Introduction to Accounting

Business Basic Types of Business

 A person or organization engaged in the regular There are major types of businesses:
conduct of commercial, industrial or professional
activities, whether for profit or not, in order to 1. Service Business
fulfill a purpose, goal, mission or cause.
 The regular conduct or pursuit of a commercial  a business that provides intangible
activity or an economic activity, including products (products with no physical form)
transactions incidental thereto, by any person for a fee
regardless of whether or not the person is  offers professional skills, expertise, advice,
engaged therein is a non-stock, non-profit and other similar products.
private organization or government entity.
 examples are: repair shops, beauty care,
health and recreation, transportation,
Characteristics of the Business communication, consulting, professional,
medical and other service companies.
 Person or organization
 Regular conduct 2. Merchandising Business
 Commercial, industrial or professional activities
 Lawful transactions  a business that buys products and sells
 Whether for profit or not the same at a higher price for a profit.
 To fulfill a purpose, goal, mission or cause  known as "buy and sell" businesses.
 sells a product without changing its form.
Forms of Business Organization  Examples are: grocery stores, convenience
stores, distributors, and other resellers.
These are the basic forms of business ownership:
3. Manufacturing Business
1. Sole Proprietorship
 a business that buys materials and
 a business owned by only one person converts them into a new product.
 usually adopted by small business entities  combines raw materials, labor, and
 easy to set-up and requires low capital overhead costs in its production process,
 owner faces unlimited liability and sells the manufactured goods to
 not easy to transfer ownership customers.

2. Partnership 4. Mixed/Hybrid Business

 a business owned by two or more persons  companies that can be classified in more
 the partners contribute resources into the than one type of business.
entity  example: A restaurant, combines
 the partners divide the profits among ingredients in making a fine meal
themselves. (manufacturing), sells a cold bottle of wine
 generally, all partners have unlimited (merchandising), and fills customer orders
liability. In limited partnerships, creditors (service).
cannot go after the personal assets of the
limited partners. Not considered engaged in business:

3. Corporation  Government agencies and instrumentalities

 Pure compensation employment (local or
 a business organization that has a abroad, private or government)
separate legal personality from its owners  Directorship in a corporation
 usually adopted by large business  Gratuitous transfer of properties by succession
organizations or donation
 can generate large amounts of capital from  Isolated or casual transactions by persons not
investments engaged in trade or business
 not easy to set-up and organize
 ownership is usually represented by shares
of stock.
 owners (stockholders) enjoy limited liability Considered engaged in business:
but have limited involvement in the
company's operations.
 Freelancers, agents and consultants
 easy to transfer ownership
  Broadcast media talents and artists After the registration and securing all the necessary
certificates and permits, the company needs to maintain
its accounting records.

Definition of Accounting
Legal Requirements in Organizing a Business
Accounting is the art of recording, classifying, and
summarizing in a significant manner and in terms of
money, transactions and events which are, in part at
1. Register Business Name and Entity least of a financial character, and interpreting the
results thereof (American Institute of Certified Public
Depending on the form of the business, it must register Accountants).
with the following government agencies:
Accounting is a service activity. Its function is to
provide quantitative information, primarily financial in
1. Sole Proprietorship - Department of Trade and nature, about economic entities that is intended to be
Industry (Business Name Registration) useful in making economic decisions (Accounting
2. Partnership or Corporation - Securities and Standards Council).
Exchange Commission (Registration System)
3. Cooperative - Cooperative Development Accounting is the process of identifying, measuring
and communicating economic information to permit
Authority (Registration System)
informed judgment and decision by users of the
information (American Accounting Association).
2. Secure Business Permits and Licenses
Accounting is an information system that measures,
processes and communicates financial
Depending on the nature of its activities, the business information about an identifiable economic entity.
must secure its permits and licenses in the city or
municipality where it conducts its business. Generally
the following will be obtained:
Accounting

 a service activity, a process

1. Business Permit or Professional Tax Receipt -  to provide financial information
from the City or Municipal Government Unit
 about economic entities
2. Fire Safety Inspection Certificate - from the
 for the use of interested users
Bureau of Fire Protection
3. Barangay Clearance and Community Tax
Purpose of Accounting
Certificate - from the barangay where the
business is operating
 to provide financial information about the
4. Employer Registration - SSS, HDMF, PHIC,
business that will be useful in making
DOLE (if applicable)
economic decisions of the users of the
information
3. Comply with BIR Requirements:
Financial Statements
The business entity must also comply with the following
requirements of the Bureau of Internal Revenue: 1. Statement of Financial Position (Balance Sheet)
2. Statement of Financial Performance (Income
Statement)
1. Business registration
2. Issuance of receipts and invoices
3. Statement of Changes in Owner's Equity
3. Keeping of tax and accounting records
4. Statement of Cash Flows
4. Withholding of taxes on certain payments
5. Notes to the Financial Statements
5. Filing and payment of taxes
6.

Users of Accounting Information

However profitable or noble the purpose of the business
may be, the failure of the business entity to comply with Internal Users (within the business organization)
any of these requirements might lead to penalties, fines,
surcharges or, at worst, closure of the business.  Owners
 Managers
 Employees
 Officers
  Internal Auditors  Reconcile accounts receivable ledger balance
with unpaid customer invoices.
External Users (outside the business organization)  Maintain Accounts Receivable Subsidiary
Ledger
 Customers  Prepare Accounts Receivable reports
 Suppliers
 Creditors
 Investors Accounts Payable
 External Auditors
 Government Agencies  Record purchase invoices
 Industrial Organizations  Record payments to suppliers
 Public  Record purchase returns, account adjustments
and debit memos from suppliers
 Receive Statement of Accounts from suppliers
Branches of Accounting  Reconcile accounts payable ledger balance with
unpaid customer invoices.
 Maintain Accounts Payable Subsidiary Ledger
1. Financial Accounting
 Prepare Accounts Payable reports
2. Management Accounting
3. Tax Accounting
4. Auditing Inventory Accounting

Bookkeeping  Record receipts of inventory from suppliers.

 Record release of inventory to customers
Bookkeeping is the recording of financial transactions  Record inventory returns and adjustments
and is part of the process of accounting in business  Prepare purchase requests and Inventory
(Financial Accounting 2003, Weygandt; Kieso; Kimmel). issuance slips
It is largely concerned with the implementation of the  Reconcile physical count of inventory to ledger
accounting procedures manual and maintenance of the balances
accounting records. Bookkeeping is the procedural  Maintain inventory subsidiary ledgers
implementation of Accounting.  Prepare Inventory reports

Bookkeeper is the person who keeps and maintains the

books of accounts of the business organization. The The Bookkeeper may also be assigned to handle other
bookkeeper is responsible for recording the transactions functions, such as:
of the business.
 Property control and monitoring
Functions of a Bookkeeper  Payroll preparation
 Remittance of statutory deductions and reports
 Tax bookkeeping
General Accounting  Treasury and banking
 Audit assistance
 Verify deposit of cash collections  Managerial and administrative functions.
 Verify petty cash disbursements
 Prepare bank reconciliation
 Record transactions in the journals The scope and variety of functions depends on the
 Post to the subsidiary and general ledgers nature, type, size, organization structure of the business
 Reconcile general and subsidiary ledgers and other factors.
 Prepare a draft of the Trial Balance
 Assist the Accountant in the closing of the Due to the importance of his or her functions, the
accounts and finalization of the financial Bookkeeper must possess the knowledge, abilities and
statements. temperaments required to properly fulfill his or her duties
 Maintain proper filing and retrieval of accounting and functions. One of the knowledge requirements
records would be the basic knowledge in Accounting.

Accounts Receivable

 Record sales invoices

 Record cash receipts from customers
 Record sales returns, account adjustments and
credit memos from suppliers
 Issue Statement of Accounts to customers
The Accounting Cycle 7. Closing Entries. The temporary nominal accounts
are eliminated from the accounts by recording and
posting the closing entries. This will prepare the
accounting records for the next accounting period.

8. Post-Closing Trial Balance. After the closing entries

are posted, the post-closing trial balance is prepared to
check that the debit and credit balances of the remaining
accounts are correct.

Optional

9. Recording of Reversing Entries. At the beginning of

the next accounting period, selected adjusting journal
entries made at the previous accounting period are
reversed to “normalize” the recording of the related
actual transactions.

Recording

1.Identification of Accountable
Transactions. Business transactions or events are
analyzed and identified whether they are accountable or
not.

2. Journalizing. The accountable transactions are

recorded in the book of original entry known as the
journal. The transactions are recorded chronologically
using the appropriate accounts and amounts.

3. Posting. The transactions from the journal are

classified in the book of final entry known as the ledger.
The ledger classifies the transactions effecting the
increases and decreases for each account.

Summarizing

4. Trial Balance. The summary of accounts balances

from the ledger is prepared in the list of accounts known
as the trial balance. This is the proof that the ledger
debit balances and credit balances are equal and is in
balance.

5. Adjusting Entries. Adjusting journal entries are

made at the end of the accounting period to assign
revenues to the period in which they are earned and
expenses to the period in which they are incurred.

Reporting

6. Financial Statements. The following financial

statements are prepared: statement of financial position,
statement of financial performance, statement of
changes in equity, statement of cash flows and the
notes to the financial statements. These financial
statements provide useful information to interested
parties for their decision-making.
The Chart of Accounts  The company received from a customer a sales
order amounting to P100,000 worth of goods.
The specific account titles and codes to use in recording  The company issued to a supplier a purchase
transactions are maintained in a Chart of Accounts. It is order amounting to P200,000 worth of inventory.
a list of the account codes and titles that are used in  The company entered into a contract to provide
recording entries in the Journal. It shall be maintained services for the next 5 years, at an amount of
and updated for necessary changes, like additions of P500,000 per year.
new accounts, change of titles and codes and removal  The company has been using the electricity for
of accounts that will no longer be used. the first month of its operations but has not yet
received the electric bill.
The accounts are normally listed in the order in which  The company has been recognized by the local
they appear in the financial statements. An account government unit as the best service provider in
code identifies the account which will serve as its cross- the locality. It is foreseen to grow into a P10
reference in the journal and ledger. million company in the next few years.
Business transactions or events are analyzed whether
they are accountable or not. Only transactions which are
Business Documents
identified to be accountable transactions are recorded in
The business documents forms serve as evidence
the accounting records. A transaction or event is
to support the accountable transactions or events.
accountable when it meets the following criteria:
These documents provide the data concerning the
parties involved, the exchange made, the date and
1. It involves the business entity. the money value of the exchange made. Some of
2. It can be measured in terms of money. the common business documents include the
3. It occurred on a specific date or for a specific following:
period.
4. It affects the assets, liabilities or equity of the
1. Sales Invoice – document issued to customer
business.
for specific materials or supplies furnished or
5. It is supported by a document.
services rendered. It is called Purchase Invoice
from the point of view of the customer.
2. Delivery Receipt – document signifying delivery
Examples of accountable transactions: of goods and receipt of inventory.
Mr. Luca Pacioli established Pacioli General Services 3. Official Receipt – document issued to
and had the following transactions for the month of acknowledge receipt of cash.
January: 4. Deposit Slip – document used to deposit cash
and cheques to a bank.
Jan 2 Investment of P100,000 capital funds by Mr. 5. Purchase Invoice – a bill from a vendor for
Pacioli into the business specific materials or supplies furnished or
Jan 7 Receipt of a Charge Invoice from a supplier for services rendered. It is called Sales Invoice from
the purchase of a desktop computer amounting to the point of view of the supplier.
P30,000. 6. Disbursement Voucher – a written, approved
Jan 9 Purchase of supplies amounting to P8,000 in record of payment of cash.
cash. 7. Withdrawal Slip – document used to withdraw
Jan Issuance of a Service Invoice for an amount of cash from a bank.
15 P40,000 to a customer for services rendered on 8. Cheque Issuance Record – a record of
account. cheques issued by the company.
9. Promissory Notes – a written promise to pay a
Jan Receipt of P28,000 cash from customers in
certain sum of money to the payee. It may
17 payment of their account.
sometimes bear an interest over a period of
Jan Payment in cash and receipt of an official receipt time.
22 from supplier for payment of accounts, P22,000. 10. Bank Statement – a document listing the bank
Jan Cash payment of P12,000 for the salary of an transactions of the depositor.
31 employee. 11. Billing Statement or Statement of Account
Jan Mr. Pacioli withdrew P10,000 cash from the – document listing the unpaid invoices of a
31 business. customer. Oftentimes, it lists chronologically the
invoices, payments and adjustments to the
account of the company.
Examples of non-accountable transactions: 12. Business Letters – correspondences to other
companies, organizations or government entities
 The owner of the business spent P80,000 for his which may serve as a basis in recording an
wedding. accountable transaction or event.
 The owner spent transportation and
representation expenses amounting to P5,000.
 A secretary was hired for P15,000 monthly
salary.
Recording Transactions in the General Journal Exercise:

Business transactions are chronologically recorded in Record the following transactions in a General Journal:
the General Journal. The transactions are recorded
through a journal entry. A journal entry shows the record Mr. Luca Pacioli established Pacioli General Services
of the effects of a transaction or an event expressed in and had the following transactions for the month of
terms of debit and credit. An entry with one debit and January:
one credit is a simple journal entry, while an entry with
one or more debits and credits is a compound journal Jan Investment of P100,000 capital funds by Mr.
entry. A journal entry has the following elements: 2 Pacioli into the business
1. The date of the transaction Jan Receipt of a Charge Invoice from a supplier for the
2. The accounts debited and credited 7 purchase of a desktop computer amounting to
3. The monetary values of the accounts debited and P30,000.
credited
Jan Purchase of supplies amounting to P8,000 in cash.
4. The posting reference code of the destination ledger
9
account
5. A brief and clear explanation of the transaction Jan Issuance of a Service Invoice for an amount of
15 P40,000 to a customer for services rendered on
account.
The accountable transactions are recorded in the
Jan Receipt of P28,000 cash from customers in
general journal following the Basic Accounting
17 payment of their account.
Equation:
Jan Payment in cash and receipt of an official receipt
22 from supplier for payment of accounts, P22,000.
Assets = Liabilities + Equity
Jan Cash payment of P12,000 for the salary of an
31 employee.
Jan Mr. Pacioli withdrew P10,000 cash from the
This equation will guide the bookkeeper in recording the
31 business.
transaction. Under the double-entry accounting system,
at least two accounts will be recorded for each
Posting to the General Ledger
accountable transaction. After the recording of each
transaction using a journal entry, the accounting
equation will maintain its equality. After the entries are recorded in the journal, the entries
are posted into the ledger. A ledger is a collection of all
of the accounts of the company. It is the book of final
Effect of Accounting Entries to the Accounts
entry. Each account has an assigned account number
and the individual accounts are properly arranged.

Each journal entry is posted into the related ledger

account, indicating the date, description debits and
credits, and the posting reference. The posting
reference serves as the cross-reference between the
journal entry and the ledger account posting.

Illustration: Post the following transactions into the

General Ledger:
General Journal

The General Journal is the books of original entry. The

journal entries transactions are recorded chronologically Date Account Title and Postin Debit Credit
with the appropriate accounts and amounts. It contains Explanation g
columns to contain the five elements of journal entries. A 202
sample General Journal is as follows: 1
Jan Cash 101 P100,00
2 0
Pacioli, Capital 301 P100,00
0
To record capital
investment.

7 Equipment 151 30,000

Accounts 201 30,000
Payable
To record purchase of
 computer equipment
on account.
121 7,000
9 Supplies 101 7,000
Cash
To record purchase of
supplies in cash.

15 Accounts Receivable 111 40,000

Service Income 401 40,000
To record income
from services
rendered to
customers.

17 Cash 101 28,000

Accounts 111 28,000
Receivable
To record collection
from customers.

22 Accounts Payable 201 22,000

Cash 101 22,000
To record payment to
supplier.

31 Salaries Expense 601 12,000

Cash 101 12,000
To record payment of
employee salaries.

31 Pacioli, Drawing 311 10,000

Cash 101 10,000
To record withdrawal
of capital.

Sample Posting to the General Ledger:

 1. Unadjusted Trial Balance
2. Adjusted Trial Balance
3. Post-Closing Trial Balance

Trial Balance

The trial balance is a listing of all the balances of the

different accounts as of a given date. The total of all
accounts with debit balances must equal to the total of
all accounts with credit balances.

Purpose of Trial Balance:

 To check the accuracy of posting in the ledger

by testing the equality of the debits and credits.
 It aids in locating errors in posting.
 It serves as the basis in the preparation of the
financial statements.

Errors in The Accounting Process

When the total debits and total credits are not equal, this
automatically signify that there is an error in the
recording or posting of entries. Some of the errors that
could occur are the following:

 Journal entry with unequal debit and credit.

 Posting to the incorrect debit or credit of an
account.
 Incorrectly footing the account balance, or trial
balance.
 Forwarding the wrong amount from the ledger to
the trial balance.
 Listing the account balance to the wrong side of
the trial balance.

The following errors will not be detected by the

preparation of a trial balance, but on a careful review of
the records:

 Failing to record a transaction or event.

 Multiple recording and posting of a transaction
or event.
 Entries or posting to the wrong account.
 Reversed entries and posting.
 Recording and posting of amounts with
transposition and trans-placement errors.

Types of Trial Balance