"BASIC ACCOUNTING" materials" or unassembled parts.

It
"produces" the goods that it sells.
"FORMS" OF BUSINESS
ORGANIZATION (Sale of GOODS) (Buy=>"Produce"=>Sell)
1. SINGLE/SOLE PROPRIETORSHIP is a ~~~~~~~~~~~~~~~~~~~~~~~~~~
business owned by only ONE
"ELEMENTS" of FS (Financial Statements)
INDIVIDUAL.
7. INCOME/REVENUE is the gross
2.PARTNERSHIP is an association of
INFLOW of economic benefits during the
"TWO or MORE" persons who bind
period in the form of INFLOWS or
themselves to contribute money, property or
enhancements on assets or decrease in
industry(services) to a common fund, with
liabilities that result in increase in equity,
the intention of dividing the profits among
other than those relating to contributions
themselves.
from the owner or owners.
3. CORPORATION is an artifical being(not
8. EXPENSE is defined as the gross
natural, like human being) created by
OUTFLOW of economic benefits during the
operation of LAW, having the rights of
period in the course of ordinary activities
SUCCESSION, and the POWERS AND
when these OUTFLOWS result in
ATTRIBUTES expressly authorized by law
DECREASE in equity other than those
or incident to its existence.
relating to distribution to owners.
4. COOPERATIVE is a legal entity owned
~In simple terms, these are COSTS incurred
and democratically controlled by its
to produce income/revenue.
members. Members often have a close
association with the enterprise as producers 9. ASSETS are defined as RESOURCES
or consumers of its products or services, or controlled by the enterprise as a result of
as its employees. past transactions and events and from which
future economic benefits are expected to
~~~~~~~~~~~~~~~~~~~~~~~~~~
flow to the enterprise.
"TYPES" OF BUSINESS
~In simple terms, these are PROPERTIES
4.SERVICE BUSINESS. This business owned by the business.
renders services to customers or clients for a
10. LIABILITIES are defined as present
fee.
OBLIGATIONS of an enterprise arising
(Sale of SERVICES) from past transactions or events, the
settlement of which is expected to result in
5. MERCHANDISING/TRADING
an outflow from the enterprise of resources
BUSINESS. This business buy goods or
embodying economic benefits.
commodities and sell them at a profit.
~In simple terms, these are the financial
(Sale of GOODS) (Buy=>Sell)
obligations or DEBTS of the business.It is
6. MANUFACTURING BUSINESS. This also described as CLAIM of the
business makes "finished goods" from "raw CREDITORS on the Assets of the
enterprise.
11. OWNER'S EQUITY/CAPITAL
represents the CLAIM of the OWNER on
the Assets of the business. It is the
RESIDUAL INTEREST in the Assets of the
business after deducting all its liabilities.
~~~~~~~~~~~~~~~~~~~~~~~~~~~
Important: CAPITAL ACOUNT (or
EQUITY ACCOUNT) consists of the
following:
a. "Owner's Capital"
b. "Owner's Drawing"
~~~~~~~~~~~~~~~~~~~~~~~~~~
EXAMPLES of "ASSET" Accounts
1. CASH is any medium of exchange that a
bank will accept at face value. It includes
coins and currencies, checks, money orders
and bank drafts.
Current asset.
2. TRADING SECURITIES are debt and
equity securities that are purchased with the
intent of selling them in the "near term" or
very soon.
Current asset.
3. ACCOUNTS RECEIVABLES are claims
against debtors or customers arising from
services rendered on account and sale of
merchandise on account.
Current asset.
4. ALLOWANCE FOR DOUBTFUL
ACCOUNT relates to the company's
receivables which might not be collected.
Current asset. (Contra-Asset)
#NOTE: "CONTRA-ASSET" account is the
opposite of "ADJUNCT" account
In layman's term,
CONTRA = deducted
ADJUNCT = added (Example: Freight In)
5. NOTES RECEIVABLE are claims
supported by promissory note.
Current asset, if short-term. (Also a Current
Asset if the problem is SILENT)
Noncurrent asset, if long-term.
6. MERCHANDISE INVENTORY are
goods on hand and are available for sale.
Current asset.
7. ACCRUED INCOME. Earned but not yet
received/collected.
Current asset.
8. ADVANCES TO EMPLOYEES. Cash
received by employees to be deducted from
their salaries in the future.
Current Asset.
9. PREPAID EXPENSES are expenses
PAID IN ADVANCE by the business ("Paid
but not yet incurred").
Current asset.
10. OFFICE/STORE SUPPLIES are being
used by the business like papers, pens,
pencils, folders, staplers, etc.
Current asset.
11. LAND is an asset that is not subject to
depreciation. It appreciates (value increases)
as time goes by.
Noncurrent asset.
12. BUILDING can be acquired by
PURCHASE or by means of
CONSTRUCTION. Construction costs may
include materials, labor, overhead, permit or
license, Architect fee, Excavation cost, etc.
Noncurrent asset.
13. MACHINERY & EQUIPMENT
includes computers, air-conditioning units,
electric fans, freezers, refrigerators, truck,
etc.
Noncurrent asset.
14. FURNITURE AND FIXTURES
includes tables, chairs, filing cabinets, etc.
Noncurrent asset.
15. ACCUMULATED DEPRECIATION.
"Total" depreciated cost of a depreciable
asset.
Noncurrent asset. (Contra-asset)
16. INTANGIBLE ASSET is an identifiable
non-monetary asset "without physical
substance" or have no physical appearance
but are expected to provide future economic
benefits to the company.
Noncurrent asset.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~
"LIABILITIES"
1. ACCOUNTS PAYABLE are amounts
due to creditors for ASSETS ACQUIRED
on account.
(Current Liab)
2. NOTES PAYABLE(short-term) are
amounts due to creditors "within" one year,
evidenced by WRITTEN PROMISE to pay.
(Current Liab)
3. ACCRUED EXPENSES are amounts
owed to others for UNPAID EXPENSES.
(Current Liab)
4. UNEARNED INCOME is revenue
collected by the business in advance.
(Received/ collected IN ADVANCE, but not
yet earned).
(Current Liab)
5. CURRENT PORTION OF LONG-TERM
DEBT are portions of mortgage, notes,
bonds and other long-term indebtedness
which are to be paid "WITHIN ONE
YEAR" from the Balance Sheet date (or end
of Reporting Period).
(Current Liab)
6. NOTES PAYABLE (long-term) are
amounts due to creditors "beyond" one year,
evidenced by WRITTEN PROMISE to pay.
(Noncurrent Liab)
7. BONDS PAYABLE is a liability owed by
a company to obtain substantial sums of
money from lenders to finance the
acquisition of equipment and other needed
assets.
(Noncurrent Liab)
8. MORTGAGE PAYABLE. Long-term
debt of the business for which the business
entity has PLEDGED certain assets as
SECURITY to the creditor. In the event that
the debt payments are not made, the creditor
can foreclose or cause the mortgaged asset
TO BE SOLD to enable the entity to settle
the claim.
(Noncurrent Liab)
~~~~~~~~~~~~~~~~~~~~~~~~~~
"OWNER'S EQUITY"
9. CAPITAL. This account is used to record
the "ORIGINAL and ADDITIONAL
INVESTMENTS" of the owner of the
business entity. It is increased by the amount
of PROFIT earned during the year or is
decreased by a LOSS.
#NOTE: This account is also used to record
the "PERMANENT withdrawal" of the
owner.
(PERMANENT withdrawal means
withdrawal of INVESTED capital)
10. DRAWINGS/TEMPORARY
WITHDRAWALS. Charged to this account
are cash or other assets withdrawn by the
owner from the business for personal use
(represented by the owner's share in profit)
A = L + OE
Look at the equal sign ( = )
If LEFT: Debit
If RIGHT: Credit
(Normal Balance)
18. INCREASE in ASSET..... DEBIT
19. INCREASE in LIAB..... CREDIT
20. INCREASE in OE..... CREDIT*
Apply "FRIENDS" and "ENEMIES" of OE

11. INCOME SUMMARY. It is a temporary Who are the "Friends" of OE?

account used at the end of the accounting
period to close income and expenses. This
account shows the profit or loss for the
period before closing to the capital account.
~~~~~~~~~~~~~~~~~~~~~~~~~~
True or False
12. The excess of INCOME over
EXPENSES is called "NET INCOME".
True
13. The excess of EXPENSES over
INCOME is called "NET LOSS". True
-Income, Revenue, Gain (CREDIT)*
Who are the "Enemies"
-Expense, Drawings (DEBIT)
21. INCREASE in INCOME..... CREDIT
22. INCREASE in EXPENSE..... DEBIT
23. INCREASE in OWNER'S
DRAWING..... DEBIT
NOTE:
(INCREASE in ASSET..... DEBIT)

14. INCOME "increases" Owner's Equity. (INCREASE in "CONTRA-ASSET."....

True "CREDIT")

15. EXPENSE "decreases" Owner's Equity. *

True
(Normal Balance) - DEAL & GIRLS
16. ADDITIONAL INVESTMENT
DEBIT (DEAL)
"increases" Owner's. True
D-ividends (Drawings)
17. OWNER's DRAWING "decreases"
Owner's Equity. True E-xpenses
~~~~~~~~~~~~~~~~~~~~~~~~~~ A-sset
DEBIT OR CREDIT L-osses
Guide: CREDIT (GIRLS)
G-ains Income, Supplies, Prepaid Expense, Land,
Building, Machinery & Equipment,
I-ncome
Furniture & Fixtures..... DEBIT
R-evenues
31. What is the "NORMAL BALANCE" of
L-iabilities Accounts Payable, Notes Payable, Accrued
Expense, Unearned Income, Bonds Payable,
S-tockholder's (or Owner's) Equity Mortgage Payable..... CREDIT
* 32. What is the "NORMAL BALANCE" of
(Normal Balance) - ADE & LOR Owner's Capital, Revenue or Income.....
CREDIT
DEBIT (ADE)
33. What is the "NORMAL BALANCE" of
A - sset Owner's Drawing, Expense..... DEBIT
D -rawings 34. What is the "NORMAL BALANCE" of
E - xpense Allowance for Doubtful Accounts,
Accumulated Depreciation..... CREDIT*
CREDIT (LOR)
*CREDIT, because they are contra-assets
L - iabilities
~~~~~~~~~~~~~~~~~~~~~~~~~~~
O - wner's equity
Definitions, Classifications and Examples of
R - evenue Accounts
~~~~~~~~~~~~~~~~~~~~~~~~ I.
*For DECREASES, just do the -REAL accounts (or PERMANENT
"OPPOSITE" accounts)
24. DECREASE in ASSET..... CREDIT The real accounts are
25. DECREASE in LIAB..... DEBIT -Assets
26. DECREASE in OE..... DEBIT -Liabilities and
27. DEREASE in INCOME..... DEBIT -Owner’s Equity/Capital
28. DECREASE in EXPENSE..... CREDIT Real accounts are reported in the Statement
29. DECREASE in OWNER'S of Financial Position(or "BALANCE
DRAWING..... CREDIT SHEET"). They are not "closed" at the end
of accounting period.
DECREASE in CONTRA-ASSET.....
DEBIT ------------------------------------------------------
---------
30. What is the "NORMAL BALANCE" of
Cash, Trading Securities, Accounts -NOMINAL accounts (or TEMPORARY
Receivables, Notes Receivables, Accrued accounts)
The nominal accounts are Revenue represents the earnings of the
business from sales of goods or service
-Income/revenues
rendered.
-Expenses and
Revenue accounts have normal CREDIT
-Owner’s Drawing balance.

Nominal Accounts are those that comprise
the elements of the Statement of Financial
Performance (or INCOME STATEMENT) –
the revenue and expenses accounts.
These accounts are called temporary
because they are "closed", or put into zero
balance, at the end of the accounting period.
*Please note that Owner’s Drawing is NOT
an income statement account, but must also
be closed, or put into zero balance, at the
end of the accounting period.
------------------------------------------------------
---------
SUMMARY:
REAL accounts (or PERMANENT
accounts)
-Assets
-Liabilities
-Owner’s Equity
Below are some common revenue accounts:
 Sales – an account used to summarize sale
of goods of a trade or merchandising
business. This includes cash sales and sales
on account.
 Service Income – the earning derived from
service rendered by a servicing business to
its customers. This includes cash and on
account service.
 Professional Fees – the earning derived
from services rendered by a professional or
professional servicing firm which could be
in cash or in collectibles to its clients.
 Interest Income – the earning representing
the time value of money derived from
promissory notes received by the business,
whether in cash or collectibles in the future.
 Rent Income – the income earned from
allowing others to use property or facility of
the business.

NOMINAL accounts (or TEMPORARY  Gain on Sales of other Assets – the income
accounts) derived from the sales of assets used in the
business operation. There is a gain on sale if
-Income/revenues the proceeds exceed the book value or cost
-Expenses and of disposed asset. Examples are gain on
equipment, gain on sale investments, gain on
-Owner’s Drawing sale of land, etc.
------------------------------------------------------  Others
---------
------------------------------------------------------
II. ---------
The REVENUE Accounts The EXPENSES Account
Expenses are cost incurred in conducting the  Others
business activities. Expense accounts have
normal DEBIT balances. Some common ------------------------------------------------------
expense accounts are as follows: ---------
SUMMARY:
 Cost of Sales – the value of merchandise
sold Revenue
 Supplies Expense – the amount of supplies -Sales
consumed or used by the business during the
-Service Income
period. Examples: used in papers, inks,
ballpoint pens, etc. -Professional Fees
 Salaries and Wages Expenses – the -Interest Income
amount paid to service rendered by the
-Rent Income
employees in the operation of the business
-Gain on Sales of other Assets
 Insurance Expense – the amount of
insurance policy incurred during the current -Others
period. Examples: premiums on building
Expenses
insurance, life insurance, plant insurance,
etc. -Cost of Sales
 Taxes and Licenses Expenses – the cost of -Supplies Expense
local as well as national taxes that are
-Salaries and Wages Expenses
incurred and required to be paid in
connection with the conduct of the business. -Insurance Expense
Example: Cost to acquire mayor’s permit, -Taxes and Licenses Expenses
registration cost of the building, percentage
tax on sales, etc. -Doubtful Account Expenses

 Others -Depreciation Expense

"Estimated Expense" -Others

 Doubtful Account Expenses – the

estimated amount of losses the uncollectible CURRENT ASSETS
accounts arising from credit sales of the
current period. This is also called the debt • Cash and Cash Equivalents
expense or uncollectible account expense. • Financial Assets
• Trade and other Receivables
 Depreciation Expense – represents the
• Inventories
current periodic cost for using depreciable
• Prepaid Expenses
plant assets. In accordance with the systemic
cost of depreciable asset should be allocated
Cash
as expense over its useful life.
• Checks
• Bank drafts
• Money order
Cash Equivalents
• Three-month BSP treasury bill
• Three-year BSP treasury bill purchased
three months before date of maturity
• Three-month time deposit
• Three –month money market instrument
• Preference shares with specified
redemption date and acquired three months
before redemption date
Such investments in time deposit, money
market instruments and treasury bills should
be classified as follows:
• If the term is three months or less ---
included in cash and cash equivalents
• If the term is more than three months but
less than a year --- classified as short-term
financial assets/temporary investments and
presented separately as current assets.
• If the term is more than a year --- classified
as noncurrent or long term investments. But
if due within a year from the end of the
reporting period, they are classified as short
term financial assets or temporary
investments.
Cash Funds for certain purposes
Included in the current assets if set aside for
use in current operations or for the payment
of current obligations:
• Petty cash fund
• Payroll fund
• Travel fund
• Interest fund
• Dividend fund
• Tax fund
The following are presented as Long term
Investments if the cash fund is set aside for
noncurrent purposes or for settlement of
noncurrent obligations.
• Sinking fund
• Redemption fund
• Preference share redemption fund
• Contingent fund
• Insurance fund
• Fund for acquisition of Plant, Property and
Equipment
Accounts Receivables
• Accounts Receivable (may it be assigned
or unassigned)
• Notes Receivable
• Accrued Interest on Notes Receivable
• Advances to officers and employees
• Dividends Receivable
• Allowance for doubtful accounts (less)
• Notes Receivable discounted (less)
• Creditor’s debit balance (not offset against
notes payable)
• Special deposits on contract bids (current if
collectible currently; noncurrent if not
currently collectible)
• Accrued Income/ Accrued Revenue :
dividends receivable, accrued rent income,
accrued royalties, accrued interest on bond,
claims
• Receivable from employees
Inventories
• Merchandising purchased
• Land or property held for sale
• Finished goods, goods in process,
materials and supplies awaiting for use in
production
• Cost of service
• Factory Supplies
• Goods owned and on hand
• Goods in transit and sold FOB destination
• Goods in transit and purchased FOB • Investment in securities (shares, bonds,
shipping point and debt instruments)
• Goods out on consignment: included in the • Investment in subsidiaries, associates,
consignor ( owner); excluded in the funds
consignee • Investment property
• Goods in hand of salesmen or agents • Cash surrender value o life insurance
• Goods held by customers on approval or • Investment in joint venture
on trial • Advances to affiliates, suppliers,
• Goods sold on installment--- included in employees and officers
the buyer; excluded in the seller • Preference share redemption fund
• Sinking fund
Prepaid Expenses • Contingent fund
• Office supplies unused • Insurance fund
• Prepaid insurance • Fund for acquisition of plant, property and
• Prepaid taxes equipment

Intangible Assets
NON CURRENT ASSETS • Patent
1. Plant, Property and Equipment (less its • Franchise
accumulated depreciation) • Copyright
2. Long-term investments • Lease rights
3. Intangible Assets • Trademark
4. Other Noncurrent Assets • Computer software

Plant, Property and Equipment Unidentifiable current intangible assets:

• Land GOODWILL
• Building
• Machinery Other noncurrent assets
• Office Equipment • Long term advances to officers, directors,
• Tools and book plates shareholders and employees
• Ship • Abandoned property
• Aircraft • Long term refundable funds
• Motor vehicle
• Pattern, mold, and dies
• Furniture and fixtures
Not included: biological assets, mineral
rights, land held for sale and land for
undetermined use

Long term Investments

• Interest royalties
• Dividends/rentals
• Capital appreciation