co. are as follows:
Cash P20,500; Accounts Receivable, P7, 250; Supplies, P650; Equipment, P12,000;
Accounts Payable, P9,300. What is the amount of owner’s equity as of July 1 of the
current year?
A)
P 8,300
B)
P13,050
C)
P20,500
D)
P31,100
Equation: A = L + OE;
A-L = OE
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2.
Spurs Company paid off P30,000 of its accounts payable in cash. What would be the
effects of this transaction on the accounting equation?
Assets = L + O E
-30,000 = -30,000
A) Assets, P30,000 increase; liabilities, no effect; equity, P30,000 increase.
B) Assets, P30,000 decrease; liabilities, P30,000 decrease; equity, no effect.
C) Assets, P30,000 decrease; liabilities, P30,000 increase; equity, no effect.
D) Assets, no effect; liabilities, P30,000 decrease; equity, P30,000 increase.
3.
How would the accounting equation of Lakers Company be affected by the billing of a
client for P10,000 of consulting work completed?
Assets = Liab + OE
A)
B)
C)
D)
+P10,000 accounts receivable, -P10,000 accounts payable.
+P10,000 accounts receivable, +P10,000 accounts payable.
+P10,000 accounts receivable, +P10,000 cash.
+P10,000 accounts receivable, +P10,000 revenue.
4. Boston Company has assets of P600,000, liabilities of P250,000, and equity of P350,000.
It buys office equipment on credit for P75,000. The effect of this transaction includes:
A)
B)
C)
D)
Assets increase by P75,000 and liabilities increase by P75,000.
Assets increase by P75,000 and expenses decrease by P75,000.
Liabilities increase by P75,000 and expenses decrease by P75,000.
Assets decrease by P75,000 and expenses decrease by P75,000. \
5. No Company collected P42,000 cash on its accounts receivable. The effects of this
transaction as reflected in the accounting equation are:
Assets = liab _+ OE
A)
B)
C)
D)
Total assets decrease and equity increases.
Both total assets and total liabilities decrease.
Total assets, total liabilities, and equity are unchanged.
Both total assets and equity are unchanged and liabilities increase.
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INTRODUCTORY PROBLEM: Group Assignment for Session 2
Submit answer Use: vibarra@ateneo.edu, NLT June 7, 5pm
Use File Name: Group No. Abu Sayad
Once upon a time, in a small province of Western Hulu-hulo, there lived a landlord by the
name of Abu Sayad. He was responsible for the well being of many farmers who live in the
small villages in the province. Each rainy season, the landlord would think on how to provide
for all of the farmers during the coming year.
One rainy season, Abu Sayad was thinking of the coming growing season. “I believe that
1 hectare of my land is worth 100 kilos of palay and will produce enough rice for one person”, he
mused. “But who should do the farming? Ah I will give two of my favorite farmers, Islaw and
Fred the responsibility to become the model for their respective villages’.” The two farmers
were summoned for an audience with Abu Sayad.
“Islaw, you will farm 2 hectares, and Fred will farm 1 hectare”, the landlord began. “I
will give Islaw 20 kilos of palay for seeds and 20 pounds of fertilizer. (Twenty pounds of
fertilizer are worth 2 kilos of palay.) Fred will get 10 kilos of palay and 10 pounds of fertilizer.
I will give each one of you a carabao to pull a plow, but you have to make arrangements with
Abu Baker, the plow maker, for a plow. The carabaos are only 3 years old and have never been
used for farming, so they have good 10 years of farming ahead of them. Take care of them
because one carabao is worth 40 kilos of palay. Come back after the harvest season and return
the carabaos and the plows along with your harvests”. Islaw and Fred accepted the offer and took
the things provided by Abu Sayad.
After the harvest season, Islaw and Fred returned to the landlord to account for their
harvests and the things given to them. Islaw said: “My Master, I present you with a slightly used
carabao, a plow that is broken beyond repair, and 223 kilos of play. Unfortunately, I owe Abu
Bakar, the plow maker, three kilos of palay for the plow I took from him. And, as you expected,
I used all the fertilizer and seeds you gave me. You will also remember, my Master that you
took 20 kilos of palay for your own personal use.”
Fred spoke next. “Here, my Master, is a partially used carabao, the plow, for which I
gave Abu Bakar, the plow maker, 3 kilos of palay from my harvest, and 105 kilos of palay. I too
used all of my seeds and fertilizer. I believe that the plow is good for two more seasons. Also,
my Master, you took 30 kilos of palay several days ago for your own table”.
“You did well”, said a very pleased Abu Sayad. After they have taken their leave, the landlord
began to contemplate what happened. “Ye,” he thought, “they did well, but I wonder which one did
better?”
Requirements: Show your computations.
1. How do you account for the increase in the owner’s equity?
2. Which farmer was the better farmer?
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NOTE: YOU DON’T NEED TO KNOW ACCOUNTING TO ANSWER THIS CASE
STUDY. USE YOUR INTUITION. SUBMIT YOUR SOLUTION.
Solution Guide:
1. It is suggested that you prepare two balance sheets, one at the beginning of the
planting season and one at the end of the planting season for each farmer. Use
your accounting equation A = L + E
2. Instead of currency, you may use kilos of palay as your common
denominator.
3. You may consider depreciation for the carabaos (ten years life) using straight
line. You may show plow at 0 if it is fully used/depreciated. It is acceptable to
show an asset with 0 value if it is not yet disposed of.
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