Define Accounting

Accounting is an art of recording, classifying and summarizing in

significant manner and in terms of money, transactions and events
which are of a financial character and interpreting the result thereof.

It is a system of recording information about a business.

The information that is collected is primarily numerical.

This information is then presented to various people to help them make decision.
cont. Define Accounting

The accounting system is used to maintain records for all businesses,

whether a multinational corporation or small business.
To account for something means to keep a record of something in your
business by using accounting system.
An accountant (or bookkeeper) collects documentation and records this
information, categorize it and presents it in specific format.
Accounting information is finally presented in the form of financial
statements – the key reports of a business.

Bookkeepers are usually involved more in data collection and entry.

Accountants can fulfill this role too, but more often these days are
involved in preparing and presenting financial statements, and fulfilling an
advisory and consulting role.
Q: As a student, how is accounting useful to me?

A: Accounting is the international "language" of business, so if you have ever thought that you
may work in a business of any kind, knowing accounting will give you an edge over others who
don’t.

Your accounting studies give you the theoretical basis of the subject and teach you the rules and
practices of accounting. After your studies you will start to see it in practice in business. There
you will get first-hand experience with income, expenses, assets, liabilities and owner's equity.
You will see these things in action.

As a final note, knowing accounting is also useful from the point of view of being able to handle
your own finances better. You can budget and plan your spending and even draw up personal
financial statements - a personal income statement and/or balance sheet. So knowing accounting
would then give you more control over your personal finances too.
The whole of accounting is based on a single equation:

The word equation comes from the word equal.

For any equation, one side always equals another.

Also, equations can be made out of anything.

1 Orange = 20php
House = Walls + Doors + Windows + Roof
1 week = 7 days
Cont. Basic Accounting Equation

Assets are possessions of the business. They are things that add value to the business and
will bring it benefits in some form. For example, furniture, machinery, vehicles, computers
or cash.

Liabilities are basically debts. The amount of liabilities represents the value of the
business assets that are owed to others. It is the value of the assets that people outside
the business can lay claim to.

Equity, or owner's equity, is the value of the assets that the owner owns. It is the value of
the business assets that the owner can lay claim to.
Cont. Basic Accounting Equation

In a nutshell, the accounting equation above shows us how much of

the assets are owned by the owner (equity) and how much are owed to others
(liabilities). It's as simple as that.
An asset is officially defined as:
A resource controlled by the enterprise as a result of past events and from which future economic benefits are
expected to flow to the enterprise.

An asset is a possession of a business that will bring the business benefits in the future.

An asset is anything that will add future value to your business.

Cont. What are Assets?

What is the test of whether something is considered an asset for your

business? Well, one asks, “Is the _______ something I own, and will it
bring me benefits in the future?"
Cont. What are Assets?
Let’s take land. If you owned the land, would it be an asset for your business?
Do you expect to receive benefits for your business in the future from the land?
Of course. So what are the benefits it will bring? Well, you can construct a
building on it that you can use for business. Even selling it would bring benefits,
in the form of cash.

How about a computer that you own – is this an asset? Will it bring you benefits in
the future? Well, amongst other things, you can store and retrieve large amounts
of information and use it to communicate with suppliers and customers.

So yes, a computer is certainly an asset.

What about a vehicle – is this an asset? Does it have benefits for your business, and if so,
what are they?
Answer: Yes, there are benefits for your business... You can use the motor vehicle to pick up
and deliver goods. So yes, this is also an asset.
Cont. What are Assets?

Debtors are people that owe your business money and the value of these debts as a
whole.

Another name for debtors is accounts receivable. The word receivable simply means
capable of being received, or will be received.

An additional requirement for an asset is that you have to be

able to measure its value somehow and you have to be able to
measure this accurately. This is usually quite simple, as the value
is equal to how much you paid for it.

Let's return to employees... how do you value an employee? Can you put an
accurate, reliable figure on how much an employee is worth to you, bearing in
mind that he or she can resign at any point by giving notice? As you can
imagine, it's nearly impossible to place a value on people – consequently
employees are actually never included as assets in accounting - but only
because we can't value them.
Cont. What are Assets?

Full test of whether something is an asset is:

1. DOES YOUR BUSINESS OWN/CONTROL IT?
2. WILL IT BRING YOUR BUSINESS BENEFITS IN THE FUTURE?
3. CAN YOU VALUE IT ACCURATELY?
If these three criteria are met, then you have an asset according to the accounting system.

There’s a basic rule about how one values any asset. The rule is:

The cost of an asset includes all costs necessary to get it to the business
premises and into a condition in which it can be sold.
So the cost of an asset can include the following:
- Purchase price,
- Import duties,
- Transport costs to get it to your premises,
- Installation or set-up costs.
A liability is officially defined as:

A present obligation of the enterprise arising from past events, the settlement of which is expected to result
in an outflow from the enterprise of resources embodying economic benefits.

A debt of the business.

The debt will result in assets (usually cash) leaving the

business in the future.
Cont. Define Liabilities

The most common liability is a loan.

Another common liability is called creditors.

A creditor, also known as a payable, is any business or person that you owe (apart from a loan).

Suppliers (who you owe for products purchased on credit) would fall under creditors.

Other examples of creditors are the telephone company that you owe or a printing shop you owe
for printing fliers. Even the tax authorities could be considered a creditor if you owe them.

When you pay a loan back, or you pay off your creditors, some of your assets (most often cash)
will leave your business.
Owner’s equity is officially defined as:

The residual interest in the assets of the enterprise after deducting all its liabilities.

Simply, The owner’s equity is simply the owner’s share of

the assets of a business.

Assets can only ‘belong’ to two types of people: the first type is
people outside the business you owe money to (liabilities), and the
second is the owner himself (owner's equity).

In other words, it's the value of all the assets after deducting the
value of assets needed to pay liabilities.
 THE ACCOUNTING EQUATION AND
FINANCIAL POSITION
These three elements, assets, owners equity and liabilities, when compared to one another, show what we
call the financial position of the business.

WOULD YOU INVEST IN THE FOLLOWING BUSINESS?

• Which of the following items would not fall under the definition of asset?
a. Land
b. Machinery
c. Cash
d. Owner’s Equity
e. Debtors

• Which one of the following items would fall under the definition of a liability?
a. Cash
b. Debtors
c. Owner’s Equity
d. Tax owed
e. None of the above

• Which of the following statements are false?

a. A liability is a debt for your business.
b. Debtors are a debt for your business.
c. The accounting equation shows how much of your assets belongs to the owner, and how much belongs to people
outside the business.
d. If you cannot work out a value for an item that will bring you future benefits, then you cannot keep this as an asset
in your records.
e. None of the above
• A business has the following items in it:
- Land P1,000,000.00
- Machinery P20,000.00
- Cash P10,000.00
- Debt P0.00
- Owner’s Equity ?

What is the value of the owner’s equity?

a. P1,000,000
b. P1,020,000
c. P1,010,000
d. P1,030,000
e. None of the above

• A business has the following items in it:

- Land P1,000,000
- Machinery P20,000
- Cash P10,000
- Loan P500,000
- Owner’s Equity ?

What is the value of the owner’s equity?

a. P500,000
b. P1,000,000
c. P530,000
d. 1,030,000
e. None of the above

• A business has the following items in it:

- Owner’s Equity P600,000
- Total liabilities P1,400,000
- Assets ?

What is the value of the assets in the business?

a. P600,000
b. P800,000
c. P1,400,000
d. P2,000,000
e. None of the above

• A business has the following items in it:

- Land P1,500,000
- Machinery P80,000
- Cash P20,000
- Owner’s Equity P900,000
- Loan P500,000
- Creditors ?
What is the value of the creditors?
a. P200,000
b. P700,000
c. P800,000
d. P1,100,000
e. None of the above

• A business has the following items in it:

- Land ?
- Vehicles P600,000
- Debtors P120,000
- Cash P30,000
- Owner’s Equity P1,000,000
- Loan P500,000
- Creditors P50,000

- What is the value of the land?

a. P1,000,000
b. P1,550,000
c. P800,000
d. P750,000
e. None of the above
Which of the following statements are true?

a. A business whose liabilities are greater than its assets has a bad financial position.
b. A business whose liabilities are greater than it’s owner’s equity has a bad financial position.
c. A business whose assets are greater than it’s own equity has a bad financial position.
d. A and B
e. All of the above