DON MARIANO MARCOS MEMORIAL STATE UNIVERSITY

MID-LA UNION CAMPUS

COLLEGE OF MANAGEMENT
CITY OF SAN FERNANDO, LA UNION

MODULE

In

ACCTG 101 (BASIC ACCOUNTING)

JOSEPHINE G. JAVONITALLA
BA Faculty

1
 Course Outline in

Acctg 101 (Basic Accounting)

COURSE DESCRIPTION:

This is an introductory course in accounting that deals with the nature, functions and scope of the
accounting discipline affecting a service concern and merchandising enterprise organized as a sole
proprietorship. Emphasis is on the basic accounting processes and principles in providing the students
with adequate knowledge in the recording, classifying and summarizing phases of accounting.

COURSE OBJECTIVES:

Upon completion of the course, the students should be able to:

1) Describe the nature, functions, scope and limitations of accounting, its major uses and users.
2) Understand and be able to explain the logic of double entry bookkeeping and the nature and
significance of each step in the accounting cycle.
3) Identify, record, classify and summarize typical transactions of a sole proprietorship engaged in
a service and merchandising business.
4) Prepare in good form the basic financial statements; the income statement, balance sheet and
statement of changes in owner’s equity.

COURSE CONTENT:

MODULE I: INTRODUCTION

Lesson 1: Meaning of Accounting Terminologies and Roles/Functions of

Accounting
Lesson 2: Forms of Business Organizations
Lesson 3: Accounting Relationships
Lesson 4: Debit and Credit

MODULE II: RECORDING PHASE

Lesson 1: The Accounting Cycle

Lesson 2: Journalization
Lesson 3: Posting
Lesson 4: Trial Balance

2
 MODULE III: WORKSHEET WITH ADJUSTMENTS AND FINANCIAL STATEMENTS

Lesson 1: Adjusting Entries

Lesson 2: Worksheet with Adjustments
Lesson 3: Financial Statements
Lesson 4: Closing Entries and Post-closing Trial Balance

MODULE IV: MERCHANDISING BUSINESS

Lesson 1: Basic Concepts and Terminologies

Lesson 2: Accounting for Purchases and Related Items
Lesson 3: Accounting for Sales and Related Items
Lesson 4: Worksheet and Financial Statements

REFERENCES:

Ballada, Win Lu. (2011). Basic Accounting Made Easy. Domdane Publishers.
Manuel, Zenaida Vera Cruz (2012). 21st Century Accounting Process. Zera Cruz Manuel. Manila.
Valencia, Edwin G. (2006-2007). Basic Accounting. Valencia Educational Supply.

3
 MODULE I

INTRODUCTION

Lesson 1: Meaning of Accounting Terminologies and

Roles/Functions of Accounting

Lesson 2: Forms of Business Organizations

Lesson 3: Accounting Relationships

Lesson 4: Debit and Credit

4
 MODULE 1

INTRODUCTION

Accounting is useful because it tries to analyze and solve financial and economic problems which
affect everyone – husband, wife, student, employee and businessman. An understanding of accounting
is needed for one to be able to manage financial resources, be it money or property.

Every business executive and business owner needs good financial information to be able to make
good decisions in running the affairs of the business. Large, small or medium business organizations use
accounting information to make decisions. Even the government and non-profit organizations also need
accounting information as the basis for making decisions.

After reading Module 1, you will learn to:

 Define accounting and appreciate its role in business.

 Know what an accounting system is and the accounting reports it generate.

 Identify the forms of business organizations and types of operations.

 Define and identify the accounting elements.

 Use the accounting equation to analyze business transactions.

LESSON 1

Definition of Terms & Role/Functions of Accounting

5
 Accounting is a service activity, which measures, records and reports information, about the
economic activities and condition of a business, to be used in making decisions.

Accounting is the language of business because it communicates vital information to statement

users for decision making purposes.

ACCOUNTING

PROVIDES FINANCIAL INFORMATION

To

Investors Clients/Customers

Managers Employees

Creditors Government

FOR MAKING DECISIONS

STAKEHOLDERS AS DESICION MAKERS

 Stakeholder is a person or entity who has interest in the economic performance of a business.
 Owner is one who puts his money in a business venture in the hope of receiving a return on
investment from profits earned by the business.
 Manager is responsible for directing the operation of the business.
 Lender is concerned with the ability of the borrower to pay not only the principal debt but also
the interest.
 Supplier offers his goods for cash or on credit terms. He extends credit, depending on the paying
ability of the customer.
 Government uses the accounting reports as a tax collector, as a regulatory body, and as a
customer.

ACCOUNTING INFORMATION SYSTEM

6
 Accounting information system involves a systematic or orderly way of measuring business
transactions through a process of recording, classifying and summarizing, and from which process
reports are generated for proper communication to decision makers.

Data Analyzed Classified

Accounting Process Summarized
Decision
Gathered Measured Stored Reported
Making
Recorded Interpreted
PHASE 1 PHASE 2 PHASE 3 PHASE 4

FUNCTIONS OF ACCOUNTING:

1. Recording – writing down the business transaction for the first time. It is often referred to as
bookkeeping.

BOOKKEEPING – the systematic and chronological recording of business transactions and

events. It is one of the functions of accounting. The accountant designs the system of records which the
bookkeeper uses.

2. Classifying – sorting out and grouping together of similar items. Items are grouped as to
accounting element.

3. Summarizing – preparation of financial reports.

4. Interpreting – preparation of additional financial reports and analysis of financial statements.

ACCOUNTING REPORTS

 Balance Sheet gives information about the financial position of the business by showing a list of
its assets, liabilities and owner’s equity.

 Income Statement is a report, which describes how the business operated over a given period
of time.

 Statement of Changes in Owner’s Equity describes the activities that led to a change in the
owner’s net worth over a number of years.

 Cash Flow Statement shows the cash inflow and cash outflow activities of the business.

TRANSACTION – the exchange of goods or services for a certain value. It is also defined as any financial
event that changes the resources of the business. A transaction has two fold effect, value received and
value parted with.

7
ILLUSTRATION:

Transaction Value Received Value Parted With

1. Investment of cash by the owner Cash Obligation for the entity to
hold the investment of the
owner

2. Purchase of equipment on cash Equipment Cash

3. Payment of rent Right to occupy the space Cash

4. Receipt of cash for services Cash Services

rendered

5. Purchase of office supplies on Office supplies Obligation to pay

account

6. Rendered services on account Right to collect Services

LEARNING ACTIVITY:

1. Differentiate accounting from bookkeeping.

2. Enumerate the four functions of accounting.
3. Enumerate and give example the users of accounting information.
4. Identify the value received and value parted with for the following transactions:
a. Mr. X invested his car to the business.
b. Purchase office supplies on cash.
c. Received cash for services rendered.
d. Sale of merchandise on account.
e. Collected the account in letter d.

LESSON 2

FORMS OF BUSINESS ORGANIZATIONS

8
A. As to ownership:

 Sole Proprietorship a business owned and managed by one person who enjoys all the profits by
himself. The simplest form of business organization.
Advantages:
1. Easy to organize.
2. Owner receives all the profits.
3. Owner has the freedom to manage.
4. Few legal restrictions.
5. Owner, not the business is taxed.

Disadvantages:
1. Unlimited liability of the owner.
2. Difficulty of raising capital.
3. Over-all direction may become a burden on owner when business grows.
4. Limited opportunity for employees since organization is not permanent.
5. Death or insanity of the owner terminates the firm.

 Partnership is an association of two or more individuals to carry on as co-owner a business for

profit. The owners are called partners.

Advantages:
1. Greater source of capital.
2. Allows for specialization of managerial skills as well as pooling of partners’ knowledge.
3. Few legal restrictions than a corporation.
4. Each partner, as an individual, is taxed, not the partnership business.
5. Better credit standing than sole proprietorship.

Disadvantages:
1. Restricted transfer of ownership.
2. Unlimited liability.
3. One partner’s action can legally bind the business.
4. Misunderstanding and dispute may terminate the agreement.
5. Limited life.

 Corporation is a business organized by at least five persons whose ownership is evidenced by

shares of stocks. The owners are called stockholders.

Advantages:
1. Unlimited life.
2. Transferability of ownership.

9
 3. Limited liability of the owners.
4. Greater source of capital.
5. Permits the use of management specialist.

Disadvantages:
1. Difficult and expensive to organize.
2. Subject to more legal restrictions.
3. Subject to higher tax on business income.
4. Stockholders have little control over management of business.
5. Subject to more government controls.

B. As to operations or source of income:

 Service Business is a type of business that derives income from sale of services to clients or
customers.

 Merchandising or Trading Business is engaged in the buying and selling of goods without
changing the form.

 Manufacturing Business a kind of business that purchases raw materials which are converted to
finished goods before finally selling them at a profit.

LEARNING ACTIVITY:

1. Differentiate the type of business organizations as to ownership.

2. Identify the following whether service, merchandising or manufacturing business.
a. Sari-sari Store f. Textile Mill
b. Beauty Parlor g. Shoe Factory
c. Hospital h. Drug Store
d. Softdrinks Factory i. PLDT
e. Computer Shop j. CSI Mall

Lesson 3

ACCOUNTING RELATIONSHIPS

ELEMENTS OF ACCOUNTING

10
 There are five accounting elements namely: Assets, Liabilities, Capital, Revenue and
Expenses.

ASSETS are resources owned by the business. They are properties and rights owned by the
business.

Two major classifications of Assets: Current Assets and Non-current Assets.

1. Current Assets – assets which can be converted into cash within one year. Common
examples include the following: cash, marketable securities, receivables, inventories, and
prepaid expenses.
2. Non-current assets – include tangible, intangible, operating and financial assets of long-
term nature.
a. Fixed Assets – known as Property, Plant and Equipment. Examples are: Land,
Building, Machinery, Furniture and Fixture, Office Equipment, Store Equipment
and Delivery Equipment.
b. Long-term Investments – assets held by the enterprise for the accretion of
wealth through distribution such as interest, royalties, dividends and rentals for
capital appreciation or for other benefits. Examples are: Investment in stocks,
Investment in Bonds and Fund for noncurrent purposes.
c. Intangible Assets – identifiable nonmonetary assets without physical substance.
Examples are: patent, copyright, trademark, franchise and goodwill.
d. Other Non-current Assets – include other long-term items which cannot be
appropriately classified under the usual asset categories.

LIABILITIES are financial obligations of the business. It has two major classifications: Current
Liabilities and Long-term Liabilities.

1. Current Liabilities – obligations which are to be settled within one year like Accounts
Payable, Notes Payable, Unearned Revenues and Accrued Expenses.
2. Non- current Liabilities – all other liabilities like Long-term Notes Payable, Bonds Payable
and Mortgage Payable.

CAPITAL is the residual interest in the assets of the enterprise after deducting all its liabilities. It
is the owner’s contribution to the business. For sole proprietorship, the term “Owner’s Equity”
would be more appropriate, for partnership’s capital can be referred to as “Partner’s Equity”
and for a corporation, “Stockholder’s Equity”.

INCOME is increases in economic benefits during the accounting period. It refers to increases in
owner’s equity resulting from selling goods, rendering services or performing other business
activities.

11
 EXPENSES are decreases in economic benefits during the accounting period. These are
decreases in owner’s equity resulting from the costs of goods and services used up in the course
of earning revenues.

Double Entry System – the system of accounting used today. It is a system in which transaction
has dual effect on the accounting elements. It is based on the hypothesis: “Value of Economic
Resources equals Value of Rights on the Economic Resources”.

ECONOMIC RESOURCES = RIGTHS ON THE ECONOMIC RESOURCES

ASSETS = EQUITIES
ASSETS = LIABILITIES + CAPITAL
(creditors’ equity) (owners’ equity)

It is normal to place liabilities before capital in the accounting equation because creditors have
preferential rights to the assets. The equation will be:

ASSETS - LIABILITIES = CAPITAL

Further, capital is composed of initial and additional contributions of the owner, increased by
profits and decreased by expenses, losses and withdrawals. Thus, the equation will be:

ASSETS = LIABILITIES + CAPITAL

Original Investment (+)
Additional Investment (+)
Withdrawal (-)
Revenue (+)
Expenses (-)

EFFECTS OF TRANSACTION ON THE ACCOUNTING ELEMENTS

Nine possible two-fold effects:

1. Increase in Assets
2. Increase in Assets
3. Increase in Assets
4. Decrease in Assets
5. Decrease in Assets
= Increase in Liabilities
= Increase in Capital
= Decrease in Other Forms of Assets
= Decrease in Liabilities
= Decrease in Capital

12
6. Decrease in Liabilities = Increase in Capital
7. Decrease in Liabilities = Increase in Other Forms of Liabilities
8. Decrease in Capital = Increase in Liabilities
9. Decrease in Capital = Increase in Other Forms of Capital

ILLUSTRATION:

Assume that on June 1, 2013, Arsen starts a a computer rental business. The following
transactions transpired during the first month of operations:

June 1 – Arsen invested cash of Php200,000.

The Owner’s investment increases an Asset (Cash) in the amount of Php200,000 and
increases Owner’s Equity (Arsen, Capital) in the amount of Php200,000.

June 2 – Bought computer units for Php150,000 on account.

The purchase of computers on credit increases an Asset (Store Equipment) and increases a
Liability(Accounts Payable) both for Php150,000

June 5 – Paid Php2,500 for computer paper, printer ribbon and other supplies for cash.
Purchase of supplies for cash increases an Asset(Supplies) and decreases another form
of Asset(Cash) both for Php2,500.

June 8 – The business receives a bill for Php 1,500 from Bombo Radio for advertising the
opening of the business.
Purchase of advertising on credit is an example of incurring an expense but payment is
done in the future. It has an effect of increasing Liabilities (Accounts Payable) for Php1,500.
Being an expense, it will reduce Owner’s Equity(Arsen, Capital).

July 15 – Php10,000 cash was received from various customers for computer services rendered.
The transaction representing the main revenue-producing activity of Arsen’s Computers
has an effect of increasing an Asset(Cash) and increasing Revenue Service Revenue). Being a
revenue, it will increase Owner’s Equity(Arsen, Capital).

July 16 – Paid the bill of Bombo Radio.

The payment of obligation decreases an Asset(Cash) and decreases a Liability (Accounts
Payable).

June 19 – Billed Erika for computer services rendered, Php 5,000.

Since the revenue is earned on June 19, a bill is sent to the client and the transaction is
recorded on the same date not on the date when the client would pay. This revenue

13
 transaction, increase an Assets(Accounts Receivable) for Php5,000 and it has also an effect of
increasing Capital (Arsen, Capital).

Learning Activity:

A. State whether each of the following is an asset, liability, or capital. If asset or liability, state the
kind:
Example: Cash on Hand Asset Current

1. Petty Cash Fund

2. Prepaid rent expense
3. Salaries payable
4. Cash in Bank
5. Furniture
6. Unused supplies
7. Prepaid insurance
8. Accrued interest on
Notes receivable
9. Accrued interest on
Notes payable
10. Notes receivable
11. Notes payable
12. Land
13. Building
14. Interest receivable
15. Interest payable
16. Accounts receivable
17. Account payable
18. AJ, Capital
19. AJ, Drawing
20. Taxes payable
21. Unearned rent
22. Supplies inventory

14
 23. Delivery equipment
24. Inventory on hand
B. Direction: Match column A with column B. Write the letter of the correct answer on the space
provided for each number.
Column A Column B
1. Arsen opened a Computer a.
Increase in assets =
Repair Shop by investing Increase in
P100, 000 cash and equipment proprietorship
worth P250,000
2. Paid the rent on the shop b.
Increase in assets = Increase
space, P10, 000.
in liabilities
3. Purchased tools for cash, P9,000. c.
Decrease in assets =
4. Completed repair work for Aaron Decrease in proprietorship
on credit, P12,000
d. Decreased in assets =
5. Purchased additional tools on credit, Decrease in liabilities
P10, 000 from Bal.
e. Increase in one asset =
6. Aaron paid his account
Decrease in one asset
7. Paid one half of the account due
to Bal
f. Decrease in one liability =
8. Paid advertising today’s news, P5,000
Increase in one liability
9. Paid the salary of the shop helper, P8,000
10. Withdrew P2,000 for personal use
11. Billed Darlene for repair service
rendered, P11,350.
12. Paid the other half of the account due to Bal
C. State the effects of the following transactions on the assets, liabilities, and capital by placing a plus (+)
sign and a minus (-) sign on the spaces provided for.

Transactions Assets Liabilities Capital

1. Invested cash and equipment

15
2. Collected cash from a customer

3. Purchased additional equipment on

credit
4. Paid the assistant’s salary

5. Billed a customer for services rendered

6. Paid the telephone bill

7. Paid the account due in number 3

8. Purchased supplies for cash

9. Received payment from customer in

number 5.
10. Withdrew cash from the business for
personal use.

LESSON 4

DEBIT AND CREDIT

Use of T-Accounts

The simplest form of the account is known as the “T” account because of its similarity to the big letter
“T”. The Account is an accounting device used to record increases and decreases in the different
elements of accounting caused by the business transactions that have transpired. The account is
illustrated below:

Account Title
______________________________________
Left side or I Right side or

16
 Debit side I Credit side
I

An account is debited when an amount is entered on the left side of the account and credited when an
amount is entered on the right side. It is a simple, direct means of recording transactions.

Rules on DEBIT and CREDIT

DEBIT TO: CREDIT TO:

1. Increases an Asset 1. Decreases an Asset
2. Decreases a Liability 2. Increases a Liability
3. Decreases a Capital 3. Increases a Capital
4. Decreases a Revenue 4. Increases a Revenue
5. Increases an Expenses 5. Decreases an Expense
6. Increases a Withdrawal 6. Decreases a Withdrawal

ILLUSTRATION:

TRANSACTION DEBIT CREDIT

1. Mr. X invested cash to start a Cash Mr. X, Capital
computer rental business.
2. Purchased computer sets on cash. Office equipment Cash
3. Paid taxes and licenses. Taxes and licenses Cash
4. Received cash for services rendered. Cash Service Revenue
5. Bought office supplies on account. Office supplies Accounts Payable
6. Billed a customer for services Accounts receivable Service Revenue
rendered.
7. Paid the account in number 5. Accounts payable Cash
8. Collected the account in number 6. Cash Accounts receeivable

LEARNING ACTIVITY:

A. State the account to be debited and credited for the following transactions:

1. Purchased repair supplies for cash, P10,200.

2. Purchased repair supplies on credit from Joseph, P15,000.
3. Paid the rent of the shop space, P5,000.
4. Purchased a service truck for cash, P100,000.
5. Completed repair work to Lorraine on credit, P6,000.
6. Paid one –half of the account due to Joseph.
7. Collected P3,500 from Lorraine.
8. Paid for gas and oil placed in the truck during the month, P2,500.
9. Purchased additional repair supplies from Joseph on cash, P10,000.
10. Completed repair work for Erika on cash, P9,000.
17
 B. State the account to be debited and credited for the following transactions:

1. Purchased for P250, 000 a small building to be used as a clinic and office.
2. Purchased dental supplies for cash, P10,500.
3. Purchased dental equipment from Daniel on credit, P100,000.
4. Paid for advertising of the clinic, P5,000.
5. Completed dental work for Jireh and collected P1,000 therefor.
6. Paid P60,000 to Daniel as partial settlement of the account.
7. Paid the dental assistant’s salary, P6,500.
8. Completed dental services for Jem for which she paid P1,000 and promised to pay the balance
of P2,000 within a few days.
9. Paid the balance of the account due to Daniel.
10. Withdrew P3,000 for personal use.

MODULE SUMMARY

Accounting is a service activity, which measures, records and reports information, about the
economic activities and condition of a business, to be used in making decisions. Business activities are
recorded in the books of accounts. From these records, reports and statements showing the progress
and status of the business are prepared periodically. These reports are indispensable in planning as well
as in making decisions.

There are four functions of accounting, namely: recording, classifying, summarizing and
interpreting. There are also two broad classification of business organization: as to ownership (sole,
partnership and corporation) and as to nature of business ( service, merchandising and manufacturing).

18
 The elements of accounting are: assets, liabilities and capital. The relationship of these
elements could be expressed in an accounting equation: A = L + C. This means that the total assets of
the business are divided into the equity of the creditors and the equity of the owner.

The present accounting system follows the double-entry bookkeeping which is founded on the
concept of value received and value parted with. It is a system in which transaction has dual effect on
the accounting elements. It is based on the hypothesis: “Value of Economic Resources equals Value of
Rights on the Economic Resources.

The Account is an accounting device used to record increases and decreases in the different
elements of accounting caused by the business transactions that have transpired. An account is debited
when an amount is entered on the left side of the account and credited when an amount is entered on
the right side. Normally, assets have a debit balance while liabilities and capital have credit balances.

SUMMATIVE TEST

Let us find out how well you understood the module. Your score to the self-test will determine
if you are ready to go to the next module.

GOOD LUCK!!!

TEST I: TRUE OR FALSE: Write true if the statement is correct and false if it is wrong. Write your
answers on the space provided before each number.

___________ 1. Accounting is the language of business.

___________ 2. Bookkeeping is the same as recording.
____________ 3. A sole proprietorship can have more than on owner.
____________ 4. The basic accounting device is the accounting equation.
____________ 5. A debit entry always decreases the balance of an account.
____________ 6. For every transaction, there is at least one account affected.
___________ 7. The journal is called the book of original entry.
___________ 8. Income increases owner’s equity, therefore it is recorded as debit.
___________ 9. Assets are properties owned by the business.
___________ 10. Expenses decreases owner’s equity.

TEST II: IDENTIFICATION: Identify the word/s described in the following statements: Write your
answers on the space provided before each number.

__________ 1. The systematic and chronological recording of business transactions and events.
__________ 2. It is owned by two or more individuals.
__________ 3. These are financial obligations of the business.
__________ 4. Skeletal form of a ledger.
__________ 5. Left side of a “T” account.
__________ 6. A type of business organization which is engaged in the selling of goods.

19
__________ 7. A person who is concerned with the ability of the borrower to pay not only the
principal debt but also the interest.
__________ 8. It is a statement of financial condition of the business.
__________ 9. It is the exchange of goods or services for a certain sum of money.
__________ 10. Assets which can be turned into cash for a short period of time usually on year.

20
21