GAAP & ELEMENTS

OF ACCOUNTING
BUSINESS TECHNOLOGY 10
OBJECTIVES:
Discuss the Generally Accepted
Accounting Principles.
Classify the elements of accounting.
Analyze the different functions of
account titles.
Answer the first monthly examination
with integrity.
GENERALLY
ACCEPTED
ACCOUNTING
PRINCIPLES
BUSINESS TECHNOLOGY 10
 What is GAAP?
The Generally Accepted Accounting Principles are
rules for the preparation of financial statemments.
All businesses need to release their financial
statement every year, which will be used by
internal and external users, and the enterprises
must comply with the GAAP.
It is comprised of 12 different principles or
assumptions.
Business/Economic Entity Assumption
States that the business must be separated from the
personal affairs of its owner.

Monetary Unit Assumption

States that an economic entity's accounting records
include only quantifiable transactions.
 Full Disclosure Principle
States that any and all information that affects the
entire understanding of a company's financial
statements must be included with the financial
statements.

Time Period Assumption

States that artificial time periods must be used to
report the results of business activity.
 Revenue Recognition Principle
States that revenue is earned and recognized upon
product delivery or service completion, without regard
to the timing of cash flow.

Matching Principle
States that the costs of doing business or the
expenses are recorded in the same period as the
revenue they help to generate.
 Cost Principle
States that accounting for purchases must be at their
cost price.

Going Concern Principle

States that unless otherwise noted, financial
statements are prepared under the assumption that
the company will remain in business indefinitely or the
business will continue and will never stop.
 Principle of Conservatism
Provides that accounting for a business should be fair
and reasonable.

Materiality Principle
States that the requirements of any accounting
principle may be ignored when there is no effect on
the users of financial information.
 Relevance, Reliance, and
Consistency Principle
States that relevant information helps a decision
maker understand a company's past performance,
present condition, and future outlook so that informed
decisions can be made promptly.

Use of Accrual Basic of

Accounting
States that require the use of accrual-basis
accounting rather than cash basis accounting.
ELEMENTS OF
ACCOUNTING
BUSINESS TECHNOLOGY 10
 Elements of Accounting
The basic elements of
accounting are assets,
liabilities, owner's equity or the
capital, income, and expenses.
 Asset Accounts
Assets are the things of value owned by
the business. These are any physical
things tangible, or intangible rights and
privileges owned and enjoyed by the
business, which are not value.
Current Assets
Resources that could be realized or
converted to cash easily or
consumed during the normal operation of
the business. Example of such are as
follows:
Cash - any medium of exchange that the bank will
accept at face value.
Accounts Receivable - are claims against debtors or
customers for merchandise sold or services
rendered on account.
Notes Receivable - are claims against debtors or
customers for merchandise sold or services
rendered on account evidenced by a written
promise to pay later.
Supplies - are goods used in the operations of the
business.
Store Supplies - supplies used in the store like tapes,
boxes, empty bottles, bins, etc.
Office Supplies - supplies customarily used in the
office such as folders, clips, bond papers & stationeries,
fasteners, etc.
Shop Supplies - supplies used in the shop like, in a
printing shop, ink, toners, oil, etc.
Prepaid Assets - are expenses paid in advance but services
for such are not yet received. (Prepaid Insurance,
Prepaid Rent, Prepaid Tax, Prepaid Advertising)
Fixed Assets
Tangible assets that are
relatively permanent in nature. These
are usually subject to depreciation
except for land. Examples of such are
as follows:
Furniture and Fixtures - include shelves, tables & chairs,
display cases, desks, filing cabinets, air conditioner, etc.
Office Equipment - includes adding machines, copiers, fax
machines, computers, typewriters, telephone, and
counters.
Delivery Equipment - consists of automobile, tricycles,
pushcarts, trucks, jeepneys, and other means for delivery
purposes.
Building - the structure where the business operations are
conducted.
Land - the lot on which the building is located or any vacant,
productive piece of land.
 Intangible Assets
Rights and privileges enjoyed by
the business. Examples of these
are as follows:
Goodwill - the patronage given by the general public
and customers to a business because of its quality
products, good human relations, outstanding
services, good location, affordable prices, etc.
Franchise - the right awarded by the
government for the use of public property like bus,
jeepney, broadcasting, etc.
Copyrights - right to receive due credit and
acknowledgment protected by the law for literary,
intellectual, scientific and creative works.
 Liability Accounts
Liabilities are the creditor's
equities or interests in the business.
These are the debts incurred by the
business enterprise or simply
the economic obligations.
Current Liabilities
Liabilities that will be due within a
relatively short period of time. The
following are examples of such:
Accounts Payable - amount owed to creditors for
goods purchased or services received but not yet paid.
Notes Payable - amount owed to creditors for goods
purchased or services received but not yet paid
evidenced or supported by a written promise to pay
later.
Salaries & Wages Payable - amount due to the
employees/skilled workers for their services rendered
but not yet paid.
Rent Payable - amount due to lessor for unpaid use of
property.
Interest Payable - interest on money
borrowed incurred but not yet paid at the
end of the period.
Taxes and Licenses Payable - amount due
to the government for unpaid taxes and
licenses needed to operate a business.
Utilities Payable - amount payable to utility
companies such as Meralco, Maynilad,
Manila Water, PLDT, Globeline, etc.
Long-term Liabilities
Liabilities that will be due for a
relatively long period of time. The
following are example of such:
Mortgage Payable - amount due to
creditors on loan secured by a
collateral.
Bonds Payable - indebtedness,
usually of the government from
the sale of bonds to the public.
 Capital Accounts
Owner's equity or capital
Represents the interest of the owner
in the business or simply the right of
the owner over the assets of the
business.
Owner's equity or capital
This is the amount that would remain
after the total liabilities are deducted
from the total assets of the business.
Examples of the accounts are as
follow:
Owner's, Capital - claims of the owner
over the business or debt of the business
to the owner.
Owner's, Withdrawal/Drawing-
owner's withdrawal of assets from the
business.
 Income Accounts
Revenue or income
Is the inflow of assets resulting from
the sale of goods or rendering of
services for fee.
Revenue or income
It is also known as the profit of the
company; hence, the gross increase in
capital resulting from the conduct of
business. Examples of account are as
follows:
Service Revenue - the income of businesses
which render services for a fee.
Professional's fee - the income of
professionals like teacher, physician, dentist
lawyer, engineer, architect, etc.
Talent fee - the income of a performer or artist
like movie actors and actresses, directors,
scriptwriters, etc.
School fees - the income of a school comprised of
tuition and other fees.
Commissions income - revenue earned from a
commission in discharging of transactions.
Admission income - the revenue earned from the
sale of concert tickets, fashion shows, etc.
Salaries & Wages income - the income of
employees/skilled workers.
Interest income - the income of a person
lending money for interest.
Sales - the income from the sale of merchandise.
 Expense Accounts
Expenses
Are the costs of doing business.
These refer to any decrease in
owner's proprietorship resulting from
the conduct of business.
Expenses
It is incurred whenever an asset is
spent or used to help produce the
revenues of the enterprise. Example
of accounts are as follows:
Advertising Expense - amount paid for the
advertisement appeared in different media.
Salaries Expense - amount paid for the salary of
employees.
Supplies Expense - amount paid for the purchase of
supplies and its consumption.
Rent Expense - amount paid for the use of other
person's property.
Taxes & Licenses Expense - amount paid for the
privilege to operate a business (e.g. business permits,
health & sanitation certificates, etc.)
Transportation Expense - amount paid for transportation.
If the business enterprise maintains automobile and other
delivery equipment, the account title is known as gas & oil.
Gas & oil Expense - amount paid for the purchase of petrol
products.
Utilities Expense - the collective term for distinct titles.
Light & Water Expense - amount paid for the
consumption of light and water.
Telephone and Telegraph Expense - amount paid for
the receipt of telephone and telegraph services.
Wage Expense - amount paid for the wage of
laborers.
Interest Expense - amount paid for the interest
incurred by the use of borrowed money.
Miscellaneous Expense - amount paid for
miscellaneous spending.
Depreciation Expense - amount allocated for the
decrease in the value of fixed assets, except for
the land, through wear and gear, deterioration,
and the passage of time.