Basic Bookkeeping

BASIC
ACCOUNTING
CONCEPTS AND
PROCEDURES
 THE ACCOUNTING PROCESS - OVERVIEW

• Key Definitions:

 Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature,
about economic entities that is intended to be useful in making economic decisions.

 Accounting is the process of identifying, measuring, and communicating economic information to permit
informed judgments and decisions by users of information.

 Accounting is the 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 a financial character, and interpreting the results
thereof.
Definition…

Accounting is the language of business and finance.

Accounting is an information system.

Accounting is the science of recording and classifying business

transactions and events, primarily of a financial character, and the
art of making significant summaries, analysis and interpretations
of those transactions and events and communicating the results
to persons who must take decisions or form judgement.
Definition…

Bookkeeping is the systematic recording of financial transactions

and events in a chronological order.

Bookkeeping is a process of recording and organizing all the

business transactions that have occurred in the course of the
business. Bookkeeping is an integral part of accounting and
largely focuses on recording day-to-day financial transaction of
the business.

Bookkeeping is actually just one part of the accounting process

which deals with the recording of the transactions. It is essentially
a record-keeping function done to assist in the process of
accounting. It is a key component in forming the financial
statements of the organization at the end of the financial year.
 Bookkeeping Accounting
Definition 1. Bookkeeping is mainly related 1. Accounting is the process of
to the process of identifying, summarizing, interpreting, and
measuring, recording, and communicating financial
classifying financial transactions. transactions that were classified
in the ledger account as a part of
bookkeeping.

Stage 2. It is the beginning stage and 2. Accounting begins where

acts as a base for accounting. bookkeeping ends.
Management Decisions 3. Management can not make 3. Management can make
decisions based on bookkeeping. decisions based on accounting.

VS. Objective 4. The objective of bookkeeping is 4. The objective of accounting is

to keep proper and systematic to ascertain the financial position
records of financial transactions. and further communicate the
information to the relevant
parties.
Financial Statements 5. Financial statements are not 5. Financial statements are
prepared during bookkeeping. prepared on the basis of records
obtained through bookkeeping.
Skill Level 6. Bookkeeping doesn’t require 6. Accounting, on the other side,
any special skills as it is requires special skills due to its
mechanical in nature. analytical and somewhat complex
nature.
 KEY DEFINITION
• Account is a record in a ledger of the transactions that have taken place with a particular
person or thing.

• Chart of accounts is simply a list of ledger accounts of a business. The primary function
is to classify and summarize the mass of detailed transactions into a concise and useful
form suitable for preparation of financial statements and reports.
Objectives of the Accounting

To maintain a systematic record of business transactions in a book of accounts, chronologically in a

journal.
To ascertain profit and loss of the business activities on a periodic basis. It is done in the Profit and Losses
(P&L) Account.

To determine the financial position of the business by analyzing the value of the assets and liabilities. For
that, a Balance Sheet is maintained.

To help the stakeholders informed of the business activities by way of a systematic approach of recording
financial transactions.

To assist the management by providing in-depth analysis of the financial data and its interpretations
across various reports.
 FORMS OF BUSINESS ORGANIZATIONS
• Sole Proprietorship - This business organization has a single owner called the proprietor who
generally is also a manager.

• Partnership - A partnership is a business owned and operated by two or more persons who bind
themselves to contribute money, property, or industry to a common fund, with the intention of dividing
the profits among themselves.

Corporation – A corporation is a business owned by stockholders. It is an artificial being created by

operation of law, having the rights of succession and the powers, attributes and properties expressly
authorized by law or incident to its existence.

Cooperative – A cooperative is a business owned by members. Its operation is being regulated and
supervised by the Cooperative Development Authority.
 ACTIVITIES PERFORMED BY BUSINESS ORGANIZATIONS:

• Service companies performs services for a fee (e.g. law firms, accounting and audit firms, stock
brokerage, beauty salons, and recruitment agencies, credit cooperatives)

• Merchandising companies purchase goods that are ready for sale and then sell these to customers
(e.g. car dealers, clothing stores and supermarkets, consumers cooperative).

• Manufacturing companies buy raw materials, convert them into products and then sell the products
to other companies or to final consumers (e.g. paper mills, steel mills, car manufacturers and drug
manufacturers).

• Agricultural companies produce agricultural products for marketing to other companies or to final
consumers (e.g. rice producers, cut flowers, banana production).
 FUNDAMENTAL CONCEPTS

• Entity Concept
An accounting entity is an organization or a section of an organization that stands apart from other
organizations and individuals as a separate economic unit.

• Periodicity Concept
An entity’s life can be meaningfully subdivided into equal time periods for reporting purposes.

• Stable Monetary Unit Concept

The Philippine peso is a reasonable unit of measure and that its purchasing power is relatively stable.
 BASIC PRINCIPLES

 Objectivity Principle
Accounting records and statements are based on the most reliable data available so that they
will be as accurate and as useful as possible.

 Historical Cost.
This principle states that acquired assets should be recorded at their actual cost and not what
the management thinks they are worth as at reporting date.

 Revenue Recognition Principle

Revenue is to be recognized in the accounting period when goods are delivered or services are
rendered or performed.

 Expense Recognition Principle

Expenses should be recognized in the accounting period in which goods and services are used
up to produce revenue and not when the entity pays for those goods or services.
 BASIC PRINCIPLES

• Adequate Disclosure
Requires that all relevant information that would affect the user’s understanding and assessment of the
accounting entity be disclosed in the financial statements.

• Materiality
Financial reporting is only concerned with information that is significant enough to affect evaluations and
decisions.

• Consistency Principle
The firms should use the same accounting method from period to period to achieve comparability over time
within a single enterprise.
Accounting as an Aid to Decision Making

• Fundamental relationships in the decision-making

process:

Accountant’s
analysis & Financial
Event Statements Users
recording
Users & Their Information needs

 Investors – need information to help them determine whether they should invest or
not.

 Lenders – interested in information that enables them to determine whether loan and
the related interest will be paid when due.

 Suppliers – need information to enable them to determine whether amount owing to

them will be paid when due.

 Government (CDA, BIR, others) – require information in order to regulate the activities
of the enterprise.

 Employees – Interest in information about stability and profitability of their

employers.

 Customers – interested in information about the continuance of the cooperative

operations.
Accounting as an Aid to Decision Making

 Accounting information is useful to anyone who makes decisions that have economic
results.

• Managers want to know if a new product will be profitable.

• Owners want to know which employees are productive.

• Investors want to know if a company is a good investment.

• Creditors want to know if they should extend credit, how much to extend, and for
how long.

• Government regulators want to know if financial statements conform to

requirements.
 The Need for Accounting

Managers, investors, and other internal groups

want the answers to two important questions:

How well did

the organization
perform? Where does
the organization
stand?
The Need for Accounting
Accountants answer these questions
with three major financial statements:

Statement of
Statement of
Financial
Operations
Condition

Statement of
Cash flows
 Account Meaning of Account Rule
Real Account • The closing balance is retained and carried forward at year Debit what comes in. Credit what
end. comes out.
• The carried forward amounts then become the opening
balance of the next year.
• These accounts usually involve assets, liabilities , and
equity.

Nominal Accounts • An account in which all the accounting transactions are Debit All Expenses and Losses,
recorded for an accounting year by transferring balances Credit all Incomes and Gains.
to permanent accounts at the end of the accounting year.
• It allows to reset the balances to zero and start the new
accounting year at fresh.
• These accounts are related to revenues, gains, losses, and
expenses of the firm.
Types of Account in accounting

An asset is a resource with economic value that an individual, corporation, or country

owns or controls with the expectation that it will provide a future economic benefit.
Assets are reported on the left side of the company’s balance sheet and are purchased
or created so as to increase the business value from their operations.

These are usually a sum of money which is owed by a person or a company.

It is a probable future payment of assets or services that a company is presently

obligated to make as a result of past transactions or events.

It is one of the most common data used by the analysts to evaluate the financial
status of the company.

It implies the shareholders’ (owner’s) equity held by the companies.

Equity is represented on the company’s balance sheet as one of the prime item.
3 Characteristics Of Assets

• The asset will provide economic benefits to a business in the

future.

• The business has control over the asset’s use.

• The business has acquired control of the asset due to a past

transaction or event.
• Types of Assets
3 Characteristics Of Liabilities

• Past transactions or events.

• Present obligations.

• A future payment of assets or services.

Types of Liabilities

• Accounts payable
• Income taxes payable
• Interest payable
• Accrued expenses
• Unearned revenue
• Mortgage payable
3 Characteristics of Equity

• Equity in a business enterprise stems from ownership rights.

• Equity represents the source of distributions by an enterprise to its

owners, whether in the form of cash dividends or other distributions
of assets.

• An enterprise may have several types of equity (e.g., equity shares,

preference share).

• Owners equity is originally created by owners’ investments in an

enterprise and may from time to time be augmented by additional
investments by owners. Equity is reduced by distributions by the
enterprise to owners.
Types of Equity

• COMMON STOCK
• PREFERRED STOCK
• CONTRIBUTED SURPLUS
• RETAINED EARNINGS
• TREASURY STOCK
• ADDITIONAL PAID IN CAPITAL
• DIVIDENDS
• OTHER COMPREHENSIVE INCOME
• OWNER’S DISTRIBUTION
• OWNER’S CAPITAL
Types of Account in accounting

Revenue is the money that a company earns from its normal business activities, such as
sales of goods or services. It’s essential to include things like interest income or gains from
investments.

Revenue is the lifeblood of any business. It’s what keeps the lights on and the wheels
turning. In short, revenue is a company’s income generated from its various activities.
It is sometimes called the top line of the business.

An expense in accounting is the money spent, or costs incurred, by a business in their

effort to generate revenues. Essentially, accounts expenses represent the cost of doing
business; they are the sum of all the activities that hopefully generate a profit.
It is important to understand the difference between “cost” and “expense” since they
each have a distinct meaning in accounting. Cost is the monetary measure (cash) that
has been given up in order to buy an asset. An expense is a cost that has expired or
been taken up by activities that help generate revenue. Therefore, all expenses are
costs, but not all costs are expenses.
Types of Revenue

• Sales Revenue
• Grants
• Rent
• Interest
• Dividends
• Income from sales of an asset
• Gains from investment
Expenses vs. Capital Expenditures

• The only difference between an expense and a capital expenditure is

that an expense has been recognized under the accrual principle and is
reflected on the income statement, whereas a capital expenditure goes
straight to the balance sheet as an asset.
• Once a capital expenditure goes on the balance sheet as an asset, it can
be expensed later as depreciation and amortization, which flows through
the income statement.
Types of Expenses

• Office supplies use up the cash (asset)

• Depreciation expense, which is a charge to reduce the book value of
capital equipment (e.g., a machine or a building) to reflect its usage
over a period.
• A prepaid expense, such as prepaid rent, is an asset that turns into a
cash expense as the rent is used up each month.
• Cost of Goods Sold (COGS)
• Operating Expenses – Selling/General and Admin
• Financial Expenses
• Extraordinary Expenses
• Non-Cash Expenses
• Non-Operating Expenses (Interest Expense)
• What is the Accounting Equation?
• The accounting equation is a basic principle of accounting and a
fundamental element of the balance sheet. The equation is as follows:
• Assets = Liabilities + Shareholder’s Equity

• This equation sets the foundation of double-entry accounting, also

known as double-entry bookkeeping, and highlights the structure of the
balance sheet. Double-entry accounting is a system where every
transaction affects at least two accounts.
• System in the Process of Accounting

• To types of accounting systems are Single Entry System and Double Entry System.

• Single Entry System – involves recording only one aspect of the financial transactions.
That is, only one account is recorded and treated in the books.
Either one account is recorded, or both the accounts are not recorded.
The oldest form of single entry system is through the cash book.
• Double Entry System – implies that every transaction is recorded across two different account.
Wherein, one account is debited, and the other is credited
Example of Single Entry System

Date Description Income Expense Balance

Dec. 1, 2022 Balance 50,000.00 30,000.00 20,000.00

Dec. 4, 2022 Rent paid 5,000.00 15,000.00

Dec. 15, 2022 Electricity bill paid 3,000.00 12,000.00

Dec. 17, 2022 Purchases 4,000.00 8,000.00

Dec. 23, 2022 Sales 14,000.00 22,000.00

Dec, 26, 2022 Sales 7,000.00 29,000.00

Dec. 31, 2022 Balance 71,000.00 42,000.00 29,000.00

Accounting Cycle

An accounting cycle refers to culminating the accounting records for further analysis, letting
internal stakeholders make well-informed and relevant financial decisions. It summarizes the
accounting events in a sequence for a specific accounting period, becoming a quick guide for
external stakeholders to decide whether to invest in the firm or associate with it for any upcoming
projects.

The steps include identifying and recording transactions to use them for further collective
analysis to be aware of a company’s current financial scenario. It is the responsibility of a
bookkeeper to maintain and keep a check on the accounting process.
Financial Statements

• Formal reports providing financial information prepared by accountant.

• Objectives is to provide information concerning the financial position, performance and
cash flows of the company needed by various users in making sound economic decisions.

1. Statement of Financial Position – Balance Sheet

2. Statement of Financial Performance – Income Statement
3. Statement of Comprehensive Income
4. Statement in Changes Equity
5. Statement of Cash Flows
6. Notes to the Financial Statements
Statement of Financial Position – Balance Sheet

• Presents of the company’s financial position of a given period of time.

• Consists of 3 elements;
• Assets
• Liabilities and
• Equities

Statement of Financial Performance – Income

Statement
• Presents the results of the firm’s operation and performance for a given time.
• Elements found in the statement consists of;
• Revenue, and
• Expense
Books of Accounts

General journal is referred to as the book of original entry. It records business transaction in
order of date using the principle of “debit and credit”.
General ledger is referred to as the book of final entry. It summarized all the journal entries of an
account to get the ending balances.

Cash receipt journal is a special journal used to record cash sales and/or collection of receivables.

Cash disbursement journal is a special journal used to record cash payments of expenses and/or
payables.

Sales journal is a special journal used to record sales on credit (receivable from customer)

Purchase journal is a special journal used to record purchases on credit (payable to supplier)
 CASH RECEIPTS JOURNAL

Debit Debit
Date Payee/Particulars Reference # Cash Sales Grants Entrance Fee
 CASH DISBURSEMENT JOURNAL

Credit Debit
Date Payee/Particulars Reference # Cash Salaries & Wages Repairs and Maintenance Power Light and Water Taxes and Licenses Feeds and Farm Supplies
 SALES JOURNAL

Debit Credit
Date Payee/Particulars Reference # Accounts Receivable Sales
 PURCHASE JOURNAL

Debit Credit
Date Payee/Particulars Reference # Accounts Payable Merchandise Inventory
 GENERAL JOURNAL

Debit Credit
Date Payee/Particulars Reference # Depreciation Expense Acc. Depreciation