SAMAL ISLAND CITY COLLEGE

Datu Taganiog St., Brgy Penaplata, Samal Distirct

Island Garden City of Samal
Davao del Norte, Philippines

Fundamentals of Accounting (for Tourism)

Course Content: This course is designed to introduce students to the principles, concepts, and
applications of financial accounting. It will explore the development of accounting information in the
use of various types of accounting information found in financial statements and annual reports. It
will emphasize what accounting information is, why it is important and how it is used by economic
decision makers. Specifically, it will cover introduction to business and decision-making, basic
structure and development of useful accounting information, understanding the basic financial
statements (balance sheet, income statement and owner’s equity and statement of cash flows),
forms of outside assurance on financial statement, and analysis of accounting information.

Prepared by:

Kate Nalla D. Ferolin, CHIA

BSTM- Faculty
 Principles of Accounting
MID-TERM PERIOD TOPICS
COVERAGE

ANALYSES OF TRANSACTIONS AND RULES OF DEBIT AND

CREDIT
The present recording system which are already innovative in procedure and are
designed to fit the changing needs of our current economic development which also
gives growth to the development in the practice of accounting profession worldwide can
be traced to the work of a Franciscan monk by the name of Luca Pacioli.

In Venice, as early as November 1494, this Franciscan monk had published book which
contained the primary principles of Mathematics and incidentally a set of accounting
procedures. The title of this book was “ Summa de Arithmetica, Geometria, Proportion
et Proportionalite” (Everything about Arithmetic, Geometry, Proportions and
Proportionality).

DEFINITION OF ACCOUNTING

The Statement of Financial Accounting Standards (SFAS) No.1 defines accounting as

follows:
“It 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.”

The American Accounting Association (AAA) which comprises primarily of accounting

educators defines accounting as follows:

“It is the process of identifying, measuring and communicating economic information to

permit informed judgments and decisions by users of the information.”

The Committee on Accounting Terminology of the American Institute of Certified Public

Accountants (AICPA) which is the largest organization of practicing accountants made the
definition of accounting as follows:

“It is an art of recording, classifying, 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.”

The definition mentions the four (4) phases of accounting which are recording, classifying,
summarizing, and interpreting. These are being outlined on the next page:

Recording - this is the phase of accounting which involves the routine and mechanical process
of writing down the business transactions and events in the books of accounts in a
chronological manner called Journalizing.

Before business transactions and events could be recorded, firstly, they should be identified,
analyzed and measured. By identifying, we mean, there should be a basis of determining
whether such were business transactions and events or not. As a rule, only transactions and
events with financial bearing to the business are recognized. By analyzing, we mean that there
should be “dual effect”, normally the value received and the value parted with of the
transactions. By measuring, we mean the assigning of monetary values involved in a
transaction. In the Philippines, we used the peso as the common financial denominator.

Classifying - this is the phase of accounting which involves the sorting or grouping of similar
items or similar and interrelated transactions and events into their respective kind and classes.
This is actually the process of transferring the entries from the journal to the ledger called
Posting.

Summarizing - this is the phase of accounting which involves the completion of the financial
statements and the accounting requirements as well. This starts from striking of a trial balance,
plotting down adjusting entries in the worksheet and the preparation of the closing entries, the
post-closing trial balance and reversing entries.

Interpreting - this is the phase of accounting which involves the “analytical and interpretative
works”. It is then, that when the financial statements are analyzed, interpreted and are
communicated to those interested parties where these could be of great help to management
as a basis for making a sound decision.

WHAT ARE BUSINESS TRANSACTIONS AND EVENTS?

Business transactions and events are considered accountable if it can be qualified and can be
expressed in terms of unit of measures or financial denominator. They likewise caused
changes (increase or decrease) in accounting values either the assets, liabilities and owner’s
equity of an enterprise.

Business transactions on the other hand, are exchanges of equal monetary values. This
definition implies the following concept of understanding:

1. For every value received, another value is given away as an exchange;

2. These values are measured in terms of pesos which are presumed to be equal.

To summarize, in every transaction, there is Value Received, we call a Debit and Value Parted
with we call a Credit. This is the “give-and-take” process in accounting as expressed in the
equation:

Debit, Value Received = Credit, Value Parted With

HOW ARE BUSINESS TRANSACTIONS ANALYZED?

Business transactions are analyzed from the view point of the business. If the transaction says
“Purchased” or “Bought”, it is the business that is buying; if the transaction says “Sold”, it is the
business that is selling; if the transaction says “Paid”, it is the business that is paying; if the
transaction says “Collected” or “Received”, it is the business that is collecting or receiving; if the
transactions is “Rendered Services”, it is the business that is rendering services, etc. and not
the other way around. As the bookkeeper or accountant of the business, you always have to
consider yourself as the business, when making the analysis.

The value received or debit should first be determined first before the value parted with or
credit. To test your ability on transactions analysis let us have a series of dry run or drill.

EXTENDED ILLUSTRATION ON TRANSACTION ANALYSIS

The following transactions with the corresponding analyses are given to illustrate the principle
of debit and credit with ready recognition of various forms of accounting values.

Perpetual Inventory System

The periodic inventory system uses an occasional physical count to measure
the level of inventory and the cost of goods sold (COGS).

Periodic Inventory System

The perpetual system keeps track of inventory balances continuously, with
updates made automatically whenever a product is received or sold.

Examples:

Transaction 1 – Bought a delivery car for cash, P850,000.

Analysis:In this transaction, the value we received is a form of an Asset which is

delivery car, we call this Delivery Equipment (account title) and the value
parted with is another form of an Asset which is “Cash”.
We then say,
Debit, Asset – Delivery Equipment P850,000
Credit, Asset – Cash P850,000
 Sold an old computer for cash, P30,000.

Analysis: In this transaction, the value we received is a form of an Asset which is

Cash and the value parted with is another form of an Asset which is
computer, we call this Office Equipment.
We then say,
Debit, Asset – Cash P 30,000
Credit, Asset – Office Equipment P
30,000
  Purchased food and beverage supplies for cash amounting to P65,000.

Under Perpetual Inventory System

Analysis: In this transaction, the value we receive is a form of an Asset we call

this, “Food and Beverage Inventory” and the value parted with is a
form of an Asset which is Cash.
We then say,

Debit, Asset-Food and Beverage Inventory P 65,000

Credit, Asset-Cash P 65,000

Under Periodic Inventory System

Analysis: In this transaction, the value we received is a form of Cost we call

this, “Purchases” and the value parted with is a form of an Asset which is
Cash.
We then say,
Debit, Cost-Purchases P 65,000
Credit, Asset-Cash P 65,000

Note: There is no need to determine the cost of goods sold under the periodic system.

THE T-ACCOUNT

The effect of changes in Assets, Liabilities, and Owner’s Equity are being summarized in an
accounting device called account. This device will group these accounting values with their
amounts belonging to one item only. In the item “cash” for example, all amounts representing
increases and decreases in cash are entered in the account cash.

An account is divided into two sides. The left-hand side is called the debit side and the right–
hand side which is called the credit side.

The left-hand or debit side shows the value received while the right-side or credit side shows
the value parted with of a transaction analysis. The device is commonly called T-Account
because it resembles a capital letter “T”. An account title is written above the T-Account.

Shown below is the formation of an Account

ACCOUNT TITLE

Left-hand Side Right-hand

Side or or
Debit side is for Credit side is for
VALUE RECEIVED VALUE PARTED WITH

An amount entered on the left-hand side of the account is called a Debit Entry while the
amount entered on the right-hand side is called a Credit Entry. The moment an “account” is
assigned to an item to which a title has already been designated, such account becomes
identical to the item thereafter. For instance, the account assigned to the item “Cash” becomes
known as Cash Account; the account assigned to the item “Notes Receivable” becomes
known as Notes Receivable Account; the account assigned to the item “:Rent Expense”
becomes known as Rent Expense Account and so forth.

To illustrate:

Shown below is a T-Account for the item “Cash”

CASH
Dr. (Debit) (Credit)
Cr.
(1) P25,000 (2)
P10,000

As an item “Cash” was written on top of the account, it becomes a Cash Account. The P25,000
that is being entered (recorded) at the left-hand side of the account is called a Debit Entry.
The P10,000 that is being entered (recorded) at the right-hand side of the account is called a
Credit Entry.
The total of the debit amounts or the debit entries of an account is called debit total while the
total of the credit entries of an account is called credit total.

Let us assume, “cash account” has the ff. entries:

CASH
Dr. P 25,000 P 10,000 Cr.
20,000 5,000

Debit total---->P 45,000 P 15,000<----Credit total

We then say,

Cash account has a debit total of P45,000 and a credit total of P 15,000.

ACCOUNT BALANCE

The difference between the debit total and credit total of an account is called an Account
Balance. If the total of the debit side exceeds the total of the credit side, the account is said to
be a Debit Balance. Conversely, if the total of the credit sides exceeds the total of the debit
side, the account is said to be a Credit Balance. If the debit total equals with that of the credit
total, the account is said to be In-Balance or Closed Account.

To illustrate:

The three (3) cases are being presented to illustrate an account balance.

Case 1: The “Cash account” is used. Cash is an asset, the normal balance is debit.

Let us assume, Cash has the following debit and credit entries.

CASH
 Dr.
Cr.
P25,000 P10,000
10, 000 5,000
credit total
Debit total P35,000 P15,000

Debit balance
P20,000

In as much as the debit total of P35,000 exceeds the credits the credit total of P15,000, Cash
account is said to be in a debit balance by P20,000. Hence, the account balance of P20,000
was placed on the debit side of the account.
We then say,
“Cash accounts has a debit balance of P20,000.”

Case 2: The “Accounts Payable” account is used. Accounts Payable is a liability,

therefore the normal balance is credit.

Let us assume, Accounts Payable account has the following debit and credit entries:

ACCOUNTS PAYABLE
Dr. P15,000 P40,000
Cr.
20,000 10,000
P50,000 - Cr
Ddebit total - 35,000
P15,000 - credit total
balance

In as much as the credit total of P50,000 exceeds the debit total of P35,000, the Accounts
Payable accounts is said to be in a credit balance by P15,000. Hence, the account balance of
P15,000 was placed on the credit side of the account.

We then say, “Accounts Payable account has a credit balance of P15,000.”

Case 3: The “accounts Receivable” account is used. Accounts Receivable is an asset,

hence, the normal balance is debit.

Let us assume, Accounts Receivable account has the following debit and credit entries.

ACCOUNTS RECEIVABLE
P12,000 P10, 000 Dr.
Cr.
4,000 6, 000
debit total - P16,000 P16 ,000 - credit
total
In as much as the debit total of P16,000 equals with its credit total of P16,000, the Accounts
Receivable accounts is said to be in-balance or a closed account. (by closed, we mean “zero
balance”)
We then say,
“Accounts Receivable accounts has a “zero” balance or the Account Receivable
account is closed”

THE RULES OF DEBIT AND CREDIT

The accounting equation, A=L+OE has developed the rules to be followed in the study of
accounting. The equation stands for the “normal balance” or “increase sides” in each of the
accounting elements. In other words, the normal balances refer to the increase side of the
account which may either be a debit or a credit. For Assets, the increase side is the debit side
(left) while for Liabilities and Owner’s Equity, the increase sides are on the credit side(right).

To illustrate:
ASSETS
DEBIT SIDE CREDIT SIDE
NORMAL BALANCE OR
INCREASE SIDE DECREASE SIDE

We then say, DEBIT to increase an Asset and Credit to decrease on Asset.

LIABILITIES
DEBIT SIDE CREDIT SIDE
NORMAL BALANCE OR
DECREASE SIDE INCREASE SIDE

We then say, CREDIT to increase a Liability and DEBIT to decrease a Liability.

OWNER’S EQUITY
DEBIT SIDE CREDIT SIDE
NORMAL BALANCE OR
DECREASE SIDE INCREASE SIDE

We then say, CREDIT to increase Owner’s Equity and DEBIT to decrease Owner’s
Equity.

The increases and decreases of Owner’s Equity account are diagrammed below.

Factors that will cause the “Owner’s Equity” to increase:

 1. Investment by owner
2. Revenues

Factors that will cause the “Owner’s Equity” to decrease:

1. Withdrawal by owner
2. Expenses

DRAWING OR PERSONAL – the reduction of an Owner’s Equity account arising from cash or
property withdrawal of an owner is not debited to Owner’s Equity account to effect the
decrease but instead debited to “Drawing Account”. The debit to drawing account increases the
said account with corresponding decrease on Owner’s Equity.

DRAWING OR PERSONAL
DEBIT SIDE CREDIT SIDE
NORMAL BALANCE OR
DECREASE SIDE
INCREASE SIDE
We then say, DEBIT to increase Drawing and CREDIT to decrease Drawing.

TEMPORARY ACCOUNTS

INCOME or REVENUE – All income of the same nature is summarized in this account.

INCOME OR REVENUE
DEBIT SIDE CREDIT SIDE
NORMAL BALANCE
DECREASE SIDE OR INCREASE
SIDE
We then say, DEBIT to increase Income and CREDIT to decrease Income.

COST AND EXPENSES – all costs and expenses incurred of the same nature are
summarized in its particular account.

COST AND EXPENSES

DEBIT SIDE CREDIT SIDE
NORMAL BALANCE OR
INCREASE SIDE DECREASE SIDE

We then say, DEBIT to increase Expense and CREDIT to decrease Expense.

To summarize, Income and Expenses are factors that affect Owner’ Equity. Income
increases Owner’s Equity while Expenses Decreases Owner’s Equity. Owner’s Equity
is increased by a credit to Income and is decreased by a debit to Expense.

To recapitulate the developed rules of debit and credit are again restated as follows.

We debit to: We credit to:

 Rule 1 increase in Asset decrease in Asset
Rule 2 decrease in Liability increase in Liability Real Accounts
Rule 3 decrease in Owner’s Equity increase in Owner’s equity
Rule 4 increase in Drawing decrease in Drawing
Rule 5 decrease in Income increase in Income Nominal
Accounts Rule 6 increase in Expenses decrease in Expenses

APPLICATION OF THE RULES

The rules of debit and credit are applicable to all forms of business organization; be it a sole
proprietorship, partnership or corporation, regardless of what type of business activity in which
they are engaged in; be it a service, merchandising, manufacturing or a hybrid company.

The following transactions show how the rules of debit and credit are applied:

Asset represented by Cash in Bank and Food &Beverages Inventory.

Liability is represented by Accounts Payable
Owner’s Equity is represented by Kareen Leon, Capital
Drawing is represented by Kareen Leon, Personal
Revenue is represented by Sales-Food and Beverage
Cost of Sales is represented by Cost of Sales-Food and Beverage
Expense is represented by Salaries and Wages
(Recording of transactions are based under perpetual inventory system)

Note: (The shaded entry represents the applicable transaction in particular)

Example:
 Ms. Kareen Leon made an initial investment of P100,000 to
start with her kitchenette business and deposited it to the
bank
Analysis : Debit, Cash in Bank of P100,000 and Credit, K.Leon, Capital of
P100,000.
Rule : Debit, increase Asset and Credit, increase in Owner’s Equity.

Cash in Bank K. Leon, Capital

Debit Credit Debit Credit
1) P100,000 1) P100,000

 Bought various food and beverage supplies on account for P95,000

Analysis : Debit, Food and Beverage Inventory of P95,000 and Credit, Accounts Payable
Rule : Debit, increase in Asset and Credit, increase in Liability.
Cash in Bank K. Leon, Capital
Debit Credit Debit Credit
 1) P100,000 1) P100,000

Food and Beverage Inventory Accounts Payable

Debit Credit Debit Credit
2) P 95,000 2) P 95,000

 Payment of salaries and wages

Analysis : Debit, Salaries and Wages of P10,000 and Credit, Cash in Bank of P10,000
Rule : Debit, increase in Expense (decrease in Equity) and Credit, decrease in Asset.

Cash in Bank K. Leon, Capital

Debit Credit Debit Credit
1) P100,000 4) P 5,000 1) P100,000
3) 90,000 5) P 60,000
6) P 10,000
Balance P 115,000

Food and Beverage Inventory Accounts Payable

Debit Credit Debit Credit
2) P95,000 3) P75,000 5) P 60,000 2)
P95,000

Balance P 20,000 Balance P 35,000

Cost of Sales-Food and Beverage Sales-Food and Beverage

Debit Credit Debit Credit
3) P75,000 3) P90,000

K. Leon, Drawing Salaries and Wages

Debit Credit Debit Credit 4) P 5,000
6) P 10,000

S
hown below are the debit and credit balances of each account.
Account Titles Debit Credit
Cash in Bank – (Asset) P 115,000
Food and Beverage Inventory – (Asset) 20,000
Accounts Payable – (Liability) P 35,000
K. Leon, Capital – (Owner’s Equity) 100,000
K. Leon, Drawing – (Personal) 5,000
Food and Beverage Sales – (Revenue) 90,000
Cost of Sales – Food and Beverage – (Cost of Sales) 75,000
Salaries and Wages – (Expense) 10,000 _____ ___
Total P 225,000 P225,000
 This gives you an advance idea on how a trial balance, as a proof of the equality of debits and
credits, is prepared.

SUMMARY OF CHANGES IN TEMPORARY ACCOUNTS OF OWNER’S EQUITY

Revenue P 90,000
Less: Cost of Sales 75,000
Gross Profit P 15,000
Less: Expenses 10,000
Profit P 5,000

K. Leon, Capital P100,000

Add, Profit 5,000
Total P105,000
Less, Withdrawal 5,000
K. Leon, Capital, End P100,000

Activity 1
I. Multiple Choice. Write only the letter of the correct answer in each of the given questions.

1. It is the assigning of peso or monetary values involved in a transaction –

A. identifying B. measuring C. classifying D. summarizing

2. The phase of accounting which involves the routine and mechanical process of writing down
the business transactions and events in a chronological manner in the books of accounts –
A. recording B. classifying C. summarizing D. interpreting

3. The phase of accounting which of involves the sorting or grouping of similar transactions
and events into their respective kinds and classes –
A. recording B. classifying C. summarizing D. interpreting

4. The interpreting phase of accounting relates to –

A. Gathering of informative data C. recording of the data gathered
B. Processing of data gathered D. communicating of the analyzed data

5. A debit entry may signify a decrease in –

A. Asset B. Liability C. Expense D. Drawing
6. The financial statements rely information which are based on past events and transactions
of the business, hence statements are –
A. historical in nature C. systematic in nature
B. financial in character D. informative in nature

7. The accounts that are used to effect reduction of capital other than drawings are – A.
Income and expenses C. only expense
B. Income only D. all of the above

8. Which of the following statements about an “asset account” is not true –

 A. In its simplest form, it consists of two parts C. The left-side is the increase side
B. It is in a T-account form D. The right-side is the increase
side

9. A n account is said to have a debit balance when –

A. Total debit and total credit are equal C. total debit exceeds total credit B.
B.Total credit exceeds total debit D. they are in “in balance”

10. A liability account has a normal balance of a –

A. Debit balance B. Credit balance C. debit entry D. Credit entry

11. A credit entry may signify a decrease in –

A. expense B. revenue C. owner’s equity D. liability

12. A credit entry may signify an increase in –

A. asset B. drawing C. owner’s equity D. expense

13. Which of the following accounts will increase when debited?

A. income or revenue B. accounts payable C. owner’s equity D.
drawing

II. Instruction: The following are “paired transactions”.

Determine 1) the value received or Debit and, 2) the value parted with or Credit.

A -1 - Chesa Santiago invested cash in the business

-2 - Chesa Santiago withdraw cash for personal use

B -1 - Bought supplies on account from R. Suico & Co.

-2 - Paid our account in full with R. Suico & Co.

C -1 - Rendered services on account to R. Baligala

-2 - Collected in full the account of R. Baligala

D -1 - Food Sales on account from various clients

-2 - Collected in full, food sales on account

-3 - Food Sales for Cash

-4 - Actual cost of food sales

E -1 - Received a note from Jocelyn Te for service rendered on account

-2 - Collected in full the note issued by Jocelyn Te

F -1 - Bought a computer for office use from Jocelyn Joson, Co.

 -2 - Paid our account with Jocelyn Joson, Co.

III. Instruction: On the space provided, indicate whether the transactions either increased or
decreased or has no effect on the accounting values which are: Assets, Liabilities, Owner’s
Equity. No.1 is answered for your guide.

Transaction Assets Liabilities Owner’s Equity

1. Bought a car on account Increased Increased no effect

2. Payment of salaries and wages ________ _________ __________
3. Ian Enriquez made an investment ________ _________ __________
4. Renders services to a client for cash ________ _________ __________
5. Rendered services to a client for cash ________ _________ __________
6. Rendered services to a client on account ________ _________ __________
7. Ian Enriquez withdrew cash for personal use ________ _________ __________
8. Cash received from borrowed money ________ _________ __________
9. Payment of promissory note to supplies ________ _________ __________
10. Payment of rental ________ _________ __________
11. Issued a promissory note to a supplier ________ _________ __________
12. Payment of Accounts Payable ________ _________ __________
13. Advance collection of services to be rendered ________ _________ __________
14. Payment of taxes to the government ________ ________ __________
15. Additional investment of Ian Enriquez ________ _________ __________
16. Received a promissory note for services done ________ _________ __________
17. Payment of insurance premium for two years ________ _________ _________

IV. Instruction: Based on the given account titles, determine the account debited and credited
with their respective amounts under Perpetual Inventory System.

Assets Liabilities Owner’s Equity

Cash in Bank Accounts Payable D. Corpuz, Capital

Accounts Receivable D. Corpuz, Drawing
Food and Beverages Inventory
Store Furniture and Fixtures
Kitchen Utensils Revenue Cost and Expenses

Catering Services Cost of Sales-Food and Beverage

Salaries and Wages

1. Deo Corpuz invested P100,000 in a small catering business.

Debit Cash in bank, P100,000
Credit D. Corpuz, Capital, P100,000

2. Bought table, chairs and display cases on account, P30,000.

Debit
Credit
3. Bought spoon and fork, drinking glasses and plates on account, P20,000 from Kingdom
Palace. Debit
Credit

4. Bought food and beverage on account, P50,000 from Leonora Caminade Co. Debit
Credit

5. Returned P2,000 cost of food and beverage to Leonora Caminade Co. for damages and
were not replaced.
Debit
Credit

6. Generated cash sales and credit sales of P35,000 and P15,000 respectively. Debit
Credit

7. Actual cost of food and beverage sold amounted to P20,000.

Debit
Credit

8. Returned to Kingdom Palace glasses and plates that were broken, P2,000 and was not
replaced. Debit
Credit

9. Deo Corpuz withdrew cash, P15,000.

Debit
Credit

10. Collected in full the sales on account, P15,000 of Transaction #6.

Debit
Credit

11. Paid our account on Transaction #2 P30,000.

Debit
Credit

12. Paid salaries for the month, P12,000.

Debit
Credit
13. Bought food and beverage for cash, P18,000.
Debit
Credit

14. Returned P3,000 cost of food and beverage because of breakages.

Debit
Credit

15. Paid the account with Kingdom Palace net of P2,000 returned…
Debit
 Credit

V. The following T-accounts are presented below.

Required:
1. Determine the debit and credit balances of each account.
2. List down the account with open balances and total the same.
3. Draft a Balance Sheet and income Statement.

Cash in Bank
Accounts Receivable 4 50,000
1 100,000 30,000 7

2 15,000 15,000 9
8 20,000

Food Inventory Kitchen Utensils

3 80,000 60,000 6 2 20,000

Accounts Payable Andreau Torralba, Capital

7 30,000 20,000 2 100,000 1
80,000 3 20,000 8

Sales - Food Cost of Sales-Food

50,000 4 6 60,000
15,000 5

Salaries and Wages

15, 000