ACCOUNTING REVIEWER [SERVICE &
MERCHANDISING TYPE OF BUSINESS]
Accounting
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According to American Accounting
association (AAA), accounting is the
process of identifying, measuring, and
communicating economic information to
permit informed judgement and decisions
by users of the information.
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According to American Institute of Certified
Public Accountants (AICPA), defines
accounting as the art of recording,
classifying and summarizing in a
significant manner and in terms money,
transactions, and events which are in part at
least of a financial character, and interpreting
the results thereof
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According to Accounting Standards Council
(ASC), sees accounting as a service
activity. Its function is to provide quantitative
information, primarily financial in nature,
about economic entities, that is intended to
be useful in making economic decisions.
Nature of Accounting
 Accounting is a service activity
- Accounting assists decision-makers by
providing them financial reports that
will guide them in coming up with
sound solutions.
 Accounting is a process
- 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 Science and Art
- Accounting is the art of recording,
classifying, summarizing, and finalizing
financial information arising from
business transactions, while at the
same time, following certain
standards, principles, and professional
ethics.
 Accounting deals with financial
information and transactions
- Accounting records financial
transactions and data, classifies
these and finalizes their result given
for a specific period.
 Accounting is an information system
- It is recognized and characterized
as a storehouse of information. As a
service function, it collects
processes and communicates
financial information of an entity.
History of Accounting
-
Accounting is as old as civilization itself.
It has evolved in response to various
social and economic. Accounting started
as a simple recording of repetitive
exchanges. Seen as indistinguishable
from the history of finance and business.
Cradle of Civilization
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Early 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 the listing of accounts receivable and
accounts payable.
14th Century “Double-Entry Bookkeeping”
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The most important event in accounting
history is generally considered to be the
dissemination of double-entry
bookkeeping by Luca Pacioli (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
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
bookkeeping.
19th Century “Beginnings of Modern Accounting
in Europe and America”
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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 Chartered Accountants
(CA).
In the late 1800s, chartered accountants from
Scotland and Britain came to the US to audit
British investments. Some of the accountants
stayed in the US, setting up accounting
practices and becoming the origins of several
US accounting firms. The first national US
accounting society was set up in 1887. The
American Association of Public Accountants
was the forerunner to the current American
Institute of Certified Accountants (AICPA.)
Basic purpose of accounting: to supply financial
information to users of the information to help them
make informed judgements and better decisions
Accounting is language of the business: used to
communicate financial information to interested
parties. Through this, different users of information
understand what is happening in the business
enterprise
Bookkeeping - procedural or mechanical aspect
of accounting and involves set-up, update and
maintenance of accounting records. It can be
done by properly trained non-accountants
Important: Bookkeeping and Accounting are
different from one another. Bookkeeping, is just
confined with the recording of monetary
transactions, which is one part of the accounting
process.
Luca Pacioli and the Summa
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1494, Fra Luca Bartolomeo Pacioli wrote a book
containing discussions on the double-entry
bookkeeping system entitled Summa de
Arithmetica, Geometria, Proportioni et
Proportionalita (Everything about Arithmetic,
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Geometry, Proportion, and Proportionality),
summary of the existing mathematical
knowledge at the time.
He was known as the “Father of Modern
Accounting” as he is the first person to
publish detailed material on the double-entry
system of accounting.
Also, he was considered as the “Father of
Double-Entry Bookkeeping”
BRANCHES OF ACCOUNTING
1. Financial Accounting - is the broadest
branch and is focused on the needs of
external users. It is about preparation of
general-purpose financial statements with the
aim of meeting mos.t of the needs of the
external users
Complete Set of Financial Statements:
 Statement of Financial Position or
“Balance Sheet” (SFP)
 Statement of Comprehensive Income or
“Income Statement” (SCI)
 Statement of Changes in Equity (SCE)
 Statement of Cash Flow (SCF)
 Notes to Financial Statements (NOTES)
2. Management (Managerial) Accounting –
Managerial Accounting involves financial
analysis, budgeting, and forecasting, cost
analysis, evaluation of business decisions,
and similar areas. It is concerned with
financial reporting for internal users
(management) and users have control over
the accounting system and can specify
precisely the type of reports needed for use in
decision-making.
3. Cost Accounting - sometimes considered as
a subset of management accounting. Cost
accounting refers to the recording, presenting,
and analysis of manufacturing costs. Cost
accounting is very useful in the manufacturing
business since they have the most
complicated costing process.
4. Tax Accounting - Tax accounting helps
clients follow rules set by tax authorities. It
includes tax planning and preparation of tax
returns which involves the determination of
income tax and other taxes. This branch of
accounting also offers tax advisory services that
deal with ways to minimize taxes legally (Tax
Avoidance), evaluation of the consequences of
tax decisions, and other tax-related matters.
 Tax Avoidance - using legal way to
minimize, reduce or eliminate the taxes due
(tax minimization)
 Tax Evasion - using illegal means to
minimize taxes.
5. Government Accounting – encompasses the
process of analyzing, classifying, summarizing
and communicating all transactions involving
receipt and disposition of government funds and
property and interpreting the results thereof.
Focus is the proper custody, disposition and
accounting for public funds
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External Users - external users are individuals
and organizations outside a company who want
financial information about the company. These
users are not directly involved in managing and
operating the business.
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Auditing
 External Audit - it refers to the examination
of financial statements by an independent
Certified Public Accountant (CPA) to express
an opinion as to the fairness of presentation
and compliance with the Accounting
Standards.
 Internal Audit - it deals with determining the
operational efficiency of the company
regarding the protection of the company’s
assets, accuracy and reliability of accounting
data, and adherence to certain management
policies. This focuses on evaluating the
adequacy of a company’s internal control
structure implemented by management.
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USERS OF ACCOUNTING INFORMATION
Internal Users - internal users are those individuals
inside a company who plan, organize, and run the
business. These users are directly involved in
managing and operating the business.
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Management - management needs the
financial information to run and operate the
business. The information allows them to
analyze the organization’s performance and
position in order to take appropriate
measures to improve the company.
Owners - they need the information to
decide whether to continue and invest further
or stop and withdraw investments from the
business.
Employees - employees need the
financial information to help them decide
whether to stay or leave the company and
look for other employment opportunities.
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Potential Investors - they need the
financial information to help them decide
which business to invest in or whether
they would or would not buy the share of a
company.
Creditors - creditors, like banks, need the
financial information to help them decide
on whether they would or would not lend
money to the business, it also allows them
to negotiate the terms of the loans of the
business.
Suppliers - suppliers need the financial
information to help them decide on giving
the terms of credit for the business. The
information also allows them to assess
whether they would still be doing business
with the company or abandoning the
business.
Government - Government Agencies,
such as but not limited to the Bureau of
Internal Revenue (BIR), Local
Government Units (LGUs), Securities and
Exchange Commission (SEC),
Department of Labor and Employment
(DOLE), and Department of Trade and
Industry (DTI) needs the information to
help them assess the taxes that should be
paid by the business and whether or not
the business complies with the laws, rules,
and regulations imposed by the
government agencies.
Customers / Clients - Customers or
Clients need the financial information to
help them decide whether to stay or find
another business to transact with as they
could affect the future of their business,
especially in business to business (B2B)
settings.
- More Resources
- Shared Control
FORMS OF BUSINESS ORGANIZATION
- Tax Advantages
Business - it refers to an organization or
enterprising entity engaged in commercial, industrial,
or professional activities. They can be for-profit
entities or they can be non-profit organizations that
operate to fulfill a charitable mission or further social
cause.
Corporation - is a business organized as a
separate legal entity (artificial person) under the
corporation law with ownership divided into
transferable shares of stocks. The corporation’s
life starts at the date the Articles of Incorporation
(AOI) is approved/registered by the Securities
and Exchange Commission (SEC).
Forms of Business Organization in the
Philippines:
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Professional
Sole Proprietorship
Partnership
Corporation
Cooperatives
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Types of Business according to Business
Activity:
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Service
Merchandising
Manufacturing
Hybrid
Sole Proprietorship - is a form of business that is
owned by one person; it is the simplest and most
common form of business organization and is
registered in the Department of Trade and Industry
(DTI)
Advantages
- Easy to Set Up
- Controlled by Owner
- Tax Incentives
- Owner keeps all the
profits
Disadvantages
- Unlimited Liability
- Difficult to Raise Capital
- The life of the business is
limited to the life of the owner.
Partnership - is a form of business owned by two or
more persons. The details of the arrangement
between the partners are outlined in a written
document called articles of partnership (AOP) and
are registered under the Securities and Exchange
Commission (SEC). The owners are called partners
and the profits of the business are divided among
partners based on their agreed sharing.
Advantages
- Easy to Set Up
Disadvantages
- Unlimited Liability
- Difficult to Raise Capital
- Responsible for Partner
Decisions
- Profits are divided
among partners
All owners are called stockholders or
shareholders and the power to vote/voting
rights for the management of the corporation
is based on the percentage of their ownership.
The proof of ownership in a corporation is
evidenced by a stock certificate which is
denominated in terms of money. The
management of the business is called the
Board of Directors. They are the ones who
elect the President or CEO of the corporation.
Advantages
- Easy to Raise Capital
- Unlimited life
- Transfer Ownership
- No personal
liability/Limited liability
Disadvantages
- It Harder to Set Up
- Higher Taxes
- Subject to several legal
restrictions as listed in the
Corporate Code of the
Philippines
Cooperatives - a cooperative is a duly registered
association of persons with a common bond of
interest, voluntarily joining together to achieve
their social, economic, and cultural needs.
Cooperative members should consist of more
than 15 people. The owners are called members
who contribute equitably to the capital of the
cooperatives (1 member = 1 Voting Power).
Cooperatives should be duly registered to the
Cooperative Development Authority (CDA). The
word cooperative should appear in the name of
the entity.
Advantages
- Enjoys the privilege of
Corporation but with
fewer restrictions
Disadvantages
- Requires continuous
education programs for
members
- Promotes the concept
of sharing resources
- Enjoys tax exemption
privilege
- The members have active
and direct participation in
the business of the
cooperative
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Restaurants
BASIC ACCOUNTING EQUATION
Assets = Liabilities + Owner’s Equity
A = L+ OE
Types of Business Activities
Service Business - offers intangible products such
as but not limited to professional skills, talents,
advice, and consultations
Examples are:
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Barber Shops
Repair Shops
Banks
Accounting Firms
Law Firms
Merchandising Business - also known as Buy and
Sell or Trading buys their products, preferably at
wholesale, and later sells them at a higher price.
They make a profit by selling the merchandise or
products at prices that are higher than their
purchase cost.
Examples are:
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Bookstores
Sari-Sari Store
Supermarket
Hardware Store
Shoe Store
Shopee & Lazada
Manufacturing Business - this type of business
buys raw materials and uses them in making a new
product, therefore combining raw materials, labor
and expenses to produce a product that they will
sell.
Examples are:
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Shoe Manufacturing Business
Car Manufacturing Business
Unilever, Apple, Samsung
Hybrid Type of Business - businesses that may be
classified under more than one type of business.
Examples are:
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Bakery
Possible effects of business transactions:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Increase in assets= increase in liabilities
Increase in assets = increase in equity
Increase in one asset= decrease in another
asset
Decrease in assets= decrease in liabilities
Decrease in assets= decrease in equity
Increase in liabilities= decrease in equity
Increase in equity = decrease in liabilities
Increase in one liability= decrease in
another liability
Increase in one equity= decrease in one
equity
In accounting, we follow the concept of Duality &
Equilibrium. This means that every event or
transaction of the business will affect at least two
things in the business.
Duality - Kapag meron kang natanggap, may
ibibigay kang kapalit. For example, Bumili ka ng
T-shirt kaya mawawalan ka ng pera dahil
pinangbayad mo.
Equilibrium - Kung magkano yung natanggap
mo, dapat equal sa ibibigay na kapalit. For
example, 100 pesos yung T-Shirt, kaya
magbabayad ka ng 100 peso bill sa seller para sa
100 pesos na T-Shirt. Balance palagi, parehas
nagkaroon, parehas din nawalan.
Monetary Unit - currency (₱) sign. UNIT in terms
of money. All transactions that are recorded are
only those with economic or monetary value.
Economic Benefits - are benefits that can be
quantified in terms of money generated, such as
net income, revenues, etc. It can also be money
saved when discussing a policy to reduce costs.
(May pakinabang pa sayo pero kung wala nang
pakinabang, hindi na siya considered as Asset)
Cost Principle - maintains the cost of an asset. It
must be recorded the original cost of an asset and
should not be recorded at Fair Market Value or
Future Value. (Kapag bumili ka ng Asset, irerecord
mo yung nabili mo especially, kung magkano mo
nabili, depende kung mababa or mataas. Kung
magkano mo binili, ganun pa rin ang price. Total
cost ng mga ginastos para dun sa isang item, mga
charge, mga transportation, etc).
Basic Accounting Concepts
1. Business entity principle: business is
considered distinct and separate from the
owner(s) of the business
 Accounting entity - an organization
accounted for as a separate economic unit
2. Dual-effect of business transactions:
whenever a business transaction takes place, it
is assumed that the value receive is equal to the
value given up (for every value received, there
is an equal value given up) Debit-Credit
3. Matching principle: profit or loss is computed
by deducting the expenses incurred from the
income earned during an accounting period.
Income recorded and reported in one
accounting period should be matched against
the expenses that directly or indirectly
contributed to the generation of the income
4. Accrual basis: income is recognized when it is
earned, regardless of when cash is received.
Expenses are recognized when incurred,
regardless of when cash is paid
 If services have already been rendered to a
customer, income is recognized even if cash
has not been received from the customer
 If cash is received from customer before a
service is rendered or goods are delivered,
income is not yet earned because there is no
service or delivery of goods yet. The cash
received would be earned only upon
rendering of service or delivery of the goods
 If services have already been received by the
business from its suppliers, expenses are
recognized even if these services have not
yet been paid for by the business
 If cash has already been paid by the
business to its suppliers, an expense is not
recorded until it is incurred
5. Cash basis of Accounting: income is
recognized when cash is received, and
expenses are recognized when cash is paid
(extra concept sometimes used by other
businesses)
6. Stable monetary unit: it is concerned with
information which can be quantified and
expressed in terms of money. For business
transactions to be included in the accounting
records and financial statements of the
enterprise, it must be expressed in terms of a
uniform means of measurement
7. Periodicity (Time Period Concept):
operating life of an enterprise may be
conveniently divided into time periods of
equal length called accounting periods.
Accounting Framework
 The Framework for the Preparation and
Presentation of Financial Statements sets
out the concepts that underlie the
preparation and presentation of financial
statements for external users
 The Framework is not part of the PFRS
and in case of conflict, the requirements of
the PFRS shall prevail over those of the
Framework
Financial statement - the means by which the
information accumulated in and processed by
financial accounting is communicated to users on
a periodic basis and is the end-product of the
financial accounting process
Parts of:
1. Financial Position: assets, liabilities
and equity
2. Comprehensive Income: Income and
expenses
3. Changes in Equity: capital, additional
investments and withdrawals
4. Cash flows: any activity that results in
inflow or outflow of money or resources
5. Notes to the financial statements
Information Provided by Financial Statements

Information about the financial position,
financial performance and cash flows of an
entity
1. Financial Position

Condition of a business, in monetary terms,
as of a given date or point in time and is
primarily provided in a statement of financial
position or balance sheet. Financial position
is affected by the economic resources
controlled, financial structure,, liquidity,
solvency, and capacity to adapt to changes in
the environment in which an enterprise operates
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Liquidity - availability of cash in the near future to
cover currently maturing liabilities or obligations
Solvency- availability of cash over the long term to
meet obligations when they fall due
Capacity for adaptation - ability of the enterprise to
use its available cash for unexpected requirements
and investment opportunities or simply called as
emergency money
c) effects on the enterprise of
changing prices
General-Purpose Financial Statements
2. Performance or profitability
Refers to whether a company is able to generate
profit or incur a loss during a particular accounting
period and is used for statement of comprehensive
income.
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2 parts: profit/loss portion and other
comprehensive income portion.
Income statement - useful tool for evaluating
management’s stewardship of the resources of the
enterprise and for assessing the inflow and outflow
of cash.
3. Changes in financial position
Information concerning changes about a company’s
financial position is useful in order to assess its
investing, financing and operating activities during
the reporting period. This information provides
users with a basis to assess the enterprise’s ability
to generate cash and cash equivalents and the
needs of the enterprise to utilize those cash flows
Statement of changes in equity - shows balance of
the owner’s investment in the business at the
beginning of the accounting period, additional
investments made by the owner, withdrawals by the
owner for personal use, the profit or loss for the
period, and the balance of the owner’s investment at
the end of the accounting period
Statement of cash flows - summarizes cash
activity for the period, classified according to the
nature of activity
4. Other supplementary information
Additional information that is relevant to
the need of financial statement users.
May include:
a) disclosures about the risk and
uncertainties concerning the
enterprise and any resources and
obligations not recognized in the
statement of financial position
b) information about geographical and
industry segments
financial statements that meet most of
the needs of other users
Special-purpose financial statements covered by management accounting and
auditing courses.
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Underlying Assumptions in the Preparation of
Financial Statements
Underlying assumptions -concepts which are
assumed to have been applied in preparing
financial statements
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Accrual basis
Going concern
Elements of Financial Statements
A. Elements pertaining to financial position
1.
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Assets - resource owned and/or
controlled by the enterprise and expected
to provide future economic benefits to the
enterprise. It is acquired by an enterprise
as a result of a past transaction or event.
The enterprise should have the capacity
to restrict or prevent other entities from
enjoying the economic benefits arising
from the use of the resource or item
Cash - items considered as medium of
exchange in business transactions
Accounts receivable - valid claims from
customers or clients arising from the
provision of services or delivery of goods
in the ordinary course of business where
the price for these services or goods have
not yet been paid
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2.
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3.
Supplies on hand - supplies purchased by
an enterprise which are unused as of the
reporting date
Merchandise Inventory - goods which have
been bought from suppliers for resale to
customers at a higher price than cost
Property , plant and equipment - long-lived
assets which have been acquired for use in
operation
Liabilities - present obligation of the
enterprise arising from past events, which
are to be settled in the future. It is required
to be settled in the future
Accounts payable - amounts due to
suppliers for goods purchased or services
received on account
Salaries payable - due to employees which
are unpaid as of the reporting date
Utilities payable - due to utility companies
for electricity, heat, light and water charges
Advances from customers - amounts
received from customers in advance for
delivery of goods or provision of services
Loans payable - obligations of an enterprise
to lenders
Equity - claim; residual interest in the
assets of the enterprise after deducting all
its liabilities and arise from the original
investment by an owner into the business
and increased by additional investments by
the owners and by profit earned during a
period
course of the ordinary activities of an
enterprise
2. Expenses - decrease in economic
benefits during the accounting period in
the form of outflows or depletions of
assets or incidences of liabilities that
result in decreases in equity other than
those relating to distributions to equity
participants.
 Losses - other items that meet the
definition of expenses and may or may not
arise in the course of the ordinary
activities of the enterprise.
Measurement of the Elements of the Financial
Statements
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Measurement Bases
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B. Elements pertaining to performance or
profitability
1.
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Income - increase in economic benefits
during the accounting period in the form of
inflows or enhancements of assets or
decreases of liabilities that result in the
increase of equity other than those a relating
to contributions from equity participants
Revenue - course of the ordinary activities of
an enterprise (sales, fees, dividends,
royalties and rent)
Gain - other items that meet the definition of
income and may or may not arise in the
Process of determining the monetary
amounts at which the elements of the
financial statements are to be
recognized and carried in the financial
statements
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Historical cost: assets are recorded at
the amount of cash or cash equivalents
paid or the fair value of the consideration
given to acquire them at the time of their
acquisition
Current cost: assets are carried at the
amount of cash or cash equivalent they
would have to be paid if the same or an
equivalent asset was acquired currently
Realizable (settlement) value: assets are
carried at the amount of cash or cash
equivalent that could currently be obtained
by selling the asset in an orderly disposal
Present value: assets are carried at the
present discounted value of the future net
cash inflows that the item is expected to
generate in the normal course of business
Business transaction - exchange of values
involving two parties or within the enterprise
External transactions - sale of goods to
customers or the provision of services to clients
Internal transactions - manufacture of goods for
sale and incurrence of losses by the company
resulting from fire and flood
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Held for trading securities - temporary
investments of excess cash which are
primarily held for short-term gain
Loans and receivables – trade
receivables and non-trade receivables and
are claim against others which arise in the
ordinary course of doing business
Trade notes receivable - written promise
from the customer to pay a fixed amount
of money on a certain future date
Non-trade receivables - all other claims
which are not trade
Inventories - assets which are held for
sale/ in the process of production/ in the
form of materials and supplies
Prepaid expenses - expenses paid for by
the business in advance. (e.g. prepaid
insurance and prepaid rent)
Long-term investments - asset held by
an enterprise for the accretion of wealth
through capital distribution for capital
appreciation or for other benefits to the
investing enterprise
Property, plant and equipment - tangible
assets used in the production or supply of
goods or services
Intangible assets - identifiable, nonmonetary assets without physical
substance
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Source Documents
 Original record of a business transaction
(date and nature of transaction amount and
parties involves)
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Examples:
1. Sales invoice - issued to evidence a sale for
cash
2. Delivery receipt - evidence the
acceptance/receipt of the goods delivered to
the customer
3. Official receipt - issued to evidence the
receipt of cash from customers
4. Vendor’s invoice - issued to the enterprise
by the enterprise’s suppliers
5. Purchase requisition forms - evidences an
employee’s request for the purchase of
needed goods or suppliers
6. IOUs - phonetic spelling of the phrase 'I Owe
You’, it is a note acknowledging
indebtedness to the enterprise
7. Promissory notes - unconditional promise in
writing made by one person to another
8. Bank statements - summary of all financial
transactions occurring over a certain period
on a bank account
9. Minutes of meetings - record of a meeting
10. Business letters - business
correspondences
11. Job time tickets - time spent working at a
particular customer order
12. Certificates of stock - ownership of shares
in a corporation
13. Time records/timesheets - time-in and timeout of employees
14. Check voucher - authorization of cash
disbursement transactions
15. Journal voucher - documents used for
transactions and journal entries for which
there is no other source document
Asset Accounts
1.
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Cash - medium of exchange for business
transactions
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2.
Liability Accounts
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Accounts payable - opposite of
accounts receivable
Notes payable - enterprise is the one
who promises to pay
Accrued liabilities - amounts owed to
others for unpaid expenses
Unearned revenues - enterprise
receives payments before providing its
customers with goods or services
Mortgage payable - used for recording
long-term debts of an enterprise
Bonds payable - large sums of money
are often required by a business for
working capital and expansion purposes
and is often obtained by floating bonds
Equity Accounts
3.
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Double-Entry Accounting System
Equity - used to record the original and
additional investments of the owner of the
business entity
Withdrawals - when proprietor withdraws
cash or other assets for non-business use
Income summary - temporary account
used to summarize all income and
expenses for a given period
Income Accounts
4.
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Service income or fees income revenues earned by performing services for
customers
Sales - revenues earned as a result of sale
of merchandise
Expense Accounts
5.
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Cost of sales - cost incurred to purchase or
to produce the products sold to customers
during the period
Salaries and wage expense - payments as
a result of an employer- employee
relationship
Utilities expense- expenses related to use
of communication facilities, the
consumption of water and electricity
Rent expense- expense for leased office
space, equipment or other assets rented
from others
Supplies expense- account used for
recording the usage of supplies in the
normal course of business
Insurance expense- portion of premiums
paid on insurance coverage which has
expired
Depreciation expense- the portion of the
cost of a tangible asset allocated or
charged as expense during as accounting
period
Bad debts expense- amount of receivables
estimated to be uncollectible and charged
as expense during an accounting period
Interest expense- expense related to
borrowed funds
1.
For every debit entry, there must be a
corresponding credit entry and accounting
equation must always be maintained
2.
Each transaction affects at least two
accounts
3.
Total debit for a transaction must equal
total credits
4.
An account is debited when an amount is
entered on the left side of the account and
credited when amount is entered on the
right side
5.
The account type determines how
increases or decreases in it are recorded
Account Balances
Difference between the total debits and the
total credits of each account
-
Debit balance - if total debits are greater than the
total credits
Credit balance - if the total credits are greater than
the total debits
Normal balance - usual balance of an account
assuming proper accounting has been made
ACCOUNTING FOR SERVICE BUSINESS
Steps in Accounting Cycle:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Analyzing business transactions through
source documents
Journalizing, or the recording of
transactions in a journal
Posting or transferring of the entries from
the journal to the ledger
Preparing the trial balance
Preparing the 10-column worksheet and
making the necessary adjusting journal
entries
Preparing the financial statements based
on adjusted account balances
Recording adjusting entries to the journal
and posting the same to the ledger
Recording and posting of closing entries
Ruling and balancing real and nominal
accounts
Preparing post-closing trial balance
Preparing reversing entries (OPTIONAL)
THE ACCOUNTING PROCESS
Documentation – Analyzing phase
Journalizing – Recording phase
Posting – Classifying phase
Preparation of Unadjusted Trial balance
– Classifying phase, 1st trial balance
5. Adjustments – Adjusting entries
6. Preparation of Adjusted Trial balance –
Summarizing, 2nd trial balance
7. Preparation of Financial Statements –
Summarizing, preparation of worksheet
8. Post-closing entries – Summarizing,
closing entries
9. Post-closing Trial balance – Summarizing,
3rd trial balance
10. Reversing entries – optional, beginning of
the next accounting period
1.
2.
3.
4.
Journal - book where transactions are initially
recorded in a systematic and chronological order;
also called the book of original entry.
Simple journal entry - one account debited and
one account credited
Compound journal entry - more than one account
is involved in a single entry
Memorandum entry - an entry which has no debit
or credit, which shows only the date and a brief
explanation or reminder
Chart of accounts - list of all accounts of the
business and their respective account numbers.
Use of this would reduce confusion as to the choice
of account titles and permits uniformity in recording
routine transactions
Ledger - group of accounts and known as the book
of final entry
Trial balance - list of all accounts and their
balances and indicated whether total debit equals
total credit. It does not guarantee that all
transactions have been recorded. It is commonly
taken every month-end
Footing - adding all the debits and credits
Open account - when in trial balance, there is a
balance either on the debit or credit side
Closed account - if the debit equals credit
Cumulative Records – continuous tally to which
new data are added.
Reasons Why Trial Balance may not be
Balance:
1.
2.
3.
4.
5.
Errors of Omission – leave out of exclude
a transaction
Errors of Commission – this type of error
does not have any effect on financial
statements (ex. Nagmadali kaya namali ng
account title)
Errors of principle – accounting entries is
recorded in incorrect account
Errors of Original Entry – resulted when
wrong amount is posted to an account
Reversal of Entry – when accounting
entry is posted in wrong direction (Debit or
Credit)
Duplication of Entries – the entry is
duplicated
7. Compensation Errors – an error has
been compensated by offsetting entry that
is also an error (Maling entry na itinatama
gamit ang isa pang maling entry >_<)
6.
Working-Back Method
1. Check if amount is doubled on debit or
credit side
2. Trans placement error - e.g. 1M -> 100,000
3. Transposition error - when position of
numbers are mixed (e.g. 535,700 ->
553,700)