FINANCIAL ACCOUNTING 1

INTRODUCTION TO ACCOUNTING → Net income is shared among

the shareholders
AND BUSINESS
BUSINESS OPERATIONS
What is Business?
1. SERVICE BUSINESS
A business is an organization or enterprising → Business that renders services
entity engaged in commercial, industrial, or to the client for a fee.
professional activities.

Basic elements present in any business

undertaking, these are:

1. Investments
2. Production of goods and/ or
services
3. Satisfaction with People’s needs
4. Profit Organization
2. MERCHANDISING BUSINESS
5. Contribution to economic
→ a business that buys goods
development
from suppliers and sells them to
BUSINESS ORGANIZATIONS the customers with a mark–up.

A. SINGLE OR SOLE PROPRIETORSHIP

→ Business Organization owned
by one person
→ Owners Keep all the profit
→ Decision-making is simple
→ Easy to form
B. PARTNERSHIP
→ There are two or more owners
in a partnership 3. MANUFACTURING BUSINESS
→ The income generated from → a business that buys raw
the business operation is materials, processes them to
divided among partners become finished products,
→ Capital investment is more as and sells the finished products
there are more than one to the customers.
investor.
C. CORPORATION
→ There are at least five owners
or investors called
shareholders
→ A greater amount of capital is
generated as there are many
shareholders/ owners
→ More taxes are imposed on the
net income earned by the
business What is Accounting?
→ Net income can only be
distributed to shareholders The art of recording, classifying, and
upon declaration of the Board summarizing in Accounting as the
of Directors Language of Business significant manner.
 FINANCIAL ACCOUNTING 2

o Suppliers
BUSINESS
→ This information users are
interested to know if the
business has the capability to
Accounting pay its obligations arising from
provides/commu
nicates Financial goods and/or services
Information delivered.
through
o Customers
FIIANCIAL → Customers need information
STATEMENTS on the ability of the business to
continuously supply them with
quality products and prices
acceptable to them.
o Government and other agencies
Government → Information is needed by the
government and their
Users/Stakeholders

Employees agencies to be able to

regulate the business activities
Customers
and collect the right taxes
needed for economic
Suppliers
development.
Lenders o Public
→ The general public interests in
Investors business vary.

The definition provides the phases of

USERS OF FINANCIAL INFORMATION accounting, and these are:
INTERNAL USERS are those persons or groups 1. Recording or Journalizing –
within the business organization. involves writing the business
transactions in a systematic and
o Investors/Owners
chronological order in the proper
→ They are the primary users of
accounting books.
accounting information.
2. Classifying – recorded business
→ They are the providers of
transactions are sorted and
capital.
grouped according to nature and
→ They need to be informed of
similarity
the expected return from their
3. Summarizing – grouped business
investments.
transactions are summarized
o Employees
through financial statements
→ The profitability and stability of
4. Interpreting – the summarized
the business are of utmost
business transactions are
importance to employees.
interpreted to evaluate the
EXTERNAL USERS are those stakeholders economic performance and
outside the business organization. condition of the business to be
used in making economic
o Lenders decisions.
→ One of the sources of
funds/capital of the business
are the lenders
 FINANCIAL ACCOUNTING 3

Accounting Process attachments to the

financial statements are
1. Gathering of Data the notes that explain
2. Transforming Data to Reliable significant accounting
Information policies and explanatory
3. Communicating Information to notes needed to clearly
Stakeholders support data reported
➢ Statement of thereto.
Comprehensive Income -
A financial statement that STATEMENT OF COMPREHENSIVE INCOME
presents the income
generated and expenses
incurred by the business
through effective and
efficient utilization of its
resources
➢ Statement of Changes in
Owner’s Equity - The
owner’s investments are
STATEMENT OF CHANGES IN OWNERS’
affected by withdrawals,
EQUITY
additional investments,
and the results of business
operations. The effects of
these are presented in the
statement of changes in
ownership equity
➢ Statement of Financial
Position - This financial
statement shows the
details of the three
accounting elements, STATEMENT OF FINANCIAL POSITION
namely the assets,
liabilities, and owner’s
equity at a particular time.
It provides information on
the financial condition of
the business
➢ Statement of Cash Flows -
The details of how cash is
generated and how it is
used by the business are
summarized in the cash
flow statement. Accounting Areas
⎯ Operating cash
flows 1. Basic Accounting or Bookkeeping
⎯ Financing cash Include the process of analyzing
flows business documents, recording,
⎯ Investing cash classifying business transactions,
flows and summarizing.
➢ Notes to Financial 2. Financial Accounting Focuses on
Statements - Included as the preparation and presentation
 FINANCIAL ACCOUNTING 4

of general-purpose financial
statements
3. Cost Accounting Deals with cost
determination and cost control
particularly those costs incurred in
producing goods and services
4. Managerial Accounting Provides
all types of financial and non-
financial information needed in THE BASIC ACCOUNTING ELEMENTS
the planning and control functions
1. Assets - are resources controlled by
of the management
the entity as a result of past
5. Auditing Area of accounting that
transaction or events and from
involves analytical work of
which future economic benefits
independent examination of the
are expected to flow to the entity.
financial statements for the
Hence, to qualify as assets,
purpose of expressing an opinion
resources must:
as to the fairness of their
a. be controlled by the entity
presentations.
b. result from past transactions or
6. Government Accounting This is also
events
known as “Fund Accounting” and
c. provide future economic
is concerned on how government
benefit is expected
funds are utilized to assure proper
2. Liabilities - are obligations of the
custody and disposition of these
entity arising from past transactions
funds to deliver basic services to
or events the settlement of which is
the community
expected to result in an outflow
7. Taxation Tax accounting
from the entity of resources
encompasses the preparation of
embodying economic benefits.
tax returns, determination of the
Hence to qualify as liabilities,
tax liabilities of a company
obligation must:
a. be a result from past
transactions or events.
ANALYSIS OF BUSINESS b. be settled through the outflow
of resources having future
TRANSACTIONS AND THE economic benefits
ACCOUNTING PROCESS c. be a present obligation of a
particular entity.
BUSINESS TRANSACTIONS 3. Owner/s Equity - is the residual
interest in the assets of the entity
An exchange of goods and services
after deducting all of its liabilities. It
between two parties for a certain sum of
is also known as net assets or net
money.
worth.

THE CHART OF ACCOUNTS

Chart of Accounts

⎯ is the lists of all account titles used

by a particular business.
⎯ the common account titles that
are used are:
 FINANCIAL ACCOUNTING 5

ASSETS Notes Payable

→ Obligations to pay evidence
Cash by a promissory note
→ Coins, bills, checks, another Accrued Expenses
cash items, on hand and in → Liabilities for services already
banks incurred but not yet paid
Accounts Receivable Loans Payable
→ Amounts collectible from → Obligations due to banks for
customers for the sale of goods loans obtained
and services Unearned Revenue
Notes Receivable → Liability for items already
→ Amounts receivable that are collected but not yet earned
evidenced by a promissory
note OWNER’S EQUITY
Accrued Revenue
→ Receivable for the value of Owner’s Capital
services earned but not yet → Represents the owner’s
collected investment or his equity in the
Merchandise Inventory business
→ Goods for sale in the ordinary Owner’s Drawing
course of business → Represents the withdrawal
Prepaid Expenses made by the owner for his own
→ Advance payments for personal use or in anticipation
services alright to be received of profits
within the year
Office Supplies
REVENUES
→ Unused stationary and supplies Service Revenue
for use in the office → Amount earned for services
Land rendered to customers
→ Lot presently used in the Sales Revenue
business → Amount earned for the value
Building of goods sold to customers
→ Buildings used in the business Commission Revenue
Furniture and Fixtures → Amount earned for
→ Chairs, tables, fixtures filing commission services rendered
cabinets, shelves, and other to clients
fixtures just Professional Fees Revenue
Office Equipment → Amount earned for
→ Computers, copier machine, professional services rendered
paper shredders to clients
Delivery Equipment Rent Revenue
→ Trucks, vans, and other → Amount earned for rental of
equipment for delivery of entity’s property
goods to customers Interest Revenue
→ Amount earned for interest
LIABILITIES earned
Accounts Payable
→ Amounts due to suppliers for
the purchase of goods or
services on credit
 FINANCIAL ACCOUNTING 6

EXPENSES Example

Salaries Expense
→ Value of compensation for
services received from
employees
Rent Expense
→ Amount incurred for the use of Complete the following equations.
property not owned by the
entity 1. Assets, P70,000= Liabilities, P40,000
Insurance Expense + Owner’s Equity, P30,000
→ Expired portion of the amount 2. Assets, P34,000 = Liabilities, P15,000
of insurance premium paid + Owner’s Equity, P19,000
Advertising Expense 3. Assets, P80,000 = Liabilities, P11,000
→ represents the amount + Owner’s Equity, P69,000
incurred for the advertising 4. Assets, P67,000 = Liabilities, P42,000
services rendered by others + Owner’s Equity, P25,000
and promoting the goods or 5. Assets, P86,000 = Liabilities, P75,000
services of the entity + Owner’s Equity, P11,000
Taxes and Licenses 6. Assets, P48,000 = Liabilities, P16,000
→ Expense Amount incurred for + Owner’s Equity, P32,000
business permits, taxes and
licenses 1. The amount of the liabilities of a
Repair and Maintenance Expense business having 95,700 of assets, of
→ Amount incurred for the which 41,000 was contributed by
services or the parts used to the proprietor
repair or maintain entity’s
assets
Utilities Expense
→ Amount incurred for power
electricity and water 2. The owner’s equity of a business
Supplies Expense with total assets of 60,000, and
→ Value of supplies used, liabilities of 42,000
specifically term as office
supplies expense or store
supplies expense
Depreciation Expense
→ Portion of the property and 3. Total Liabilities of Moskov’s
equipment that expired during Services are 200,000 with an equal
the period amount of Owner’s Equity. How
much is the total assets?
THE ACCOUNTING EQUATION

The relationship of the accounting

elements is expressed in the basic
accounting equation:
4. The value of the assets of a
ASSETS = LIABILITIES + OWNER’S EQUITY business having 60,000 in liabilities,
and in which the owner has 22,000
equity.