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Accounting for Non-Accountants: Basic Concepts & Techniques

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Accounting
for Non-Accountants
Dr. Joyce S. Wendam
Lecturer
I - Basic Accounting:
Concepts, Techniques
and Conventions
Definition of Accounting
 Accounting is the art of recording,
classifying and summarizing in a
significant manner and in terms of
money, transactions and events which
are, in part at least, of a financial
character and interpreting the results
thereof.
Functions of Accounting
Functions of accounting:
1. Recording of data
2. Classifying of data
3. Summarizing of data
4. Interpreting the results
Major users of accounting
information
 1. owners of the business
 2. management of the business
 3. banks or creditors of the business
 4. the government or its agencies
 5. prospective investors
 6. consumers
 7. employees of the business
 8. the general public
2 – The Elements of
Accounting
The Accounting Elements
 Assets
 Owner’s Equity
 Liabilities
 Revenue
 Expenses
Assets
 Assets are items of worth owned by the
business organization in conducting its
operations.
 Examples: cash, receivables, stock,
land
Types of Assets
1. Current assets – those assets which
are readily converted into cash within a
twelve-month period or within the normal
operating cycle of a business.
 As a guide – non-monetary assets that
are convertible to cash within a year or
the normal operating cycle of a business
are categorized as current assets.
2. Non-current assets - those which are not
readily convertible into cash within a twelvemonth period or within the normal operating
cycle of a business and, thus, it has a longterm nature. Also known as long-term
assets.
These assets are mostly not intended to be
sold by the business entity. Ex. - land,
building, machinery, motor vehicles,
equipment and furniture.
Liabilities
 Amounts owed by the business entity to
outside parties other than its owner and
as such these are seen as “debts” and
obligations of the business.
 Examples – accounts payable, notes
payable, loans, salaries payable
a. Current Liabilities
 Current Liabilities - debts and
obligations which should be paid within a
twelve-month period or within the normal
operating cycle of a business.
 Examples are creditors, accounts
payable, salaries payable.
b. Non-current Liabilities
 Non-current Liabilities – debts and
obligations which will be paid over more
than a twelve-month period and, thus, it
has a long-term nature. Also known as
long-term liabilities.
 Examples – mortgage loan or long-term
notes payable
Owner’s Equity
 Also known as owner’s contribution,
investment, proprietorship, net worth or
capital to the business.
 Outstanding claim of the owners in the
assets of a business after satisfying the
claims of the creditors.
Revenue & Expenses
 Revenue - amount made or earned by
the business entity as a result of its
operations.
 Expenses – expenditures associated
with earning revenue. These are
generally utilized in the period in which
they incurred.
Profit/Loss calculation
 The primary objective of most business
organizations is to make earnings or profits.
 To calculate a profit or loss, we only need to
subtract expenses from revenues.
 If revenue is greater than expenses, a profit is
made and consequently, a loss is made when
revenue is less than expenses.
 In Accounting, a loss is generally shown with
parentheses around it ( a negative numerical
figure).
Accounting Equation
The Fundamental Accounting Equation:
Assets = Liabilities + Owners’ Equity
The accounting equation may also be
expressed in two other forms:
(1) OWNER’S EQUITY = ASSETS – LIABILITIES
(2) LIABILITIES = ASSETS – OWNER’S EQUITY
Expanded Accounting
Equation
A = L + OE (C + R – E – D)
Where:
A = assets
L = liabilities
OE = Owner’s Equity
C = Capital
R = Revenue
E = Expenses
D = Drawings
DOUBLE-ENTRY
BOOKKEEPING
Phases of Accounting
 Recording Phase
 Classifying Phase
 Summarizing Phase
 Interpreting Phase
 Recording Phase –
refers to the procedure of methodically and
chronologically documenting business
transactions in the appropriate accounting books.
 Classifying Phase refers to the procedure of sorting accounting
entries and grouping them into same type such
as asset accounts, liability accounts, owner’s
equity accounts, revenue accounts and expense
accounts.
 Summarizing Phase –
refers to the procedure of abridging or
summing up of accounting entries that
were classified in the classifying
phase into more
useful financial statements.
 Interpreting Phase –
refers to the procedure of analyzing the financial
statements done in the summarizing phase to
provide answers to major users of financial
information.
Principles of Double-Entry
Bookkeeping System
(1) Each business transaction involves a
worth received and a worth given away;
(2) The balance of the accounting equation
should always be conserved, that is, the
accounting equation should still be
balance after each business
transaction.
Debit and Credit Entry
Double-entry bookkeeping system always
records a transaction using two entries:
 Debit entry deals with the worth received
(things-of-value received) by the
business entity.
 Credit entry deals with the worth given
away (things-of-value given away) by the
business entity.

For you to understand further the double-entry
bookkeeping system, study the following business
transactions:
1. The business purchase a motor vehicle for P500,000
from David Car Sales paid in cash.
worth received: motor vehicle worth P500,000
worth given away: cash of P500,000
What is the accounting entry?
Debit entry – transportation equipment worth
P500,000
Credit entry – cash-on-hand of P500,000
Rules of Debit and Credit
 Rule 1: An asset is increased by a debit entry.
 Rule 2: An asset is decreased by a credit
entry.
 Rule 3: A liability is increased by a credit entry.
 Rule 4: A liability is decreased by a debit
entry.
 Rule 5: An owner’s equity is increased by a
credit entry.
 Rule 6: An owner’s equity is decreased by a
debit entry.
 Rule 7: A revenue is increased by a credit
entry.
 Rule 8: A revenue is decreased by a debit
entry.
 Rule 9: An expense is increased by a debit
entry.
 Rule 10: An expense is decreased by a credit
entry.
3. FINANCIAL ACCOUNTING
REPORTS
Financial Statements
 Summarized reports of accounting transactions
 Two-fold purpose: to communicate to users:
- the effect of operating activities during a
specified period of time; and,
- the business’ financial position at the end of
the period
 Types of financial statements:
Income Statement
Balance Sheet
Statement of Cash Flow
Balance Sheet
 Reports the financial position of a
business at a specific point in time
 Often called the “statement of financial
position”
 Equation: Assets = Liabilities + Owners’
Equity
Balance Sheet
 Assets – economic resources that are
expected to benefit future activities
 Equities – claims against, or interests in, the
assets
 Liabilities – entity’s economic obligations to
non-owners
 Owners’ equity – excess of the assets over the
liabilities
For a corporation, the owners’ equity is called
the stockholders’ equity.
Pro Forma Balance Sheet
XYZ Co.
Balance Sheet
December 31, 20xx
ASSETS
Current Assets
Cash
Marketable Securities
Accounts Receivable
Merchandise Inventory
Other Current Assets
Total Current Assets
Fixed Assets
Land
Building
xxx
xxx
xxx
xxx
xxx .
xxx
xxx
xxx
Furniture & Fixture
Office Equipment
Total
Less: Accumulated Depreciation
Total Fixed Assets
TOTAL ASSETS
xxx
xxx .
xxx
LIABILITIES & STOCKHOLDERS’ EQUITY
LIABILITIES
Current Liabilities:
Notes and Accounts Payable
Taxes Payable
Other Current Liabilities
Total Current Liabilities
Long-term Liabilities
Total Liabilities
xxx .
xxx .
xxx
.
xxx
xxx
xxx .
xxx
xxx .
xxx
.
STOCKHOLDERS’ EQUITY
Capital Stock
Retained Earnings
Total Stockholders’ Equity
TOTAL LIABILITIES & STOCKHOLDERS’
EQUITY
xxx
xxx .
xxx .
xxx
.
Income Statement
 Measures the operating performance of
the corporation by matching its
accomplishments (revenue from
customers, which is usually called sales)
and its efforts (cost of goods sold and
expenses).
 Measures performance for a span of time
 Also known as Profit and Loss Statement
 Revenues - inflows of assets either from the
sale of goods or the performance of services
 Expenses - outflows or other uses of assets to
produce revenues over expenses
 Net income (sometimes referred to as earnings
or profit) is the excess of revenues over
expenses, including tax expense
ABC Corporation
Income Statements
For Year Ended December 31, 2008
(in thousands of pesos)
Sales
Less: Cost of Sales
Gross Income
Less: Operating Expenses
Selling
Administrative
Total Operating Expenses
Income from Operations
Less: Interest Expense
Income before tax
Less: Income Tax
Net Income
3,280
2,120
1,160
350
420
770
390
30
360
126
234
====
Statement of Cash Flows
 Prepared by analyzing changes in balance
sheet amounts and the data in the income and
retained earnings statements.
 The financing (i.e. obtaining financial
resources) and investing (i.e. using financial
resources) activities of a company are of
considerable interest to users of financial
information because those activities change
the financial position of the business
C.
Pro forma Cash Flow Statement
XYZ Enterprise
Cash Flow Projections
For the Period Ending _________
Opening Balance
Cash Receipts
Collection of Receivables
Cash Sales
Sale of Temporary Investments
Sale of Equity
Short-Term Borrowing
Long-Term Borrowing
Investments
Total Receipts
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx .
xxx
Cash Disbursements
Payments for Raw Materials Purchases
Payments for Labor
Manufacturing Overhead and Expenses
Selling Expenses
General and Administrative Expense
Payment for Fixed Assets
Interest Payments
Loan Repayments
Payments on Real Estate Mortgage
Payment on Income Taxes
Other Taxes and Assessments
Total Disbursements
End Balance
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx .
(xxx) .
xxx
=======
MANAGEMENT ACCOUNTING
II - INTRODUCTION
Management Accounting 
Management Accounting – the application of appropriate
techniques and concepts in processing the historical and
projected economic data of an entity to assist management in
establishing a plan for reasonable economic objectives and in the
making of rational decisions with a view towards achieving these
objectives.

Management Accounting defies attempts at comprehensive, concise
definition; it changes constantly to adapt to technological changes,
changes in manager’s needs, and new approaches to other functional
areas of business – marketing, production, finance, organizational
behavior, and corporate strategy.

An indispensable part of the system that provides information to
managers – the people whose decisions and actions determine the
success or failure of an organization.
Definition of Management
Accounting
 Management Accounting includes the methods
and concepts necessary for effective planning,
for choosing alternative business actions and
for control through the valuation and
interpretation of performance (The
American Accounting Association).
 The essential aim of management accountant
is to assist management in decision making
and control (Brown and Howard).
Financial Accounting and Managerial Accounting
Major Differences:
1.
They serve different audiences
- Financial Accounting – serves persons outside
the firm such as creditors, customers,
government units and investors.
- Managerial - insiders
2.
Differ in source and nature
- Financial Accounting reports are developed from
the basic accounting system , which captures
data about completed transactions.
Financial Accounting and Managerial Accounting
-
Managerial - reports incorporate information that is
not found in the financial
accounting system;
such information might relate to expected future
transactions (such as budgeted sales and costs) or
alternatives to past
transactions (such as showing
what income would have been if we had sold more
units at a lower price)
3.
-
As to purpose
Financial accounting reports are general purpose.
-
Managerial accounting reports are specifically
designed for a particular user or a particular decision.
Financial Accounting and Managerial Accounting
4.
Financial accounting reports concentrate on the
results of past decisions.
Managerial accounting reports often concentrate on
what is likely to happen in the future.
5. Managerial accounting has no external restrictions
such as the generally accepted accounting principles
(GAAP) while financial accounting has to adhere to
GAAP.
Managerial Functions and their
Relationship to Accounting
1. planning – setting goals and developing strategies and
tactics to achieve them
2. decision making - use of analytical techniques
3. control - determining whether goals are being met,
and if not, what can be done.
4. performance evaluation - how well operations are
being controlled
Objectives of Management
Accounting
Main objective – to supply the required data to perform the internal management
functions.
The ff. are some of the functions:
- Collection of data – for preparation of plans
- Evaluation of plans – ascertaining the defects if any and brought to the notice of
the managers immediately.
- Observing the performance – comparing the actual with the standards
- Observing the reports – analyzing the uses of various types of statements in the
organization and suggesting for their improvement.
- Coordination among persons – showing organizational relaitons among people
- Financial analysis
- Timely decisions
- Peaceful atmosphere
- Coordination
- Submission of reports – for performance evaluation

Role of Managerial Accounting within an Organization
 Boeing – “ Less transactional and more decision-support type of
work. More analytical, more . . . option analysis”
 US West – “ From a historical role to a much more collaborative
business partner, doing a lot more analysis, saying here’s what we
need to do in the business. A business partner. It’s how do we
run the business and what are the financial impacts of doing that.”
 Caterpillar - “Accountants evolve to become more of a team
player and being involved in major projects and being looked to as
a business advisor or consultant to help leverage our expertise on
profitability of certain products or outsourcing decisions and then
helping the team develop strategy and focus the team all the way
through recommendation and implementation.”
Source: Counting More , Counting Less: Transformation in the Mangament Accosunting Profession, Institute of Managmeent Accosutning, 1999.
Activities of Managerial Accountants
 Assist in the design of the organization’s
information system
 Ensuring that the system performs
adequately
 Periodically reporting information to
interested managers
 Undertaking special analyses
III - Profit Planning
 Cost-Volume-Profit Analysis – a systematic examination of the
relationships among costs, activity levels or volume, and profit.
 Cost – refers to amount of resources given up in exchange for
some goods or services
 Classification of cost
1. fixed – remain the same in total over a wide range of volume
2. variable – change in total in direct proportion to changes in
volume
Profit Planning
Example:
Exeter Company
Selling price of backpacks
Cost of backpacks from manufacturers
Variable cost to pack and ship
Sales commission at 5% of P20.00
Total Variable Cost
Fixed Costs (rent, salaries, insurance, etc.)
P20.00
P10.00
1.00
1.00
P12.00
P40,000
Contribution Margin
Contribution Margin – the difference between selling price
per unit and variable cost per unit
Contribution margin percentage – per-unit contribution
margin divided by selling price
CM/unit
CM percentage = ___________
Selling Price
a) In our example, how much is the contribution margin
per unit and what is the contribution margin
percentage?
b)
What is the total cost?
Total costs = fixed costs + (variable cost per unit x unit
volume)
(Assume units sold, 6000 units)
c) Determine profit:
Profit = (selling price x unit sales) - total variable
costs – total fixed costs
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