ACCOUNTING REVIEWER
PRINCIPLES OF ACCOUNTING
What is accounting?
1.
Accounting is often called the language of business
because it is used in describing all types of business
activities.
2.
BASIC ACCOUNTING EQUATION
Assets= Liabilities+ Owner’s Equity
Expanded Accounting Equation:
3.
Assets= Liabilities+ Owner’s Equity (+ Revenues- 4.
Expenses)
5.
Users of Financial Statements
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Investors
Employees
Lenders
Suppliers and other trade creditors
Customers
Government and their agencies
Public
6.
7.
8.
Nature of Business
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Service concern- the business derived its 9.
income from services rendered to clients
Merchandising- engaged in buying goods or
commodities or any form of finished
products and sell these at a profit.
10.
Manufacturing- engaged in buying of raw
materials and supplies to be processed or
manufactured.
Forms of Business Organizations
1. Sole proprietorship- Owner’s Equity
2. Partnership- Partner’s Equity
3. Corporation or Hybrid companyStockholder’s Equity or Shareholder’s Equity
4. Cooperatives- Member’s Equity
ACCOUNTING CONCEPTS AND ASSUMPTIONS
 Business Entity- the business is considered
as an entity that is separate and distinct
from the owner of the management.
- To measure the actual performance of
the business
 Money Measurement- all transactions of
the business are recorded in terms of
money
- It provides a common unit of
measurement
 Historical Cost- assets should be shown in
the balance sheet at the cost of purchase
instead of current value
 Materiality- immaterial amounts may be
aggregated w/ amounts of a similar
function and needed not be presented
separately
1. Principle of Relevance- that the resulting
information is meaningful and useful to those who
need to know something about the status of a
certain organization.
2. Principle of objectivity- that the resulting
information is not influence by the personal bias or
judgment of those who finish it.
3. Principle of Feasibility- that it can implemented
without undue complexity or cost.
4. Cost Principle- this principle requires assets
should be recorded at original or acquisition cost.
5. Objectivity Principle- this principle requires that
accounting records should be based on reliable and
verifiable data as evidence of transactions.
6. Materiality Principle- this principle dictates
practicability to rule over theory in determining the
valuation of an item.
7. Matching Principle- this is the combined concept
of revenue recognition & expenses
8. Recognition Principle- Revenue should be
recognized when earned and corresponding
expense should be recognized when incurred during
the same period as revenue is earned.
9. Consistency Principle- this principle requires that
accounting methods and procedures should be
applied on a uniform basis from period to period to
achieve comparability in the FS.
10. Adequate Disclosure Principle- this principle
requires that financial statement should be free
from any material misstatement.
o Revenues are recognized when they are
earned, but not when cash is received
o Expenses are recognized as they are
incurred, but not when cash is paid.
o Depreciation should be changed as part of
the cost of a fixed asset consumed during
the period of use.
THREE MAJOR FINANCIAL STATEMENTS
1. Balance Sheet
- Also called statement of financial
position or statement of financial
condition that shows the financial
position at a certain date or a specific
date
- As of ( particular date)
Three sections
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Assets
Liabilities and owner’s equity
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The beginning equity of the owner is
increased by the additional investment
and profit, and it is decreased by
withdrawal and loss.
For the (month, year, quarter) ended
ELEMENTS OF FINANCIAL STATEMENTS AND
ACCOUNT TITLES USED
2. Income Statement
- a FS which shows the performance of
the enterprise for a given period of time
- Used to be known as the “ results of
operations” of the enterprise consisting
revenues, expenses and operating
results which would be either be profit
or loss.
- For the (month, year, quarter) ended
o Assets- are economic resources that are
expected to benefit future activities of the
organization
o Liabilities- are the entity’s economic
obligations to non-owners
o Owner’s equity- is the residual interest in
the assets of the enterprise after deducting
all its liabilities
o Revenues- increase in equity
o Expenses- decrease in equity
Current Assets
-
Refers to all assets that are expected to
be realized, sold, and consumed within
the enterprise normal operating cycle.
CA accounts
Cash- an account used to record the amount of
money received by the business that is composed
of bills and coins, checks and postal money order.
Cash equivalents- short-term, highly liquid
instruments that are readily convertible into cash
Petty Cash Fund- for petty or small expenses
Notes Receivable- receivable supported by
promissory note
Accounts Receivable- used to record sales on
account in the ordinary course of the business
customers and clients of goods and services
3. Statement of Changes in Owner’s Equity
- a FS that summarizes the changes in
equity for a given period of time
Allowance for Doubtful Accounts- a valuation
account which shows the estimated uncollectible
account of A/R. (contra assets- deduction to
accounts receivable)
Accrued Income- the amount of income earned but
not yet collected
Advances to employees- collectible from
employees for allowing them to make cash
advances which are deductible against their
salaries or wages.
Inventories- asset held for sale in the ordinary
course of business
Prepaid Expenses- expenses paid in advance such
as prepaid rent, prepaid insurance, prepaid
interest, prepaid advertising, etc.
Unused Supplies- other supplies purchased for use
but are left on hand and still unused.
Non-Current Assets (Fixed assets)
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Long- term investments
NCA accounts
Property and Equipment- tangible assets which are
permanent in nature and used in business
operations
Land- not depreciated, it is expected to be useful to
business for indefinite period of time.
Building- finished construction owned by the
business where operations and transactions took
place
Equipment
Furniture and Fixtures
Accumulated Depreciation- contra asset,
deduction from P&E
Intangible assets (patent, copyright, franchise,
trademarks, etc.
Current Liabilities
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Trade and other payables
CL accounts
Accounts Payable- financial obligation of an
enterprise that constitutes an oral or verbal
promise to pay
Notes Payable (short-term) - evidenced by a
promissory note, the enterprise is the one who
issued note
Non- Current Liabilities- long-term obligation of
the enterprise which are due and payable for more
than one year
NCL accounts
Notes Payable (long-term) - requires payment for
more than one year
Mortgage Payable- requires a fixed or tangible to
be pledged as a collateral to ensure payment
Owner’s Equity or Capital
Withdrawal- owner’s withdrawal is likewise
indicated by the use of the owner name with the
word drawing
Revenues- refer to the amounts earned from the
company’s ordinary course of business
1. Professional fees or service revenue for
service company
2. Sales- for merchandising and manufacturing
concerns
Net income/Profit- excess of income over total
expenses
Expenses- are decrease in economic benefit during
the accounting period in the form of a decrease in
asset or an increase in liability that result in
decrease
Profit (Loss) - if expenses exceed the revenues, it is
called a “loss”
Expenses include ordinary expenses such as:
1. Cost of sales
2. Advertising expense
3. Rent expense
4. Salaries expense
5. Income tax
6. Repair expense/repair and maintenance
7. Uncollectible accounts/ Bad debts
8. Depreciation expense
9. Insurance expense
10. Taxes and licenses
11. Amortization expense
12. Office supplies expense
13. Utilities expense
14. Miscellaneous expense
Accrued Expenses- expenses incurred by the
enterprise but are not yet paid
Fiscal year- an accounting period of twelve months
starting with any month except January and ending
in any month except December.
Pre-collected or Unearned Income- obligations of
the business that will be settled when certain
services are rendered.
Calendar Year- an accounting period of twelve
months starting from January to December.
Lesson II
Accounting –it is 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 financial character and
interpreting the result thereof.
Bookkeeping – is the process of recording
“systematically” the business transactions in a
chronological manner.
Three parts of bookkeeping:
1) Recording
2) Classifying
3) Summarizing
1. Recording – is a phase of accounting which
involves the routine and mechanical process of
writing down the business transactions and events
in the books of accounts in a chronological manner
called journalizing.
 Chronological – arranged in order to the
date occurrence
 Journalizing – to be recorded in journal
Note: Before recording transactions, each
transaction must be identified, analyzed and
measured.
2. Classifying – is a phase of accounting which
involve sorting of grouping of similar and
interrelated transactions and events.
 Posting -is the process of transferring the
entries from the journal to ledger. Example
for this is the T-Account where in the left
side is debit while in the right side is credit.
ACCOUNT TITLE
Left side/ Debit
Right side/ Credit
3. Summarizing – is a phase of accounting which
involves the completion of the financial statements
and the accounting requirements as well.
Interpreting- is the phase of accounting which
involves “analytical and interpretative works”.
Business Transactions- are the business activities
that can may affect the assets, liabilities and
owner’s equity or what we called accounting
elements.
 In every transaction there is a Value
Received, we called it as Debit (Dr)
 While the Valued Parted with, we called it as
Credit (Cr)
Analysis of business transactions
If the transaction is;
 Purchased or Bought, it means the business is
the “buyer”
 Sold means the business is the “seller”
 Paid means the business is paying (and there’s
a cash involve)
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Collected it means the business is collecting
Rendered Service it means the business is
rendering service (Service Revenue)
When the owner Invested it means the
business made an initial investment (Capital)
When the owner got cash from the bank,
means that there is withdrawal (Drawing)
TAKE NOTE!!! ALWAYS CONSIDER YOURSELF AS
THE BUSINESS
ACCOUNT BALANCE – the difference
between the debit total and credit total of an
account
DEBIT BALANCE – total of Debit sides exceeds
the total of credit side
CREDIT BALANCE - total of Credit sides
exceeds the total of debit side
Ex.
Cash
P25,000 P10,000
10,000
5,000
Dr. Total P35,000
P15,000 Cr. Total
Debit. Bal. P20,000
THE THEORY OF DEBIT AND CREDIT
Debit - Left
Credit - Right
Two basic elements of a business
1. What it owns
2. What it owes
Assets - resources owned by the business (what it
owns
Liabilities - Claim of the creditors
Equity - Claim of the owner
Basic Accounting Equation
ASSET = LIABILITIES + OWNERS EQUITY
Normal Balance
Asset - Debit
Liabilities - Credit
Owners Equity - Credit
Revenue - Credit
Expense - Debit
Drawing – Debit
THE RULES OF DEBIT AND CREDIT
Debit
Credit
Asset
Normal
Decreased side
Balance/
increased
side
Liabilities
Decreased
Normal Balance/
side
increased side
Owners’
Decreased
Normal Balance/
Equity
side
increased side
CAUSE TO INCREASE THE OWNERS’ EQUITY
 Investment by owner
 Revenues
CAUSE TO DECREASE THE OWNERS’ EQUITY
 Withdrawal
 Expenses
TEMPORARY ACCOUNTS
Income or Revenue - all income earned of the
same nature
Expenses - all expenses incurred of the same
nature
Income and Expense are the factors that affect
Owners Equity. Income increases Owners Equity
while Expense decreases Owners Equity.
APPLICATION OF THE RULES
Rules of debit and credit are applicable to:
ILLUSTRATING A SERVICE CONCERN
- Assets are represented by CASH IN BANK and
OFFICE SUPPLIES INVENTORY
- Liability is represented by ACCOUNTS PAYABLE
- Owners Equity is represented by FM1-1, CAPITAL
- Drawing is represented by FM1-1, DRAWING
- Revenue is represented by PROFESSIONAL
INCOME
- Expense entry nearer to Revenue