1.1.1.

1 Explain the Meaning of Accounting

Accounting is the process of recording, classifying, summarizing, and interpreting

financial transactions. It helps in tracking the financial activities of a business and
provides information that is useful for decision-making1.

1.1.1.2 Explain the Objectives of Accounting

The main objectives of accounting are:

Record Keeping: To maintain a systematic record of financial transactions.

Financial Results: To determine the profit or loss of a business.

Financial Position: To understand the financial status of the business (assets,

liabilities, and equity).

Decision Making: To provide information that helps in making business decisions

1.1.1.3 Explain the Importance of Accounting Information to Various Users

Accounting information is important to various users:

Owners/Shareholders: To assess the profitability and stability of the business.

Managers: To make informed business decisions and manage resources effectively.

Investors: To decide whether to invest in the business.

Creditors: To evaluate the creditworthiness of the business.

Government: For tax purposes and regulatory compliance .

1.1.1.4 Identify the Branches of Accounting

The main branches of accounting are:

Cost & Management Accounting: Focuses on recording and analyzing costs to help
management in planning and controlling business operations.

Financial Accounting: Involves recording and reporting financial transactions to

provide information to external users like investors and creditors .
1.1.1.5 Explain the Concept of Business Entity and Money Measurement

Business Entity Concept: This concept states that a business is a separate legal entity
from its owners. The financial transactions of the business are recorded separately from
the personal transactions of the owners .

Money Measurement Concept: This concept states that only transactions that can be
measured in monetary terms are recorded in the accounting books. Non-monetary
items, like employee skills or customer satisfaction, are not recorded

1.1.2.1 State the Accounting Equation

The accounting equation is:

Assets = Liabilities + Equity

This equation is the foundation of double-entry bookkeeping .

1.1.2.2 Explain the Elements of the Accounting Equation

The elements of the accounting equation are:

Assets: Resources owned by a business that are expected to provide future economic
benefits (e.g., cash, inventory, property) .

Liabilities: Obligations of a business that it needs to settle in the future (e.g., loans,
accounts payable) .

Equity: The owner's claim on the assets of the business after all liabilities have been
deducted. It includes items like retained earnings and common stock .

1.1.2.3 Explain the Relationships Between the Elements of the Accounting Equation

The accounting equation shows the relationship between assets, liabilities, and
equity:

Assets are financed by either liabilities or equity.

Liabilities represent claims by creditors, while equity represents claims by owners .

The equation ensures that the balance sheet remains balanced, meaning the total
assets always equal the sum of liabilities and equity.
1.1.2.4 Explain the Statement of Financial Position and Its Components

The statement of financial position, also known as the balance sheet, provides a
snapshot of a company's financial condition at a specific point in time. It includes:

Assets: Current assets (e.g., cash, accounts receivable) and non-current assets (e.g.,
property, equipment) .

Liabilities: Current liabilities (e.g., accounts payable, short-term debt) and non-
current liabilities (e.g., long-term debt) .

Equity: Share capital, retained earnings, and other reserves .

1.1.2.5 Relate the Accounting Equation to the Statement of Financial Position

The accounting equation is directly reflected in the statement of financial position:

Assets are listed first, followed by liabilities and equity 4.

The equation

Assets = Liabilities + Equity

Assets=Liabilities+Equity ensures that the balance sheet is balanced, showing that the
company's resources are financed by debts and owner's equity .

1.1.2.6 Illustrate the Effects of Transactions on the Accounting Equation and the
Statement of Financial Position

Here are examples of how different transactions affect the accounting equation and the
statement of financial position:

Example 1: Purchasing Equipment for Cash

Transaction: Buy equipment worth P5,000.

Effect on Accounting Equation:

Assets: Equipment increases by P5,000; Cash decreases by P5,000.

No change in total assets, liabilities, or equity.

Effect on Statement of Financial Position:

Increase in non-current assets (equipment).

Decrease in current assets (cash).

Example 2: Taking a Loan

Transaction: Take a loan of P10,000.

Effect on Accounting Equation:

Assets: Cash increases by P10,000.

Liabilities: Loan payable increases by P10,000.

Effect on Statement of Financial Position:

Increase in current assets (cash).

Increase in non-current liabilities (loan payable).

Example 3: Owner Withdraws Cash

Transaction: Owner withdraws P2,000.

Effect on Accounting Equation:

Assets: Cash decreases by P2,000.

Equity: Drawings increase by P2,000.

Effect on Statement of Financial Position:

Decrease in current assets (cash).

Decrease in equity (drawings).

1.1.3.1 Meaning of the Double Entry System in Relation to the Dual Concept

The double entry system is a bookkeeping method where every transaction affects at
least two accounts. This system is based on the dual concept, which states that every
financial transaction has equal and opposite effects in at least two different accounts

For example, if a business purchases inventory, it will increase the inventory account
(asset) and decrease the cash account (asset).

1.1.3.2 Relate the Accounting Equation to the Double Entry System

The accounting equation is Assets = Liabilities + Equity

Assets=Liabilities+Equity This equation forms the basis of the double entry system

In double entry bookkeeping, every transaction is recorded in a way that maintains this
equation. For instance, if a company takes out a loan, it increases both its assets (cash)
and liabilities (loan payable), keeping the equation balanced

1.1.3.3 Rules of Double Entry

The rules of double entry are:

1. Every transaction affects at least two accounts: One account is debited and
another is credited

2. Total debits must equal total credits: This ensures the accounting equation
remains balanced

3. Debit and credit rules for different types of accounts:

• Assets: Increase with debits, decrease with credits.

• Liabilities: Increase with credits, decrease with debits.

• Equity: Increase with credits, decrease with debits.

• Revenue: Increase with credits, decrease with debits.

• Expenses: Increase with debits, decrease with credits

1.1.3.4 Illustrate the Rules of Double Entry

Let's illustrate these rules with an example:

Example: Purchasing Equipment for Cash

 • Debit the Equipment account (an asset) to increase it.

• Credit the Cash account (an asset) to decrease it.

Example: Selling Goods for Cash

• Debit the Cash account (an asset) to increase it.

• Credit the Sales Revenue account (revenue) to increase it

1.1.4.1 Explain the Ledger and Its Importance

A ledger is a principal book or computer file for recording and totaling economic
transactions measured in terms of a monetary unit of account by account type, with
debits and credits in separate columns and a beginning monetary balance and ending
monetary balance for each account 1. The importance of the ledger includes:

Permanent Record: It provides a permanent record of all financial transactions.

Financial Statements: It is used to prepare financial statements.

Error Detection: It helps in detecting and correcting errors.

Financial Analysis: It aids in financial analysis and decision-making .

1.1.4.2 Identify the Uses of the Columns of the Ledger

The columns in a ledger typically include:

Date: The date of the transaction.

Description: A brief description of the transaction.

Debit: The amount debited to the account.

Credit: The amount credited to the account.

Balance: The running balance after each transaction .

1.1.4.3 Record Transactions Using the Double Entry System

In the double entry system, every transaction affects at least two accounts. Here are
examples for different types of accounts:
Capital: Owner invests cash into the business.

Debit: Cash

Credit: Capital

Assets: Purchase of equipment for cash.

Debit: Equipment

Credit: Cash

Liabilities: Taking a loan.

Debit: Cash

Credit: Loan Payable

Expenses: Paying rent.

Debit: Rent Expense

Credit: Cash

Income: Earning revenue.

Debit: Cash

Credit: Sales Revenue

Drawings: Owner withdraws cash.

Debit: Drawings

Credit: Cash .

1.1.4.4 Divide the Ledger into Specialist Areas

The ledger can be divided into specialized areas for better organization:

Sales Ledger: Records all sales transactions.

Purchases Ledger: Records all purchase transactions.

General Ledger: Records all other transactions, including assets, liabilities, equity,
income, and expenses .

1.1.4.5 Record Transactions in the Sales, Purchases, and General Ledgers

Traditional Method: Each transaction is recorded in the respective ledger with debits
and credits.

Running Balance Method: Each transaction is recorded with a running balance after
each entry .

1.1.4.6 Balance Off Accounts in the Ledger

Balancing off accounts involves:

1. Totaling both the debit and credit sides.

2. Calculating the balance (difference between total debits and credits).
3. Adding a one-sided entry to make totals equal (balance carried down).
4. Completing the double entry with an opposite entry (balance brought
down) .

1.1.4.7 Explain the Balance on the Ledger Accounts

The balance on a ledger account represents the net difference between the debits and
credits. For example, if the debits exceed the credits, the account has a debit balance,
and vice versa . This balance is crucial for preparing financial statements and ensuring
the accuracy of financial records.