BASIC ACCOUNTING (SY: 2022-2023)

ACCOUNTING I ACCOUNTING SUBJ (MAJORS) I BASIC ACCOUNTING

Business – an organization in which basic
resources are assembled and processed to
BASIC ACCOUNTING TERMINOLOGIES
provide goods or services to customers or clients;
Accounting is a service activity. Its objective is to maximize profit
function is to provide quantitative information,
Accounting system – allows businesses to develop
primarily financial in nature, about economic
financial records that can be used to prepare
entities, that is intended to be useful in making
reports on the financial state of the business
decisions, in making reasoned choices among
alternative courses of action. (Accounting The Accounting Profession
Standards Council)
Public Accounting – accountants and their staff
Accounting is the art of recording,
who render services for a fee
classifying, summarizing, in a significant manner
and in term of money, transactions and events Auditing – the independent examination of
which are in part at least of a financial character financial statements for the purpose of expressing
interpreting the result thereof. an opinion on the fairness of the said statements
Accounting is an information system that prepared by the company under audit; primary
measures business activities, processes service offered in public practice
information into reports and communicates the
reports to decision makers. Tax Services – preparing of income tax returns
Accounting serves as a communication link and advising of clients on tax matters
between the business entity and the users of the
financial information (Accountancy = “Language of
Business”)

Recording or Bookkeeping process of Management Advisory Services – providing

systematically maintaining a record of all business services to clients on matters relating to the
transactions, either manually or electronically, design and maintenance of a company’s
and is done in chronological order or according to accounting system, budgeting, cost accounting,
the date of occurrence production, organizational planning and other
business matters,
Classifying – sorting or grouping of similar
interrelated transactions in their responsive class Private Accounting – accountants employed by
business firms or by a not-for-profit organization
Summarizing – the preparation of financial
statements (Statement of Comprehensive Income, Government Accounting – accountants who are
Statement of Changes in Owner’s Equity, employed in any governmental units
Statement of Financial Position, Statement of
Accounting Education – accountants employed as
Cash Flows)
instructors, professors, reviewers, researchers
Internal Revenue Code of the Philippines Section
Forms of Business Organization
232A – all business which are compelled by the
law to pay internal revenue taxes should pay Single or sole proprietorship – business owned by
internal revenue taxes to keep books of accounts only an individual called the proprietor; easiest
and records in accordance with the standard form of business to organize since there is only
accounting system minimal requirements to follow

Revenue Regulation Section 3 No. V-1 – the books Partnership - an association of two or more
of accounts and records shall consist of a journal persons who bind themselves to contribute
and a ledger, or their equivalent and shall contain money, property or industry to a common fund,
all information necessary for the accurate with the intention of dividing profits among
determination of internal revenue taxes due on the themselves; partners sign the Articles of Co-
businesses Partnership that contains the terms of
partnership(how much of the business is owned by
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ACCOUNTING I ACCOUNTING SUBJ (MAJORS) I BASIC ACCOUNTING

each partner, their duties and responsibilities, and Owners – provides the money/capital that the
how the profit and loss are to be divided among business needs to begin operations; through the
the partners) financial reports, the owner can properly manage
and monitor the business, analyzing whether or
Corporation - an artificial being created by
not he/she can expect reasonable return from
operation of law having the rights of succession
his/her investment
and the powers and attributes expressly
authorized by law or incident to its existence; gets Management – use accounting information to set
its capital by issuing stocks to individuals and to goals for the organization, to evaluate the
other businesses who become owner or progress made toward those goals, and to take
stockholders of the corporation corrective action if necessary

Types of Businesses Employees – financial statements enable them to

assess the ability of the enterprise to provide
Service Business - renders services to customers
remuneration, retirement benefits, and other
or clients for a fee
employee opportunities and benefits
Services – sells people’s time (ex. Accounting,
External Users (not directly involved in the
legal services)
business enterprise; outside)
Trader – buys and sells products (ex. Wholesale,
Potential Investors – use financial statements in
retail)
evaluating what income they can reasonably
Merchandising Business - buys goods or expect from their investment
commodities and sells them at a profit
Creditors – nagpapautang; determine the
Manufacturing Business - makes finished goods borrower’s ability to meet scheduled payments
from raw materials or unassembled parts;
Customers – interested in information about the
produces the goods it sells
continuance of an enterprise, especially if they are
Raw Materials – grows or extracts raw materials dependent on the company’s offerings either in the
(ex. Farming, mining, oil) form of goods or services

Infrastructure - sells the utilization of Taxing authorities – amount of the tax is

infrastructure (ex. transport, hotels, telecoms, determined using accounting information
sports facilities, property management)
Government regulation authorities – most
Financial - receives deposits, lends and invests organizations face government regulation. For
money (ex. bank, investment house) example, the Security and Exchange Commission
(SEC) requires businesses to disclose certain
Insurance - pools premiums of many to meet financial information to the public. The SEC, like
claims of a few (ex. insurance) many government agencies, bases its regulatory
activity in part on the accounting information it
receives from firms

Nonprofit organizations – they (e.g churches, most

hospitals, etc.) use accounting information in
much the same way that profit-oriented
businesses do

Other users – consumer groups and the general

public may also be interested in the amount of
Users of Financial Statements
income that the businesses earned
Internal Users (directly involved in the business
enterprise; operates/runs the business)
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ACCOUNTING I ACCOUNTING SUBJ (MAJORS) I BASIC ACCOUNTING

Generally Accepted Accounting Principles (GAAP) Matching Principle - costs and expenses incurred
- defines what is accepted accounting practice in generating the revenue should be properly
and they are like laws that must be followed in matched against the related revenue in
financial reporting. determining the net income or net loss for the
period
The set of rules, procedures, assumptions,
postulates, and concepts followed in recording Statement of Comprehensive Income - shows the
business transactions and events, and in the summary of the company's revenue and expenses
preparation of general purpose financial for a given period
statements
Statement of Financial Position (Balance Sheet) -
Business Entity Concept - the business entity is shows the list of a company's asset, liabilities and
treated as separate and distinct from its owner/s owner's equity as of a specific date; shows the
and from other business units financial position or condition of an enterprise as
of a specific date
Going Concern or Continuity Assumption - unless
there is evidence to the contrary, the business Statement of Changes in Owner's Equity - or
entity will continue to operate for an infinite Capital Statemnt is the summary of changes in the
period owner's equity that have occured during the
specific period of time

Statement of Cash Flows - provides information

Time Period Assumption - the indefinite life of the
about the cash receipts and the cash payments of
business be divided into time periods or
an entity for a given period of time: contains what
accounting periods for the purpose of preparing
are the sources of cash and the uses or
financial reportd on the performance and financial
disbursements made by the company
position of the business
Notes to the Financial Statements - presents in
Monthly Basis - shortest accounting period
narrative form the significant accounting policies
Quarterly Basis - at the end of every three months and other related explanatory notes that have
affected the preaparation of the financial
Semi-Annual Basis - six months statements

Annually - one year Relevance - information must be relevant to the

decision-making needs of users; information would
Calendar Year - begins on January 1 and ends on
influence a decision by helping users form
December 31
predictions about the outcome of past, present
Fiscal Year - begins on any month except January and future events, or confirm and correct prior
and will end on the twelvth month of the following expectations
year
Reliability - information is free from errors and
Interim Statements - less than one year bias and can be depended upon by users to
represent faithfully what it purports to represent
Unit of Measurement Assumption - accounting
should measure and report the results of a
business' economic activities in terms of a
Understandability - information provided in the
monetary unit
financial statements must be presented in a form
Accrual Basis - revenue or income should be and expressed in terminology that a user
recognized when incurred regardless of when understands
payment is made
Comparability - users must be able to compare the
*Cash Basis - method of recognizing revenue and financial statements of an entity through time in
expense when cash is received or when cash is order to identify trends in its financial position or
paid performance from one accounting period to the
next
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ACCOUNTING I ACCOUNTING SUBJ (MAJORS) I BASIC ACCOUNTING

Branches of Accounting LIABILITIES - present obligations of an enterprise
arising from past transactions or vents, the
Managerial Accounting - area of accounting that is
settlement of which is expected to result in an
focused on the accumulation and preparation of
outflow from the enterprise of resources
financial preparation of financial reports for the
embodying economic benefits; financial
use of management
obligations or debts of the business; claim or
a profession that involves partnering in
equity of the creditors on the assets of the
management decision-making, devising, planning,
enterprise
and performance management systems, and
providing expertise in financial reporting and
control to assist management in the formulation
and implementation of an organization’s strategy

Financial Accounting - area of accounting that is

focused on developing and reporting financial CAPITAL - represnts the equity or claim of the
information needed for external users owner on the assets of the business; the residual
interest in the assets of the business after
Government Accounting - A branch of deducting all its liabilities
noncommercial accounting that takes into
account collection of taxes, computation of REVENUE/ INCOME - is the gross inflow of
national income, fixing of gross national product economic benefits during the period in the form of
(GNP) target, ascertaining the balance of inflows or enhancements on assets or decrease in
payments, among others liabilities that result in the increase in equity,
other than those relating to contributions from the
Auditing - tasks include the review of a firm’s owner/s
accounting systems and financial statements to
confirm that all these follow the Generally EXPENSES - is the gross outflow of economic
Accepted Accounting Principles and prescribed benefits during the period in the course of ordinary
standards. activities when these outflows result indecrease
in equity other than those relating to distribution
Tax Accounting - Focuses on tax matters; includes to owners; costs incurred to produce revenue
all undertakings concerning tax computation,
filing tax returns, and planning for future tax Accounting Information System - the combination
obligations of personnel, records, procedures that a business
uses to provide financial data
Cost Accounting - Branch of accounting in which
costs incurred by the firm in accomplishing its *We computerize to do the accounting faster and
objective or executing its various activities are make it more reliable; specialization combines
collected, recorded, and classified. similar transactions to speed the process

Accounting Research Business Transaction - an event that has some

effect on the resources of a firm or on the source
- Branch of accounting that is responsible for the of the firm's assets; an activity that involves a
development and discovery of accounting change of values
concepts and practices. Accounting research is
conducted by both the accounting educators and External Transaction - transactions that happen
practicing accountants. between a business and an outsider

Accounting Equation Internal Transactions - transactions that happen

within the business that do not involve outsiders
ASSETS - resources controlled by the enterprise
as a result of past transactions and events from Source Document - the evidence of a transaction
which future economic benefits are expected to that describes the essential facts of the
flow to the enterprise; properties owned by the transaction
business
Assets = Liabilities + Owner's Equity
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ACCOUNTING I ACCOUNTING SUBJ (MAJORS) I BASIC ACCOUNTING

or Account - a record of each asset, liability, owner's
equity, revenue, expense items in which the
effects of business transactions are recorded
Assets - Liabilities = Owner's Equity
T-Account - used for illustrations, analyzing
Assets - Capital = Liabilities transactions

*the left side of the equation shows the assets Debit - came from the Latin word "debere" (to
while the right side shows who provide the funds owe); left side of an account
or resources needed by the business
Credits - came from the Latin word "credere" (to
Equity - rights to properties (Liabilities - the equity trust or believe); right side of an account
of the creditors; Capital - equity of the owner/s)
Debit signifies:
Account Form (Balance Sheet) - total assets are
Increase in Assets
shown in the same line as with the total liabilities
and capital Decrease in Liabilities

Report Form (Balance Sheet) - liabilities and Decrease in Capital

capital section are shown below the assets
Increase in Drawing
section
Decrease in Revenue
Operating Activities - involve the production or
purchase of merchandise and the sale of goods or Increase in Expense
services to customers; include the expenditures
related in administering the business; relate to the
calculation of net income; includes collections of
Credit signifies:
interest cash payments to settle credit purchase
of merchandise, and payments of interest expense Decrease in Assets

Increase in Liabilities

Increase in Capital

Investing Activities - transactions that involve Decrease in Drawing

making and collection of loans that involve
purchasing and selling plant assets, other Increase in Revenue
Productive assets, and investments; ; involve the
Decrease in Expense
purchase or sale of assets that are classified on
the balance sheet as plant and equipment,
intangible assets or long-term assets
Simple Journal Entry - there is only one debit and
Financing Activities - a company's transactions one credit in the entry
with its owner/s and long term creditors; includes
Compound Journal Entry - there are more than two
borrowing of cash on a short-term basis
accounts involved
Journalizing - process of recording business
transactions in the book of original entry or journal
(where transactions are first recorded) Ledger - a group of accounts; provides a summary
of transactions for an accounting period; book of
Double-Entry Bookkeeping - method of recording
final entry
business transactions which recognizes the dual
effect of a transaction; for every value received Posting - process of transferring the entries from
there is a corresponding value parted with or the journal to the accounts in the ledger
given up
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ACCOUNTING I ACCOUNTING SUBJ (MAJORS) I BASIC ACCOUNTING

Pencil Footing - after posting the journal entries to account is debited with a corresponding credit to
the ledger, the amounts of the debit and credit an asset account
columns of the accounts are totaled and the
Expense Method - the account debited upon
difference between the amount of debit and credit
payment is an expense account, upon adjustment
totals is determined
an asset account is debited and an expense
Trial Balance - summary of the listing of the account is credited
account titles and the balance of each account;
Unearned/ Deferred Revenues - liability account;
prepared to test the quality of the debit and credit
revenues collected or received in advance by the
balances of the accounts in the ledger
business
Chart of Accounts - list of all accounts in the
business and their corresponding account number

Transposition - an error committed when the order

of numbers are reversed Liability Method - the account credited upon
receipt of cash is a liability account, upon
Slide - an error committed when one or more digits
adjustment such liability account will be debited
are either moved to the left or right
and a revenue account is credited
Accounting Period - period of time into which an
Revenue/ Income Method - the account credited at
entity's life is arbitrarily divided for financial
the date of collection is a revenue/income
statement purposes
account, upon adjustment a revenue account is
Adjusting process - step after the preparation of debited and a liability account is credited
the trial balance; process of gathering and putting
Deferrals - postponement of the recognition of
together data necessary to update the balances of
revenue which the company has received or
the accounts
collected in advance and the postponement of the
Adjusting Entries - entries prepared at the end of recognition of expense which has been paid in
the accounting period to update or adjust the advance
balances of accounts; affect at least one income
Accruals - refer to the recognition of expense
statement account and one balance sheet account
already incurred though not paid, and the
Accrued Expenses - liability account; expenses recognition of revenue already earned though not
already incurred but not yet paid; accrued received
liabilities accrued payable
Property, Plant and Equipment (Fixed/ Plant
Accrued Revenue - asset account; revenue already Assets) - physical resources that are owned and
earned by the business but not yet collected or used by the business which are relatively fixed or
received at the accounting period permanent in nature that have a long useful life

Interest Receivable - interest earned but not yet Depreciation Accounting - process of allocating
collected; reported as a current asset in the the depreciable cost of a fixed asset over its
balance sheet since it will be collected in 30 days estimated useful life

Interest Payable - interest expense but not yet Accumulated Depreciation - accumulated amount
paid; reported as a current liability in the balance of depreciation expense from the year of
sheet since it will be paid in 30 days recognition to the latest balance sheet date

Prepaid/ Deferred Expense - expenses paid in Asset Cost - purchase price plus other direct costs
advance; asset account; are expected to become incurred in acquiring and bringing the asset to its
expenses through the passage of time through use intended use
and consumption; opposite af accrued expense
Estimated Residual Value/ Salvage Value/ Scrap
Asset Method - the account debited upon payment Value/ Trade in Value - estimated amount the fixed
is an asset account, upon adjustment an expense asset can be sold at the end of its useful life
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ACCOUNTING I ACCOUNTING SUBJ (MAJORS) I BASIC ACCOUNTING

Estimated Useful Life - may be expressed in years Net Loss - the difference if the total expenses
or number of units, or hours that the asset can be exceed the total revenues that is added in the
used credit column total

Uncollectible Accounts or Bad Debts - the Capital Statement(Statement of Owner's Equity) -

company's receivables which might not be a financial statement that summarizes the
collected transactions affecting the owner's capital;
prepared by showing the beginning capital
Accounting Cycle - series of steps accountants
balance, adding net income or deducting net loss,
perform during an accounting period; its purpose
then subtracting owner's withdrawals; the result
is to generate financial statements
is the ending capital balance that is forwarded to
1. The transactions are analyzed by the balance sheet
examining source documents
Classified Statement of Financial Position -
2. The transactions are journalized subdivides the assets and liabilities in order to
provide more specific information for the users of
3. The journal entries are posted to the financial statements; assets are classified to
ledger current assets and non-current assets while
liabilities are classified to current liabilities and
4. A trial balance is prepared
non-current liabilities
5. The data needed to adjust the accounts
Current Assets - cash and other assets that are
are assembled
converted into cash or used up in a relatively short
period of time, usually onr year or less; listed in
order of liquidity (convertability into cash)
6. A worksheet is prepared
Non-current Assets - assets acquired for use in the
7. The financial statements are prepared business rather than for sale; also called fixed
assets because they are used for long-term
8. The adjusting entries are journalized and
purposes
posted to the ledger
Current Liabilities - debts usually due within one
9. The closing entries are journalized and
year, the payment of which normally will require
posted to the ledger
the use of current assets; listed in the order of
their maturity (the sooner the liability is to be
paid, the earlier it is normally listed
10. A post-closing trial balance is prepared
Non-current Liabilities (Long-term Liabilities) -
11. The reversing entries are journalized
debts that will be paid after a relatively long
and posted to the ledger
period of time, usually more than one year; the one
Worksheet - is a columnar sheet of paper used to with the earliest due dates are listed first
summarize information needed to make the
International Accounting Standard No. 7 - cash
adjusting and closing entries and to prepare the
flow information is useful in providing users of
financial statements, only a tool used by
financial statements with a basis to assess the
accountants and is not part of the formal
ability of the enterprise to generate cash and the
accounting record
need of the enterprise to utilize those cash flows.
Adjusted Trial Balance - the original trial balance The economic decisions that are taken by users
plus or minus the adjustments require evaluation of the entity to generate cash
and the timing and certainty of their generation
Net Income - the difference if the total revenues
exceed the total expenses that is added to the Operating Activities – create revenues and
debit column total expenses in the entity’s major line of business;
affect the income statement; which report the
accrual basis effects of operating activities
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ACCOUNTING I ACCOUNTING SUBJ (MAJORS) I BASIC ACCOUNTING

Investing Activities – increase or decrease the • CONSISTENCY – The Accounting Policies and
assets that the business has to work with; include methods followed by the company should be the
more than buying and selling of assets that are same every year
classified as investment in the balance sheet
Example:

1. Period should not be changed frequently from

Jan-Dec to Apr-Mar

Financing Activities – obtain funds from investors • ACCRUAL – In General it is assumed that
and creditors needed to launch and sustain the Accounts are always prepared based on Accrual
business[ basis. However there are entities which follow
Cash Basis of Accounting Also
Closing Entries – entries prepared at the end of the
accounting period to bring the balances of The Company Law / Income Tax Act Prescribes all
temporary or nominal accounts to zero, so that Companies to follow Accrual Basis of Accounting
they will be ready to receive data for the next except for Professional Firms and Government
accounting period Organizations which are allowed to follow Cash
Basis of Accounting.
Temporary Accounts: revenues; expenses; and
drawing accounts ACCOUNTING CONCEPT AND PRINCIPLES

Post-Closing Trial Balance – the trial balance • BUSINESS ENTITY PRINCIPLE – a business
prepared after the adjusting and closing enterprise is separate and distinct from its owner
procedures; temporary accounts are no longer or investor.
included since they have been closed
Examples:
Interim Statements – financial statements
1. If the owner has a barber shop, the cash of the
prepared for the period of less than a year;
barber shop should be reported separately from
adjustments for accrued items must be considered
personal cash.
in preparing interim statements

Reversing Entries – are prepared for certain types

of adjusting entries as of the first day of the next 2. The owner had a business meeting with a
accounting period; reverses the effects of prospective client. The expenses that come with
adjusting entries to which they relate; purpose is that meeting should be part of the company’s
to simplify the first entry relating to that same expenses. If the owner paid for gas for his
item in the next accounting period; all adjusting personal use, it should not be included as part of
that increase assets or liabilities must be the company’s expenses.
reversed, adjusting entries that decrease assets
or liabilities are not reversed • TIME PERIOD PRINCIPLE – financial statements
are to be divided into specific time intervals.
ACCOUNTING CONCEPTS AND PRINCIPLES
Example:
ACCOUNTING CONVENTIONS
1. Philippine companies are required to report
• GOING CONCERN PRINCIPLE – business is financial statements annually.
expected to continue indefinitely (long period of
time) 2. The salary expenses from January to December
2015 should only be reported in 2015.
Example:
• MONETARY UNIT PRINCIPLE – amounts are
1. When preparing financial statements, you stated into a single monetary unit
should assume that the entity will continue
indefinitely. Examples:
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ACCOUNTING I ACCOUNTING SUBJ (MAJORS) I BASIC ACCOUNTING

1. Jollibee should report financial statements in • MATCHING PRINCIPLE – cost should be matched
pesos even if they have a store in the United with the revenue generated.
States.
Example:
2. IHOP should report financial statements in
1. When you provide tutorial services to a
dollars even if they have a branch here in the
customer and there is a transportation cost
Philippines
incurred related to the tutorial services, it should
• OBJECTIVITY PRINCIPLE – financial statements be recorded as an expense for that period.
must be presented with supporting evidence.
• DISCLOSURE PRINCIPLE – all relevant and
Example: material information should be reported.

1. When the customer paid Jollibee for their order, Example:

Jollibee should have a copy of the receipt to
1. The company should report all relevant
represent as evidence.
information.
2. When a company incurred a transportation
• CONSERVATISM PRINCIPLE – also known as
expense, a voucher should be prepared as
prudence. In case of doubt, assets and income
evidence.
should not be overstated while liabilities and
• COST PRINCIPLE – accounts should be recorded expenses should not be understated. Anticipate no
initially at cost not at their current market value. Profits but provide for all possible losses.
Accountants are by nature Conservative
Examples:
and also to protect the interest of the
1. When Jollibee buys a cash register, it should Shareholders and Creditors it is required to
record the cash register at its price when they provide for all losses.
bought it.
Example:
2. When a company purchases a laptop, it should
be recorded at the price it was purchased. 1. In case of doubt, expenses should be recorded
at a higher amount. Revenue should be recorded
• ACCRUAL ACCOUNTING PRINCIPLE – revenue at a lower amount.
should be recognized when earned regardless of
collection and expenses should be recognized • MATERIALITY PRINCIPLE – in case of assets
when incurred regardless of payment. On the other that are Immaterial to make a difference in the
hand, the cash basis principle in which revenue is financial statements, the company should instead
recorded when collected and expenses should be record it as an expense.
recorded when paid. Cash basis is not the
Example:
generally accepted principle today.
1. A school purchased an eraser with an estimated
Example:
useful life of three years. Since an eraser is
1. When a barber finishes performing his services immaterial relative to assets, it should be
he should record it as revenue. When the barber recorded as an expense.
shop receives an electricity bill, it should record it
• DUAL ASPECT CONCEPT
as an expense even if it is unpaid.
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

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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

Example:

1. A Sales invoice for Rs.1 Million

Credit Note for Rs.15000 received

2. For instance, if a company is awarded a

contract to build an office building the revenue
from that project would not be recorded in one
lump sum but rather it would be divided over time
according to the work that is actually being done.