Financial

Accounting
and Reporting
Introduction to
Accounting
 Introduction to Accounting
✗ Accounting is the language of business and is called this
because all organizations set up an accounting information
system to communicate data to help people make better
decisions.
✗ Accounting is a system that Identifies – Records –
Communicates relevant, reliable, and comparable information
about an organization’s business activities.
✗ Accounting is the art of recording, classifying, summarizing.
Accounting is also a science as it is structured knowledge
based on certain basic principles.
Branches of accounting

✗ Financial Accounting
✗ Management Accounting
✗ Government Accounting
✗ Auditing
✗ Tax Accounting
✗ Cost Accounting
✗ Accounting Education
✗ Accounting Research
Branches of accounting

 Financial Accounting is the branch of accounting that focuses on

general purpose financial statements.
 Management Accounting involves the accumulation and
communication of information for use by internal users.
 Financial Accounting focuses on the information needs of external
users.
 Government Accounting refers to the accounting for the government
and its instrumentalities
 Auditing involves the inspection of an entity's financial statements or
business processes to ascertain their correspondence with an
established criteria.
 Branches Of accounting

1. Cost Accounting is the systematic recording and analysis of the costs of

materials, labor, and overhead incident to the production of goods or
rendering of services.
2. Tax Accounting is the preparation of tax returns and rendering of tax
advice, such as the determination of tax consequences of certain
proposed business endeavors.
3. Accounting Education refers to teaching accounting and accounting-
related subjects in an organized learning environment.
4. Accounting Research pertains to the careful analysis of economic events
and other variables to understand their impact on decisions
Forms of business

✗ A single or sole proprietorship is an unincorporated business

owned by an individual and often managed by that same person.
✗ A partnership is a business owned by two or more people,
known as partners.
✗ Corporations are a separate legal entity created by
shareholders.
Types of business

✗ Business is an organization in which basic resources, such as

materials and labor, are assembled and processed to provide goods
or services to customers.
✗ Manufacturing is a type of business that changes basic inputs into
products that are sold to individual customers
✗ Merchandising is a type of business that purchases products from
other businesses and sells them to customers.
✗ Service is a type of business that provides services rather that
products to customers.
Accounting and Its
Environment
Accounting Concepts and principle

✗ Separate entity concept — Under this concept, the business is viewed

as a separate person, distinct from its owner(s).
✗ Historical cost concept (Cost principle) — Under this concept, assets
are initially recorded at their acquisition cost.
✗ Going concern assumption — Under this concept, the business is
assumed to continue to exist for an indefinite period of time.
✗ Matching (or Association of cause and effect) — Under this concept,
some costs are initially recognized as assets and charged as expenses
only when the related revenue is recognized.
Accounting Concepts and principle

✗ Accrual Basis of accounting — Under the accrual basis of accounting,

economic events are recorded in the period in which they occur rather
than at the point in time when they affect cash.
✗ Time Period (Periodicity, Accounting period, or Reporting period
concept) — Under this concept, the life of the business is divided into
series of reporting periods.
✗ Prudence (or Conservatism) — Under this concept, the accountant
observes some degree of caution when exercising judgments needed in
making accounting estimates under conditions of uncertainty.
Accounting Concepts and principle

✗ Stable monetary unit — Under this concept, assets, liabilities, equity,

income and expenses are stated in terms of a common unit of measure,
which is the peso in the Philippines.
✗ Materiality concept — This concept guides the accountant when
applying accounting principles. This is because accounting principles
are applicable only to material items.
✗ Cost-benefit (Cost constraint) — Under this concept, the costs Of
processing and communicating information should not exceed the
benefits to be derived from the information's use.
Accounting principle concept

✗ Full disclosure principle — This concept is related to both the

concepts of materiality and cost-benefit
✗ Consistency concept — This concept requires a business to apply
accounting policies consistently, and present information consistently,
from one period to another.
Time Period

✗ The life of the business is divided into series of equal short periods
called reporting periods (or accounting periods).
✗ A reporting period is usually 12 months, although it can be longer or
shorter.
✗ A calendar year period starts on January 1 and ends on December 31
of the same year.
✗ A fiscal year period also covers 12 months but starts on a date other
than January 1, e.g., July 1, 2019 to June 30, 2020.
✗ An accounting period that is shorter than 12 months is called an
"interim period." An interim period can be a month, a quarter (3
months) or a semiannual period (6 months).
 Accounting
equation and
double entries
The accounting equation

✗ Basic Accounting Equation

✗ ASSET = LIABILITIES + OWNER’S EQUITY

✗ ASSETS — are the economic resources you control that have resulted from
past events and can provide you with economic benefits.
✗ LIABILITIES — are your present obligations that have resulted from past
events.
✗ EQUITY — is simply assets minus liabilities. Other terms for equity are
"capital," "net assets," and "net worth."
The accounting equation

Account Title

Left side or Debit side Right side or Credit side

Double entry system

✗ Accounting is based on the double-entry system which means that the

dual effects of a business transaction is recorded.

Assets Liabilities and Owner’s Equity

Debit Credit Debit Credit

Increases Decreases Decreases Increases
Double Entry System

Income statement Accounts

Debit for decreases in owner’s Credit for increases in owner’s

equity equity

Liabilities and Owner’s

Expenses Equity
Debit Credit
Debit Credit Decreases Increases
Increases Decreases
Normal Balance

Increases Recorded by or Normal Balance

Account Category Debit Credit
Asset 
Liabilities 
Owner’s Equity:
• Owner’s Capital 
• Withdrawals 
• Income 
• Expense 
Accounting for
service business
Recording business
transactions
Journal

✗ The journal is a chronological record of entity’s transactions.

✗ Example: Assume that Dahyun Kim established her own entertainment

company with an initial investment of P500,000 on May 1.

Date Account Title P.R. Debit Credit

1 2018
2 May 1 Cash 500,000
3 Kim, Capital 500,000
4 Initial Investment
5
The ledger

✗ A grouping of the entity’s accounts is referred to as a ledger.

Cash Kim, Capital

May 1 500,000 May 1 500,000
Trial Balance

✗ Is a list of all accounts with their respective debit or credit balance.

Adjusting the
accounts
Accrual basis and cash basis

✗ The financial statements, except for the cash flow statement, are
prepared on the accrual basis of accounting in order to meet their
objectives.
✗ Under accrual basis, transaction and events are recognized when they
occur and not as cash is received or paid.
✗ GAAP require that a business use the accrual basis

✗ In cash basis, the transaction is not recorded until the cash is received
or paid.
The need for adjustments

✗ Accountants makes adjusting entries to reflect in the accounts

information on economic activities that have occurred but have not yet
recorded.
Adjustments for deferrals

✗ Prepaid Expense are expenses that are paid in advance. Prepaid expenses are
assets, not expenses.

Prepaid Expense (OE:E) xxx

Prepaid Insurance (A) xxx

Rent Expense (OE:E) xxx

Prepaid Rent (A) xxx

Supplies Expense (OE:E) xxx

Supplies (A) xxx
Adjustments for deferrals

✗ Depreciation of Property and Equipment when the portion of the cost of the
asset is reported as expense in each accounting period.
Asset Cost xxx

Less: Estimated salvage value _xxx_

Depreciable Cost xxx

Divided by: Estimated useful life _xxx_

Depreciation expense xxx_

Depreciation Expense (OE:E) xxx

Accumulated Depreciation (A) xxx

Adjustments for deferrals

✗ Unearned revenue is when you received cash in advance before the

service is rendered or goods are delivered, and you have the obligation
to perform services or deliver goods.

Unearned Revenue xxx

Revenue xxx
Adjustment for accruals

✗ Accrued Expenses are expenses that are already incurred but not yet
paid.
Expenses xxx
Accounts Payables xxx
✗ Accrued Revenues are services during the period that are neither paid
by the clients not billed at the end of the period but already earned.
Accounts Payable xxx
Revenue xxx
✗ Accrual for Uncollectible Accounts
Uncollectible accounts expense xxx
Allowance for uncollectible accounts xxx
 Summary of adjusting Entries
Account Balances BEFORE Adjustment Adjusting Entry
Type of adjustment Balance Sheet Income Statement Account Debited Account Credited
Account Account
Prepaid Expense:
Asset Method Asset Overstated Expense Understated Expense Prepaid Expense (A)
Expense Method Asset Understated Expense Overstated Prepaid Expense (A) Expense

Depreciation Asset Overstated Expense Understated Expense Contra Asset

Unearned Revenue:
Liability Method Liabilities Overstated Income Understated Unearned Revenues(L) Revenue
Income Method Liabilities Understated Income Overstated Revenue Unearned Revenues (L)

Accrued Expense Liabilities Understated Income Overstated Expense Payable (L)

Accrued Revenue Asset Understated Expense Overstated Receivable (A) Revenues