BASIC ACCOUNTING (SY: 2022-2023)

ACCOUNTING I ACCOUNTING SUBJ (MAJORS) I BASIC ACCOUNTING

BASIC ACCOUNTING TERMINOLOGIES Management Advisory Services – providing services to clients

on matters relating to the design and maintenance of a
Accounting is a service activity. Its function is to company’s accounting system, budgeting, cost accounting,
provide quantitative information, primarily financial in nature, production, organizational planning and other business matters,
about economic entities, that is intended to be useful in making
decisions, in making reasoned choices among alternative Private Accounting – accountants employed by business firms
courses of action. (Accounting Standards Council) or by a not-for-profit organization
Accounting is the art of recording, classifying,
summarizing, in a significant manner and in term of money, Government Accounting – accountants who are employed in
transactions and events which are in part at least of a financial any governmental units
character interpreting the result thereof.
Accounting Education – accountants employed as instructors,
Accounting is an information system that measures
professors, reviewers, researchers
business activities, processes information into reports and
communicates the reports to decision makers. Forms of Business Organization
Accounting serves as a communication link between
the business entity and the users of the financial information Single or sole proprietorship – business owned by only an
(Accountancy = “Language of Business”) individual called the proprietor; easiest form of business to
organize since there is only minimal requirements to follow
Recording or Bookkeeping process of systematically
Partnership - an association of two or more persons who bind
maintaining a record of all business transactions, either
themselves to contribute money, property or industry to a
manually or electronically, and is done in chronological order or
common fund, with the intention of dividing profits among
according to the date of occurrence
themselves; partners sign the Articles of Co-Partnership that
Classifying – sorting or grouping of similar interrelated contains the terms of partnership(how much of the business is
transactions in their responsive class owned by each partner, their duties and responsibilities, and
how the profit and loss are to be divided among the partners)
Summarizing – the preparation of financial statements
(Statement of Comprehensive Income, Statement of Changes Corporation - an artificial being created by operation of law
in Owner’s Equity, Statement of Financial Position, Statement having the rights of succession and the powers and attributes
of Cash Flows) expressly authorized by law or incident to its existence; gets its
capital by issuing stocks to individuals and to other businesses
Internal Revenue Code of the Philippines Section 232A – all who become owner or stockholders of the corporation
business which are compelled by the law to pay internal
revenue taxes should pay internal revenue taxes to keep books Types of Businesses
of accounts and records in accordance with the standard
Service Business - renders services to customers or clients for
accounting system
a fee
Revenue Regulation Section 3 No. V-1 – the books of
Services – sells people’s time (ex. Accounting, legal services)
accounts and records shall consist of a journal and a ledger, or
their equivalent and shall contain all information necessary for Trader – buys and sells products (ex. Wholesale, retail)
the accurate determination of internal revenue taxes due on the
businesses Merchandising Business - buys goods or commodities and
sells them at a profit
Business – an organization in which basic resources are
assembled and processed to provide goods or services to Manufacturing Business - makes finished goods from raw
customers or clients; objective is to maximize profit materials or unassembled parts; produces the goods it sells

Accounting system – allows businesses to develop financial Raw Materials – grows or extracts raw materials (ex. Farming,
records that can be used to prepare reports on the financial state mining, oil)
of the business
Infrastructure - sells the utilization of infrastructure (ex.
The Accounting Profession transport, hotels, telecoms, sports facilities, property
management)
Public Accounting – accountants and their staff who render
services for a fee Financial - receives deposits, lends and invests money (ex.
bank, investment house)
Auditing – the independent examination of financial statements
for the purpose of expressing an opinion on the fairness of the Insurance - pools premiums of many to meet claims of a few
said statements prepared by the company under audit; primary (ex. insurance)
service offered in public practice

Tax Services – preparing of income tax returns and advising of

clients on tax matters
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ACCOUNTING I ACCOUNTING SUBJ (MAJORS) I BASIC ACCOUNTING

Users of Financial Statements Time Period Assumption - the indefinite life of the business be
divided into time periods or accounting periods for the purpose
Internal Users (directly involved in the business enterprise; of preparing financial reportd on the performance and financial
operates/runs the business) position of the business
Owners – provides the money/capital that the business needs Monthly Basis - shortest accounting period
to begin operations; through the financial reports, the owner can
properly manage and monitor the business, analyzing whether Quarterly Basis - at the end of every three months
or not he/she can expect reasonable return from his/her
investment Semi-Annual Basis - six months

Management – use accounting information to set goals for the Annually - one year
organization, to evaluate the progress made toward those goals,
Calendar Year - begins on January 1 and ends on December
and to take corrective action if necessary
31
Employees – financial statements enable them to assess the
Fiscal Year - begins on any month except January and will end
ability of the enterprise to provide remuneration, retirement
on the twelvth month of the following year
benefits, and other employee opportunities and benefits
Interim Statements - less than one year
External Users (not directly involved in the business enterprise;
outside) Unit of Measurement Assumption - accounting should
measure and report the results of a business' economic
Potential Investors – use financial statements in evaluating
activities in terms of a monetary unit
what income they can reasonably expect from their investment
Accrual Basis - revenue or income should be recognized when
Creditors – nagpapautang; determine the borrower’s ability to
incurred regardless of when payment is made
meet scheduled payments
*Cash Basis - method of recognizing revenue and expense
Customers – interested in information about the continuance of
when cash is received or when cash is paid
an enterprise, especially if they are dependent on the
company’s offerings either in the form of goods or services Matching Principle - costs and expenses incurred in
generating the revenue should be properly matched against the
Taxing authorities – amount of the tax is determined using
related revenue in determining the net income or net loss for the
accounting information
period
Government regulation authorities – most organizations face
Statement of Comprehensive Income - shows the summary
government regulation. For example, the Security and
of the company's revenue and expenses for a given period
Exchange Commission (SEC) requires businesses to disclose
certain financial information to the public. The SEC, like many Statement of Financial Position (Balance Sheet) - shows the
government agencies, bases its regulatory activity in part on the list of a company's asset, liabilities and owner's equity as of a
accounting information it receives from firms specific date; shows the financial position or condition of an
enterprise as of a specific date
Nonprofit organizations – they (e.g churches, most hospitals,
etc.) use accounting information in much the same way that Statement of Changes in Owner's Equity - or Capital
profit-oriented businesses do Statemnt is the summary of changes in the owner's equity that
have occured during the specific period of time
Other users – consumer groups and the general public may
also be interested in the amount of income that the businesses Statement of Cash Flows - provides information about the
earned cash receipts and the cash payments of an entity for a given
period of time: contains what are the sources of cash and the
Generally Accepted Accounting Principles (GAAP) - defines
uses or disbursements made by the company
what is accepted accounting practice and they are like laws that
must be followed in financial reporting. Notes to the Financial Statements - presents in narrative form
the significant accounting policies and other related explanatory
The set of rules, procedures, assumptions, postulates,
notes that have affected the preaparation of the financial
and concepts followed in recording business transactions and
statements
events, and in the preparation of general purpose financial
statements Relevance - information must be relevant to the decision-
making needs of users; information would influence a decision
Business Entity Concept - the business entity is treated as
by helping users form predictions about the outcome of past,
separate and distinct from its owner/s and from other business
present and future events, or confirm and correct prior
units
expectations
Going Concern or Continuity Assumption - unless there is
Reliability - information is free from errors and bias and can be
evidence to the contrary, the business entity will continue to
depended upon by users to represent faithfully what it purports
operate for an infinite period
to represent
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ACCOUNTING I ACCOUNTING SUBJ (MAJORS) I BASIC ACCOUNTING

Understandability - information provided in the financial CAPITAL - represnts the equity or claim of the owner on the
statements must be presented in a form and expressed in assets of the business; the residual interest in the assets of the
terminology that a user understands business after deducting all its liabilities

Comparability - users must be able to compare the financial REVENUE/ INCOME - is the gross inflow of economic benefits
statements of an entity through time in order to identify trends in during the period in the form of inflows or enhancements on
its financial position or performance from one accounting period assets or decrease in liabilities that result in the increase in
to the next equity, other than those relating to contributions from the
owner/s
Branches of Accounting
EXPENSES - is the gross outflow of economic benefits during
Managerial Accounting - area of accounting that is focused on the period in the course of ordinary activities when these
the accumulation and preparation of financial preparation of outflows result indecrease in equity other than those relating to
financial reports for the use of management distribution to owners; costs incurred to produce revenue
a profession that involves partnering in management
decision-making, devising, planning, and performance Accounting Information System - the combination of
management systems, and providing expertise in financial personnel, records, procedures that a business uses to provide
reporting and control to assist management in the formulation financial data
and implementation of an organization’s strategy
*We computerize to do the accounting faster and make it more
Financial Accounting - area of accounting that is focused on reliable; specialization combines similar transactions to speed
developing and reporting financial information needed for the process
external users
Business Transaction - an event that has some effect on the
Government Accounting - A branch of noncommercial resources of a firm or on the source of the firm's assets; an
accounting that takes into account collection of taxes, activity that involves a change of values
computation of national income, fixing of gross national product
External Transaction - transactions that happen between a
(GNP) target, ascertaining the balance of payments, among
business and an outsider
others
Internal Transactions - transactions that happen within the
Auditing - tasks include the review of a firm’s accounting
business that do not involve outsiders
systems and financial statements to confirm that all these follow
the Generally Accepted Accounting Principles and prescribed Source Document - the evidence of a transaction that
standards. describes the essential facts of the transaction
Tax Accounting - Focuses on tax matters; includes all Assets = Liabilities + Owner's Equity
undertakings concerning tax computation, filing tax returns, and
planning for future tax obligations or

Cost Accounting - Branch of accounting in which costs

incurred by the firm in accomplishing its objective or executing
Assets - Liabilities = Owner's Equity
its various activities are collected, recorded, and classified.
Assets - Capital = Liabilities
Accounting Research
*the left side of the equation shows the assets while the right
- Branch of accounting that is responsible for the development
side shows who provide the funds or resources needed by the
and discovery of accounting concepts and practices. Accounting
business
research is conducted by both the accounting educators and
practicing accountants. Equity - rights to properties (Liabilities - the equity of the
creditors; Capital - equity of the owner/s)
Accounting Equation
Account Form (Balance Sheet) - total assets are shown in the
ASSETS - resources controlled by the enterprise as a result of
same line as with the total liabilities and capital
past transactions and events from which future economic
benefits are expected to flow to the enterprise; properties owned Report Form (Balance Sheet) - liabilities and capital section
by the business are shown below the assets section
LIABILITIES - present obligations of an enterprise arising from Operating Activities - involve the production or purchase of
past transactions or vents, the settlement of which is expected merchandise and the sale of goods or services to customers;
to result in an outflow from the enterprise of resources include the expenditures related in administering the business;
embodying economic benefits; financial obligations or debts of relate to the calculation of net income; includes collections of
the business; claim or equity of the creditors on the assets of the interest cash payments to settle credit purchase of
enterprise merchandise, and payments of interest expense
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ACCOUNTING I ACCOUNTING SUBJ (MAJORS) I BASIC ACCOUNTING

Investing Activities - transactions that involve making and Ledger - a group of accounts; provides a summary of
collection of loans that involve purchasing and selling plant transactions for an accounting period; book of final entry
assets, other Productive assets, and investments; ; involve the
purchase or sale of assets that are classified on the balance Posting - process of transferring the entries from the journal to
sheet as plant and equipment, intangible assets or long-term the accounts in the ledger
assets
Pencil Footing - after posting the journal entries to the ledger,
Financing Activities - a company's transactions with its the amounts of the debit and credit columns of the accounts are
owner/s and long term creditors; includes borrowing of cash on totaled and the difference between the amount of debit and
a short-term basis credit totals is determined

Journalizing - process of recording business transactions in the Trial Balance - summary of the listing of the account titles and
book of original entry or journal (where transactions are first the balance of each account; prepared to test the quality of the
recorded) debit and credit balances of the accounts in the ledger

Double-Entry Bookkeeping - method of recording business Chart of Accounts - list of all accounts in the business and their
transactions which recognizes the dual effect of a transaction; corresponding account number
for every value received there is a corresponding value parted
Transposition - an error committed when the order of numbers
with or given up
are reversed
Account - a record of each asset, liability, owner's equity,
Slide - an error committed when one or more digits are either
revenue, expense items in which the effects of business
moved to the left or right
transactions are recorded
Accounting Period - period of time into which an entity's life is
T-Account - used for illustrations, analyzing transactions
arbitrarily divided for financial statement purposes
Debit - came from the Latin word "debere" (to owe); left side of
Adjusting process - step after the preparation of the trial
an account
balance; process of gathering and putting together data
Credits - came from the Latin word "credere" (to trust or necessary to update the balances of the accounts
believe); right side of an account
Adjusting Entries - entries prepared at the end of the
Debit signifies: accounting period to update or adjust the balances of accounts;
affect at least one income statement account and one balance
Increase in Assets sheet account

Decrease in Liabilities Accrued Expenses - liability account; expenses already

incurred but not yet paid; accrued liabilities accrued payable
Decrease in Capital
Accrued Revenue - asset account; revenue already earned by
Increase in Drawing the business but not yet collected or received at the accounting
period
Decrease in Revenue
Interest Receivable - interest earned but not yet collected;
Increase in Expense
reported as a current asset in the balance sheet since it will be
collected in 30 days

Credit signifies: Interest Payable - interest expense but not yet paid; reported
as a current liability in the balance sheet since it will be paid in
Decrease in Assets 30 days
Increase in Liabilities Prepaid/ Deferred Expense - expenses paid in advance; asset
account; are expected to become expenses through the
Increase in Capital
passage of time through use and consumption; opposite af
Decrease in Drawing accrued expense

Increase in Revenue Asset Method - the account debited upon payment is an asset
account, upon adjustment an expense account is debited with a
Decrease in Expense corresponding credit to an asset account

Expense Method - the account debited upon payment is an

expense account, upon adjustment an asset account is debited
Simple Journal Entry - there is only one debit and one credit and an expense account is credited
in the entry
Unearned/ Deferred Revenues - liability account; revenues
Compound Journal Entry - there are more than two accounts collected or received in advance by the business
involved
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Liability Method - the account credited upon receipt of cash is 10. A post-closing trial balance is prepared
a liability account, upon adjustment such liability account will be
debited and a revenue account is credited 11. The reversing entries are journalized and posted to
the ledger
Revenue/ Income Method - the account credited at the date of
collection is a revenue/income account, upon adjustment a Worksheet - is a columnar sheet of paper used to summarize
revenue account is debited and a liability account is credited information needed to make the adjusting and closing entries
and to prepare the financial statements, only a tool used by
Deferrals - postponement of the recognition of revenue which accountants and is not part of the formal accounting record
the company has received or collected in advance and the
postponement of the recognition of expense which has been Adjusted Trial Balance - the original trial balance plus or minus
paid in advance the adjustments

Accruals - refer to the recognition of expense already incurred Net Income - the difference if the total revenues exceed the total
though not paid, and the recognition of revenue already earned expenses that is added to the debit column total
though not received
Net Loss - the difference if the total expenses exceed the total
Property, Plant and Equipment (Fixed/ Plant Assets) - revenues that is added in the credit column total
physical resources that are owned and used by the business
Capital Statement(Statement of Owner's Equity) - a financial
which are relatively fixed or permanent in nature that have a long
statement that summarizes the transactions affecting the
useful life
owner's capital; prepared by showing the beginning capital
Depreciation Accounting - process of allocating the balance, adding net income or deducting net loss, then
depreciable cost of a fixed asset over its estimated useful life subtracting owner's withdrawals; the result is the ending capital
balance that is forwarded to the balance sheet
Accumulated Depreciation - accumulated amount of
depreciation expense from the year of recognition to the latest Classified Statement of Financial Position - subdivides the
balance sheet date assets and liabilities in order to provide more specific
information for the users of financial statements; assets are
Asset Cost - purchase price plus other direct costs incurred in classified to current assets and non-current assets while
acquiring and bringing the asset to its intended use liabilities are classified to current liabilities and non-current
liabilities
Estimated Residual Value/ Salvage Value/ Scrap Value/
Trade in Value - estimated amount the fixed asset can be sold Current Assets - cash and other assets that are converted into
at the end of its useful life cash or used up in a relatively short period of time, usually onr
year or less; listed in order of liquidity (convertability into cash)
Estimated Useful Life - may be expressed in years or number
of units, or hours that the asset can be used Non-current Assets - assets acquired for use in the business
rather than for sale; also called fixed assets because they are
Uncollectible Accounts or Bad Debts - the company's used for long-term purposes
receivables which might not be collected
Current Liabilities - debts usually due within one year, the
Accounting Cycle - series of steps accountants perform during payment of which normally will require the use of current assets;
an accounting period; its purpose is to generate financial listed in the order of their maturity (the sooner the liability is to
statements be paid, the earlier it is normally listed
1. The transactions are analyzed by examining source Non-current Liabilities (Long-term Liabilities) - debts that will
documents be paid after a relatively long period of time, usually more than
one year; the one with the earliest due dates are listed first
2. The transactions are journalized
International Accounting Standard No. 7 - cash flow
3. The journal entries are posted to the ledger
information is useful in providing users of financial statements
4. A trial balance is prepared with a basis to assess the ability of the enterprise to generate
cash and the need of the enterprise to utilize those cash flows.
5. The data needed to adjust the accounts are The economic decisions that are taken by users require
assembled evaluation of the entity to generate cash and the timing and
certainty of their generation

Operating Activities – create revenues and expenses in the

6. A worksheet is prepared
entity’s major line of business; affect the income statement;
7. The financial statements are prepared which report the accrual basis effects of operating activities

8. The adjusting entries are journalized and posted to Investing Activities – increase or decrease the assets that the
the ledger business has to work with; include more than buying and selling
of assets that are classified as investment in the balance sheet
9. The closing entries are journalized and posted to the
ledger
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ACCOUNTING I ACCOUNTING SUBJ (MAJORS) I BASIC ACCOUNTING

2. The owner had a business meeting with a prospective client.
The expenses that come with that meeting should be part of the
Financing Activities – obtain funds from investors and company’s expenses. If the owner paid for gas for his personal
creditors needed to launch and sustain the business[ use, it should not be included as part of the company’s
expenses.
Closing Entries – entries prepared at the end of the accounting
period to bring the balances of temporary or nominal accounts • TIME PERIOD PRINCIPLE – financial statements are to be
to zero, so that they will be ready to receive data for the next divided into specific time intervals.
accounting period
Example:
Temporary Accounts: revenues; expenses; and drawing
accounts 1. Philippine companies are required to report financial
statements annually.
Post-Closing Trial Balance – the trial balance prepared after
the adjusting and closing procedures; temporary accounts are 2. The salary expenses from January to December 2015 should
no longer included since they have been closed only be reported in 2015.

Interim Statements – financial statements prepared for the • MONETARY UNIT PRINCIPLE – amounts are stated into a
period of less than a year; adjustments for accrued items must single monetary unit
be considered in preparing interim statements
Examples:
Reversing Entries – are prepared for certain types of adjusting
entries as of the first day of the next accounting period; reverses 1. Jollibee should report financial statements in pesos even if
the effects of adjusting entries to which they relate; purpose is they have a store in the United States.
to simplify the first entry relating to that same item in the next
2. IHOP should report financial statements in dollars even if they
accounting period; all adjusting that increase assets or liabilities
have a branch here in the Philippines
must be reversed, adjusting entries that decrease assets or
liabilities are not reversed • OBJECTIVITY PRINCIPLE – financial statements must be
presented with supporting evidence.
ACCOUNTING CONCEPTS AND PRINCIPLES
Example:
ACCOUNTING CONVENTIONS
1. When the customer paid Jollibee for their order, Jollibee
• GOING CONCERN PRINCIPLE – business is expected to
should have a copy of the receipt to represent as evidence.
continue indefinitely (long period of time)
2. When a company incurred a transportation expense, a
Example:
voucher should be prepared as evidence.
1. When preparing financial statements, you should assume that
• COST PRINCIPLE – accounts should be recorded initially at
the entity will continue indefinitely.
cost not at their current market value.
• CONSISTENCY – The Accounting Policies and methods
Examples:
followed by the company should be the same every year
1. When Jollibee buys a cash register, it should record the cash
Example:
register at its price when they bought it.
1. Period should not be changed frequently from Jan-Dec to
2. When a company purchases a laptop, it should be recorded
Apr-Mar
at the price it was purchased.
• ACCRUAL – In General it is assumed that Accounts are
• ACCRUAL ACCOUNTING PRINCIPLE – revenue should be
always prepared based on Accrual basis. However there are
recognized when earned regardless of collection and expenses
entities which follow Cash Basis of Accounting Also
should be recognized when incurred regardless of payment. On
The Company Law / Income Tax Act Prescribes all Companies the other hand, the cash basis principle in which revenue is
to follow Accrual Basis of Accounting except for Professional recorded when collected and expenses should be recorded
Firms and Government Organizations which are allowed to when paid. Cash basis is not the generally accepted principle
follow Cash Basis of Accounting. today.

ACCOUNTING CONCEPT AND PRINCIPLES Example:

• BUSINESS ENTITY PRINCIPLE – a business enterprise is 1. When a barber finishes performing his services he should
separate and distinct from its owner or investor. record it as revenue. When the barber shop receives an
electricity bill, it should record it as an expense even if it is
Examples: unpaid.

1. If the owner has a barber shop, the cash of the barber shop
should be reported separately from personal cash.
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ACCOUNTING I ACCOUNTING SUBJ (MAJORS) I BASIC ACCOUNTING

• MATCHING PRINCIPLE – cost should be matched with the Example:

revenue generated.
1. A Sales invoice for Rs.1 Million
Example:
Credit Note for Rs.15000 received
1. When you provide tutorial services to a customer and there is
a transportation cost incurred related to the tutorial services, it 2. For instance, if a company is awarded a contract to build an
should be recorded as an expense for that period. office building the revenue from that project would not be
recorded in one lump sum but rather it would be divided over
• DISCLOSURE PRINCIPLE – all relevant and material time according to the work that is actually being done.
information should be reported.

Example:

1. The company should report all relevant information.

• CONSERVATISM PRINCIPLE – also known as prudence. In

case of doubt, assets and income should not be overstated
while liabilities and expenses should not be understated.
Anticipate no Profits but provide for all possible losses.
Accountants are by nature Conservative and also to
protect the interest of the Shareholders and Creditors it is
required to provide for all losses.

Example:

1. In case of doubt, expenses should be recorded at a higher

amount. Revenue should be recorded at a lower amount.

• MATERIALITY PRINCIPLE – in case of assets that are

Immaterial to make a difference in the financial statements, the
company should instead record it as an expense.

Example:

1. A school purchased an eraser with an estimated useful life of

three years. Since an eraser is immaterial relative to assets, it
should be recorded as an expense.

• DUAL ASPECT CONCEPT

The Value of the Assets owned by the concern is equal to the

claims on the Assets

ASSETS = LIABILITIES + OWNER’S EQUITY

OWNER’S EQUITY = ASSETS – LIABILITIES

LIABILITIES = ASSETS – OWNER’S EQUITY

Ex: If Owners Equity is 600000 and Liabilities are 400000, then

Total Asset = 1000000

• REALIZATION CONCEPT

The Sales is considered to have taken place only when either

the cash is received or some third party becomes legally liable
to pay the amount. Revenues are recognized when they are
earned or realized. Realization is assumed to occur when the
seller receives cash or a claim to cash (receivable) in exchange
for goods or services