REVIEW OF BASIC ACCOUNTING

- Rosalinda

WHAT IS ACCOUNTING?
- Accounting is a service activity. Its function is to provide quantitative
information, primarily financial in nature, about economic events that is
intended to be useful in making economic decisions.
- Accounting is an information system that measures, processes, and
communicates financial information about economic entity.
- Accounting is the process of identifying, measuring, and communicating
information to permit informed judgements and decisions by users of the
information.
- Accounting is an 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.
- Accounting is a process of identifying, recording, communicating
economic events of an organization to related users (Weygandt, 2005).
Economic events include purchase of materials, sale of goods, and
acquisition of machinery which are measured in monetary terms and are
recorded in the financial statements.

● Identifying involves the selection of the economic events which are

important to a particular business transaction.
● Recording the act of keeping chronological record of events that are
measurable in accounting documents like journals and ledgers.
● Communicating refers to the process of communicating financial reports
to the users of financial information.

NATURE OF ACCOUNTING
 1. Accounting is a service activity.
2. Accounting is a process.
3. Accounting is both an art & discipline.
4. Accounting deals with financial information and transactions.
5. Accounting is known and characterized as a storehouse of information.

HISTORY OF ACCOUNTING
● The Cradle of Civilization (3600 B.C.)
- Clay tablets was used in keeping accounting records

● Double-entry Bookkeeping (14th century)

- Double-entry bookkeeping was disseminated by Luca Pacioli.

● French Revolution (1700)

- Development of accounting theory began during this period.

● The Industrial Revolution (1760-1830)

- Fixed assets and mass production were given importance.

● The Beginnings of Modern Accouting in Europe and America (19th

century)
- Modern accounting in Europe and America began.

● The Present (20th century)

- Development in accounting profession was developed.

BRIEF HISTORY
“Luca Pacioli” — father of accounting.

In 1494 he published his book, “SUMMA DE ARITHMETICA,

GEOMETRIA, PROPORTIONI ET PROPORTIONALITA” — “Everything
about Arithmetic, Geometry, Proportions and Proportionality”.

“Particularis de Computis et Scripturis” or “Details of Calculation and

Recording”.— double entry bookkeeping
FUNCTIONS OF ACCOUNTING

BRANCHES OF ACCOUNTING
● Financial Accounting
● Management Accounting
● Government Accounting
● Auditing
● Tax Accounting
● Cost Accounting

USERS OF ACCOUNTING INFORMATION

Internal Users - individuals inside the organization who plan, organize, and ran
the business. They are directly involved in managing and operating the
business. Internal users are also called as “primary users”.
● Owners
● Managers

External Users - are the individuals or organizations outside the company who
are not involved in operating the business.
● Perspective Owners
● Creditors
 ● Government
● Employees
● Customers
● General Public

FORMS OF BUSINESS ORGANIZATION

1. Sole Proprietorship
- is an unincorporated business owned by one single person and
often managed by that same person.

Advantages
● Ease of Formation
● Owner has full control of the business
● The owner can freely mix personal assets with business assets
● Owner has all the profits for himself
Simple taxation

Disadvantages
● Unlimited Liability
● Difficulty of raising additional capital
● Owner’s bias

2. Partnership
- is an unincorporated business owned by two or more persons
associated as partners.

Advantages
● Easier to create than a corporation
● Better ability to acquire additional capital than sole proprietorship
● Larger pool of human capital than sole proprietorship

Disadvantages
● Unlimited liability
● Mutual agency
● Limited life

3. Corporation
 - is an entity recognized by law as possessing an existence separate
and distinct from its owners; that is, it is a separate legal entity.
Endowed with many of the rights and obligations possessed by a
person, a corporation can enter into contracts in its own name; buy,
sell, or hold property; borrow money; hire and fire employees; and
sue and be sued.

Advantages
● Ability to acquire additional capital
● Transferrable ownership rights
● Limited liability of stockholders
● Virtually unlimited life
● Larger pool of human capital

Disadvantages
● Heavily regulated by the government
● Double taxation
● Not easy to form
● More expensive to form

ACCOUNTING CONCEPTS AND PRINCIPLES

1. Materiality Principle - this includes all assets that are immaterial to make
a difference in the financial statements which the company should record
as an expense.
2. Going-Concern Principle - this means that the business is expected to
continue indefinitely.
3. Time Period Principle - the financial statements are usually divided into
specific time intervals. The business should report the financial
statements appropriate to a specific period.
4. Monetary Unit Principle - any amount involved in the business is stated
into a single monetary unit.
5. Business Entity Principle - in this principle, there is a separation and
distinction of transactions between the business enterprise and its owner
or investor.
6. Cost Principle - accounts should be recorded initially at cost as well as
assets at their perspective cash amounts at the time the asset was
purchased.
7. Accrual Accounting Principle - revenue should be recognized when
earned regardless of collection. Same goes with expenses which are
 recorded when incurred regardless of payment. But in the Cash Basis
Principle, revenue is logged when collected, and expenses should be
recorded when paid. A cash basis is not generally an accepted principle
today.
8. Matching Principle - cost should be matched with the revenue generated.
It requires that the expenses incurred during a period be recorded in the
same period in which the related revenues are earned.

ACCOUNTING EQUATION
Asset
- is the sum of liabilities and owner’s equity.
- Are the items that a company owns that can provide further economic
benefits.

A = L + EO

Liabilities
- Is the difference after the owner’s equity is deducted to asset.
- Are the financial obligation of a company that results in the company’s
future sacrifices of economic benefits to other businesses.

L=E-A

Equity
- Is the money that is bought by the owners of the company for running the
business.

TYPES OF MAJOR ACCOUNTS

1. Assets
2. Liabilities
3. Owner’s Equity
4. Revenue or Income - is the money that the company earns from its
regular sales of products or services.
5. Expenses - are the money that the company spends to produce the goods
or services it sells.
CLASSIFICATION OF ASSETS
1. Current Assets
- Are assets that collected, sold, and even used up to one year after
year-end date.
Examples ;
a. Cash - is money on hand, or in banks, and other items considered as a
medium of exchange in business transactions.
b. Accounts Receivable - is the money that customers owe a company for
products or services they have already received but not yet paid for.
c. Notes Receivable - it involves a written promise to pay a specific amount
of money at a future date.
d. Inventories - are assets held for resale in the course of the business.
e. Supplies - are items purchased by an enterprise that is unused as of the
reporting date.
f. Prepaid Expenses - are advance payment for expenses.
g. Accrued Income - is an income or revenue earned by the firm but not yet
collected.
h. Short-term Investments - are the investments made by the company that
is intended to be sold immediately.

2. Non current Assets

- Are assets that cannot be collected, sold, and even used up to one
year after year-end date.
Examples ;
a. Property, Plant, and Equipment - are long-lived assets that have been
acquired for use in operations.
b. Long term Investments - are the investments of the firm made for long-
term purposes.

● Tangible Assets - are physical assets in the form of cash, furniture and
fixtures, and supplies.
● Intangible Assets - are non-physical assets in the form of trademarks and
patterns.

CURRENT VS. NON-CURRENT LIABILITIES

1. Current Liabilities
- Are those that reach its due date for payment within one year-end
date.
Examples ;
 a. Accounts Payable - is the money that a company owes to its suppliers or
vendors for goods or services that have been received but not yet paid for.
It represents the company's short-term obligations to pay off its debts.
b. Notes Payable - It refers to a written promise by a company to repay a
specific amount of money at a future date to a lender or creditor.
c. Accrued Expenses - are costs that a company has incurred but has not yet
paid for.
d. Unearned Income - is money that a company receives in advance for
goods or services that it has not yet delivered.

2. Non-current Liabilities
- Are those that do not reach its due date for payment within one
year-end date.
Examples ;
a. Loans Payable - is a contract wherein the owner of the company gives the
right to use it to another party in exchange for an interest payment and
gives back the property at the end of their contract.
b. Mortgage Payable - is the liability of a property owner to pay a loan taht
is secured by property and from the borrower’s point of view.

OWNER’S EQUITY
Two important elements that comprised the equity:
1. Capital - is the worth of cash and other assets invested in the business.
2. Drawing - is an account debited for assets withdrawn by the owner for
personal use from the business.

INCOME
- Is the increase in resources resulting from the performance of service or
selling of goods.
Examples ;
● Service revenue for service entities
● Sales for merchandising and manufacturing companies
● Interest Income

EXPENSE
- Is the decreasenin resources resulting from the operations of the business.
Examples ;
● Salaries Expense
● Interest Expense
● Utilities Expense
● Rent Expense

BOOK OF ACCOUNTS
General Journal
- Original book of entry / Daily Transactions
- Is the “book of original entry” where you can find the initial record
of the transactions of a firm. It clearly shows the debit and credit
effects on specific accounts in every transaction.
- The most basic journal. It is composed of spaces for dates, account
titles and explanations, references, and two columns for the
amounts.

General Ledger
- Final book of entry / Summarize of Transactions
- It contains the total or balance of each account.