Introduction to

Accounting

Definition of Accounting
Accounting has 3 widely
accepted definition
American Accounting
Association
“Accounting is the process of
identifying, measuring, and
communicating economic
information to permit Accounting
informed judgment and It is the systematic process of
decisions by users of the measuring and reporting
information.” relevant financial information
American Institute of about the activities of an
Certified Public economic organization or unit.
Accountants Its underlying purpose is to
“Accounting is the art of provide financial information.
recording, classifying, and It is expressed in monetary
summarizing in a significant terms.
manner and in terms of
money, transactions, and Nature of Accounting
events which are in part at
least of financial character, A systematic process
and interpreting the results Process - A series of actions
thereof.” that produces something or that
Accounting Standards lead to a particular result.
Council An art
“Accounting is a service Art - A skill acquired by
activity. Its function is to experience, study, or
provide quantitative observation
information, primarily A service activity
financial in nature, about Service - Occupation or
economic entities that is function of serving
intended to be useful in Activity - Something that is
making economic decisions.” done as work or for a particular
purpose.
Aspects of Accounting
The following are the 4
aspects of accounting:
 Recording
Writing down of business  Statement of
transactions chronologically Comprehensive Income
in the books of account. (Income Statement)
Business Transactions  Statement of Changes in
Interactions between Equity
businesses and other  Statement of Cash Flows
stakeholders (customers,  Notes
suppliers, investors,  Interpreting
government offices, etc.) Representing the qualitative
Examples: and quantitative financial
 Purchase of office supplies information about the
 Payment of monthly bills business transactions
 Selling of business’ understood by the users of
products financial statement.
 Rendering of services
Functions of Accounting
a) To fulfill the stewardship
function of management
(owners)
 Classifying b) To help interested users to
Sorting similar and related come up with informed
business transactions into 3 decisions
categories: c) To support daily operations
 Assets of the business
 Liabilities Generate relevant and timely
 Owner’s Equity/Equity financial information for
 Summarizing interested individuals/parties
Preparing the financial (investors, government
statements from the agencies, creditors, and
transactions recorded in the management) in making
books of account that are decision.
needed by its users.
Financial Statement Bookkeeping vs.
According to Philippine Accounting
Accounting Standard (PAS) 1 -  Bookkeeping
Presentation of Financial Focused with recording of
Statements, a complete set of monetary transactions which
financial statement prepared is one part of accounting
periodically should compose process.
of:  Accounting
 Statement of Financial Broader than bookkeeping.
Position (Balance Sheet)
History of Accounting
 14th Century: Double Entry Internal users are those who
Bookkeeping make decisions on behalf of
 1494 C.E. the organization.
Frater Luca Bartolomes • They directly manage the
Pacioli company’s daily operations
 An Italian monk and a) Managers/management
mathematician They plan, organize, and run a
 He wrote Summa de business
Arithmetica, Geometria, o Top-level management
Proportioni et They use the information to
Proportionalita oversee the performance of
(Everything about the whole organization and set
Arithmetic, Geometry, its strategic direction.
Proportion, and  Chief Executive Officer
Proportionality) which (CEO)
was published in Venice  Chief Financial Officer (CFO)
in November 1494.  Chief Operating Officer
 Father of Modern (COO)
Accounting. o Middle-level
Summa de Arithmetica, management
Geometria, Proportioni et They ensure that their unit
Proportionalita performances are aligned with
 Particularis de Computis the organization’s objectives
et Scripturiz, a section of  Department heads
this book (24 pages) is  Branch managers
composed of 36 short  Junior executives
chapters that describe o Lower-level management
bookkeeping. They oversee the day-to-day
Users of Accounting operations and direct
Information employees in the
 Accounting communicates performance of tasks.
financial information to  Supervisors
different decision-makers who  Team leaders
use accounting information. Employees/ Labor Union
 Users of accounting They assess the company’s
information are collectively profitability and stability, and
referred to as stakeholders their consequence on future
which are classified as internal salary and job security.
and external. Financial information
help determine if they have a
future the company.
Internal Users of Owners
Accounting Information
 They provide the capital to the  They are secondary users of
business. financial information who are
parties outside the company.
 They are not directly involved
Accounting information in the company’s operations
helps owners decide whether but their decisions affect the
to withdraw or increase their business entity.
investments.
They are interested to know
the returns on their
investment.

Common information
needed by Internal Users
 “Do we have enough Potential Investors
cash to pay bills?”  They need information to
 “Can the company afford help them decide
to give a salary increase?” whether they should
 “How much is the invest in the business.
company’s sales growth for  They would want to know
the month?” potential returns on their
 “How much is the cost of investment.
producing each unit of Creditors and Potential
product?” Creditors
 “Which product line is  They assess the
more profitable?” creditworthiness and the
 “How much is the tax capability of the business
payable to the government?” to pay its obligation
The accounting information including the related
provided to internal users can interest on maturity date.
be in the form of Customers
management reports,  They assess their
budgets, and financial suppliers' financial
statements. position, which is
External Users of necessary for them to
Accounting Information maintain a stable source
External users of supply in the long
 Are those who make their term.
decisions based on the  “Will the business
company’s financial continue to honor its
information. warranties?”
Suppliers
 They use the financial Examples:
statements of their Owners, management
customers to determine (directors and officers),
whether the debts owed employees, tax authorities,
to them will be paid when suppliers, creditors, and
due or whether the customers.
customer has enough Indirect Users
funds or resources to pay  They use the financial
for the goods to be information to provide
delivered or services to advice to and protect the
be rendered. interest of direct users.
Tax Authorities  Examples: Regulatory
 They use the financial agencies or registration
reports to determine authorities, financial
whether the business analysts and advisors,
paid the correct amount stock exchange, lawyers,
of taxes. reporting agencies, trade
Regulatory Bodies associations, and labor
 They want to ensure unions.
whether the accounting
information is following
the rules and regulations
set to protect the
stakeholders.
 Examples: Securities and
Exchange Commission
(SEC), and Bangko
Sentral ng Pilipinas (BSP)
Public
 They use the accounting
information to know how
the business affects the
economy, possible
prospects for
employment, and/or for
educational and research
purposes.
Direct vs. Indirect
 They have direct interest
over the company.
 They use the information
to protect their own stake
in the entity.
 FUNDAMENTALS OF primarily financial in nature,
AACOUNTING about economic entities that
is information to be useful in
Chapter I making economic decisions,
BASIC ACCOUNTING in making reasoned choices
FEATURES, CONCEPT AND among alternative courses of
PRINCIPLES action."
OBJECTIVES:  It is the language of
At the end of the chapter, the business.
student will be able to:
 It is also defined as
 Define accounting and
the systematic art of
its importance;
recording, classifying and
 List down the nature,
summarizing in a significant
and functions of accounting
manner and in terms of
in the business world;
money, transaction and
 Determine the scope
events which are in part at
and branches of accounting;
least of a financial character
 Describe the different
and interpreting the results
types and forms of business;
thereof.
 Give examples of each
 It is actually
type and forms of business;
information system that
 Identify and classify
measures business activities,
the different assets, liabilities
processes information into
capital, revenues and
reports and communicates
expenses accounts;
the results to decision
 Describe the basic
makers.
financial statements of
business; and
 Recall the elements of
financial statement of These are the followings
business. activities of accounting:
1. Recording
is engaged putting into
records all the business
transactions. It can be
CHAPTER CONTENT:
recorded either manually or
The Accounting Standards
electronically. It is usually
Council defines
done in chronological manner
accounting as follows:
 It is a service activity. according to date of
Its function is to provide occurrence. It is also known
quantitative information, as Bookkeeping.
2. Classifying
is sorting and grouping of all clothing store, or a
similar and interrelated supermarket, grocery stores,
transactions. shoe store, etc.
3. Summarizing 3. The
is the preparation of financial Manufacturing/Producing
statements intended for the Business
users of financial information. It buys raw materials, turns
4. Interpreting them into a new product, and
is engaged in analyzing the sells the products to earn a
financial statements and the profit. For example, a
changes to its financial construction company or a
performance from prior years pulp mill. Producing
businesses include
to other similar businesses.
businesses like farms,
mining, forestry, etc.
4. The Non-Profit
Purpose of Accounting in
Organization
Business
1. It provides information It involves activities to meet
social needs and not for a
useful for decision making.
financial profit. For example,
2. It records and
a church, service club, the
analyzes necessary business
Cancer Society, cooperatives,
transactions. charitable institutions. etc.
3. It provides useful
information both inside and
outside stakeholders of the
organizations.

Types of Business Forms of Business

The different type of business Ownership
falls into 4 categories: There are 3 main forms of
1. The Service business ownership:
Business 1. Sole Proprietorship/
It provides services to the Single proprietorship
customers. For example, This is an entity owned by an
banks, barber shop, individual or single person.
accounting firm, hospital, The owner is called
school’s cinema etc. proprietor.
2. The Merchandising 2. Partnership
Business. Is an entity owned and
It buys goods and resells the shared by 2 or more persons.
goods more than the cost for The owners are called
a profit. For example, a partners.
3. Corporation business would be and to
Is an entity whose operation estimate the rate of return of
is created according to the the invested money.
law. The capital is shared and 4. Employees
divided in form of stocks. The Information necessary to
owners are called determine the stability of the
shareholders or stockholders. business that will give
4. Cooperatives assurance of security of
This is an entity exempt from employment through good
taxation. The owners are remuneration and benefits.
called members. 5. Lenders/Financial
Users of Financial
Institutions
Information
Information necessary to
The accounting information is
determine whether the
prepared to be useful both to
internal and external company can pay the
stakeholders. principal and interests when
Stakeholders due.
are any individual or group of 6. Suppliers/other
people that have interest to trade creditors
the financial information Information necessary
important in decision making. whether the company has the
capacity to pay the amounts
The stakeholders and the on the goods and services
accounting information delivered.
need; 7. Government and
1. Management their agencies
Information necessary for Information necessary to
planning and controlling to investigate whether the
who will have a significant business operation complies
impact to the operation of to the promulgated
the business. government's rules and
2. Owner/s firm or regulation.
prospective owners 8. Customers
Information necessary to Information necessary to
know the progress of the determine the fairness of
business and to determine prices and stability of
how their money was being business for continuous
used. patronage of goods and
3. Investors services.
Information necessary to 9. Financial analyst
know on how profitable the and advisors
Information necessary to  He should pass the board
determine the market examination for Certified
position of the business in Public Accountant in order to
the industry as well as to give practice the said profession.
best advised on how to  The Profession of
improve the profitability level Accountancy
of the company.
10. Trade Associations
Information necessary to
report industry statistics, and
business industry
comparisons relevant in
economic decisions. The following are the
11. Public categories in practicing
Information necessary to accountancy as a
profession:
determine if the company
has significant contribution to
1. Private Accounting
the economy through
It provides accounting
employment and payment of
services to private
taxes. companies. The accountant
Certified Public may or may not be a CPA. He
Accountant is specialized in one specific
According to the Board of task such as budgetary
Accountancy, under accounting, internal auditing,
Professional Regulation management accounting,
Commission who administers etc.
the CPA board exam every Comptroller/Controller
month of May and October. The executive officer in
charge of accounting activity.
The board determines the 2. Public Accounting
qualification for CPA It provides accounting
examinees and they should services to the general
possess the following; public. He is Certified Public
 A Filipino citizen Accountant by profession. He
 At least 21 years old renders services such as
 Good moral character taxation, auditing,
 Graduates of Bachelor of management advising etc., to
Science in Accounting, or the clients.
Bachelor of Science in 3. Government
Commerce, major in Accounting
accounting or its equivalent. Accountants who are
employed in any government
units such as LGU's, Bangko It is a field of accounting
Sentral ng Pilipinas, Bureau specialized in offering advice
of Internal Revenue etc. They on tax and calculating tax
render services as auditor, liability and completing tax
budget officer or consultant returns. They may offer
in government offices. advice on tax efficient
5. Research and business decisions. These are
Education mostly practiced by public
Accountants accountants.
Who impart knowledge, 3. Management
expertise and skills to Accounting
schools, university, and It is a field of accounting that
review centers as instructors, examines and provides cost
reviewers or researchers. information to the internal
Only CPAs can practice this management for the
profession. They are required purposes of planning,
to enhance their knowledge controlling and decision
through continuous making.
education. 4. Cost Accounting
It is a field of accounting that
is responsible to classifying,
recording and appropriate
allocation of expenditure for
Specialized Accounting the determination of the cost
Fields of products or services,
1. Auditing determines the budgets and
It is a field of accounting that profitability of products or
reviews and investigates any department. It is the main
aspect of a business, whether principle of management
financial or nonfinancial in accounting.
nature. The auditor is known
to be the one responsible in
auditing activities. They are
fully trained to examine 5. Financial
whether the financial Accounting
statements are in accordance It is a field of accounting that
to generally accepted involves preparation and
accounting principles (GAAP) interpretations of financial
and give opinion as to the statement primarily concerns
accuracy and fairness of for external users.
presentation of accounting 6. Government
data. Accounting
2. Tax Accounting
It is a field of accounting that
deals on proper use the 2. Reliability
public funds for the service of Reliability refers to the
the people and not for profit. degree of confidence data
This is commonly used in users put on the faithfulness
non-profit organization. and truthfulness of the
financial accounting
Generally Accepted information.
Accounting Principles Reliability is an attribute of
(GAAP) financial information making
The rules, procedures and it neutral, free from bias and
practices came to be known error and complete. The
as generally accepted concept of prudence or
accounting principles (GAAP). conservatism also has a
It encompasses the direct impact upon the
conventions rules, reliability of the financial
procedures practice and information.
standards followed in the 3. Understandability
accumulation, preparation Understandability requires
and presentation of that financial accounting
accounting data in the information must facilitate
financial statements. understanding. Moreover, it
should be intelligible and
Qualitative Characteristics comprehensible to the point
of Financial Statement that it can be flexible and be
1. Relevance understood by not just
The term relevance simply business executives and
means that useful stockholders but as well as
information should have the the general public.
capacity to make a difference It should be presented and
in the decision making expressed in business
process of entrepreneurs and language that all data users
managers. It should help data understand.
users in predicting the 4. Comparability
outcome of different business Comparability simply means
undertakings. the ability to compare, to
Relevance, on the other bring together financial
hand, is affected by its nature accounting information for
and materiality. A non- the purpose of noting
material transaction cannot similarities, difference and to
influence a business decision monitor the growth of the
thus it isn't relevant. business entity.
It should be comparable understated. There are
horizontally and transaction or events that are
dimensionally, meaning, it uncertain. In order to
should be comparable within maintain the relevance of
the entity and across entities. information, it must be
Accounting Concepts recorded on time, and must
Rules of accounting that estimate required judgment
should be followed in for its uncertainty.
preparation of all accounts 5. Time period
and financial statements. It is the assumptions that at
have indefinite life of
business divided into time
periods or accounting period
for the purpose of preparing
Four fundamental financial statements. It can
concepts are: be prepared on a monthly
1. Accruals concept basis, every three months
It is when the revenue and (quarterly), six months (semi-
expenses are recorded when annual), twelve months
they occur and not when the (yearly/annually).
cash is received or paid out. An accounting period can be
2. Consistency concept calendar year, fiscal or
It is continuously choosing normal business year. A
the same accounting method calendar year starts the
for the entire operation of the operation of the business
business, that method must from January to December.
not be changed unless there Fiscal year is a 12-month
is a sound reasons to do period, starting any month of
otherwise. the year except for January.
3. Going concern Normal business year is also
It is a basic accounting the 12-month operation that
principle that assumes a ends any month the year
business entity will continue when the business is at
to operates in foreseeable lowest point of the business
future. or slack point of the season.
4. Prudence concept 6. Cost basis
(also conservation Asset value recorded on its
concept) original acquisition cost and
Prudence is a key accounting not on its market value.
principle which makes sure 7. Business entity
that assets and income are Business entity treated as a
not overstated and liabilities separate and distinct from its
and expenses are not
owners or forms other Accounting information
business units. is very important for the
8. Full disclosure stakeholders because it holds
Financial statements should qualitative and quantitative
disclose relevant data information useful in
necessary in decision economic decision making of
making. the entity. All financial
9. Lower of cost or information are well
market value presented and summarized in
Inventory is valued either at the so-called financial
cost or the market value, statement. Valix (2012)
whichever is lower; defined financial statement
10. Matching as "the means by which
Transactions affecting both information accumulated and
revenues and expenses, processed in financial
should be recognized in the accounting is periodically
same accounting period. communicated to the users.
11. Materiality In other words, the financial
Materiality is the relevance of statements are the end
the information to influence product or main output of
the decision making. It is the financial accounting process."
impact of the ability of the It is necessary to prepare the
information to affect the financial statement in interim
decision of the users of periods for internal purposes
financial statement, whether but it is a must to prepare the
it involves amount of the statement every year.
money or the importance of
the occurrence of the events. Purpose of Financial
Statements
12. Unit of Financial statements
measurement presentation purports the
All business transaction following reasons, (Valix
should be measured on its 2012), stated;
equivalent monetary value. 1. It provides information
All financial data should be about the financial position,
recorded with a common unit performance and cash inflows
of measure. of an enterprise that is useful
13. Objectivity to wide range of users in
Financial statements should making economic decisions.
be based only on verifiable 2. It shows the results of
evidence, including an audit the management's
trail. stewardship of the resources
Accounting Reports entrusted to it.
3. It provides information
about an enterprise's assets,
liabilities, equity, income and
expenses, including gains
and losses and cash flows.

The financial statement is

composed of the
following:
 Balance Sheet
 Income Statement
 Statement of changes
in equity
 Cash flow statement
 Notes of Financial
Statement
Balance sheet
Balance sheet is a report
showing the financial position
of a company on a particular
date. The three elements are
assets, liabilities and equity.
 course of enterprise's
operating cycle. It is held
primarily for trading
purposes, or for the short
term and expected to be
realized when 12 months of
the balance sheet.
1. Operating Cycles
are time between the
acquisition of material put
into process and realization in
cash and an instrument that
is readily convertible to cash.
2. Account Titles
are assigned name and titles
for the accountant and used
for conversation for ease of
reference. The following are
the account titles used in
current and non-current
assets;
3. Cash
is any medium of exchange
that a bank will accept at
face value. It includes coins
and currencies, checks,
money orders and bank
drafts.
5 Major Accounts
4. Accounts Receivables
1. Assets
are claims against debtors,
2. Liabilities
customers or clients arising
3. Owner’s Equity
from services rendered on
4. Revenue/Income
account and the sale of
5. Expense
merchandise on account.
Assets
5. Notes Receivables
According to ASC SFAS No. 1,
are claims against debtors,
assets are classified into two
customers or client for the
namely; current assets and
services rendered evidenced
non-current assets.
by written promise to pay
Assets are current when it is
issued by the debtor.
expected to be realized in or
6. Merchandise
held for sale of consumption
Inventories
in normal course of sale
consumption in normal
are goods on hand available represents the whole amount
for sale. from depreciation expenses
7. Supplies/Supplies on charged in the past and
Hand current periods.
are consumable goods used 3. Equipment
in the course of business. It are tangible assets which are
represents the cost of tools or instruments used in
supplies on hand. It can be the operation of business. It
classified as office or store has its own specific design
supplies, papers, pencils, and style to handle activities
pens, folders etc. are the both for production and
examples. administrative purposes. It
8. Prepaid Expenses can be classified as store
are expenses paid in equipment or office
advance. Example: six equipment. They include
months rental paid in computers, air-conditioning
advance (Prepaid rent), one units, calculator, typewriter,
year insurance premium cash register, and other
(Prepaid Insurance). similar assets.
Noncurrent Assets 4. Delivery Equipment
The ASC states that include assets used for
Noncurrent Assets are "all transporting merchandise.
other assets not classified as 5. Machinery
current should be classified is tangible assets that has its
as noncurrent." own system to work in order
1. Property, Plant and to produce products and to
Equipment/Fixed provide services to
Assets customers.
Per PAS # 16. These are the 6. Furniture and Fixtures
tangible assets that are held are properties owned by the
by enterprise for use in the business which are not part
production or supply of goods of the building property.
and service or for rental to These quickly depreciate
others for administrative compared to other assets.
purposes which are expected These include the following:
to be used during more than office tables, filing cabinets,
one period. chairs, showcases and other
2. Accumulated similar items used in the
Depreciation operation of business.
is an account that contains Intangible Assets
the sum of periodic are the identifiable non-
depreciation charges. It is a monetary assets without
contra-account that physical substance. They
provide future economic Salaries Payable
benefits to the company. are unpaid salaries to the
They include franchise, employees at the end of the
copyrights, patent accounting period.
trademarks and computer Taxes Payable
software. are present obligation due to
Liabilities the government.
it is defined by ASC Interest Payable
Framework as "present are interest incurred on the
obligations of an enterprise loan but they are not yet paid
of which is expected to result at the end of the period.
in an outflow from the Non-current Liabilities
enterprise arising from past It is long term liabilities
transactions or events, the expected to be settled for
settlement of which is more than a year.
expected enterprise or Mortgage Payable
resources embodying are long term debts secured
economic benefits. These are by collateral.
debts and obligation of the Capital/Equity: (Owner's
business to creditors which is Capital)
not recognized unless is the account that represents
incurred. It can be settled the equity or claims of the
through cash or promissory owner on the assets of the
note. business. It is the residual
Current Liabilities interest in the assets of the
it is a present obligation that business. It is the difference
is expected to be settled in of total assets and total
the normal operating cycle of liabilities.
the business. It is due to be Owner's Drawing account
settled within one year from charged to the owner's
the balance sheet. drawing are cash or other
assets withdrawn or taken by
The following are account the owner form the business
titles used in current and for personal use.
non-current liabilities; Income Statement
Accounts Payable This is a report showing the
are the amount due to financial performance of an
creditors for assets acquired enterprise for a given period
in account. time. It shows the income
Notes Payable results and the expenses
are the amount due to incurred during the operation
creditors supported by of the business.
promissory note Revenue Or Income
According to ASC revenue is activities when these results
defined as "gross inflow of in decrease in equity other
economic benefits during the than those relating to
period in the form of inflows distribution owners." The cost
or enhancement on assets or incurred during the course of
decrease in liabilities that business.
results in increase in equity,
other those relating to The following are the
contributions from the owner account titles used in
or owners." It is the income expenses:
earned in providing services Cost of sales
to customers and from the is the cost of goods
sales of merchandise as well. purchased and sold
merchandise or sold
The following are the manufactured and sold.
common income titles Advertising expense
used: are expenses incurred to
Sales promote the product of the
are total sales of business.
merchandise sold. Salesmen's salaries
Professional fee are the compensation given
income is income earned to sales agent.
after rendering professional Salesmen's commission
services such as CPA's, is the incentive given to sales
doctors, lawyers. agents based on their total
Rent Income amount of sales earned.
is the amount of lease/rental Salesmen's travelling
earned for the period. expenses
Service Income/Revenue are travelling allowances
is the amount of income given to sales agents.
earned from services Office salaries
rendered from service are compensations given to
concern business. administrative employees.
Supplies expense
Interest Income are the number of supplies
is the amount earned for used during the operation of
lending money. business.
Expenses Taxes
The ASC defined expenses as are governmental duties
the "gross outflow of incurred in the current
economic outflow result period.
benefits during the period in
the course of ordinary
Utilities expense involved the production of
are expenses incurred for merchandise and the sale of
light and water consumed goods or services to
during the operation of customers.
business. Investing Activities
Repairs and maintenance transactions that involve
are expenses paid for making and collecting loans
repairing the assets of the or that involve purchasing
business. and selling plant assets,
Bad debts other productive assets and
are the estimated number of the investments
losses from uncollectible Financing activities
accounts of the business. are transactions that involve
Depreciation proceeds of equity securities,
expense is the allocated cost short term/long term
of fixed assets in the current borrowings, payment of
period. dividends to investors, etc.
Statement of Owner's
Equity
is a report that summarizes
the changes to equity in a
given period time. The
accounts that affect owner's
equity are the following:
changes to equity,
income/losses, drawing
account.
Statement of Cash Flows
is the report that shows the
cash inflow and cash outflow
which resulted from three
business activities; operating,
investing and financing
activities during the period.
Cash Inflows
are receipts or increase in
cash balance while
Cash Outflow
is disbursement/payment out
of cash or decrease in cash
as of balance sheet date.
Operating activities
 Branches of Accounting individuals entrusted with
Common Branches of those funds.
Accounting Auditing
Financial Accounting Involves inspection of an
 It is the branch of entity’s financial statements
accounting that focuses or business processes to
on general-purpose ascertain their
financial statements. correspondence with
 General Purpose Financial established criteria.
Statements cater to the
common needs of Tax Accounting
external users, primarily It is the preparation of tax
the potential and existing returns and rendering tax
investor, and lenders and advice, such as the
other creditors. determination of tax
Management Accounting consequences of ascertaining
Involves the accumulation proposed business
and communication of endeavors.
information for use by Cost Accounting
internal users. It is the systematic recording
Management Advisory and analysis of the costs of
Services materials, labor, and
Is an offshoot of management overhead incident to the
accounting. It includes production of goods or
services to clients on matters rendering of services.
of accounting, finance, Accounting Education
business policies,  Refers to teaching
organization procedures, accounting and
product cost, distribution, accounting-related
and other phases of business subjects in an organized
conduct and operations. learning environment.
Government Accounting  It is the process of
Refers to the accounting for facilitating the acquisition
the government and its of knowledge and skills
instrumentalities, focusing regarding one or more of
attention on the custody of the other branches of
public funds, the purposes to accounting.
which those funds are Accounting Research
committed, and the  Pertains to the careful
responsibility and analysis of economic
accountability of the events and other
 variables to understand  It is registered with the
their impact on decisions. Securities and Exchange
 Includes a broad range of Commission (SEC).
topics, which may be Corporation
related to one or more of  More than one individual
the branches of owns it.
accounting, the economy  Unlike a partnership, it is
as a whole, or the market created by operation of
environment. law rather than contract.
Forms of Business  Ownership in a corporation
Organizations is represented by shares of
 A business is an activity stocks. The owners are
where goods or services called stockholders or
are exchanged for money. shareholders.
 A person who is engaged  It is an artificial being or a
in business is called an juridical person.
entrepreneur or  In the eyes of the law, it is
businessman. like a person separate from
its owners.
Businesses in the Philippines  It can transact on its own,
are organized in one of the have its properties, incur
following: its obligations, and sue or
Sole or Single be sued.
Proprietorship  Incorporators (founders)
 A business owned by only shall not be more than 15.
one individual.  However, it can have as
 It is the simplest form of many stockholders as its
business organization. authorized capitalization
 The business owner is permits.
called “sole proprietor.”  A corporation is registered
 It is registered with the with the Securities and
Department of Trade and Exchange Commission
Industry (DTI). (SEC).
Partnership Cooperative
 A business owned by two  Owned by more than one
or more individuals who individual.
entered into a contract to  However, it is formed in
carry on the business and accordance with the
divide among themselves provisions of The
the earnings therefrom. Philippine Cooperative
Code of 2008.
  The owners of a  However, a cooperative
cooperative are called can have as many
members. members as its by-laws
 It is an association of permit.
individuals who joined  It is registered with the
together to contribute Cooperative Development
capital and cooperate to Authority (CDA)
achieve certain goals.
Example: Types of Business
A group of farmers may According to Activities
form a cooperative to The following are the major
acquire delivery trucks to be types of business according
used in transporting their to the activities they
produce to the market. If the undertake:
cooperative earns profit (net 1. Service Business
surplus), a farmer can  It offers services as its
recover his costs through main product rather than
patronage refunds. physical goods.
 Another concept is that  May offer professional
members need to skills, expertise, advice,
patronize the lending service, and
cooperative’s goods or similar services.
services. Examples:
Patronage refunds  Schools
 Pertain to the profit that  Professionals (accounting
a cooperative returns to firm, law firm, etc.)
its owners.  Hospitals and clinics
 A member who has  Banks and other financial
not patronized any of the institutions
services of the cooperative  Hotels and restaurants
for an unreasonable period  Transportation and travel
may be removed from the (travel agency, etc.)
cooperative upon majority  Entertainment and event
vote of the board of planners.
directors.
 It also has juridical
personality similar to a
corporation.
 Founding members shall not 2. Merchandising
be less than 15 individuals. Business/Trading
 Buys and sells goods without  Restaurants are expected
changing their physical form. to fill-in customer orders
Examples: and provide dining
 General merchandise services; thus, they are
resellers (grocery stores, more of a service-type
department stores, hardware business.
stores, pharmacies, online
stores, sari-sari stores, etc.)
 Distributors and Chapter II
dealers (rice wholesalers, ANALYZES OF
vegetable dealers, 2nd hand ACCOUNTING
dealers, etc.) TRANSACTION
3. Manufacturing Business
 One that buys raw Business Transaction
materials and processes them The nature of business is
into final products. to earn profit, and it
 Changes the physical becomes possible by
form of the goods it has building good relationship
purchased in a production with suppliers, employees,
process. investors and other
Examples: stakeholders.
 Car manufacturers
 Technology, food These stakeholders are the
processing companies source of the company in
 Factories
creating the so-called
Some businesses, called
business transaction,
hybrid businesses, engage
which are the business
in more than one type of
events and economic
activity.
activities that are
Example: A restaurant uses
measurable in monetary
ingredients to cook meals
and non-monetary value.
(manufacturing), sells Coca-
Arganda stated that
Cola drinks (merchandising),
and serves food to customers
"internal transactions are
(service).
activities that involves one
 Hybrid businesses are enterprise and another
classified into one of the enterprise, while external
major types based on the transactions are activities
activity that is most in line performed within the
with the business’s enterprise."
purpose.
It is better to know which bookkeeping eeping
transaction affects the system.
financial statement.
Business transactions that Double Entry
may affect balance sheet bookkeeping system
are assets, liabilities. and is recording of transactio
owner's equity, while transaction that requires
transactions that affect equal balance of the total
income statement are amount both debits and
revenues/income and credita. Hernane, stated
expenses. that accounting equation
is "assets is equal to
equity.
On the latter part of the
chapter, you will be able to Equity is the right to
know how these properties, these are the
transactions are presented equity to creditors
on financial reports. (liabilities), and the equity
of the owners (capital)."
Accounting Equation Assets - Equity: Thus, this
In accounting system, equation is mostly applied:
business transactions Assets Liabilities Owner's
should be recorded, Equity
classified, summarized and The
interpreted. All of these
functions of accounting
cannot be made unless
you follow the basic
accounting equations.

Accounting equations
can be defined as:
It is also known as balance
sheet equation, because it
represents the relationship
of three elements such as
assets, liabilities and above equation must the
owner's equity. It is the maintained balance. The
foundation of double-entry left side represents the
assets and the right sides
are liabilities and owner's
equity. From the given
equation, we can also
derive the following
equation:
 Assets Liabilities
 Owner's
 Equity and Assets
 Owner's Equity
 Liabilities

Accounting Equation
Expanded
In the accounting equation
expanded, the accounting
equation should always be
balanced. The effects of
each transaction will either
increase or decrease the
elements of each
accounting equation.

Remember that owner's

equity increases by
investment t of an owner,
earned income/revenue,
and it decreases due to
incurred expenses and
personal drawings of the
owner.

To further illustrate this is

how transaction increases
or decreases in the
accounting equation.
Assets= Liabilities +
Owner's Equity
 Chapter III that both sides must
RECORDING OF always be equal.
BUSINESS
TRANSACTION OF The T-Account
SERVICE BUSINESS It is similar to big capital
letter T, that's why it is
Double-Entry Method Of called T-account. It is
Bookkeeping known to be the simplest
In accounting system, the form of account which is
business transactions are used to demonstrate the
recognized when it is debit and right side of an a
recorded through the use account. Furthermore, it is
of "double-entry system" important nt to remember
which means transactions remember that that each
are necessary to be side, represent the left and
recorded twice. right side. Arganda et al,
show the T-account as
The method of recording
this transaction involves
dual effect to the elements
of accounting equation so-
called double-entry
method of Accounting equation will
bookkeeping. greatly help you in
remembering the normal
Account balances of the account
It is defined as individual like, assets' normal
record that summarizes balance is debit side, while
the increase and decrease liabilities and owners'
of each asset, liability and equity is the credit side.
owner's equity transaction. On the latter part of the
Each account will have discussion, you will realize
title and corresponding that it will be easier to
account number. It shows remember the normal
the debit and credit side of balances of of each
an account. The debit account by remembering
sides represent the left the accounting equation.
side, and then the credit
side represents the right Debit And Credit
side. Always remember The word debit and credit
came from the latin word
"debere" which means to Value Received and
"to owe" and "credere" Value Parted With
In every business
transaction, there is an
exchange of value for
value, which can be
identified through value
received and value parted
which means "to trust or with. In addition, value
to believe" Debit is may either be given in
abbreviated as "DR" and form of money, property or
credit as "CR." In recording services. To analyze
transaction, the debit and transaction, determine
credit signifies an increase what you receive and what
and decrease of an you have given away.
account. There are
accounts which normally
increases when it is Example 1. You bought an
debited, there are some accounting book from
that increases when it is National Bookstore for P
credited. 350. What did you
In general, bookkeeper will receive? Accounting book
say "debit to" rather than What value have you
"place an entry to debit parted with or given away?
side of an account", or Money worth of P 350.00
"credit to" rather than In recording of debit and
"place an entry to credit lit credit, it should be;
side of an account." For Debit- Credit
better understanding, the Book- Cash
table below summarizes Example 2. You bought
the normal balances of all goods with account worth
account. P100 at the sari-sari store.
What did you receive?
Goods. What value have
you parted with or given
away? A promise to pay
later or obligation to pay.
In recording of debit and
credit, it should be; Debit-
Credit
Goods- Accounts value parted with/given
payable. away represents the credit
Example 3. You pay the side of an account. The
goods in No. 2 for cash. next illustration will show
What did you receive? My you the corresponding
promise to pay later or account titles for each
obligation to pay. What transaction.
value have you parted
with or given away? Money
worth P 100. In recording
of debit and credit, it
should be:
Debit - Accounts
payable
Credit - Cash

For further understanding,

consider the following

examples.
The value received can
represent as a debit side
of an account then, the
Chapter Evaluation
1. What are the
accounts and its normal
balances?
Accounts are categories
used to track financial
transactions in an
organization's accounting
system. They are classified
into five primary types,
each having a normal
balance:
 Assets: These
represent resources
owned by the
business (e.g., Cash,
Accounts
Receivable,
Equipment). Their
normal balance is
debit.
 Liabilities: These
are obligations the
company owes to
others (e.g.,
Accounts Payable,
Loans). Their normal
balance is credit.
 Equity: This
represents the
owners' claims on
the company's
assets (e.g., Capital,
Retained Earnings).
Its normal balance is
credit.
 Revenue
(Income): This
represents the
inflow of money
 from sales or  Closing Journal
services provided Entry: Made at the
(e.g., Sales, Service end of a fiscal period
Revenue). The to close temporary
normal balance is accounts (e.g.,
credit. revenues, expenses)
 Expenses: These to prepare the books
are costs incurred in for the next period.
running the business  Reversing Journal
(e.g., Rent Expense, Entry: Made at the
Salaries Expense). beginning of a new
The normal balance accounting period to
is debit. reverse certain
2. What are the types adjusting entries,
of journal entry? preventing double-
The types of journal counting of
entries are: revenues or
 Simple Journal expenses.
Entry: Involves one 3. What are T-accounts
debit and one credit and its importance?
(i.e., a single A T-account is a visual
transaction affecting representation of an
only two accounts). account in the shape of
 Compound Journal the letter "T". It helps in
Entry: Involves tracking the movements of
multiple debits debits and credits in each
and/or credits, account. The left side of
meaning more than the T-account is the debit
two accounts are side, while the right side is
affected in the the credit side.
transaction. Importance of T-
 Adjusting Journal accounts:
Entry: Made at the  They help in
end of an visualizing how
accounting period to transactions affect
account for accounts.
expenses incurred or  Useful for learning
revenues earned but and understanding
not yet recorded. the double-entry
accounting system.
  They provide a quick This relationship ensures
and easy way to that every journal entry
check the balance of maintains balance through
each account. equal debits and credits.
 Assist in ensuring 5. How do you record
that the accounting business transactions
equation (Assets = using T-accounts?
Liabilities + Equity) To record business
remains balanced. transactions using T-
4. How are the value accounts, follow these
received and value steps:
parted with related to 1. Identify the
journal entry? accounts affected
In double-entry by the transaction
accounting, every (e.g., Cash,
transaction involves a Inventory, Sales).
value received and a 2. Determine
value parted with: whether each
 Value received: account is debited
The asset or service or credited based
that a business on the nature of the
gains (recorded as a transaction (assets
debit). increase through
 Value parted with: debits, while
The asset or liabilities increase
obligation that the through credits,
business gives up etc.).
(recorded as a 3. Enter the
credit). transaction in the
For example, when a T-account:
company purchases o Debit the left
equipment with cash: side of the T-
 The value received account for
is the equipment the account
(debit to receiving
Equipment). value.
 The value parted o Credit the
with is the cash right side of
paid (credit to the T-account
Cash). for the
 account
giving up
value.
4. Ensure that total
debits equal total
credits, which
keeps the
accounting equation
in balance.
For example, if a business
sells goods for cash:
 Debit Cash (an
asset account) for
the amount
received.
 Credit Sales (a
revenue account) for
the amount earned.