INTRODUCTION TO ACCOUNTING • INCOME ACCOUNTS

Accounting is the LANGUAGE OF BUSINESS • EXPENSE ACCOUNTS

FINANCIAL REPORTS

END PRODUCT= FINANCIAL INFORMATION or

ACCOUNTING INFORMATION
Example of Economic Events:
• The FINANCIAL REPORTS serve as a
1. Sales of bread and other bakery
MEDIUM of COMMUNICATION between
products
the business firm and interested users with
regards to financial activities. 2. Purchases of flour that will be used
for baking
• Financial reports provide INFORMATION
regarding the CURRENT STATUS of a 3. Purchases of trucks needed to
business. deliver the products
Accounting is IMPORTANT in DECISION- MAKING Which is NOT an example of an ECONOMIC
of the USERS. EVENT?
Revenue < Expenses Net Loss a. Payment to dealer of school supplies
Revenue >Expenses Net Income/Profit b. Agent attended to customer’s concern
Revenue = Expenses Break-even c. Purchase of new iPhone &Plus stocks
Accounting is both an ART and a SCIENCE. d. Sales of diapers and baby wipes
Requires set of skills: RECORDING – involves keeping a chronological
diary of events (business transactions) that are
1. Analytical Skill
measured in pesos. The diary referred to in the
2. Critical Thinking definition are the journals and ledgers.

3. Communication Skill Also known as BOOKKEEPING

It has: COMMUNICATING – once the data recorded has

been summarized through financial statements,
• System
these accounting reports are submitted to
• Process management. Due to technicality of accounting
reports, the accountant’s interpretation &
• Sequential Steps analysis of the FS are needed.
Accounting – Identifying, Recording, According to AICPA/ American Institute of Certified
Communicating Public Accountants “Accounting is the art of
recording, classifying and summarizing significant
• IDENTIFYING – selecting economic events
manner and in terms of money, transactions, and
that are relevant to a particular business
interpreting the results thereof.”
transaction.
According to PIPCA/ Philippine Institute of Certified
Items are sorted and group under the same
Public Accountants “Accounting is a system that
name. It may be classified as:
measures business activities, processes given
• ASSET ACCOUNTS information into reports and communicates those
findings to decision- makers.”
• LIABILITY ACCOUNTS
Why we need Accounting
• CAPITAL ACCOUNTS
 • To help us appreciate and understand Computis et Scripturis” (Details of
Calculation & Recording).
the financial reports of any businesses.

• Everyday transactions cannot all be

The Industrial Revolution 1760-1830 Mass
retained in our memory – to avoid these,
Production Importance of Fixed Assets
transactions should be RECORDED for
future reference. • Mass production and the great
importance of fixed assets were given
• Accounting helps the users of financial
attention during this period.
reports to see the bigger picture of the
• Merchandise was priced based on
business in financial terms.
managers’ hunches about cost.
HISTORY OF ACCOUNTING

PRIMITIVE ACCT. Late 1800s Institute of Accountants in Glascow

• Cradle of Civilization • The modern, formal accounting profession

• Around 4,000 B.C., record- keeping was emerged in Scotland in 1854 when Queen
already common from Mesopotamia, Victoria granted a Royal Charter to the
China and India to Central and Institute of Accountants in Glasgow,
South America. creating the profession of the Chartered
• The oldest evidence of this practice was the Accountant (CA). In the late 1800s,
“clay tablet” of Mesopotamia chartered accountants from Scotland and
• which dealt with commercial transactions Britain came to the U.S. to audit British
at the time such as listing of accounts investments.
receivable and accounts payable.
• Primitive accounting methods to record the
growth of CROPS and HERDS (Herding of 1900-2000 Growth of corporations and industries
farm animals) – railroad and steel

14th Century Double-entry Bookkeeping Luca • The growth of corporations, especially

Pacioli those in the railroad and steel industries,
spurred the development of accounting.
• Accounting developed as a result of the
• Corporate owners were no longer
information needs of merchants in the
necessarily the managers of their business.
city-states of Italy during the 1400s.
Managers had to create accounting system
• Luca Pacioli is said to be the FATHER OF
to report to the owners.
ACCOUNTING. He is monk mathematician
and friend of Leonardo Da Vinci.
• He published the first known description of MODERN ACCT. The Present 21st Century
double-entry bookkeeping entitled Globalization Effect of Technologies
“Summa de Arithmetica, Geometria,
• There would still be a lot of developments
Proportioni et Proportionalita”
in the field of accounting because of
(Everything about Arithmetic, Geometry
GLOBALIZATION and the EFFECTS of NEW
and Proportion) in Venice in November
TECHNOLOGIES.
1949.
• He introduced the double-entry • Nowadays, investors seek investment
bookkeeping system. opportunities all over the world. The trend
• He wrote a book entitled “Summa de now for accounting professionals is to
Arithmetica, Geometria, Proportioni et observe one single set of global accounting
Proportionalita” which included a 27-page standards.
on bookkeeping entitled “Particularis de
THE ACCOUNTING PROFESSION
The success depends on: • Professionalism & with qualifying
experience
• how well he/she understands the
accounting procedures and principles; “It is not the CPA that looks for a company, it is
the company that looks for the CPA.”
• how clearly and accurately he/she can
communicate financial information to the
users of the statements.
BRANCHES OF ACCOUNTING
2 Classifications
1. Financial Accounting
1. Public Accountants • The BROADEST BRANCH OF
ACCOUNTING because it keeps
• Designated as Certified Public
track of all company’s transactions.
Accountants (CPA)
• Financial accounting is primarily
• Those who serve the GENERAL concerned with the recognition,
PUBLIC and collect professional fees measurement and
for their works (gov’t or communication of economic
accounting/auditing firms) activities.
• This information is communicated in
• Can be viewed as FIRMS of a complete set of financial
ACCOUNTANTS that serve clients statements. It is assumed under this
such as businesses. branch that the users have one
common information need.
• Examples: SGV & Co. Philippines,
• Financial accounting conforms with
P&A Grant Thorton, KMPG
accounting standards (GAAP)
International, etc.
developed by standard-
2. Private Accountants setting bodies.In the Philippines,
there is a Council created to set
• Those who work as employees for a single
these standards.
business or in
• Examples of these financial reports
corporate setting (e.g. Jollibee, Meralco, PLDT, include:
etc.) • INCOME STATEMENT
• STATEMENT OF CHANGES IN EQUITY
Certified Public Accountant (CPA) • BALANCE SHEET
• STATEMENT OF CASH FLOWS
• CPA is a professional accountant who
• NOTES TO FINANCIAL STATEMENTS
earns his title through a combination of
education, experience and an acceptance • Financial accounting is primarily
score in the written examination given by concerned with processing historical
the Board of Accountancy (BOA). data. Although financial accounting
generally meets the need of
Qualifications (R.A. 9298 or The Philippine
external users, internal users of
Accountancy Act of 2004)
accounting information also use
• A Filipino Citizen these information for their decision-
making needs.
• Is of good moral character
• Often called as “GENERAL PURPOSE
• A holder of the degree in
ACCOUNTING INFORMATION
Accountancy
2. Management/Managerial Accounting
• Have passed the licensure board
• Provides ACCOUNTING
exam
INFORMATION within the
 organization (internal users – accounting data and adherence to
owners, managers & employees ) certain management policies.
• Examples 5. Tax Accounting
• Evaluation of sales performance of  This branch of accounting focuses on
Sales & Marketing Department; TAX MATTERS.
• Annual expenses on employees’  This includes all undertakings
learning & concerning tax computation, filling
• development of HR Department of tax returns and planning for
• It involves in management decision, future tax obligations.
financial analysis, budgeting, 6. Cost Accounting
forecasting, cost analysis and  This branch of accounting focuses on
evaluation of business decisions the COST INCURRED BY THE FIRM
WITHIN THE ORGANIZATION. IN PRODUCING A PRODUCT or
3. Government Accounting (GA) SERVICE.
• GA is a process of I-R-C of financial  Cost accounting is very useful in
information about the manufacturing businesses since
GOVERNMENT which involves the they have the most complicated
receipt, transfer, spending, usability costing process.
and disposition of government  Cost accountants also analyse actual
assets and liabilities. and standard costs to help
• It takes into account the collection managers determine future courses
of taxes and computation of of action regarding the
National Income, GDP,  company’s operations.
• GNP, Balance of Payments, among  Cost accounting will also help the
others owner set the
 SELLING PRICE of his products.

4. Auditing
 There are two types of auditing: 7. Accounting Education
External Auditing and Internal  This branch of accounting deals with
Auditing. developing future accountants by
 EXTERNAL AUDITING – refers ETC creating relevant accounting
(examining, testing and checking) curriculum.
the ACCURACY of the data in  Accounting professionals can
financial reports conducted by an become faculty members of
INDEPENDENT CPA with the educational institutions.
purpose of expressing an opinion as  Accounting educators contribute to
to fairness of presentation and the development of the profession
compliance with GAAP through through their effective teaching,
AUDITED REPORTS. publications of their research and
 INTERNAL AUDITING – refers ETC influencing students to pursue
(examining, testing and checking) careers in accounting. Accounting
the ACCURACY of the data in teachers share their knowledge on
financial reports conducted by an accounting so that students are
employed accountant with the informed of the importance of
purpose of determining the accounting and its use in our daily
operational efficiency of the lives.
company regarding the protection of 8. Accounting Research
its assets, accuracy & reliability of  Accounting research focuses on the
search for new
  knowledge on the effects of INVESTORS – to know how well their investment is
economic events on the process of performing.
summarizing, analysing, verifying,
CREDITORS/LENDERS – to assess the credit
and reporting standardized financial
worthiness of the borrowers (the ability to pay
information, and on the effects of
back any loan)
reported information on economic
events. CUSTOMERS – to know the continuance of an
 Two types of research: POSITIVE and enterprise especially when they have a long-term
NORMATIVE. involvement with.
 Positive research – accounting
practices SUPPLIERS – to assess the credit- worthiness of
 Normative – accounting standards its customers before offering goods and services
on credit.

TAXING AUTHORITIES – to determine whether a

USERS OF ACCOUNTING INFORMATION business declared the correct amount of tax in its
tax returns.
These are the interested parties who need the
accounting information to make decisions such as GOVERNMENT REGULATION AGENCIES – to
plans, organizations and run the business. ensures that a company’s disclosure of accounting
information is in accordance with the regulations.

AUDITORS – external auditors examine the FS in

Accounting Information
order to form an audit opinion.
 This is the ULTIMATE NEED of DECISION-
PUBLIC – these include journalists, analysts and
MAKERS that today’s accountant should
academics with an interest in economic
focuses on.
development.
 Accounting is an information system that
measures, processes and communicates TYPE OF BUSINESS ACCORDING TO OWNERSHIP
financial information to users.
What is BUSINESS?
 AIS (Accounting Information System)
involves the collection, storage and • refers to an organization - commercial or
processing of financial and accounting data industrial firm that manages resources
used by internal users to report engaged in various activities to effectively
information to users. produced the desired one common goal.
Internal Users • It is an UNDERTAKING whereby one SELLS
GOODS and/or SERVICES in exchange for
OWNERS – to know the financial progress or status
money or its equivalent.
of the business.
1. Types of Business According to Ownership
MANAGEMENT – to see whether the business is
-A business entity may be formed in
profitable or not; to set goals for the organization
various ways. The type of business
and evaluate the progress made toward those
organization the owners choose will
goals and to take corrective actions, if necessary.
determine how the company will conduct
EMPLOYEES – to assess the ability of the its various business activities.
enterprise to provide remuneration, retirement
TYPES OF OWNERSHIP
benefits and other employee benefits and
opportunities.  Sole proprietorship
• “sole” means one.
External Users
• a business which is owned and
managed by only one person.
 • is a popular business or MOST 2. A partner can be held liable for the acts
COMMON FORM due to its of the other partners.
simplicity, ease of setup, and 3. Like sole proprietorship, it can be easily
nominal cost. dissolved and limited amount of capital
• Termination of the business is may be raised.
• upon death of the owner. 4. Termination of business is upon
death/withdrawal of partners.
Advantages:

1. Easy to form.  Corporation

2. The OWNER controls all the operations • A juridical or artificial entity being
and management of business. created by operation of law (BP 68
3. The owner receives all the NET or Corporation Code of the
INCOME/PROFITS of the business. Philippines) owned by no less than
4. Less governmental control (regulated by five persons.
DTI) • Ownership is divided into
transferrable share of stocks.
Disadvantages: • Owners are called STOCKHOLDERS
5. The amount of capital is limited only by or SHAREHOLDERS. They assigned
the wealth of the proprietor. BOARD of DIRECTORS to manage
6. The owner assumes all the risks including the business.
NET LOSS of the business. • The government agency primarily
7. The life of business is limited to the life of tasked to regulate private
the owner. corporations in the Philippines is SEC
(Securities and Exchange
Commission)
 Partnership
• The corporation begins its existence
• an association of two or more
from the date the Articles of
persons (at least 2) who bind
Incorporation is approved by the
themselves together to do business
SEC (not to exceed 50 years).
for profit.
• The proof of ownership is
• The details of arrangement
evidenced by a stock certificate.
between the partners are outlined
in a written document called Advantages:
Articles of Partnership.
• the persons owning this form of 1. Can easily raise additional funds by selling
business are called partners. shares of stocks to the public.

Advantages: 2. Shareholders are not liable for the debts of

the corporation.
1. Easy and inexpensive to form and dissolve.
2. Greater amount of capital may be raised Disadvantages:
compared to a sole proprietorship.
1. It is relatively complicated to set up.
3. There is relative freedom and flexibility in
decision-making compared to a 2. Subject to several legal restrictions as listed
corporation. in the Corporation Code of the Philippines.
4. Less governmental control (DTI)
 Cooperative
5. Better management results from the
• A cooperative business, also known
combined experience and ability of several
as a co-op, is a type of organization
individuals.
that is both owned and controlled by
Disadvantages:
its members, who also happen to
1. The profits are divided among members.
use the services and products of
the cooperative.
TYPES OF OPERATION/ ACTIVITIES BASIC ACCOUNTING CONCEPTS

 Service • The “GROUND RULES” that govern how

• businesses engage in the rendering accountants measure, process and
of service to others for a fee, like communicate financial information.
beauty parlor, law firm, dental
• Commonly known as “RULES” to be used as
clinic, and medical clinic.
guide action in the day to day dealings of
• This type of business offers
business entities and how these items can
PROFESSIONAL SKILLS, ADVICE and
be accounted or.
CONSULTATIONS.
• Example: barber shops, repair • Also knows as GAAP or Generally Accepted
shops, banks, accounting & law Accounting Principles. GAAP is a
firm combination of authoritative standards and
the commonly accepted ways of recording
 Merchandising and reporting accounting information.
• businesses that are into the buying
and selling goods or commodities
like the grocery story, drug store 1. ENTITY CONCEPT
and department store • An “entity” is the organizational unit
• This type of business buys at for which accounting records are
wholesale and later sells the maintained.
products at retail. • Under this concept, the business is
• Examples are: book stores, sari- sari regarded as having a SEPARATE and
stores, hardware stores DISTINCT PERSONALITY from that of
the owner/s – generating its own
 Manufacturing expenses, owning its assets and
• businesses that are engaged in the owing its own liabilities.
processing of products or the • This means that the personal
conversion of raw materials into transactions of the owners must
finished goods that are then sold NOT combined with transactions of
like the furniture factory and shoe the business.
factory. 2. GOING CONCERN CONCEPT
• This type of business buys raw • Means the ability of a business to
materials and uses them in making “RUN PROFITABLE” for an indefinite
a new product, therefore period of time until the concern is
combining raw materials, labour stopped due to bankruptcy and its
and expenses into a product for sale assets were gone for liquidation.
later on. • This concept assumes that the
• Examples are: shoe manufacturing business us to continue its operation
businesses, car manufacturing indefinitely.
plants • It assumes that during and beyond
• the next fiscal period a company will
 Hybrid complete its current plans, use its
• These are businesses that may be existing assets and continue to meet
classified under more than one type its financial obligations.
of business. 3. TIME PERIOD OR PERIODICITY
• MANUFACTURING + CONCEPT
MERCHANDISING
• MERCHANDISING + SERVICE • The life of a business is divisible into time
• MANUFACTURING + MERCH. + periods of equal length.
SERVICE
• The business has two (2) options :
a. CALENDAR YEAR • When goods/services are fully
rendered or delivered.
a twelve-month period beginning
with January 01 and ends on
8. MATCHING CONCEPT
Dec.31
• This concept states that all expenses
b. FISCAL YEAR incurred to generate revenues
MUST BE RECORDED in the same
any 12 consecutive months (does period that the income are recorded
not start with Jan. 01 and ends on to properly determine net income or
Dec. 31) net loss of the period.
9. VERIFIABILITY CONCEPT
Example: Educational Institutions
• This principle requires that all
4. MONETARY CONCEPT or MONETARY transactions must be evidenced by
MEASUREMENT business documents free from
• It means that all transactions of the personal biases and independent
business are recorded in terms of experts can verify reports.
money. • Examples: Official Receipts (OR),
• It provides a common unit of invoices and vouchers
measurement. 10. MATERIALITY CONCEPT
• Monetary concept would be in • This concept refers to relative
terms of different currencies. importance of an item or event.
• Peso (₱) for the PHILIPPINES Materiality depends on the size and
• Brunei Dollar (B$) for BRUNEI D. nature of the item.
• Riel (៛) for Cambodia • This concept is used to judge what
• JPY (¥) for Japan sorts of transactions or items are
5. COST CONCEPT SIGNIFICANT and their classification
• Assets (resources) acquired by the in the FS.
business must be recorded at 11. DISCLOSURE CONCEPT
acquisition price and no adjustments • All relevant ant material events
are to be made on this valuation in affecting the financial
later periods. condition/position of a business and
• Assets are normally shown at their the results of its operations must be
original costs of acquisition. communicated to users of financial
6. ACCRUAL CONCEPT statements.
• This concept requires that income • FS should disclose fully and fairly
be recorded when earned regardless which is sufficient and material for
whether cash is received. (Accrued decision making.
Income)
• An expense be recognized when 12. CONSISTENCY CONCEPT
incurred/have already been received • This concept states that once a
regardless whether payment is method is adopted, it must NOT BE
made. (Accrued Expenditure) CHANGED from year to year to allow
7. REVENUE REALIZATION CONCEPT comparability of FS between years
• Also known as “Recognition of and between businesses.
Revenue”. • It says that the SAME METHOD
• The concept provides that income is should be followed over the years
recognized: because change in methods would
• when the earning process is lead to inconsistency in profits.
essentially complete when an • For example, if the accounting
exchange has taken place period for a firm is from Jan 1 to Dec
31 for the current year, the firm
 cannot simply change the • Current assets are those assets which will
accounting period for next year to typically become cash or be consumed in
be April 1 to March 31. one year or one operating cycle, whichever
is greater.

FIVE MAJOR TYPE OF ACCOUNTS • Example of Current Assets

Major Type of Accounts – Cash on Hand or Cash in Bank

1. ASSETS – Receivables

2. LIABILITIES – Inventories

3. CAPITAL / OWNER’S EQUITY – Prepaid Expenses

4. INCOME/REVENUE • Liquidity reflects the ability of the firm to

generate sufficient cash to meet its
5. EXPENSE
operating cash needs and to pay its
obligations as they become due.

ASSETS 1. CASH
• Cash and cash equivalents include
• These are the RESOURCES owned currency, bank deposits, and
and controlled by the firm. various marketable securities that
• Assets are economic resources can be turned into cash on short
OWNED by the business. notice merely by contacting a bank
• Assets are probable future or broker.
economic benefits obtained or • Cash is money owned by the
controlled by a particular entity as company.
a result of past transactions or Can be:
events. • Cash on hand
• It include PROPERTIES and OTHER • Cash in bank
THINGS of value whose ownership 2. ACCOUNTS RECEIVABLE
title is in the name of the business. • Accounts receivable represent credit
sales that have
• not yet been collected.
TWO KINDS OF ASSETS
• Example: Anthony of So Cool Air-
 CURRENT ASSETS - Are the ASSETS that can Conditioning performed a service to
be realized or converted to cash within one his client for a fee amounting to
year. P50,000. However, payment will be
 NONCURRENT ASSETS – Are the ASSETS that made after a month after he issued
can be realized or converted to cash more a bill/invoice. So Cool Air-
than a year. Conditioning account receivable is
P50,000 by charge/credit account
ACCORDING TO FORM
customer.
 TANGIBLE ASSETS - Are PHYSICAL ASSETS • Are COLLECTIBLES or amounts due
such as cash, supplies, furniture and from customers arising from credit
fixtures sales (goods) or credit services
 INGTANGIBLE ASSETS - Are NON-PHYSICAL (service).
ASSETS such as patents, trademarks, • The longer a debt remains unpaid,
franchise, copyrights & brands. the higher the chance that it will
not ever be paid.
CURRENT ASSETS
3. NOTES RECEIVABLE
 • Are COLLECTIBLES or amounts due Account Receivable vs. Accrued Income
from customers arising from credit
• Account receivables are “COLLECTIBLES”
sales (goods) or credit services
from customers with OUTSTANDING
(service) supported by PROMISSORY
INVOICES that the company issued/billed
NOTES.
and the customers still not making
4. MERCHANDISE INVENTORY
payments.
• Inventory represents items that
have been purchased or • While Accrued Income refers to
manufactured for resale to “COLLECTIBLES” or the amount that
customers. company had offered the goods/services
• Cost of unsold merchandise. but INVOICES still NOT RECREATE and BILL
• The PURCHASE PRICE of the to CUSTOMERS.
particular line of goods the business
expects to sell to its customers for NON CURRENT ASSETS
cash or on charge.
• Noncurrent assets are assets used in the
5. SUPPLIES ON HAND
conduct of the business and for which the
• Unused supplied purchased by an
replacement cycle is longer than one year.
enterprise
• Example of Noncurrent Assets
• The cost value of such things such as
- Land
wrapping paper and packaging
- Building
tape, computer ribbons/inks,
- Equipment
envelopes, stamps, paper and other
- Furniture
assets of a similar nature that the
- Fixtures
business will use up in performing
• Also known as FIXED ASSETS.
activities.
Property, plant, and equipment comprises
6. PREPAID EXPENSE
the most common type of noncurrent
• EXPENSES PAID IN ADVANCE.
assets. These are used in the operations of
• These refers to future expenses that
the company
the company has paid for in
• Intangible Assets
advance. It is place in this account
- Patent
until the services or items are used
- Brand name
and becomes expenses.
- Trade mark
• Example : PREPAID RENT
7. PREPAID INSURANCE Property, Plant, and Equipment
• The part of premium cost of all kinds
• Property usually represents the land upon
of insurance carried by the business
which the firm's offices, factories, and
(fire, flood, earthquake, industrial
other facilities are located.
all risks etc.)
8. ACCRUED INCOME • Buildings or plant may include buildings,
• Income already earned BUT NOT YET warehouses, hospitals, and myriad other
COLLECTED assets.
• Examples : Interest payments, rents,
commission fees, dividends. • Equipment includes office furniture, tools,
• Interest earned on promissory note computers, and the like.
issued by the customer before the INTANGIBLE ASSETS
maturity date of the note.
9. ADVANCES TO EMPLOYEES • Intangible assets lack physical substance and
• Cash advance given to an employee yet are important resources in the regular
to be liquidated in the form of operations of a business.
service.
 • Patents, Brand Name & Trademarks – IP - Amounts due to suppliers for goods
(Intellectual Properties) purchased on account or for services
received on account
Examples of Current Assets
2. NOTES PAYABLE
• Cash, AR, NR, Inventories, Supplies, Prepaid - Are amounts due to third parties supported
Expenses, Prepaid Insurance, Accrued by PROMISSORY NOTE.
Income -
3. ACCRUED EXPENSE
Examples of Noncurrent Assets - Accrued expenses represent liabilities for
services already consumed but not yet paid
• Land, Building, Equipment, Furniture,
for or included elsewhere in liabilities.
Fixtures, Brands, Patents, Trademarks etc.
- Unpaid expenses of the company.
Difference between Current & Noncurrent - Salaries payable, taxes payable
Asset 4. UNEARNED INCOME
- These are customer payments RECEIVED
- Current Assets are the assets that can be
before the delivery of goods and services.
realized within one year while Noncurrent
- The liability is the SERVICES TO BE
Assets are the assets that can be realized
PERFORMED or GOODS TO BE DELIVERED
more than a year.
in the future.
LIABILITIES
NON CURRENT LIABILITIES
• Liabilities are DEBTS or OBLIGATIONS of the
– They are contracts to repay debt at specified
business to a party other than its owner.
future dates and often place some restrictions on
• Liabilities are probable future sacrifices of the activities of the firm until the debt is fully
economic benefits arising from present repaid.
obligations of a particular entity to transfer
• Loans Payable – includes taking account of
assets or provide services to other entities
receipt of loan, re-payment of loan
in the future as a result of past transactions
principal and interest expense.
or events.
• Mortgage Payable – liability of a property
• Liabilities include any probable obligation
owner to pay a loan that is secured by a
that the firm has incurred as a
property.
consequence of its past activities.
OWNER’S EQUITY
• These are obligations that the company is
required to pay. • The RESIDUAL INTEREST of the owner from
the business after deducting liabilities from
TWO KINDS OF LIABLIITIES
the assets.
• Current Liabilities- are short-term
• Owner’s Equity represents the owners’
obligations that are expected to utilize cash
claims on the assets of the business.
or other current assets within a year.
• Net assets of the business.
• Non-current Liabilities- represent
obligations that generally require payment – Arithmetically, it is the difference between
over periods longer than a year. assets and liabilities.

CURRENT LIABILITIES Owner’s Equity = Assets – Liabilities

1. ACCOUNTS PAYABLE • Also known as CAPITAL, PROPRIETORSHIP or

- Accounts Payable is the obligation to pay. INVESTMENT in the business.
- Includes anything that a firm purchases on
credit.
• Owners' equity is the residual interest in the MEASURING & REPORTING FINANCIAL
assets of an entity after deducting PERFORMANCE
liabilities.
FORMS OF INCOME STATEMENT
• Capital
1. Natural Form
– the value of cash and other assets
Formerly known as single-step Income
invested in the business by the
Statement.
owner of the business
Normally prepare in service-oriented
• Drawing
businesses.
– cash withdrawn by the owner for
Under this form, all income accounts are
personal use from the business.
arrange in one group; all expense accounts in
(personal cash withdrawals)
one group and then deduct the total expenses
INCOME from the total income to arrive at the final
results.
• Income is the increase in resources from
performance of service or selling of goods. 2. Functional Form

• Income increases owner’s equity Formerly known as multiple-step Income

Statement.
• Example:
Normally prepare in trading & manufacturing
1. Service Revenue/Income from Service
firms.
Entities
Under this form, specific sections of income,
2. Sales from Merchandising or Manufacturing
cost, and expenses in a series operations are
Companies
clearly shows.
EXPENSE
This form requires cost of good sold (COGS)
• Expense is the decrease in resources and expenses be subtracted to arrive at the
resulting from the operations of business. final results (NI/NL) .

• Expense decreases owner’s Equity in the DEBIT & CREDIT of INCOME STATEMENT
accounting equation ACCOUNTS

• Salaries Expense, Interest Expense , Utilities REVENUES

Expense
-The purpose of a business, other than to
render service is to the community, is to
INCREASE ASSETS and OWNER’S EQUITY
through revenues.

Example:
CHART OF ACCOUNTS Bob the barber gave a haircut to John, who in
return paid for his services. Bob earned some
• A listing of the accounts used by companies
revenue. As a result à The CASH of Bob’s
in their financial records.
Barber Shop INCREASES, thus increasing
• Helps to identify where the money is coming business assets and also subsequently, Bob’s
from and where it is going. Equity.

• The foundation of the financial statements. EXPENSES

-In earning revenue, a business INCURS

EXPENSES. Expenses are DECREASES in
 OWNER’s EQUITY because they use up the Equipment
business assets.
Furniture & Fixtures
Example:
Classification of Liabilities
Tina, the dental assistant of Dr. Sharon, was given
Current Liabilities
her salary for the month. The clinic incurred an
expense. As a result ,the cash of Sharon’s Dental Accounts Payable
clinic DECREASED; thus, decreasing business assets
and also subsequently, Dr. Sharon’s Equity. Notes Payable

NORMAL BALANCE OF INCOME & EXPENSE Accrued Expenses

ACCOUNTS
Unearned Income
Upon analyzing the effects of income and expense
Commission Payable
accounts in the owner’s equity, one may conclude
that, since owner’s equity or capital has a Interest Payable
NORMAL CREDIT BALANCE, it must follow that:
Noncurrent Liabilities
-All INCOME ACCOUNTS will also have NORMAL
Loans Payable
CREDIT BALANCES since they cause an in increase
in the capital account. Mortgage Payable

-Since EXPENSES have a decreasing effect in the Classification of Income

capital account, the normal balance of all expenses
accounts would be debit. 1. Service Income – income from services
rendered
ACCOUNT TITLES
a. Professional Fees
Classification of Assets
b. Medical Fees
Current Assets
c. Legal Fees
Cash on Hand
d. Dental Fees
Cash in Bank
e. Accounting Fees
Notes Receivable
f. Management Fees
Interest Receivable
2. Other Income
Accounts Receivable
a. Interest Income – income earned
Advances to Employees from loan/money deposited in a
bank
Merchandise Inventory
Dividend Income – income earned in investing
Accrued Income
cash in stocks of other businesses.
Supplies on Hand
Types of Income
Prepaid Insurance
Commission Income (income derived by an agent)
Prepaid Expense
Dividend Income (income from share/stocks
Noncurrent Assets investments)

Land Interest Income (income from loan transactions)

Building
Rent Income (income from the use of land or unit DRAWINGS – withdrawals of cash by the owner for
space) PERSONAL USE. (Thus, DECREASES the OWNER’s
EQUITY.)
Classification of Expense
REVENUES – gross increases in owner’s equity from
Advertising and Promotion Expense
business activities entered into for the purpose of
Commission Expense producing income. (Thus, INCREASES the OWNER’s
EQUITY.)
Fringe Benefit Expense
EXPENSES – operating activities of the firm. (Thus,
Donation Expense DECREASES the OWNER’s EQUITY.)
Gas and Oil Expense THE ACCOUNTING EQUATION
Insurance Expense Assets = Liabilities + Owner’s Equity
Office Supplies Expense Liabilities =Assets - Owner’s Equity
Store Supplies Expense Owner’s Equity = Assets - Liabilities
Pag-IBIG, PhilHealth & SSS Contributions Expense

Rent Expense EFFECTS OF TRANSACTIONS ON THE

ACCOUNTING EQUATION
Repair & Maintenance Expense
I – increase
Representation and Entertainment Expense
D– decrease
Salaries and Wages Expense
NE – no effect
Subscription Expense
DEBIT & CREDIT T-ACCOUNT
Tax & License Expense
T-ACCOUNT
Toll & Parking Expense
Business transactions (economic activities)
Travel Expense
cause INCREASES and DECREASES in the
Utility Expense accounting value.

Doubtful Accounts Expense • To record these changes, a business firm

makes use of ACCOUNTS.
Bad Debts Expense
• An ACCOUNT is an accounting device used
Depreciation Expense
to summarize the increases and decreases
Miscellaneous Expense in the A, L, O, R and E of the business.

Classification of Owner’s Equity • A simple form of account looks like a big

letter “T”, thus it is called a T-Account.
OWNER’S EQUITY
• T-Account has a left side (DEBIT) and right
Represents the owner’s claim to total assets. It is side (CREDIT).
subdivided into four (4)

INVESTMENTS – the assets put in the business by

the owner. (Thus, INCREASES the OWNER’s
EQUITY.)
 • “To DEBIT” and “To CREDIT”, however
SHOULD NOT BE CONFUSED with “to
increase” and “to decrease”.

• Debit/Credit may mean either increase or

decrease

depending on the ACCOUNTS AFFECTED

(ALORE).

RULES OF DEBIT & CREDIT

DEBIT

+ asset

-liability

-owner’s equity

expense

CREDIT

-asset

+liability

+owner’s equity

Revenue

NOT SURE IF INCLUDED SA EXAM

SINCE HINDI YATA NA-DISCUSS
MEASURING & REPORTING CHANGES IN EQUITY

Statement of changes in owner’s equity or

capital statement presents a summary of the
changes that occurred in the owner’s equity of • Opens with the owner’s capital balance at
the entity during specific time period. the beginning of the period.

Increase in owner’s equity arise from • ADD Net Income

investments by the owner and net income
• DEDUCT in the case of Net Loss
earned.
• SUBTRACT Withdrawals by the owner
Net loss for the period causes the owner’s
equity to decrease. • Statement ends with the Owner’s Capital
Balance at the end of the period.
Net income or Net loss comes directly from the
Income Statement.

Investments and withdrawals by the owner are MEASURING & REPORTING CASH FLOWS
capital transactions between the business and
its owner, so that do not affect the income CASH FLOWS
statement.
- Means cash that the company received and paid.
Withdrawals
KINDS OF CASH FLOWS
Withdraw of assets from the business for
1. Cash Inflows
personal use of the OWNER of the firm.
2. Cash Outflows
TYPES OF WITHDRAWALS

1. Temporary
Cash Inflows
• Owner withdraws assets from the
business in anticipation of future -whenever a business receives cash as payment
profits. from the customers, the amount received
represents cash inflow.
• Recorded by using the “OWNER’s,
DRAWING” account. Cash Outflows

2. Permanent -whenever a business pays the salaries of the

employer, pays the utilities or purchase supplies,
• Owner withdraws assets from the business
all these represents cash outflow on the part of
and has no intention of returning the
the business.
amount withdrawn,
Statement of Cash Flows
• Recorded by using “ OWNER’s, CAPITAL”
account. -reports the firm’s receipt and disbursement of
cash which are
Withdraw of assets from the business for
personal use of the OWNER of the firm. classified according to the company’s major
activities.
PRO FORMA ENTRY
3 Kinds of Company’s Major Activities

1. Operating

2. Investing

3. Financing

Three Kinds of Company’s Major Activities

Statement of Changes in O. Equity
Operating Activities
 • shows the cash effects of revenue and term borrowings but excluding
expense transaction. payments for interest;

• Cash flows under Operating Activities (2) Cash withdrawals made by the owner

 Cash receipts from : (1) Collections Types of Statement of Cash Flows

from Customers for the service
- There are two (2) recommended formats in the
rendered or goods sold; (2) Sale of
preparation of
Trading Securities;
statement of cash flows”
(3) Dividends and Interests Received; (4) Other
Cash Receipts. 1. Direct Method
 Cash payments to: (1) suppliers of Direct method lists the receipts of cash from
merchandise; (2) Salary of specific OPERATING ACTIVITIES and also the
employees; (3) Professional Fees; (4) list of also CASH RECEIPTS and PAYMENTS for the
Maker of the note for the interest other two major activities of the company, namely:
that has accrued (interest INVESTING and FINANCING.
payments); (5) Purchase of trading
securities; (6) Taxes; (7) Other 4 STEPS in PREPARING STATEMENT OF CASH
expenditures FLOWS under

Income Activities DIRECT METHOD

• shows the cash effects of transactions 1. Identify the activities that either INCREASED
involving ACQUISITION and DISPOSAL of or DECREASED the ASSET CASH.
plant assets, intangible assets and
2. Properly classify these increases or
investments.
decreases per category: Operating,
• Cash flows under Investing Activities Investing or FINANCING

 Cash receipts from : (1) Sale of Used 3. Identify whether the effect is a NET
Plant Assets (2) Collection of INCREASE or NET DECREASE in the ASSET
Principal on loans and other CASH.
securities
4. Compute the ENDING CASH BALANCE by
 Cash payments for: (1) Purchase of adding/deducing the net increase/decrease
Plant, Property and Equipment (2) from the beginning balance.
Loans extended to other entities by
the company
2. Indirect Method
Financing Activities
Indirect method is normally used by the
• shows the cash effects of transactions
companies that employ accrual method rather
involving LONG-TERM DEBT and EQUITY
than cash method in their accounting system.
FINANCING TRANSACTIONS.
This format starts NET INCOME and reconciles
• Cash flows under Investing Activities
to cash flows from operating activities.
 Cash receipts from : (1) Proceeds
This format makes it easier to compute cash
from both short-term and long-
flows from operating activities by a short-cut
term borrowings (2) Investment of
method by starting with the net income or net
Owners
loss amount and reconciles to operating
 Cash payments for: (1) Repayments activities cash flows.
to creditors of short-term and long-
Usefulness of Statement of Cash Flows
1. It forecasts for the firms future cash flows.

2. It informs the company’s capacity to pay

current and future debts.

3. The reasons for the difference between net

income and net cash provided (used) by
operating activities.

4. The cash investing and financing

transactions during the period.