-Accounting Definitions
- Accounting is a service activity. It
functions to provide quantitative
information, primarily financial in nature
about economic entities that are intended to
be useful in making economic decisions with
reasoned choices among alternative courses
of actions.
- Accounting is the process of recording,
classifying, and summarizing, in a
significant manner and in terms of money,
transactions, and events which are part, at
least of a financial in character and
interpreting the results thereof. Accounting,
in this sense explains how quantitative
information are being processed according to
their ultimate uses.
- Accounting is a language of business.
Accounting is communicating financial
statement to the users.
Financial statements
BALANCE SHEET- Condition of the
business enterprise as of given period. “as
of”, statement contains cumulative figures
from the start of the business commercial
operation up to the present statement date.
INCOME STATEMENT- Results of
operation. Whether the business enterprise
makes profit or losses for a period of time.
“for a period”, statement contains figures
that transpired only during the period of the
statement date.
STATEMENT OF CASH FLOWS- cash
sources and the cash uses of the business
enterprise during a period of time.
RECORDING- writing down of business
transactions in the official book of
accountants.
CLASSIFYING- Sorting of business
transactions to their specific accounts.
SUMMARIZING- Summing up of the
business transactions recorded in the book of
accounts.
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*These 3 processes comprises the first phase
of accounting, which referred to as
bookkeeping.*
BOOKKEEPING
Systematic and chronological recording of
business transactions, observing therein the
fundamental principles of accounting. The
preparation of trial balance is supposedly the
end product of a bookkeeper and the starting
point of an accountant’s work.
MONEY- Cash
TRANSACTION- Exchange of values.
Values are money, rights, properties, and
services.
EVENT- Act of happening. Must have an
impact to business enterprise, could be either
positive or negative. Most of the time,
negative account is recorded than positive.
*Last phase of accounting is interpretation*
Accounting concepts and principles
ENTITY CONCEPT- Personality of the
owner and the personality of the business are
distinct and separate from each other.
OBJECTIVITY PRINCIPLE- AKA
Reliability principle. Transactions should be
verifiable by other parties and are proper
supported with pieces of evidence.
COST PRINCIPLE- Transactions have to
be recorded at the amount that one has
actually paid for.
MATERIALITY PRINCIPLE- The
Materiality of an account is a matter of
professional judgement. Skill of an
accountant judging an account is essential.
MATCHING PRINCIPLE- The reason the
business earns an income is that it simply
spends. We will match the expenses incurred
to the revenue earned.
ACCOUNTING PERIOD- A period of 12
months;
CALENDAR PERIOD- 12 months which
will end on December 31.
FISCAL PERIOD- 12 months which will
end other than December 31.
REVENUE RECOGNITION- It is an
Accounting principle that determines the
specific conditions. Income is recognized
when an specific event occurs, and the
income pertaining to it is measurable.
Income is recognized when the company
delivers merchandise or services to its
customers.
CONSERVATISM- Concept of
Recognizing expenses and liabilities in the
least amount of time if there is uncertainly of
the outcome and certainly of revenue and
assets received.
- Conservatism principle is a guide of an
accountant, but he should use his best
judgement to evaluate a situation and to
record certain transactions in relation to the
information available at that time.
Users of financial Statement
BUSINESS OWNERS- Very particular to
what has happened in their business venture.
They also make decisions depending on the
report and its interpretation.
BUSINESS MANAGERS- Direct and
control the business enterprise, they really
need the financial statements as reference for
their daily routine business decision making.
GOVERNMENT- Correct payment of
taxes. It is basis for checking the correctness
of the latter’s tax payment.
POTENTIAL INVESTORS- Checks the
soundness of the business enterprise before
they plan to invest their money and to assure
a fair return of their investment as well.
CREDITORS- Check on the paying
capacity of the customers first to minimize
doubtful or uncollectible accounts.
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LABOR UNIONS- For their basis to
demand for increase in the salary of their
union members.
BUDGET OFFICERS/ACCOUNTANTS/AUDITORS
- Budget officers prepare the company
budget and for them to know the progress of
its operation as compared to its plan.
Forms of business organization
SOLE PROPRIETORSHIP- Only one
owner. Usually holds small- medium sized
business enterprises.
Proprietor- male owner
Proprietress- female owner
PARTNERSHIP- Two to Four owner.
Usually holds small-medium to sometimes
big business enterprise and owners called
partners. The profit is divided according to
their agreement.
CORPORATION- Owners ranges from 5
and more. Usually holds true for medium
and big enterprises. Ownership will be based
on stocks available in the stock market.
*The generic name of the owner is called
Corporator. *
*Stockholder, shareholder owns a stock
corporation.*
*Members owns a non-stock corporation. *
*The ownership of the corporation is divided
into shares of stocks.*
Types of business organization
SERVICE CONCERN- Render services to
the customers to earn income.
TRADING CONCERN- Also called as
merchandising concern, which the owner
purchase merchandise and sell it to customer
and simply adds reasonable mark up on the
cost of the merchandise to gain profit.
MANUFACTURING CONCERN- Type
of business which usually buys raw materials
and converts them into a finish product and
sells into the market.
Application of accounting concepts
and principles.
DATA GATHERING- Office manager or
nay responsible officer of the company will
transact business. Can be either done
personally or be delegated to the company
staff.
ENTITY CONCEPT- Only business
transactions are allowed to be entered into
the books of the accounts and such
transactions should be authorized by the
manager of the company.
OBJECTIVITY PRINCIPLE-
Transactions must be supported by pieces of
evidences.
 The receipt must be in the name of the
company.
 The receipt must be an invoice (Cash
or credit invoice) or an official
receipt.
 The receipt must be claimed within the
taxable period only.
VERIFIABILITY PRINCIPLE- it is the
effect of the application of the entity concept
and the objectivity principle. We can check
on the authorization for the incurrence of the
said transaction, with their supporting
evidence.
RELIABILITY PRINCIPLE- Effect of the
previous application of the accounting
principles. We apply entity concept and
objectivity principle, it will make our
transactions reliable.
Components of cash receipt voucher
 Heading
 Name of the company and Name
of the office form.
 Cash receipt voucher number, for
future referencing.
 Body of the form; particulars, debit,
credit.
 Prepared by, shows the responsibility
of the person who prepared the
voucher.
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 Checked by, accuracy of the
transaction and the journal entry
prepared.
 Approved by, shows that the journal
entry is now approved for entry in
books of account.
If the transaction is a cash receipt, then it
will be journalized in the cash receipt
journal. Attached to the cash receipt
voucher are the copy of the official receipt
mentioned in the form.
Components of cash receipt voucher
 Heading
 Name of the company and Name
of the office form.
 Cash receipt voucher number, for
future referencing.
 Body of the form; particulars, debit,
credit.
 Prepared by, shows the responsibility
of the person who prepared the
voucher.
 Checked by, accuracy of the
transaction and the journal entry
prepared.
 Approved by, shows that the journal
entry is now approved for entry in
books of account.
 Name of the bank, check number, and
amount essential for recording
purposes and for bank reconciliation
purposes.
 Received by
 The check itself
* Journal voucher is used other that cash
receipts (not supported by official receipt
and cash payments) not supported by a
check.*
Components of journal voucher
 Heading
 Name of the company and Name
of the office form.
 Cash receipt voucher number, for
future referencing.
 Body of the form; particulars, debit,
credit.
 Prepared by, shows the responsibility
of the person who prepared the
voucher.
 Checked by, accuracy of the
transaction and the journal entry
prepared.
 Approved by, shows that the journal
entry is now approved for entry in
books of account.
* Cash receipt book contains all the cash
received by the business entity and
journalized in cash receipt voucher. The
cash receipt voucher serves as control
measure of accounting officers so that no
transactions will be recorded by the
accounting staff without an approved cash
receipt voucher.*
Trial balance
- it is the list of account titles in the ledger
with their corresponding balances. It does
not demonstrate whether the accounts are
correct or not, but whether all accounts are
transferred correctly to the ledger
Trial balance of totals- listing the account
title found in the ledger and getting the total
of each debit and credit to be written in the
debit and credit column of the trial balance.
Trial balance of balances- Get the
difference between the debit and credit, and
place the differences under the column
(debit or credit) having the greater value.
Business forms and Documents
SALES INVOICE
 Also called Cash sales invoice, charge
invoice, or service invoice. It
documents the services rendered or the
commodities sold by the customer.
 All information can be located at the
option of the designing accountant.
 Other information can also be
incorporated in the invoice depending
on the need of the business enterprise.
PROVISIONAL RECEIPT
 Similar to the official receipt; only
difference is the collectors issue the
document upon arriving at the office
and endorse the collection to the
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company cashier, who will then
acknowledge and issue the official
receipt.
 Some companies uses provisional
receipt if the payment made by the
customer is in form of check. When
the check collection is deposited and
cleared with the bank, an official
receipt will be issued.
 It is considered as temporary receipt.
Cannot be considered as good
evidence to be kept.
OFFICIAL RECEIPT
 Name of business enterprise, address,
and proprietor.
 TIN, for control procedures of the BIR.
 Amount, must be written in words and
in figures. Also the nature of the
payment.
 Form of payment (cash, bank deposit,
check collection)
 Signature of the authorized person to
accept collection.
 Control number, can be written
anywhere.
Transaction Analysis
ACCOUNT TITLE- Word used to describe
the transaction.
CHART OF ACCOUNTS- list of account
titles used by business enterprises to describe
their transactions.
ASSET ACCOUNT- Resources controlled
by the entity as a result of past transactions
or events and from which future economic
benefits are expected to flow to the entity.
CASH- Generic Account
CASH ON HAND- Money or cash
substitutes representing the collection of the
company awaiting deposit to the company’s
depository bank the following day.
CASH IN BANK- Money of the company
that is in the bank awaiting payment.
 CASH IN FUND- A fund intended to
pay petty expenses.
 CASH EQUIVALENT- Short-term
investments made by the company. Only
accounts under 3 months maturity will
considered on this account.
ACCOUNTS RECEIVABLE-
Customers’ account arising from selling
activities. Refers to a trade account
receivables.
NOTES RECEIVABLE- Collectible of the
company and is supported by promissory
note.
MERCHANDISE INVENTORY-
Merchandise of the company intended for
sale in the course of its business operation.
PREPAYMENTS- Advance payment made
by the company.
LAND
BUILDING
FURNITURE AND FIXTURES
OFFICDE EQUIPMENTS
DELIVERY EQUIPMENT
LIABILITY ACCOUNTS- Present
obligation of the entity arising from past
transactions or events the settlement of
which is expected to result in an outflow
from the entity of resources embodying
economic benefits.
ACCOUNTS PAYABLE- Liability account
of the company, arising from purchase of
merchandise that is intended for sale.
NOTES PAYABLE- Liability accounts
supported by a promissory note.
CAPITAL ACCOUNT- Residual interest
in the assets of the entity after deducting all
its liabilities.
CAPITAL- Capital account of the owner.
WITHDRAWAL, Withdrawal made by the
owner.
REVENUE ACCOUNT- Increase in
economic benefit during the accounting
period in the form of inflow or increase in
assets or decrease in liability that results in
increase in equity, other than contribution
from equity participants. This will increase
capital.
SERVICE INCOME- Render service in
order to earn an income like the services.
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INTEREST INCOME- Earned out of
lending its money or depositing money with
a banking institution.
SALES- Merchandising type of business
organization that is used in selling
merchandise.
SALES DISCOUNT- Cash discount given
to customers for setting their accounts on
time.
SALES RETURNS- Actual return made by
the customers.
SALES ALLOWANCES- No actual return
but to an allowance given instead, for the
defective merchandise delivered.
EXPENSES ACCOUNT- Decrease in
economic benefit during the accounting
period in the form of an outflow or decrease
in assets or increase in liability that results in
decrease in equity, other than contribution
from equity participants. This will decrease
capital.
PURCHASES- Merchandise purchase,
which are intended for sale.
PURCHASE DISCOUNT- Discount given
by merchandisers when you pay your
liabilities on time.
PURCHASE RETURNS- Return of
merchandise to the suppliers.
PURCHASE ALLOWANCES-
Allowances given by the supplier
representing reduction of price for purchased
merchandise.
SALARIES AND WAGES- Labor
payments to employees.
EMPLOYEE BENEFITS- Labor payments
to employees beside from basic payment that
are highly discretionary on part of employer.
OFFICE SUPPLIES EXPENSE- Various
office supplies used by the office.
UTILITIES EXPENSE- Light, water,
telephone expenses.
RENT EXPENSE
ADVERTISING EXPENSE- Cost of
promotion and advertising the product.
INSURANCE EXPENSE- Represents fire
and burglary insurance of the various assets.
INVESTMENT- Owner has transferred to
its business as a start up or additional.
 DEBIT Assets
Withdrawals
Expenses
CREDIT Liabilities
Investments
Revenues

Recording and Posting

SERVICE REVENUE JOURNAL-
Record of all services rendered on account
only. If the business is a trading concern
then, it is called SALES JOURNAL
PURCHASE JOURNAL- Record of
purchases on account only.
CASH RECEIPT JOURNAL- Record of
all cash receipts of the company.
CASH DISBURSEMENT JOURNAL- All PREPAID EXPENSES- These are the
cash disbursement. expenses already paid by the company,
GENERAL JOURNAL- Record of all although not yet incurred or advanced
transactions. payments.

Adjustments
ACCRUED EXPENSES- Expenses that are
already incurred but not yet paid by the
company.

UNEARNED INCOME- This is the income

already received by the company but not yet
earned, or advance receipt coming from the
customers.
* Whenever we take up an accrued expense,
we have to debit the appropriate expenses,
such as salaries and wages, utilities
expenses, and other appropriate expense
accounts, and credit the liability accounts,
like the accrued utilities payable or accrued
salaries payable.*
ACCRUED INCOME- This is the income
that is already earned by the company but
not yet received.

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DEPRECIATION- Is the Systematic
allocation of the cost of an asset. The
straight line method is normally used in
computing the depreciation of an asset.
DOUBTFUL ACCOUNT- This is the
portion of the estimated collectible accounts
The estimate can be based on a percentage of
income, sales, or a percentage of accounts
receivables
Post-Financial Statement Process
CLOSING ENTRIES- The purpose of
closing entries is to zero out temporary
account by transferring all temporary
accounts to a permanent account.
RULES IN CLOSING ENTRIES
 Debit all the credits you see in the
income statement columns of your
working paper.
 Credit all the debits you see in the
income statement columns of your
working paper.
 The counterpart will be the income
summary for the revenue and the
expenses and capital for the drawing
account.
POST-CLOSING TRIAL BALANCE
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We are assured that we can start with the
next accounting period in proper order and
that debit is equal to credit.
OBSERVATIONS
 Last account title to be shown in this
statement must be capital account.
Accrued salaries and wages and
unearned service income are inserted
among the current liabilities. This is
done because the post closing trial
balance must be arranged in
accordance with the accounting
equation.
The capital is computed as:
Beginning Capital
Add: Net Income
Total
Less: Drawing
Ending Capital
REVERSAL BALANCE- Last process in
the accounting cycle is the reversal entries.
Reversal of adjusting entries made at the end
of the accounting period, which will result in
normal recording of transaction in the next
accounting period. The process is optional in
nature.
Entities that needed to be reversed are:
 Accrual of income
 Accrual of expenses
 Prepayments (if expense method is
used)
 Unearned income (if income method is
used)
Merchandising Concern Business
Enterprise
SALES- revenue account for merchandising
business enterprise.
SALES RETURN- Account will be used
whenever the customer physically returns
the merchandise.
SALES ALLOWANCES- Account will be
used whenever the customer does not really
return the merchandise; instead, we give a
little reduction from our sales price because
of the defects.
TRADE DISCOUNT- Motivates the
customers to buy in commercial quantity.
Customers can get more discounts if they
buy in volume. Transactions will be
recorded as net of the trade discounts.
Normally trade discounts are expressed in
terms of percentage.
CASH DISCOUNT- Will motivate the
customers to pay their account on time.
Settlement of account within discount period
can help the customers avail the cash
discount.
2/10- 2% discount is given if he can pay
within 10 days
N/30- No discount but should be payed
within 30 days.
Eom- Account is collectible at the end of
the month.
5 eoms- 5% discount will be given if he
can at the end of the month.
PURCHASE ACCOUNT- There is a
restrictive use. We can only use this account
title if the merchandise purchased by the
company is intended for sale. Like sales
transactions purchases have two contra-
purchase accounts, Purchase discount and
purchase return and allowances.
FREIGHT OF CHARGES
MODE OF DELIVERY:
FREE ON BOARD (FOB)
DESTINATION- Seller muna magbabayad
kaya di pa kay buyer yung ownership until
mareceive nya yung product.
FREE ON BOARD (FOB) SHIPPING
POINT- Si buyer na ang may ownership
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kahit di pa nya na rereceive yung product
and the shipping fee shoulder din ni buyer.
MODE OF PAYMENT OF FREIGHT:
FREIGHT COLLECT- Buyer will pay the
freight charges.
FREIGHT PREPAID- Seller will pay the
freight charges.
TYPES OF FREIGHT AGREEMENT:
FREIGHT IN- Purchase of goods from
supplier; adjunct account and is added to the
account purchases to come up with gross
purchases and a product cost.
FREIGHT OUT- Account is associated
with the sales if goods to our customer; an
operating expense account and a period cost.
Bank Reconciliation
-Accounting activity where accounting
corresponds to the reconciling the balance of
cash book and the balance of a company’s
deposit with a bank. Normally these two
records do not balance due to the timing and
the nature of their activities.
RECONCILING ITEMS:
UNDEPOSITED COLLECTIONS-
Collections that the company has made
during the day, but are not yet deposited to
the bank.
DEPOSIT IN TRANSIT- Collections that
the company has already made and deposited
to the bank but noy yet credited to the
company’s account because of clearing cut-
off.
CREDIT MEMO- Collections made by the
bank and credited by the bank to the
company’s account. Sometimes loan
proceeds which the bank credited to the
account, the book should also have the
record of it to balance the accounts.
DEBIT MEMO- Payments made by the
bank in behalf of the company. Banks only
debits the account of the company.
OUTSTANDING CHECKS- Checks
issued and released by the company to a
payee. Once the check is released, the check
can already be encashed or not encashed.

Financial Analysis
VERTICAL ANALYSIS- Comparison of
figures within the same accounting period.
Establishing relationship of the size of one
account with the standard account to be
compared.
 We want to know how big our cost of
sales is compared to our sales (cost of
sales divided by sales)
 We want to know how big our gross
profit is compared to our sales (gross
profit divided by sales)
FINANCIAL ANALYSIS- Computing
percentages and ratios in the financial
statement has no significance at all if there is
no interpretation, as well as
recommendations for improvement of what
is considered weak areas in the operation.
Goal is to improve the weak areas, and
therefore, build better control, protecting the
assets of the company

 We want to know how big our

expenses are compared to our sales
(expenses divided by sales)
 We want to know how big our net
income is compared to our sales (net
income divided by sales).

*In vertical analysis we consider the sales

as 100% because we will compare all the
other digures in relation to the sales. Sales
therefore, will be the standard of
comparison.*

HORIZONTAL ANALYSIS- It is the

comparison of the previous year’s account
title with the current year’s account’s title.
Establishing the increase or decrease of the
account over the period analyzed.

*Horizontal analysis is comparing figures of

two or more accounting periods. By
comparing the two figures, you can observe
the growth of such account; if you do this
for several years, you can observe the trend
of the increase/decrease of such account.
For decision-making purpose, any abnormal
increase/decrease may be an indicator that
the company should analyze such account.*