CLARK COLLEGE OF SCIENCE AND TECHNOLOGY

(formerly Clark International College of Science & Technology)

SNS Bldg., Aurea St., SamsonvilleSubd., Dau, Mabalacat City, Pampanga
Telefax No.: (045) 624-0215

INTRODUCTION IN ACCOUNTING
Accounting Cycle
1. Analyze Transactions
2. Journal Entries
3. Posting to ledger or T- Accounts
4. Trial Balance
5. Financial Statements
a. Income Statement
b. Statement of Changes in Owner’s Equity / Capital Statement
c. Financial Position / Balance Sheet
d. Cash Flow Statement
6. Closing Entries
7. Post Closing Trial Balance
8. Adjusting Entries

Introduction to Business and Accounting

Learning Objectives:
1. State why businesses need to keep records
2. Define business and enumerate its different forms and ownership
3. Distinguish types of business according to activities
4. Define economic decision
5. Define accounting
6. Distinguish accounting from bookkeeping
7. Describe nature of accounting
8. Explain the functions of accounting in business

Importance of Record-Keeping

For you as students, why it is important in the business to record all their transactions that involves
money?
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A record, as used in business, is defined as a list or monitoring of transactions entered into a

business. It is usually maintained by a bookkeeper or an accountant of the company.

Basically, it is important for business to keep records in order to monitor their activities especially if
these activities are entered into with parties. These records may be used as references especially
when dealing with customers and suppliers, making business decisions, and auditing financial
statements.

Business

A business (also known as enterprise or firm) is an organization engaged in the trade of goods,
services, or both to consumers where the goods or services are exchanged for other goods, services
or money.

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 CLARK COLLEGE OF SCIENCE AND TECHNOLOGY
(formerly Clark International College of Science & Technology)
SNS Bldg., Aurea St., SamsonvilleSubd., Dau, Mabalacat City, Pampanga
Telefax No.: (045) 624-0215

Accounting

Is an art of recording, classifying, summarizing in a significant manner and in terms of money,

transactions and events which have at least financial character, and interpreting the results thereof.

Accounting is the language of business, it is the process of identifying, measuring and communicating
economic information to permit informed judgement and decision by users of the information.

Bookkeeping

Is define as an art and science of recording financial transactions of a business.

Functions of Accounting in Business

1. Recording – also called bookkeeping. It is systematically and chronologically recording or

business transaction of the business in a book called general journal.
2. Classifying - deals with the grouping in one account of similar transactions in the entries
found in the journal. Classification is done in a a book called general ledger.
3. Summarizing - transforms the classified data into various reports in an understandable and
useful form. This process leads to the preparation of trial balance and financial statements.
4. Analyzing and Interpreting – After the financial data are recorded, classified, and
summarized, these data are analyzed and interpreted in such a way that they will be useful for
the users in making sound economic decisions.
5. Communicating – Communication is done through preparation of financial reports that help
the users in making meaningful judgement when forming economic decisions for their
organization. Financial reports are the output of the accounting process.

Form of Business Organizations

A business may be organized as follows:

1. Sole Proprietorship – is a form of business organization owned by only one individual.

The proprietor may operate alone, or may employ others as business operations expand. It
is the most basic form of business and many successful businesses have started as sole
proprietorship. Example, Sari-Sari Store, mobile phone repair shops

Advantages
a. Less complex and minimal regulatory requirements
b. No conflict in decision making
c. Enjoys all profits earned by the business
Disadvantages
a. Limited resources
b. No benefit of second opinion in decision making.
c. Bears the risks and losses alone.
d. Unlimited liability for debts incurred by the business therefore, personal property may be
used to satisfy the unsettled obligations to the creditors.

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 CLARK COLLEGE OF SCIENCE AND TECHNOLOGY
(formerly Clark International College of Science & Technology)
SNS Bldg., Aurea St., SamsonvilleSubd., Dau, Mabalacat City, Pampanga
Telefax No.: (045) 624-0215

2. Partnership – is a business organization whereby two or more persons, known as

partners, bind themselves to contribute money, property, or industry into common fund with
the intention of dividing profits among themselves.

Advantages
a. More ideas are exchange and tackled
b. More resources
Disadvantages
a. Conflict in decision making
b. Can be easily dissolved (e.g. disagreement among partners, withdrawal or death of
partner)
c. Unlimited liability for debts incurred by the business therefore, personal property may be
used to satisfy the unsettled obligations to the creditors.

3. Corporation – is an artificial being created by operation of law, having right of succession

and the powers, attributes, and properties expressly authorized by law or incident to its
existence. A corporation can exist for a period of no longer than 50 years, but its
registration is subject to renewal.

The cost of forming and managing a corporation is relatively high compared to other legal
forms of businesses. A corporation is subject to greater regulation, scrutiny, control, and
supervision of the government.

A corporation has limited powers as provided under the Corporation Code of the
Philippines and its own Articles of Incorporation.

It has separate legal entity.

Stockholder or Shareholder – person who invests and becomes an owner of corporation.

DTI – Department of Trade and Industry

SEC – Security of Exchange Commision

Types of Businesses According to Activities

1. Service Business – is a type of business that operates through the use of profession or
expertise and its offers different kinds of services to its clients or customers. Selling of
skills, knowledge and expertise.

Examples: Schools, Repair Shops, Hospitals, Law Firms

2. Merchandising or Trading Business – It is also known as buy and sell as it is literally buy
goods and then sells the same to its customers.

Examples: Supermarkets, sari-sari stores, drugstores, fast foods.

3. Manufacturing Business – producers of goods. It buys raw materials then, processes

those materials to convert them into finished good.

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 CLARK COLLEGE OF SCIENCE AND TECHNOLOGY
(formerly Clark International College of Science & Technology)
SNS Bldg., Aurea St., SamsonvilleSubd., Dau, Mabalacat City, Pampanga
Telefax No.: (045) 624-0215

Examples: Shoe manufacturers, Mobile phone manufacturers

Fundamental Concepts
1. Entity Concept – regards the business enterprise as separate and distinct from its owners
and form other business enterprises.
2. Periodicity – is the concept behind providing financial accounting information about the
economic activities of an enterprise for specified time periods. For reporting purposes, one
year is usually considered as one accounting period.

An accounting period may be classified as either of the following.

a. Calendar Year – a twelve-month period that starts on January 1 and ends on
December 31.
b. Fiscal Year – a twelve-month period starts on any month of the year other than
January and ends twelve months after the start period. (e.g. Start April 1, 2019 ends
its fiscal year March 31, 2020.)
3. Going Concern – is a concept which assumes that the business enterprise will continue to
operate indefinitely.
Example : In preparing financial statements of the business, the accountant assumes that
the business will not close or shut operations within the next years.

FINANCIAL STATEMENTS FOR SERVICES BUSINESS AND THE FUNDAMENTAL

ACCOUNTING EQUATION

Types of Financial Statements

1. Statement of Comprehensive Income or Income Statement – shows the result of the
operations for a given period. It consists the Revenue, Cost and Expenses.
2. Statement of Changes in Owner’s Equity or Statement of Owner’s Equity - shows the
changes in Capital as a result of additional investment or withdrawals by the owner,
plus or minus the net income or net loss for the year.
3. Statement of Financial Position or Balance Sheet – shows the financial condition of a
business as of a given period. It consists of the Assets, Liabilities, and Capital
4. Statement of Cash Flows - summarizes the cash receipts and cash disbursement for the
accounting period.

TYPICAL ACCOUNT TITLES USED

Statement of Financial Position or Balance Sheet

1. Assets – these are economic resources owned by the business expected for future gained.
They are property and rights of value owned by the business.
Classification of Assets
A. Current Assets – expected to realize in, or is intended for sale or consumption in, the
entity’s normal operating cycle.
a. Cash or Cash Equivalents
b. Receivables – include the amounts collectible from any of the following.
 Accounts Receivable – is the amount collectible from the customer to whom
sales have been made or services have been rendered on account or credit.
 Notes Receivable – is a promissory note issued by the client or customer in
exchange for services or goods received as evidence of his/her obligation to
pay.

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 CLARK COLLEGE OF SCIENCE AND TECHNOLOGY
(formerly Clark International College of Science & Technology)
SNS Bldg., Aurea St., SamsonvilleSubd., Dau, Mabalacat City, Pampanga
Telefax No.: (045) 624-0215


Interest Receivable – amount of interest collectible on promissory notes
received from customers and clients.
c. Inventories – unsold goods at the end of the accounting period.
d. Prepaid Expenses – include supplies bought for use in the business or services and
benefits to be received by the business in the future paid in advance.
B. Non- Current Assets (Property, Plant and Equipment)
a. Land
b. Building
c. Equipment
d. Furniture and Fixtures
e. Intangible Assets – e.g. patents, copyrights, licenses, franchises, trademark, brand
names.

2. Liabilities – these include debts, obligation to pay, and claims of the creditors on the asset
of the business.
Classification of Liabilities
A. Current Liabilities (Short term Liabilities) usually payable within normal operating
cycle.
a. Accounts Payable – debts arising from purchase of an asset or acquisition of
service on account.
b. Notes Payable – debts arising from purchase of an asset or acquisition of service
on account evidenced by a promissory note.
c. Loans Payable – is a liability to pay the bank or other financing institution arising
from funds borrowed by the business payable within 12 months (Note: If loan is
payable beyond 12 months, then it is classified as Non- Current Liabilities)
d. Utilities Payable – obligation to pay utility companies for services received form
them. (e.g. electric, communication, water)
B. Non-Current Liabilities (Long Term Liabilities) usually payable beyond normal
operating cycle or beyond 12 months.
a. Mortgage Payable – a long term debt of the business with security or collateral in
the form of real properties.
b. Bonds Payable – is a certificate of indebtedness under the seal of a corporation,
specifying the terms of repayment and the rate of interest charged.

3. Owner’s Equity or Capital – this includes the interest of the owner on the business.
A. Capital – is an account bearing the name of owner representing the original and
additional investment of the owner of the business increased by the amount of net
income earned during the year. It is decreased by the cash or other assets withdrawn
by the owner as well as the net loss incurred during the year.
B. Drawing – represent the withdrawals made by the owner of the business either in cash
or other assets.

Income and Expenses

Statement of Comprehensive Income or Income Statement

Forms of Income Statement

Revenue – Expenses = Net Income or Net Loss
1. Natural Form – otherwise called the nature of expense method, presents expenses
according to nature. This type of income statement is used in service business.

*Do not duplicate or distribute without written permission from CLARK COLLEGE OF SCIENCE AND TECHNOLOGY
 CLARK COLLEGE OF SCIENCE AND TECHNOLOGY
(formerly Clark International College of Science & Technology)
SNS Bldg., Aurea St., SamsonvilleSubd., Dau, Mabalacat City, Pampanga
Telefax No.: (045) 624-0215

2. Functional Form – otherwise known as the cost of sales method, present expenses
according to function. This type is used in a merchandising Business.

Account Titles

A. Service Income – includes revenues earned or generated by the business in performing

services for a customer or client.
B. Expenses
a. Salaries and Wages Expense
b. Utilities Expense
c. Supplies Expense
d. Insurance Expense
e. Depreciation Expense
f. Interest Expense
g. Bad Debts Expense

Accounting Equation
Asset = Liabilities + Capital
Effects of transactions on the Accounting Equation

Transactions Assets Liabilities Capital

1. Mr. Sy invests 500, 000.00 Cash 0 Sy, Capital
cash. +500, 000.00 +500, 000.00
2. Purchased 5, 000.00 Supplies Accounts 0
supplies on credit. + 5, 000.00 Payable
+5, 000.00
3. Owner invests 60, 000.00 Equipment 0 Sy, Capital
equipment. +60, 000.00 +60, 000.00
4. Buy Land 600,000.00 Land
paying cash. +600, 000.00
Cash
-600, 000.00
5. Borrow cash 20, 000.00 with Cash Notes Payable
promissory note. +20, 000.00 +20, 000.00
6. Rendered 10, 000.00 Cash Service Income
services for cash. +10, 000.00 +10, 000.00
7. Paid 700.00 Utilities Cash Utilities Expense
expense for the month. -700.00 -700.00
8. Paid the supplies bought on Cash Accounts
credit in transaction No. 2. -5,000.00 Payable
-5, 000.00
9. Rendered 2, 000.00 services Accounts Receivable Service Income
on credit. + 2, 000.00 +2, 000.00
10. Collected the account in Cash
transaction No. 9. +2, 000.00
Accounts Receivable
-2, 000.00
11. Paid the salary of the Cash Salaries Expense
helper, 5, 000. -5, 000.00 -5, 000.00
12. Mr. Sy withdrew 7, 000 cash Cash Sy, Drawings
for personal use. -7, 000.00 -7,000.00

*Do not duplicate or distribute without written permission from CLARK COLLEGE OF SCIENCE AND TECHNOLOGY
 CLARK COLLEGE OF SCIENCE AND TECHNOLOGY
(formerly Clark International College of Science & Technology)
SNS Bldg., Aurea St., SamsonvilleSubd., Dau, Mabalacat City, Pampanga
Telefax No.: (045) 624-0215

13. Purchased tables and chairs Furniture and Fixture Accounts

35, 000 on account. +35, 000.00 Payable
+35, 000.00

14. Purchased computer set Equipment Notes Payable

worth 40,000 paid half on +40, 000.00 +20, 000.00
cash and issued promissory Cash
note on the balance. -20, 000.00
15. Paid half on transaction no. Cash Accounts
13 -17, 500.00 Payable
-17, 500.00
16. Paid the full amount due on Cash Notes Payable
transaction no. 14 -20, 00.00 -20, 000.00
17. Paid rent of the shop 20, Cash Rent Expense
000.00 -20, 000.00 -20, 000.00
18. Bought additional supplies Supplies Accounts
16, 000 on credit. +16, 000.00 Payable
+16, 000.00
19. Paid electric bill 1, 500. Cash Utilities Expense
-1, 500.00 -1, 500.00
20. Rendered service to Notes Receivable Service Income
customer worth 8,000 and +8, 000.00 +8, 000.00
received promissory note.
21. Received payment from Cash
transaction no. 20. +8, 000.00
Notes Receivable
-8, 000.00

References:
Fundamentals of Accounting authored by Flocer Lao Ong
Fundamentals of Accounting 1 by Lorenzo G. Tan, CPA and Reymart P. Repollo, CPA

Prepared by:

JOEL D. DOMINGO

Instructor

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