INTRODUCTION OF ACCOUNTING

What is accounting?

“Accounting is the practice of recording, analyzing, and reporting financial transactions. It's a way to keep track of a
business's money pppwhere it comes from, where it goes, and how it's used”

"Accounting is the process of identifying, measuring, and communicating economic information to permit informed
judgments and decisions by users of the information." -According to the American Accounting Association (AAA)

“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." -American Institute of
Certified Public Accountants (AICPA)

HISTORY OF ACCOUNTING
In Mesopotamia, clay tablets were used to record transactions involving goods and commodities, creating some of the
earliest known accounting records.

Double-Entry Bookkeeping introduced the concept of recording each financial transaction with equal debits and credits,
ensuring that the books remained in balance.

Luca Pacioli the modern accounting system owes much to the development of double-entry bookkeeping by Luca
Pacioli, an Italian mathematician, and Franciscan friar, in his book "Summa de arithmetica, geometria, proportioni et
proportionalità" in 1494.

Formation of Professional Organizations

These organizations played a key role in shaping the profession and promoting standardized accounting practices.

Functions of Accounting in Businesses

Recording Financial Transactions: This function provides an accurate and complete financial history of the
business.
Classifying and Categorizing Data: Proper categorization allows for a clear understanding of the financial
health and performance of the business.
Summarizing Financial Information: These statements provide a concise overview of the business's financial
position, profitability, and cash flow, aiding in decision-making and financial analysis.
Types of Financial Statement

● Statement of Financial Position ● Statement of Changes in Equity

● Statement of Comprehensive Income ● Statement of Cash Flow

Statement of Financial Position

The balance sheet provides a snapshot of a company's financial position at a specific point in time; It shows
what a company owns (assets), what it owes (liabilities), and the owners' stake (equity) in the business; It
helps stakeholders understand the company's overall financial health and its ability to meet short-term and
long-term obligations.
Statement of Comprehensive Income
The income statement reports a company's financial performance over a specific period; It details the
revenues earned and expenses incurred during that period, ultimately showing whether the company made a
profit or incurred a loss; It provides insights into the company's profitability, showing how well it generates
profit from its operations.
Statement of Changes in Equity
This statement tracks the changes in owners' equity over time; It records investments, withdrawals, profits,
and losses, affecting the equity section of the balance sheet; It helps owners and investors understand how
their ownership in the company has changed and what contributed to those changes.
Statement of Cash Flow
The cash flow statement reports the cash movements in and out of a company during a specific period; It
categorizes cash flows into operating, investing, and financing activities; It offers insights into a company's
liquidity, showing whether it has enough cash to meet its obligations and invest in growth.

External and Internal User

External
External users are individuals or entities outside of an organization who interact with its systems, products, or
services. They do not have the same level of access to internal data and operations as internal users. External users
primarily consume services or products provided by an organization.

External User

1. Customers - They buy products or services but don't have access to the internal workings or data of the
company.
2. Vendors and Suppliers - provide goods or services to a company and may need limited access to its systems for
invoicing or order management.
3. Investors and shareholder - They are interested in the financial performance and strategy of the company but
are not involved in daily operations.
4. Regulatory Agencies - Organizations like the FDA or EPA may need to review certain data or systems but are not
part of the organization itself.
5. Consultation - These are external experts brought in to solve specific problems or provide strategic guidance.
Internal

Internal users are individuals within an organization who have authorized access to its secure internal systems and data.

Internal User

1. Employees - employees are internal users who have different levels of access to the company's data, depending
on their role.
2. Management Team - have high-level access to most data of a company
3. It staff - personnel responsible for maintaining the internal systems. They usually have deep access to the
organization's network and data.
4. Research and development Team - Involved in developing new products or services, they have access to
sensitive and proprietary data.
 5. Hr department - Responsible for employee data and internal policies, they are considered internal users with
specific access rights.
Accounting Concept and Principle
Accounting is the systematic and comprehensive recording, classifying, summarizing, and interpreting of financial
information.

Basic Concept in Accounting

A. Business Entity Concept

B. Going Concern Concept
C. Money Measurement Concept
D. Periodicity Concept
E. Dual Aspect Concept
Business Entity Concept

● This concept separates the financial information of the business from the personal financial information of the
owner. (kailangan ibalik yung pera sa business kapag kumuha ng pera galling business)
Going Concern Concept

● A business is assumed to continue its operations for the foreseeable future without the intention or necessity of
liquidation.
Money Measurement Concept

● In accounting, only those transactions which can be expressed in terms of money are recorded. (dapat kung ano
lang ang may value, ayon lang ang ire-record sa financial statement)
Periodicity Concept

● The life of a business is divided into time periods or intervals, and these periods are of equal length. It helps in
regularly assessing the performance of a business. The length of this period depends on the business and the
nature of its transactions, but common periods include monthly, quarterly, and annually.
Dual Aspect Concept

● This principle is the foundation of the double-entry bookkeeping system, which is used universally in accounting.
For every debit, there is a corresponding credit, which means that assets on one side are always balanced by
liabilities plus equity on the other.
Sample: if a business takes a loan of 10,000 from a bank

Debit Credit

Asset P10,000 (cash)

Liability P10,000 (Loan)

Major Accounting Principle

● These principles form the basis upon which the complete suite of accounting standards have been built. The key
objective is to provide users of financial statements – such as investors, creditors, and regulators – a clear,
reliable, and comparable view of the financial performance and position of an entity.
Accrual Principle

● This principle states that revenues and expenses should be recorded when they are earned or incurred,
regardless of when the cash is actually received or paid.

Month Activity Accounting Action

December Painted the house Recognized Revenue (earned income)

January Received Payment Recognized revenue (earned income)

Matching Priniciple

● The matching principle requires that revenues and the expenses used to produce them be recognized in the
same accounting period. It's closely related to the accrual principle.
Consistency Principle

● Once an accounting method is adopted, it should be applied consistently from one accounting period to the
next. This ensures that financial statements can be meaningfully compared over different periods.
Cost Principle

● Assets and liabilities should be initially recorded at their original cost. The historical cost is objective as it's based
on verifiable transaction evidence. Example: If a business purchases a piece of land for $100,000, it should be
recorded at its purchase price (cost) in the financial statements, even if its estimated market value is $150,000 a
year later.
Objectivity Principle

● Accounting information and financial statements should be free from personal bias. They should be based on
objective evidence.
Full Disclosure Principle

● Financial statements should disclose all relevant and material information that might influence the decisions of
users. Example: If a company is being sued and may have to pay a large settlement, they need to disclose this
information in the footnotes to the financial statements, even if the outcome of the lawsuit is still uncertain.
Materiality Principle

● Only significant transactions that would change the decision of a reasonably informed user need to be reported.
Insignificant amounts can sometimes be ignored if including them is not relevant or would not influence a user's
decision. Example: If a large corporation like Apple were to lose a $100 office chair, it would not significantly
impact their financial position or results. In such a case, the materiality principle would allow them to not
specifically report this loss.
Prudence or Conservatism Principle
 ● Accountants should always exhibit caution in financial reporting so that the assets and incomes are not
overstated, and the liabilities and expenses are not understated.

Accounting Equation
Assets - These represent what a company owns or controls. This includes tangible items like cash, accounts
receivable, inventory, buildings, and equipment, as well as intangible items like patents and copyrights.

Liabilities - These represent what a company owes. This includes accounts payable, salaries payable, loans,
mortgages, and any other debt the company has.

Equity - This represents the owner's claim to the assets after all liabilities have been subtracted. In other words,
if all debts were paid off, this is what the owners would be left with.

A=L+C L=A–C C=L-C

L C

Five Major Accounts

● Assets ● Revenue

● Liability ● Expense

● Equity

Assets

Assets represent the economic resources owned or controlled by a business that have measurable value and are
expected to provide future benefits

Current Assets: These are assets that are expected to be converted into cash or used up within one year or one
operating cycle. Examples include cash, accounts receivable, inventory, and prepaid expenses.

Non-Current Assets (Fixed Assets): These are assets that are expected to provide benefits beyond one year. Examples
include property, plant, and equipment, intangible assets like patents and trademarks, and long-term investments.

Liabilities

Liabilities represent the obligations or debts that a company owes to external parties.
Current Liabilities: These are obligations that are expected to be settled within one year or one operating cycle,
whichever is longer. Examples include accounts payable, short-term loans, and accrued expenses.

Non-Current Liabilities (Long-Term Liabilities): These are obligations that extend beyond one year. Examples include
long-term loans, bonds payable, and deferred tax liabilities.

Equity

Equity represents the residual interest in the assets of a company after deducting liabilities. It is essentially the
ownership interest in the business

● Owner's Equity (Shareholders’ Equity): This includes the contributions of the owners (common stock) and any
retained earnings or losses from prior periods.
● Comprehensive Income: This includes certain gains and losses that bypass the income statement and are directly
included in equity.
Revenue

Revenue represents the income generated by a company from its primary operating activities, such as the sale of goods
or services to customers.

● Sales Revenue: Income from the sale of goods or services.

● Interest Income: Income earned from interest on loans or investments.

● Dividend Income: Income earned from dividends on investments in the equity of other companies.

● Rental Income: Income generated from renting out property or equipment.

Expense

Expenses represent the costs incurred by a company in the course of its normal operations to generate revenue. These
costs are subtracted from revenue to calculate the company's net income.

● Cost of Goods Sold (COGS): Expenses associated with the production or purchase of goods sold during a specific
period.
● Operating Expenses: These include various costs such as salaries, rent, utilities, marketing, and depreciation.

● Interest Expense: The cost of borrowing money, such as interest on loans.

● Income Tax Expense: The income tax obligations of the company.

TERMINOLOGIES
International Financial Reporting Standards (IFRS)

Assets – kung ano ang pagmamay ari ng company

Liabilities – utang

Equity – puhunan / capital

Liquidation – pagbebenta ng ari-arian ng isang company para mabayaran yung mga nagpapa-utang

Shareholder – may share or pagmamay ari sa company’s stock

Revenue – Buong kita, hindi pa nababawas yung expense

Current – within one year

Non-current – more than a year

Accruals –

Draings - Withdrawals

Assets
Accounts receivable – Nabigay mo na yung service tapos yung bayad hindi pa (matatanggap mo)
Furnitures and Fixtures
Automobiles – all about sasakyan
Prepaid – advance payment
Office Supplies – within one year magagamit
Office Equipment – more than a year magagamit

Liabilities
Accounts payable – may utang; nabigay na yung service sayo pero di mo pa nababayaran (babayaran mo)
Notes payable – kailangan ng promissory notes na nag iindicate na mababayaran sa nasabing date
Unearned revenue – nabigay na yung pera pero hindi pa natatanggap yung service

Capital
Owner’s Equity – puhunan/capital ng owner
Owner’s Drawings – withdrawals ng owner