FUNDAMENTALS OF ACCOUNTING, BUSINESS, AND MANAGEMENT
THE ACCOUNTING EQUATION AND THE DOUBLE ENTRY SYSTEM
ACCOUNTING EVENTS AND TRANSACTION
Accounting Event is an economic occurrence that causes changes in an
enterprise’s assets, liabilities and/or equity, events may be internal actions, such
as the use of equipment for the production of goods or services. It can be
external event, such as the purchase of raw materials from supplier.
ACCOUNTING INFORMATION SYSTEMS
Is the combination of personnel, records, and procedures that a business uses to
meet its need for financial information. Most firms have an accounting manual
that specifies the policies and procedures to be followed in accumulating
information within the accounting information system.
ACCOUNTING MANUAL
Details what events are to be recorded in the accounts, and when and how the
information is to be classified and accumulated.
ECONOMIC ACTIVITIES FLOW INTO THE ACCOUNTING PROCESS
ECONOMIC
ACTIVITIES
DECISION ACCOUNTING
MAKERS INFORMATION
THE
ACCOUNTING
PROCESS
TYPES OF ACCOUNTING SYSTEMS
MANUAL
COMPUTER BASED
DATABASE
CLOUD
THE ACCOUNTING EQUATION
ASSETS = LIABILITIES + OWNER’S EQUITY
BUSINESS AND FINANCIAL TRANSACTIONS
Business Transactions refer to an occurrence of an event or a condition that affects a
firm’s financial position and can be reliably recorded.
Financial Transactions can be analyzed or expressed in terms of its effects on the
accounting equation. It will be analyzed by means of a financial transaction worksheet.
ACCOUNTING CYCLE:
Step 1 Identification of events to be recorded
Step 2 Transaction are recorded in the journal
Step 3 Journal Entries are Posted to the Ledger
Step 4 Preparation of Trial Balance
Step 5 Preparation of the Worksheet including adjusting entries
Step 6 Preparation of the financial statements
Step 7 Adjusting journal entries are journalized and posted
Step 8 Closing journal entries are journalized and posted
Step 9 Preparation of a post-closing trial balance
Step 10 Reversing Journal Entries are Journalized and posted
PREPARING THE WORKSHEET
Enter the account balances in the unadjusted trial balance column and total the
amounts.
Enter the adjusting entries in the adjustments column and total the amounts.
Compute each account’s adjusted balance by combining the unadjusted trial balance
and the adjustment figures. Enter the adjusted amounts in the adjusted trial balance
columns.
Extend the asset, liability and owner’s equity amounts from the adjusted trial
balance columns to the balance sheet columns. Extend the income and expense
amounts to the income statement columns. Total the statement columns.
Compute profit or loss as the difference between total revenues and total expenses
in the income statement. Enter profit or loss as a balancing amount in the income
statement and in the balance sheet, and compute the final column totals.
ADJUSTMENTS AND CLOSING ENTRIES
ADJUSTMENT ARE JOURNALIZED AND POSTED
o The adjustment process is a key element of accrual basis accounting. The
worksheet helps in the identification of the accounts that need adjustments. The
adjusting entries are directly entered in the worksheet.
CLOSING ENTRIES ARE JOURNALIZED AND POSTED
o Income, expenses and withdrawal accounts are temporary accounts that
accumulate information related to a specific accounting period. These temporary
accounts facilities income statement preparation.
Close the income accounts
Close the expenses accounts
Close the income summary
Close the withdrawal account
POST CLOSING TRIAL BALANCE AND REVERSING ENTRIES
PREPARATION OF A POST CLOSING TRIAL BALANCE
The post-closing trial balance verifies that all the debits equal the credits in the
trial balance.
The trial balance contains only balance sheet items such as assets, liabilities, and
ending capital because all income and expenses accounts, as well as the
withdrawal account, have zero balance.
RESERVING ENTRIES
Preparing the post-closing trial balance may not be last step in the accounting
cycle. Some entities elect to reverse certain end-of-period adjustment on the
first day of the new period. A reversing entry is a journal entry which is the exact
opposite of a related adjusting entry made at the end of the period. It is
basically a bookkeeping technique made to simplify the recording of regular
transaction in the next accounting period.
PHYSICAL COUNT
NEED FOR A PHYSICAL COUNT: In the periodic inventory system, purchases of
merchandise are accumulated in the purchases account. During the accounting period,
no entry is made to the merchandise inventory account such that its balance at the end
of the period.
STEPS INVOLVED IN THE PHYSICAL COUNT FOLLOWS
All merchandise owned by the entity is counted
The quantity counted is multiplied by the cost per unit for each inventory item.
The costs of various items are added to determine the total cost of inventory.
COMPLETE SET OF FINANCIAL STATEMENTS
An entity shall present with equal prominence all of the financial statements in a
complete set of financial statements. Per revised International Accounting Standards
(AIS) No.1, a complete set of financial statements comprises:
A statement of financial position as at the end of the period;
A statement of comprehensive income for the period;
A statement of changes in equity for the period;
A statement of cash flows for the period;
Notes, comprising a summary of significant accounting policies and other
explanatory information; and
A statement of financial position as at the beginning of the earliest comparative
period when an entity applies an accounting policy retrospectively or makes a
retrospective restatement of items in this financial statement or when it
reclassifies items in its financial statements.
JOURNALS AND VOUCHERS
SPECIAL JOURNALS
Cash Receipts Journal
Purchases Journal
General Journal
Flexibility Of Special-purpose Journals
VOUCHER SYSTEM
Voucher
Voucher Register
Unpaid Voucher File
Check Register
Paid Voucher File
Recording Partial
ELEMENTS OF FINANCIAL STATEMENTS
ASSET
Present economic resources controlled by the entity as a result of past events and
has the potential to produce economic benefits
LIABILITY
Present obligation of the entity to transfer economic resources as a result of past
events.
EQUITY
Residual interest in the assets of the entity after deducting all its liabilities
INCOME
Increases in assets, or decreases in liabilities, that result in increases in equity, other
than those relating to contributions from holders of equity claims.
EXPENSE
Decreases in assets, or increases in liabilities, that result in decreasing in equity,
other than those relating to distributions to holders of equity claims.
BALANCE SHEET
ASSET
Accounts Receivable
Cash
Equipment
Inventory Land
Prepaid Expense
LIABILITIES
Accounts Payable
Loans Payable
Salaries Payable
Taxes Payable
EQUITY
Capital
Drawing
INCOME STATEMENT
INCOME
Interest Income
Net Sales
Services Revenue
EXPENSES
Advertising Expense
Depreciation Expense
Rent Expense
Utilities Expense
INCOME STATEMENT
STATEMENT OF COMPREHENSIVE INCOME
Shows your revenues and expenses over a period of time.
Income – Expenses = Net Income
FOR EXAMPLE:
SOFTBYTE
Income Statement
For the Month Ended September 30, 2002
Revenues
Service revenue $ 4,700
Expenses
Salaries expense $ 900
Rent expense 600
Advertising expense 250
Utilities expense 200
Total expenses 1,950
Net Income $ 2,750
Note: Net income of $2,750 shown on the income statement is added to the
beginning balance of owner’s capital in the statement of owner’s equity.
STATEMENT OF OWNER’S EQUITY
STATEMENT OF CHANGES IN EQUITY
Explains the effects of transactions on equity during the accounting period.
Beginning Equity + Investments +/-Net Income (Loss) – Withdrawals = End Equity
SOFTBYTE
Statement of Owner’s Equity
For the Month Ended September 30, 2002
M. Doucet, Capital, September 1 $ -
Add: Investments $ 15,000
Net Income 2,750 17,750
$ 17,750
Less: Drawings (Withdrawal) 1,300
M. Douceyt, Capital September 30 $ 16,450
BALANCE SHEET
STATEMENT OF FINANCIAL POSITION
Highlights the relative strength of a company at a point in time
Assets = Liabilities + Equity
SOFTBYTE
Balance Sheet
September 30, 2002
Assets
Cash $ 8,050
Accounts Receivable 1,400
Supplies 1,600
Equipment 7,000
Total assets $ 18,050
Liabilities and Owner’s Equity
Liabilities
Accounts payable $ 1,600
Owner’s Equity
M. Doucet, Capital 16,450
Total liabilities and owner’s equity $ 18,050
CASH FLOWS STATEMENT
STATEMENT OF CASH FLOWS
Explains how a company obtain and use cash during the accounting period.
Net operating + Net investing + Net Financing = Net Change in Cash
SOFTBYTE
Cash Flow Statement
For the Month Ended September 30, 2022
Cash flows from operating activities
Cash receipts from customers $ 3,300
Cash payments to suppliers and employees (1,950)
Net cash provided by operating activities $ 1,350
Cash flows from investing activities
Purchase of equipment $ (7,000)
Net cash provided by investing activities (7,000)
Cash flows from financing activities
Investments by owner $ 15,000
Drawings by owner (1,300)
Net cash provided by investing activities 13,700
Net increase in cash $ 8,050
Cash, September 1 -
Cash, September 30 $ 8,050
T-ACCOUNT
BASIC FORM OF ACCOUNT
Account Name
Debit Side Credit Side
Normal Balances
ASSET, LIABILITY, AND EQUITY ACCOUNTS
Asset Accounts Liability Accounts
Increase in Decrease in Decrease in Increase in
Debit Side Credit Side Debit Side Credit Side
Normal Debit Normal Credit
Balance Balance
Equity Accounts
Decrease in Increase in
Debit Side Credit Side
Normal Credit
Balance
NORMAL BALANCES
INCOME AND EXPENSE ACCOUNTS
Income Accounts Expense Accounts
Decrease in Increase in Increase in Decrease in
Debit Side Credit Side Debit Side Credit Side
Normal Credit Normal Debit
Balance Balance
NORMAL BALANCES
SPECIFIC EQUITY ACCOUNTS
Drawings Accounts Capital Accounts
Increase in Decrease in Decrease in Increase in
Debit Side Credit Side Debit Side Credit Side
Normal Debit Normal Credit
Balance Balance
ACCOUNTING CYCLE
ANALYZE
JOURNALIZING POSTING
TRANSACTIONS
PREPARATION OF PREPARATION OF ADJUSTING
TRIAL BALANCE WORKSHEET ENTRIES
PREPARATION OF
POST-CLOSING
FINANCIAL CLOSING ENTRIES
TRIAL BALANCE
STATEMENTS
PREPARATION OF TRIAL BALANCE
ANALYZE
JOURNALIZING POSTING
TRANSACTIONS
PREPARATION OF PREPARATION OF ADJUSTING
TRIAL BALANCE WORKSHEET ENTRIES
PREPARATION OF
POST-CLOSING
FINANCIAL CLOSING ENTRIES
TRIAL BALANCE
STATEMENTS
PREPARATION OF FINANCIAL STATEMENTS
ANALYZE
JOURNALIZING POSTING
TRANSACTIONS
PREPARATION OF PREPARATION OF ADJUSTING
TRIAL BALANCE WORKSHEET ENTRIES
PREPARATION OF
POST-CLOSING
FINANCIAL CLOSING ENTRIES
TRIAL BALANCE
STATEMENTS
CLOSING ENTRIES
ANALYZE
JOURNALIZING POSTING
TRANSACTIONS
PREPARATION OF PREPARATION OF ADJUSTING
TRIAL BALANCE WORKSHEET ENTRIES
PREPARATION OF
POST-CLOSING
FINANCIAL CLOSING ENTRIES
TRIAL BALANCE
STATEMENTS
