ACCOUNTING – art of recording, classifying, and summarizing in a significant manner and in terms of many.

(AICPA /
American Institute of Certified Public Accountants)

- (ASC/Accounting Standards Council) Service activity

- FUNCTION: provide quantitative information, primarily financial in nature, about economic entities, that is
intended to be useful in making economic decisions
- (AAA/American Accounting Association) process of identifying, measuring, and communicating economic
information to permit informed judgments and decisions by used of the information.

PURPOSE OF ACCOUNTING

- PRIMARY: to provide reliable and relevant financial information for decision-making

- Known as the ‘language of business’ – common communication where information flows from one party to another
- Provide financial information to a variety of users / speak by itself by simply showing statement / information

ROLE OF ACCOUNTING

- Enables to evaluate of the result of the operation as presented in the income statement or statement of
comprehensive income
- Helps to determine the financial status of the business based on the statement
- Budgets are prepared based on historical data
- For tax compliance reports and filing of financial statements

USERS OF ACCOUNTING INFORMATION

- Resource providers
o Equity investors – stakeholders (existing and potential)
o Lenders – banks
o Other creditors – suppliers
- Investors – information to determine whether to invest based on future profitability, return or capital growth
- Creditors – information to determine whether to grant credit based on risks and ability of the entity to repay debts
- Customer – information on whether an entity will continue to honour product warranties and support it product
lines
- Employees and trade unions – information on whether the entity has the ability to pay increased wages and
benefits, and offer job security
- Government authorities - information to calculate the amount of tax owing and whether the entity complies with
tax laws
- Regulatory agencies – information to determine whether the entity is operating within prescribed rules

INTERNAL USERS EXTERNAL USERS

Management group Financing group

- Sole proprietors - investors

- Partners - potential investors
- Board of directors - trade creditors
- Officers - bank and other financial institutions
- Managers
- supervisors public group

- government
- regulatory agencies
- taxing authorities
- labor unioin
- employees
- retirees
- economic planners
- customers
BUSINESS ORGANIZATION

- SOLE PROPRIETORSHIP – business owned by one person

o Simple to establish; owner controlled
- PARTNERSHIP – two or more persons, carrying on a business in common with a view to making a profit
o Simple to establish; shared control; broader skills and resources
- CORPORATION – separate legal entity created by operation of law owners of corporation called stakeholders
and their ownership interests are presented by the number of shared they own in the corporation
o Easier to transfer ownership; easier to raise funds; limited liability

TYPE OF BUSINESS ACTIVITIES

- OPERATING ACTIVITIES – transactions which are conducted to generate revenue for the business
o Include ordinary and necessary expenses incurred to effect sales and/or to perform services
▪ Eg: usual na ginagawa sa business – nagsusukli, tumatanggap nang bayad
- INVESTING ACTIVITIES – transactions involving acquisition and disposal of long-term assets to facilitate the
business operations
o Lending capital to another entity
▪ Eg: purchase of office furniture, making loans to other entities
- FINANCING ACTIVITIES – transaction involving the capital structure of the business
o Raising capital of the business through owners’ investment to it or from borrowings
▪ Eg: bank borrowings, payment of bank loans

TYPES OF BUSINESS OPERATIONS

- SERVICING – renders services to clients for a fee; service as the primary product
▪ Barber shop, laundry shop
- MERCHANDISING – engages in buying and selling of goods; derives earnings from markup added to the cost of
goods it sells
▪ Buy and sell
- MANUFACTURING – converts raw materials into finished goods that are sold at a selling price

ACCOUNTING CONCEPTS – important ideas that accountant assume in recording business transactions

- Bedrock of accounting and also known as postulates or accounting assumptions

▪ 1. Separate entity; 2. Going concern; 3. Time period; 4. Accrual; 5. Monetary unit

ACCOUNTING CONVENTIONS – practices that practitioners accept because of their long existence and use

- Good example of accounting conventions is use of debit and credit or the dual aspect concept
- Accountants have long observed this practice based on the idea that in every business transaction, a value received
has a corresponding value given

BASIC ASSUMPTIONS IN ACCOUNTING

- ECONOMIC ENTITY ASSUMPTION – business enterprise is regarded as separate and distinct entity from
person or people who own and run it
- GOING CONCERN ASSUMPTION – business entity will continue operating indefinitely for a period of time
sufficient to carry out its contemplated objectives, plans, contracts, and commitments unless the liquidation of the
entity is imminent; related to objectivity and historical cost
- MONETARY UNIT ASSUMPTION – assumes that money is the common denominator in measuring economic
activity; changes in money purchasing power is generally NOT accounted for
- PERIODICITY ASSUMPTION - assumes that the life of the enterprise is divided into several peiods); financial
report is prepared, it is important to indicate the date the time period it covers
o Monthly, quarterly
- ACCRUAL-BASIS ASSUMPTION – financial statements, except statement of cash flows, are prepared on the
accrual basis of accounting; net profit is the difference between revenues and expenses NOT cash inflows&outflows
BASIC PRINCIPLES OF ACCOUNTING – define broadly the actions that will best accomplish the objectives of
accounting

- Refers to a doctrine, which is the basis of all other rules, procedures, and methods used in accounting practice
- The authoritative body of accountancy formulated standard principles, assumptions, and procedures – GAAP /
generally accepted accounting principles
1. Measurement principle
a. cost principle – also known as historical cost, recorded amount is based on acquisition price
b. fair value principle – valuation principle is market-based
2. Revenue recognition principle – revenues are recognized when earned regardless of when cash is collected
3. Expense recognition principle – expenses are recognized when incurred regardless of when cash is paid
4. Full-disclosure principle – all relevant information should be reported.

FINANCIAL STATEMENTS – written records that convey the business activities and the financial performance of a
company, often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or
investing purposes.

- Single most important source of information needed to make sound business decisions

COMPONENTS OF FINANCIAL STATEMENTS

- Balance sheet or statement of financial position

- Income statement
- Statement of cashflows
- Statement of changes in owner’s equity

BALANCE SHEET – also called statement of financial position; serves as snapshot, providing the most comprehensive
picture of an organization’s financial situation. It report on an organization's assets (what is owned) and liabilities (what is
owed)

- Help to keep track of an individual's or business entity’s finances

ELEMENTS OF BALANCE SHEET

- Asset
- Liabilities
- Equity/capital/owner’s equity

INCOME STATEMENT – A financial statement that show the company’s income and expenditures. Also shows whether
a company is making profit or loss for a given period.

ELEMENTS OF INCOME STATEMENT

- Revenue
- Expenses
- Gain
- losses

GAIN – profit that arises from events or transactions which are incidental to business such as the sale of fixed assets,
winning a court case, appreciation in the value of an asset. Also increase in the equity of a company through various
transactions except from owner’s investments or revenues

PROFIT: the excess of revenue of a period over its related expenses during an accounting years is termed as profit.
PROFIT LOSS – decrease in net income that is outside the normal operations of the business. Losses can result from a
number of activities such as; sale of an asset for less than its carrying amount, the write-down of assets, or a loss from
lawsuit.

CASH FLOW STATEMENT – To provide detailed picture of what happened to a business’s cash during specified period,
known as accounting period. It demonstrates an organization’s ability to operate in the short and long term, based on how
much is flowing into and out of the business.

ELEMENTS OF STATEMENT OF CASHFLOW

- cashflow from operating activities – top of company’s cash flow statement; used to explain where a company gets it s cash
from ongoing regular business activities. SALE AND MANUFACTURING
- cashflow from investing activities – shows the cash generated or spent relating to investment activities. PHYSICAL
ASSETS, INVESTMENTS IN SECURITIES
- cashflow from financing activities – shows the net flows of cash that are used to fund the company. DEBT, EQUITY,
DIVIDENDS

STATEMENT IF CHANGES IN EQUITY (statement of retained earnings) – measures the changes in owner’s equity
throughout specific accounting period. Covers: net profit & loss

ASSETS – anything that has current or future economic value to a business. Everything controlled and owned by the
company that is currently valuable or could provide monetary benefit in the future.

- Can be fixed assets (ones which remain constant for a very long period of time such as buildings and lands) or
current asset (ones which can be readily converted to cash such as securities, inventory, and other short-term
investments)

1. Cash – currency (bills or coins), checks, postal money, orders, and treasury warrants received by the business
2. Accounts Receivable – amounts collectible from customers, or clients (for goods sold and services rendered).
3. Merchandise Inventory – goods acquire for sale and are still unsold.
4. Notes Receivable – amounts collectible that are covered by promissory notes.
5. Interest Receivable – interest earned on notes receivable but not yet received in cash.
6. Prepaid Expense – expenses to be incurred yet in the future but already paid.
7. Unused Supplies – supplies that are still unused as of the end of the accounting period.
8. Land – land acquired by the business for its use.
9. Building – structure or edifices acquired for use of the business.
10. Machinery and Equipment – heavy, metallic and movable items that are capable of performing certain functions
or used to perform certain functions.
11. Delivery Equipment – wheeled items used in making deliveries to customers or clients.
12. Furniture and Fixtures – refers to movable items of significant value and acquired to improve the workable
condition of a place.
13. Office Equipment – heavy, metallic and movable items used in an office to perform certain functions or are capable
of performing certain functions.

LIABILITIES – economic obligations to creditors to be paid at some future date by the company. Then can be debts or
legal obligation of a company which can occur during the business operations of a company.

- Recorded on the right side of the balance sheet. It can be contrasted with assets. Liabilities reger to things that
you owe or have borrowed.

1. Accounts Payable – obligations to suppliers for items bought and are not supported by promissory notes.
 2. Notes Payable – obligations covered by promissory notes.
3. Loans Payable – obligations arising from loans obtained.
4. Taxes Payable – amount of levies on property or income due to the government.
5. Mortgage Payable – this is a long-term debt of the business for which property has been give as collateral or
security.

OWNER’S EQUITY – portion of a company’s asset that an owner can claim; it is what’s left after subtracting a
company’s liabilities from its assets. Owner’s equity is listed on a company’s balance sheet.

1. Owner, Capital – capital of the sole proprietor on his business. If the owner is Ric D. Generoso, the account
becomes Ric D. Generoso, Capital.
2. Owner, Drawing – this account title is used for withdrawals used by the owner. If the owner’s name is Ric. D.
Generoso, the account title is Ric D. Generoso, Drawing or Ric D. Generoso, Personal.

REVENUE – money generated from normal business operations, calculated as the average sales price times the number
of unit sold. It is the top line (or gross income) figure from which cost are subtracted to determine net income.

- Also known as sales on the income statement

1. Service Income – this refers to revenue realized by providing services to the customers.
2. Fees Income - refers to revenue realized by providing professional services to customers.
3. Sales – this account title is used to refer to revenue from sell of goods that were previously acquired for sale.
4. Rent Income – this account absorbs the amounts of rental earned on the properties of the business.
5. Interest Income – amount earned for the lending of money.

EXPENSES – cost of operations that a company incurs to generate revenue. Simply defined as the cost one is required to
spend on obtaining something.

1. Taxes and Licenses – cost of permits and taxes incurred.

2. Advertising Expense – incurred in making the public aware of the good or services being offered by the business.
3. Salaries and Wages – the compensation earned by the employees for services rendered for the business.
4. Supplies Expense – cost of supplies already used.
5. Light, Power and Water – cost of light power and water consumption as indicated on bills presented by utility
companies.
6. Telephone and Telegram – telephone and telegram charges as indicated on bills presented by telecommunication
companies.
7. Rent Expense – the amount of rentals incurred based on occupancy of space or usage of property and equipment.
8. Tools Expense – cost of tools treated as expense.
9. Depreciation Expense – the portion of property cost allocated to an accounting period.
10. Insurance Expense – insurance premiums related to current period.
11. Bad Debts – provision for uncollectible receivables.
12. Miscellaneous Expenses – the different minor expenses incurred and for which no specific account title has been
adopted.
 ACCOUNTING EQUATION

EQUITY = Assets – Liabilities

LIABILITIES = Assets - Equity

ASSETS = Liabilities + Equity

PROFIT = revenue - expenses

EXPANDED ACCOUNTING EQUATION – form of basic accounting equation that includes distinct components
of owner’s equity, such as dividends, shareholder capital, revenue, and expenses.

- Used to compare a company’s assets with greater granularity than provided by the basic equation

GOLDEN RULES OF ACCOUNTANCY – rules of debit and credit which guide the system of accounts

1st : Debit what comes in, Credit what goes out

2nd : Debit all expenses and losses, Credit all incomes and gains

3rd : Debit receiver, Credit giver

ASSET – increase debit, decrease credit

EXPENSE – increase debit, decrease credit

LIABILITY – increase credit, decrease debit

INCOME/REVENUE – increase credit, decrease debit

EQUITY/CAPITAL - increase credit, decrease debit

ACCOUNTING TRANSACTION AND EVENTS – any economic events that affects company’s assets, liabilities, or
equity at the time of the event.

ACCOUNTING TRANSACTIONS TWO TYPE:

EXTERNAL TRANSACTIONS – also known as business INTERNAL TRANSACTIONS – exchange of assets and
transaction; a trade of goods and services for money. This takes funds within the business. For instance, payment of employees is
place between company and an external party. an internal transaction because funds are paid to an individual
within the company in exchange for their labor
- Dealing with 3rd parties / ibang tao
- Dealing within organization