Unit 1 review: Intro to Accounting

Business entities are important players in the economy because:

1. Employment:
- They employ ppl → Ppl can then provide their needs → Gov money can then be used to
ppl in need and other important projects
2. Tax (Revenue for the Gov)
- When they earn higher → they give more taxes → Gov money can then be used to ppl in
need and other important projects → Making a better country → keeping talented
workers in the country → helping make a better country
3. Active exchange in goods and services
- More money circulating → higher value in currency → can buy more dollars → easier to
pay more debts → Gov money can then be used to ppl in need and other important
projects
“The government noticed this, so they support businesses. Like during the pandemic, the
government made it that banks can give loans much easier to help dying businesses”

For the business to prosper, its management must be updated with (financial) information in
order to make sound decisions. They do this through accounting. Accounting provides the
necessary information for decision-making.

-------------------------------------------------------------------------------------------------------------------------------

Business:
- An organization in which basic resources(inputs) such as materials and labor are
processed to provide goods or services(output)
- legally- recognizd entity designed to sell goods or services to consumers to generate
profit

Businesses are legal if:

1. They have a business permit/ mayor’s permit secured from the city/ local government
unit
2. Complying with requirements for the permit like SSS, BIR, PhilHealth, Pag-ibig, DOLE
3. Exemption: If they are classified as “MBE” or Minority Business Enterprise (people
who have capital of P3,000.00 below), they can sell goods and services even without a
permit.

Non-profit organizations/ businesses- the main objective is not about the profit but instead to do
socio-civic services. But they do still need money/profit and therefore accounting so that they
know how to handle funds to do the activity.
“ All types of business need accounting”
The different forms of business entities(based on how they are formed):
1. Sole proprietorship- one owner
- Advantage: (1) the owner gets all the profit; (2) easier to make decisions; (3)
easier to form because not much requirement to comply
- Disadvantage: (1) you take all the responsibility, you have no other inputs taken
in decision making; (2) capitalization is limited only to one owner, if consumed,
no more funds and only borrow from the bank which is difficult; (3) limited life,
easy to dissolve; (4) unlimited liability because debts will be paid by the owners’
personal funds.
2. Partnership- two or more owners that bind themselves to a contract and contribute
money, property, or industry into a common fund with the intention of dividing the profits
among themselves.
- Bind by (articles/contract of partnership)
- Disadvantage: (1) It can be more than 100, 1000, 1000000, but all must agree
when decisions are made, so even at least 1 disagrees, it will be a violation of
the contract. (2) Limited life, it can be easily dissolved (when any dies or
withdraws), but ppl left can continue if they register a new business; (3) liability is
unlimited. If the business cannot pay a liability, they need to pay the full liability
with their own money, even if one can’t pay, the others will take the burden.
- Advantage: (1) more source of capital; (2) more skills and knowledge to use in
making decision making; (3) division of work
3. Corporation- at least 5-15 individuals(or incorporators) before or now at least one. can
register the corporation at the beginning. But after being established, there can be more
stockholders by selling shares of stocks. Not all stockholders are or can be owners.
- Advantages:(1) ownership is divided into stocks; (2) decisions are by the
majority; (3) Board of directors make best decisions; (4) unlimited life some
owners may die but operations will still go on.; (5) widest source of capital; (6)
- Disadvantages: (1) not easy to form; (2) if you are an owner but not part of the
BOD, you cannot make decisions; (

Types of operating activities:

1. Service business- provides service for a fee ;like hospitals, schools, law forms, engr
firms etc.
2. Merchandising Business- AKA Tading business or __. Earns revenue buy adding it to
cost, and selling it at a selling price.
a. Wholesaler: sales in bulk
b. Retailer: selling in small voulumes
3. Manufacturing business- buy materials, produce it, and sell the finished product. May
sell to merchandising business.
What is Accounting:
Common definition that is accepted by all: AICPA definition
“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 financial character, and interpreting the results thereof”
- Art- we need to be creative
- Record classify and summarize- transaction event with financial impact. Increase
or decrease the accounting elements
- Accounting does not make decisions but provide information and
recommendations

Four functions of accounting:

1. Recording
2. Classifying
3. Summazring
4. interpreting

Accounting is the language of the business because it communcates the financial

information to the various users

Users of accounting:
1. Interna- within the company
2. External- outside the company that are interested in the company’s financial
status

Finacial statements:
1. Statement of comprehensive income
2. Statement of financial position
3. Statement of Equity
4. Statement of cash flows
5. Notes to Financial statements

Period
1. Annual(required)
2. semi-annual
3. Quarter

Types:
1. Calendar period: from Jan 1- Dec 31
2. Fiscal Period: from any date
Lesson 2 Accounting Elements and the Accounting Equation

The accounting elements are the components of Financial statements. What we see in the FS.
These are called the accounts and classified into 5 major classification:
- Assets- any property owned by the business and has a value which the company can
use to obtain future economic benefits. There are Tangible Assets(anything that has a
physical), while intangible Assets(anything that does not have a physical existence but in
a form of rights and privileges). There are two classifications of assets: Current
Assets( assets that will be used, consumed, sold, and collected within a year) while Non-
current Assets( will be used, consumed sold, and collected for more than a year)
- Liabilities- obligations or amounts due to the creditors bought on account or from the
borrowing of money that will be due within one year. Its classified into Current(required
to be payed or settled within 1 year) and Non-current Liabilities( After a year)
- Equity- this is the owner interest of the owners (assets-libilities=equity). This is
considered as the net worth or net assets. Types: Owner’s capital(what the owner has
put into the business or invested) and Owners drawing(is the owner’s withdrawal of
his/her investment)
- Revenue- any increase in assets or owner’s interest from any operating transactions.
This includes the gains from sales and transactions not related to the normal generation
of sales such as bank interest and
- Expenses- Outflow of assets, or basically the outflow of owner’s interest that are apart
from owners’ drawings.

The accounting equation is the mathematical expression that shows the relationship between
among the accounting elements. This important because…. Revenue and expenses affect the
acc by increasing or decreasing the equity.
Accounting equation is used ti
Business transactions are

In real life the source/business documents(proof or evidence) themselves is where you get
information.not in a list of transactions. This can be found in the invoice.

It can be called service revenue, or taxi income

Lesson no. 3
Accounting process; based on double entry bookkeeping systems
Steps called: Accounting cycle because its a continuos prcess, from period to period

Steps:
Recording Phase
1. Documentation- analyzing of documents
2. Journalizing- recording in journal
3. Posting- recording in ledger
Summarizing Phase:
4. Preparation in Trial balance
5. Optional: preparation of worksheet
6. Preparation of FS
7. Adjusting journal entries
8. Journalize and posting CJE closin entries
9. Ruling nominal accounts
10.
11.

Account balance, noramal balance, contra accounts

Chart of accounts- account no are used as codes, up to the company
Each asset account starts with 1, 2 if liabilities, 3 if equities, 4 revenue, 5 expense
Real accounts nominal accounts

Journalizing is the process or recording transactions in the journal. Journal entries are
recorded arranged in chronological order. A journal is a loose-leaf page or boud book where
business transactions are first recorded. It is sometimes refered to as the book of original entry.
Kind of journal:
1. General Journal- records day to day transactions Special Journals- records specific
transactions
a. Cash receipt-
b. Cash disbursement- cash payment
c. Sales journal-
d. Purchase journal-

Ma’am’s Journalizing Technique

1. Analyze the transaction
2. Identify at least 2 accounts
3. Find in which category each of them fall in
4. See increase or decrease
5. Use the RULES (DEA-LER)or (Drawings, expense, assets, liabilities, equity, revenue)

Bookkeeping
1. Source document
2. Journal
3. Ledger
4. Trial balance
5. Financial statement - SFP, SCI, SCF, SE, Notes to FS

Ledger- is used to summarize all the individual transactions listed on the books of prime entry.
Posting is the process used to tranfer the debit and credit entries from the journal accounts.
 1. General Ledger
2. Debtor’s ledger- for customers
3. Creditors ledger- for suppliers

In SFP credit and debit must be balance. If not there are two types of error:
1. Trial balance error- xan be detected in the trial balaxe/ balance sheet
2. Accounting error- equal la ghpa ht TB, error can be detected by audit