Introduction to Accounting Communicating

- The summary of the information processed

Accounting in the accounting system in order to
produce and communicate relevant
- A service entity.
information to intended users.
- Its function is to provide quantitative
- Accounting information is communicated to
information, primarily financial in nature,
interested users through accounting
about economic entities that will be useful
reports, the most common form of which is
in making decisions.
the financial statements.
- The art of recording, classifying, and
summarizing in a significant manner and in Nature of Accounting
terms of money, transactions and events
• Accounting is a process with the basic
which are in part or at least of a financial
purpose of providing information about
character and interpreting the results
economic activities intended to be useful in
thereof.
making economic decisions.
- The process of identifying, measuring and
communicating economic information to Types of Information Provided
permit informed judgment and decision by
by Accounting
users of the information.
1. Quantitative information
Elements of the Definition
2. Qualitative information
Identifying
3. Financial information
- The accountant analyzes each business
transaction and identifies whether the Functions of Accounting in
transaction is an “accountable event” or Business
“non-accountable event.”
• To provide external users with information
- The analysis and identification of
that is useful in making investment and
accountable events.
credit decisions; and
- Not all activities of the business entity are
• To provide internal users with information
an accountable or economic event.
that is useful in managing the business.
Recording
Brief History of Accounting
- The accountant recognizes the
• Accounting can be traced as far back as the
“accountable events” he has identified. This
prehistoric times, perhaps more than
process is called “Journalizing.”
10,000 years ago.
- After journalizing, the accountant then
classifies the effects of the event on the • Double entry records first came out during
“accounts.” This process is called “Posting.” 1340 A.D. in Genoa.

Measuring • In 1494, the first systematic record keeping

dealing with the “double entry recording
- The assigning of monetary values of the
business’ accountable events.
 system” was formulated by Fra Luca Pacioli, External Users
a Franciscan monk and mathematician.
- Those who are not directly involved in
• Fra Luca Pacioli is considered as the father managing the business.
of modern accounting. • Existing and potential investors (e.g.,
stockholders who are not directly
Financial Accounting
involved in managing the business)
- Branch of accounting • Lenders (e.g., banks) and Creditors (e.g.,
- Governed by PFRS suppliers)
• Non-managerial employees
Financial Reporting
• Public
- Endeavors in promoting principles that are
useful to other financial reporting. Forms of Business
- Provision of financial information about an Organizations
entity that is useful to external users.
Sole or single proprietorship
Financial statements - The business that is simplest and most
- Structured representation of entity’s common is the one owned by only one
financial position and results of its individual.
operations.
Partnership
- End product of the accounting process.
- The association of two or more individuals
Financial Report who contribute money, property or industry
- Includes the financial statements plus other into a common fund. With the intention of
information provided outside the financial dividing profits among themselves.
statements that assists in the interpretation
of a complete set of financial statements
Corporation
and improves users’ ability to make efficient - An artificial being created by operations of
economic decisions. law, having the right of succession and the
power, attributes, and properties expressly
Users of Accounting authorized by law or incidental to its
Information existence.

Internal users Cooperative

- Those who are directly involved in - An autonomous and duly registered
managing the business. association of persons, with a common
• Business owners who are directly bond of interest, who have voluntarily
involved in managing the business joined together to achieve their social,
• Board of directors economic, and cultural aspirations.
• Managerial personnel
Types of Business According
to Operations Manufacturing business
Service Business - This business buys raw materials, process
- This operation offers you skills, talent, time them into finished products and sells them.
and knowledge as its main product rather - Examples of manufacturing business are
than physical items. food processing companies, electronic
factories, and motor bike manufacturers.
- Examples of services include: Schools,
universities, professional services, banks, Hybrid Business
hotels and restaurants.
- This business engages in more than one
Merchandising or Trading business type of operations.
- Example, a hotel and restaurant business
- This operation requires you to buy and sell
are engaged in rental and service to
goods without changing the physical form.
customers while at the same time buy and
- Examples of merchandising business are
sell boutique items.
wholesalers, retailers, on-line stores and
resellers.

Branches of Accounting and

Their Uses
Basic Accounting Concepts Historical Cost Concept
- Assets are initially recorded at their
and Principles acquisition cost.

Going Concern Assumption

Accounting Information
- The business is assumed to continue to exist
General Purpose Accounting for an indefinite period of time.
Information
Matching
- Designed to meet the common needs of
most statement users. - Some costs are initially recognized as assets
- This information is governed by the and charged as expenses only when the
Philippine Financial Reporting Standard. related revenue is recognized.

Special Purpose Accounting Accrual Basis of Accounting

Information - Income is recorded in the period when it is
- Designed to meet the specific needs of earned rather than when it is collected,
particular statement users. while expense is recorded in the period
- This information is provided by other types when it is incurred rather than when it is
of accounting, e.g., managerial accounting, paid.
tax basis accounting, etc. Prudence
Accounting Concepts and - The observance of some degree of caution
Principles when exercising judgments under
conditions of uncertainty.
• Set of logical ideas and procedures that
- Such that, if there is a choice between a
guide the accountant in recording and
potentially unfavorable outcome and a
communicating economic information.
potentially favorable outcome, the
• They provide reasonable assurance that unfavorable one is chosen.
information communicated to users is - This is necessary so that assets or income
prepared in a proper way.
are not overstated and liabilities or
Basic Accounting Concepts expenses are not understated.

Separate Entity Concept Reporting Period or time period

- The business is viewed as a separate entity, - The life of the business is divided into series
distinct from its owners. of reporting periods.
- Only the transactions of the business are Stable Monetary Unit
recorded in the books of accounts. The
personal transactions of the business - Assets, liabilities, equity, income and
owners are not recorded. expenses are stated in terms of a common
unit of measure, which is the peso in the
Philippines.
Materiality Concept Importance of Philippine
- An item is considered material if its Financial Reporting
omission or misstatement could influence Standards (PFRSs)
economic decisions.
• Entities should follow a uniform set of
- Materiality is a matter of professional
generally acceptable reporting standards
judgment and is based on the size and
when preparing and presenting financial
nature of an item being judged.
statements; otherwise, financial statements
Cost-benefit would be misleading.
• The term “generally acceptable” means that
- The costs of processing and communicating
either:
information should not exceed the benefits
a. the standard has been established by an
to be derived from the information’s use.
authoritative accounting policy-making
Full Disclosure Principle body; or
b. the principle has gained general
- Information communicated to users reflect
acceptance due to practice over time and
a balance between detail and conciseness,
has been proven to be most useful.
keeping in mind the cost-benefit principle.
• The process of establishing financial
Consistency Concept accounting standards is a democratic
process in that a majority of practicing
- Like transactions are accounted for in like
accountants must agree with a standard
manner from period to period.
before it becomes implemented.
Concept of Articulation
Relevant Regulatory Bodies
- All of the components of a complete set of
financial statements are interrelated. Securities and Exchange
Commission (SEC)
Residual Equity Theory
- The SEC is tasked with regulating
- This theory is applicable where there are corporations, including partnerships.
two classes of shares issued, ordinary and - SEC required corporations and partnerships
preferred. to file audited financial statements.
- The equation is “Assets – Liabilities –
Preferred Shareholders’ Equity = Ordinary Bureau of Internal Revenue (BIR)
Shareholders’ Equity”. - The BIR is tasked in collecting national taxes
and administering the provisions of the Tax
Fund Theory
Code.
- The accounting objective is the custody and
administration of funds. Bangko Sentral ng Pilipinas (BSP)
- The BSP is tasked in regulating banks and
Realization
other entities performing baking functions.
- The process of converting non-cash assets - BSP influences the selection and application
into cash or claims for cash. of accounting policies by these businesses.
Cooperative Development Neutrality
Authority (CDA) - Information is selected or presented
- The CDA is tasked in regulating without bias.
cooperatives.
Free from Error
- CDA influences the selection and
application accounting policies by - There are no errors in the description and in
cooperatives. the process by which the information is
selected and applied.
Fundamental vs. Enhancing
Enhancing Qualitative
Fundamental Qualitative Characteristics
Characteristics
- The characteristics that enhance the
- The characteristics that make information usefulness of information.
useful to users.
Comparability
Relevance
- The information helps users in identifying
- Information is relevant if it can affect the similarities and differences between
decisions of users. different sets of information.
Predictive Value Verifiability
- The information can be used in making - Different users could reach consensus as to
predictions. what the information purports to represent.
Confirmatory Value Timeliness
- The information can be used in confirming - The information is available to users in time
past predictions. to be able to influence their decisions.
Materiality Understandability
- An ‘entity-specific’ aspect of relevance. - Users are expected to have reasonable
Faithful Representation knowledge of business activities; and
willingness to analyze the information
- The information provides a true, correct diligently.
and complete depiction of what it purports
to represent.

Completeness
- All information necessary for users to
understand the phenomenon being
depicted is provided.
The Accounting Equation Definitions
Income
and Types of Accounts
- Are increases in economic benefits during
the period in the form of increases in
The Accounting Equation assets, or decreases in liabilities, that result
Assets = Liabilities + Equity in increases in equity, excluding those
relating to investments by the business
Elements of the Accounting owner.
Equation
Expenses
Assets - Are decreases in economic benefits during
- Are the economic resources you control the period in the form of decreases in
that have resulted from past events and can assets, or increases in liabilities, that result
provide you with economic benefits. in decreases in equity, excluding those
relating to distributions to the business
Liabilities owner.
- Are your present obligations that have
resulted from past events and can require Profit or Loss
you to give up economic resources when - The difference between income and
settling them. expenses.

Equity Illustration 3
Using the same information in Illustration Nos. 1 and 2
- Are assets minus liabilities. Other terms are During the period, you earned income of P10,000 and
capital, net assets and net worth. incurred expenses of P6,200.

Illustration 1: At the end of the period, your total assets incred to P5,000
You decided to put up a barbeque stand and have estimated that you and total liabilities decreased to P400.
will be needing P2,000 as start-up capital. You check your savings and
you found you have P800. At this point, you went to your mother to Your expanded accounting equation is
borrow the P1,200 but she told you she has no extra money. Assets = Liabilities + Equity + Income - Expenses

Your accounting equation is: 5,000 = 400 + 800 + 10,000 - 6,200

Assets = Liabilities + Equity
Assets = Liabilities + Equity + Profit
800 = 0 + 800
5,000 = 400 + 800 + 3,800
Illustration 2
Now, you decided to borrow from a friend the balance

Your accounting equation is Account

Assets = Liabilities + Equity
- The basic storage of information in
2,000 = 1,200 + 800 accounting.
- It is a record of the increases and decreases
in a specific item of asset, liability, equity,
The Expanded Accounting income or expense.
Equation
Assets = Liabilities + Equity + Income - Expenses
The T-Account Companion Accounts
- Refers to the account that is always shown
with another account. There are two types
of companion accounts:

Contra Accounts
- An account with a balance opposite the
normal accounts in its category.
- An example of a contra account is
Accumulated Depreciation. It has a credit
balance and shown among the assets (with
debit balances).
- A contra account decreases the valuation of
an account.
Classifications of The Five
Major Accounts Adjunct Accounts
According to financial statements - An account with a balance similar to the
where they appear normal accounts in its category.
- An example of adjunct account is Premium
Balance Sheet Accounts on Bonds Payable. It has a credit balance
- Accounts that are the components of the and shown among the liabilities (credit
statement of financial position. balance).
- An adjunct account increases the valuation
Income Statement Accounts of an account.
- Accounts shown in the statement of Chart of Accounts
comprehensive income.
- A list of all the accounts used by a business.
Traditional classification NIKHOLI EVENTS MANAGEMENT
CHART OF ACCOUNTS
Permanent or Real Accounts
- Refers to accounts that are not closed (bring Account
Number
Account Name Account
Number
Account Name

down to zero) at the end of every ASSETS REVENUES

100 Cash in bank 400 Service Fees
accounting period. 101 Accounts Receivable
101-A Allowance for bad debts EXPENSES
- These are accounts found in the balance 102 Office Supplies 500 Salaries and Wages Expense

sheet.
103 Prepaid Insurance 501 Office Supplies Expense

Temporary or Nominal Accounts 104

104-A
Equipment
Accumulated Depreciation
502
503
Rental Expense
Utilities Expense
504 Depreciation Expense
- Refers to accounts that are closed at the LIABILITIES
200 Accounts Payable
505
506
Insurance Expense
Interest Expense
end of every accounting period. 201 Accrued Utilities 507 Income Summary
202 Loans Payable
- These are accounts found in the income
OWNER'S EQUITY
statement. 300 Nikholi, Capital
301 Nikholi, Personal

Mixed Accounts
- Refers to accounts that are partly real and
partly nominal at initial recording.
Common Account Titles transportation, office equipment, computer
equipment, and furniture and fixtures.
Balance Sheet Accounts
Liabilities
Assets
Accounts Payable
Cash
- Obligations supported by oral or informal
- Includes money or its equivalent that is promise to pay.
readily available for unrestricted use.
Notes Payable
Accounts Receivable
- Obligations supported by written or formal
- Claims from customers supported by oral promise to pay.
promise to pay.
Interest Payable
Allowance for Bad Debts
- Interest incurred but not yet paid. Interest
- The estimated losses from uncollectible payable arises from interest-bearing
accounts receivables. liabilities.
Notes Receivable Accruals
- Receivables supported by promissory notes. - Expenses already incurred but not yet paid
Inventory by the business such as salaries, utilities and
rental.
- Represents goods that are held for sale.
- For a manufacturing business, inventory Unearned Income
includes goods undergoing process of
- Items that are related to income that were
production and raw materials that will be used
in the production. collected in advance before they are
earned.
Prepayments
Equity
- Represents the unused portion of supplies,
rental or insurance. Owner’s Capital
- This account is used to record permanent
Land
investment to the business by the owner
- A lot on which building of the business has and permanent withdrawal of assets.
been constructed.
- Not depreciable. Owner’s Drawing
- This account is used to record the
Building
temporary withdrawals of the owner during
- Structure used in its business. the period.
Accumulated Depreciation Income Statements
- The total amount of depreciation expense Service Fees
recognized since the building was acquired
and made available for use. - Revenues earned from rendering services.

Equipment Sales
- Consists of various assets such as - Revenues earned from the sale of goods.
machineries and factory equipment,
Interest Income Advertising Expense
- Revenues earned from the receipt of - Represents the cost of promotional or
interest-bearing notes. marketing activities during the period.

Gains Insurance Expense

- Income earned from the sale of assets - Cost of the expired insurance during the
(except inventory) or from enhancement of current period.
assets or decreases in liabilities that are not
classified as revenue. Taxes and Licenses
- Cost of business and local taxes required by
Expenses government for the conduct of business
Cost of Sales such as mayor’s permit, community taxes,
property taxes.
- Represents the value of inventories that
have been sold during the period. Transportation Expense
Delivery Expense - The necessary cost of transporting
employees for business related trips.
- represents the seller’s cost of delivering
goods to customers. Interest Expense
- Other terms are: freight out, transportation
- Represents the cost of borrowings from
out and carriage outwards.
financing entities.
Salaries Expense
Miscellaneous Expense
- Represents the services received from
- Represents various small expenditures
employees.
which do not warrant separate
Rent Expense presentation.
- Rental of office or store spaces used during Losses
the period.
- Expenses which may or may not arise from
Utilities Expense the ordinary course of business.
- Losses may arise from sale of assets (except
- Cost of water, electricity, internet, cable
inventory), decrease in the value of assets
that have been consumed during the
due to damage, obsolescence and other
period.
changes in the value.
Supplies Expense
- Cost of office or store supplies used during
the period.

Bad Debts Expense

- Amount of estimated losses from
uncollectible accounts during the period.

Depreciation Expense
- Cost of depreciable asst that have been
allocated during the current period.
Books of Accounts and Special Journal
- Used to record transactions with similar
Double Entry System nature (e.g., Sales journal, Purchases
journal, Cash receipts journal, and Cash
Books of Accounts disbursements journal)

- These are books where you record all the General Journal
financial transactions of the business. - All other transactions that cannot be
- Entries in the books of accounts are recorded in the special journals are
required to be supported by documents recorded in the general journal.
such as invoices, official receipts, vouchers,
Date Particulars PR Debit Credit
and other related documents.
- One of the requirements of the Bureau of
Internal Revenue for your business
registration is the books of accounts.

Types of Books of Accounts

Combination Journal
Manual Books of Accounts - To record multiple transactions in one
- The traditional journal, ledger and columnar journal.
book. - This assigns columns for accounts
- Recording in these books handwritten, so frequently used by the business.
you typically use this in small businesses. - This journal is commonly for service
businesses with limited type of
Loose-Leaf Books of Accounts transactions.
- You print and bound these journals and Doc. Cash Accounts Accounts SUNDRY
Date Particulars Explanation No. Dr. (Cr.) Receivable Dr. (Cr.) Payable Dr. (Cr.) Account Name Amount
ledgers.
- Recording can be done using the Microsoft
Excel.

Computerized Books of Accounts Types of Special Journals

- An accounting program that facilitates fast Sales Journal
and efficient record keeping.
- Used for businesses with voluminous - Used to record sales on account.
transactions. Invoice Accounts Sales Output
Date Particulars Terms No. Receivable (Dr.) (Cr.) Tax (Cr.)
List of the books of accounts
that a business must
maintain
1. Journal (General and Special)
2. Ledger (General and Subsidiary) Purchase Journal
- Used to record purchases of goods held for
Journal sale on account.
- Also called the “book of original entries”.
- The accounting record where business
transactions are first recorded.
Cash Receipts Journal Double Entry System
- Used to record all transactions involving Concept of Duality
receipts of cash.
- Each transaction is recorded in two parts –
debit and credit.

Concept of Equilibrium
- Each transaction is recorded in terms of
equal debits and credits.

Normal Balances of Accounts

Cash Disbursements / Payments

Journal
- Used to record all transactions involving
payments of cash.

Ledger
- Also called the “book of final entries”.
- Used to classify the effects of business
transactions on the accounts. Rules of Debits and Credits
General Ledger
- Contains all the accounts appearing in the
trial balance.

Subsidiary Ledger
- Provides a breakdown of the balances of
controlling accounts.

Formats of the Ledgers

Ending balances of an Account
• Debits to a specific asset or expense
account should be greater than (or equal)
to the credits in those accounts.
• Credits to liabilities, equity and income
should be greater than (or equal to) the
debits in those accounts.
• The difference between the values of debits
and credits to an account represents the
ending balance of that account. The
minimum balance of an account should be
zero.
• When an asset account results in an ending
credit balance (debit amount is less than
credit amount). This means that the said
asset account has an abnormal balance.
Illustration:
The company received cash of P10,000 from
owner’s investment and P5,000 from collections. It
also paid P12,000 of its expenses. How much is the
cash balance at the end?
10,000 + 5,000 – 12,000 = 3,000
Using the T-account approach and the rules of
debit and credit:

Cash
10,000 12,000
5,000
15,000 12,000
End. Balance 3,000
Contra and Adjunct Accounts
Contra Asset Accounts
- Are presented in the financial statements as
deduction to their related accounts.

Adjunct Accounts
- Are presented in the financial statements as
addition to their related accounts.