IM For Principles of Acctg 1st Sem SY 2021 22 SPCPC 1

INSTRUCTIONAL MATERIAL
for
PRINCIPLES OF ACCOUNTING
Compiled By
Benjamin A. Abarquez Jr., CPA

Professor/Lecturer- Polytechnic University of the Phils.
OVERVIEW
In this Instructional Material, the students will take a glimpse of what business is like in
terms of the accounting information system; especially for aspiring accountants, entrepreneurs
and business professionals. This will prepare students to appreciate that accounting is the
perfect head-start through which they can fully understand the economic events affecting
various businesses. This will assist them in choosing their career path in business, management
and accounting.
This Instructional Material illustrates that accounting serves as an aid in understanding

economic events; and that accounting builds simple principles and processes to compile and
record these events. The fundamentals, concepts and processes that are discussed at the start
of this book chose simple illustrations and examples. The discussions and illustrations are
carefully presented in a step by step process, and as the chapter progresses, these become a
bit complicated towards analysis and generation of reports. It is done this way to prepare
students in understanding and solving real business transactions at later modules. The basic
principles of accounting will serve as guide to students, not only in the recording of the business
transactions but also in the preparation of the results of operations, which are the financial
statements.
At the end of each module, test materials or exercises are provided to give way for
students to practice what they have learned from the modules. This will also give them the
avenue of solving simple problems in order to enhance their analytical skills.
MODULE 1 INTRODUCTION TO ACCOUNTING
OBJECTIVES
At the end of the chapter, students are expected to:
 Narrate the history and origin of accounting.
 Define the meaning of accounting.
 Describe the nature of accounting.
 Explain the functions of accounting in business.
 Identify activities and events where accounting is used in making business decisions.
COURSE MATERIALS
HISTORY OF ACCOUNTING
The accounting practice dated back to the history of mankind. It started when the human
beings lived in caves, in trees, and in other safe dwellings; wherein their main occupation was to
collect root crops, vegetables and fruits and to prey birds and animals for their living. In doing
these activities in a day to day basis, they would likely keep records of their harvests and preys
to keep tract of inventories while scheduling some of their time doing other things. They did this
by drawing lines and figures on the stones, on walls and ceilings inside the caves; on the bark of
the trees, on skins of animals or making knots out of the vines or creeping grasses.
The Practice of Accounting in the Early Civilization

Record keeping was already common during the “Cradle of Civilization” as countries like
China, India or Mesopotamia traded goods in exchange for something valuable. The
development which led to early accounting included writing, counting and money exchanges.
Accounting records dating back more than 7,000 years have been found in Mesopotamia
and documents from ancient Mesopotamia show lists of expenditures, and goods received and
traded. The development of accounting, along with that of money and numbers, may be related
to the taxation and trading activities of temples. Other early accounting records were also found
in the ruins of ancient Babylon, Assyria and Sumeria (source: https:/en.wikipedia.org/wiki/History
of accounting)
The Founder of Double – Entry Accounting System and The Father of Accounting
The double-entry accounting system, which revolutionized accounting, was invented by
Benedetto Cotrugli in 1458. The double-entry accounting system is defined as a bookkeeping
system that involves two accounts in recording transactions: one is a debit and the other is a
credit.
Subsequently, the Italian mathematician and Franciscan monk Luca Pacioli invented a system of
record keeping that used a memorandum entry, a journal, and a ledger. Pacioli is known today
as the father of accounting and bookkeeping. He wrote Summa de Arithmetica, Geometria,
Proportioni et Proportionalita (The Collected Knowledge of Arithmetic, Geometry, Proportion,
and Proportionality) in 1494, which included a page on the topic of double-entry bookkeeping.
The topics he wrote on record keeping and double-entry accounting became a reference and a
tool in teaching accounting for the next hundred years. (reference :
https://www.thoughtco.com/history-of-accounting)
The Beginning of Modern Accounting

Professional organizations for accountants were first established in Scotland in 1854
These were the Edinburgh Society of Accountants and the Glasgow Institute of Accountants and
Actuaries. The organizations were granted a royal charter by Queen Victoria and the members
of such organizations could call themselves as chartered accountants.
Businesses in various industries proliferated that resulted to the demand for reliable
accounting system wherein the accounting profession became an integral part of the business
and financial system. These chartered accountants of Scotland came to the U.S. for audit and
practice of their profession that led to the establishment of the American Institute of Certified
Public Accountants in 1887.
The Present Times

The accounting profession in the 20th century branched into different professional expertise in
the field of accounting. As this developed, requirement for financial statement preparations,
financial audits and financial reporting became so stringent. In the Philippines, self-regulation is
being encouraged and beyond this act, the government also sets accounting standards through
laws and agencies such as the Securities and Exchange Commission (SEC). Globalization led
accounting regulatory bodies require accounting practitioners to observe International
Accounting Standards for the purpose of assuring investors of transparency and reliability on
financial reports.
WHAT IS ACCOUNTING?
In the early years, accounting was regarded as both an art and a science. It had been
defined as “the art of recording, classifying and summarizing in a significant manner in
terms of money, transactions and events which are, in part at least, of financial character,
and interpreting the results there of. ”
Let’s discuss the content of the above meaning to fully appreciate why it was such
defined that way:
a. “Art” is a part of our knowledge that helps us attain our objectives, design processes
and policies, design appropriate forms and improved controls. Our goal in the
business is to know the financial results. This is accomplished by way of recording,
classifying and summarizing the business transactions in the best way.
b. “Recording” of transactions in various ways, according to the accounting standards

and as required according to the size of the organization.
c. “The art of classifying” which is the grouping of transactions or entries of the same
nature at one account.
d. “The art of summarizing” business transactions, because an organization has to

prepare the financial statements.
e. “Summarizing in a significant manner” means that summarizing must be done a way

wherein there is sense of importance and must suit the purpose for which it is done. It
should also be user friendly.
f. “In terms of money” – because money is the measure and basis in recording the
transactions.
g. “Transactions and events which are, in part at least, of financial character”.

Accounting deals with financial transactions and events only that will change the
financial position of that organization. The financial character is being measured in
terms of money.
h. “Interpreting the results”. Accounting is not only on the aspect of recording,

classifying, summarizing of transactions and events, and the preparation of financial
statements. The financial results are interpreted in such a way that the results can be
understood and appreciated by at least non-accounting users. The users who are the
management, investors and other parties interested in the business will use these
interpretations in the decision-making and may also interpret the accounting
information for their own purpose.
At present, accounting has become a discipline, no longer regarded as an art. If we say

discipline, the practice is bound with sets of accounting standards and rules associated with the
Code of Ethical Conduct of accountants. These accounting standards are contained in the
Philippine Accounting Standards (PAS) and Philippine Financial Reporting Standards (PFRS).
The accounting practice of an organization has its own processes and uses special
accounts unique to their company and industry. But when reporting the results to agencies that
require the reports, the financial statements should conform with the accounting standards’
format; to make it generally acceptable.
Accounting has passed a long historical process that it already affects our business and
social lives. It became a profession that involves acquiring a degree and formal education to
specialize in its fields. It is seen now as a “service activity.” It is a link between business
activities and decision-makers, thus regarded as the language of the business. Business
enterprises can only communicate themselves to users and decision makers through
accounting.
The new definition of accounting, in line with the practice of accountancy is:
"Accounting is a service activity. Its function is to provide quantitative information,
primarily financial in nature, about economic entities that is intended to useful in making
economic decisions, in making reasoned choices among alternative courses of action.“
The above new definition has not lost the content and essence of the old definition. The
emphasis is more on its “service activity”, a more appropriate reference to accounting rather
than as an “art”.
NATURE OF ACCOUNTING
The nature of accounting has been defined in so many ways. Basically, it is a service to
account for economic activities and events that has value. It is expressed in monetary terms.
Let see how accounting has evolved from the scriptures in caves to what it is now using
new technologies.
 It started as a science. In the history of men where mankind had relied on their special
skills and natural-born intelligence, accounting was simply invented by them in a way that
they could understand it. They had formulated means on how to record their activities.
I believed that when we began to exist, each of us possesses unique skills and
intelligence different from one another. One has the skill of a scientist, a skill of an
entrepreneur, a skill of a manager, a mathematician and etc. These skills would normally
come out naturally and these were used in the olden times as a science.
 It was defined as an art. The art is on the recording aspect, classifying, summarizing and
interpreting. Man is a natural born artist; in this way art has been applied to accounting
more effectively. When art is applied, processes and policies are made uniquely for the
business including management reports which are customized as needed by the users.
Though in the end, standard financial reports are prepared to conform with certain
accounting standards.
 It became a discipline. This is because accountancy became a profession and the

practice of it is governed by sets of rules and accounting standards. The accountant is
also bound by the Code of Ethical Standards.
 In this era of millennium, accounting has become an information system. Whether it is

a manual system or a computerized system, accounting is a whole information system.
This information system accepts not only financial data or transactions but also non-
financial transactions. In this way, information generated would only not pertain to the
monetary activities but also on activities surrounding the financial transactions which are
also essential in the decision making; like the quantities of goods being sold or
purchased, the suppliers’ and customers’ information details, the details of attendance
and lates on payroll transactions, the employees’ details, etc. These details in the
information system are also needed to draw and prepare in-house management reports
like sales reports, HR report, purchasing reports, etc.
The functions of accounting include:

1. Identifying and analyzing source documents which enter into the information system.
These are activities that are relevant to the business operations. The business activities
are normally transactions and events in source documents that transpired in its day-to-
day activities. These transactions are called inputs which are processed into the
information system and are generated as financial and management reports.
2. Recording the source documents which are economic activities into the books of
accounts of the organization. The function of recording is called bookkeeping. It is
described as the recording of financial transactions that are appropriately classified, in
the accounting books of an organization, by either manual means or computerized
means. In the accounting information system, this is called transaction processing.
3. Preparing the financial and management reports. The financial reports include: (1)
Statement of Financial Position, also commonly called the Balance Sheet, (2) Statement
of Income, (3) Statement of Cash Flows, (4) Statement of Changes in Equity. The
management reports are normally in-house reports needed by the organization’s various
departments like Sales Reports, HR Reports, Ageing of Accounts Receivables or
Payables and other in-house reports that are essential in the review of the business
financial performance and operations.
4. Analyzing and interpreting the financial reports for different users who have interest in
the business and who will use these in their decision making. The interpretations are
either in the form of vertical or horizontal analysis and financial ratios, using the classified
financial statements. The interpretation will further be discussed in part 2 of this book.
In an organization, rendering a timely and correct decision is very important to correct

past mistakes and formulate new goals and targets. This decision-making process is being aided
by accounting itself. Without accounting, users in the organization will not be able to provide
improvements in the organization and achieve their visions and goals.
Some of accounting’s results that are helpful in making business decisions are as
follows:
1. The use of Ageing Report of Accounts Receivable. This report is important in determining
the paying habits of the customers and whether the credit policies are properly enforced
or not.
2. The use of Ageing Report of Accounts Payable. This report provides information on how
effective cash payments to suppliers or vendors are managed.
3. The use of trend reports and analysis of sales performance. This data will assist the
sales group in the organization determine whether sales targets are achieved or not.
4. The use of expense reports and analysis. This report is important in determining whether
expenditures conform with budget.
5. The use of accounting in monitoring inventories. Inventories are important assets in the
company as cash. There should be proper monitoring of inventories to avoid
obsolescence and losses, and to make sure that these are moved quickly to accelerate
the quick inflows of cash.
EXERCISES/ASSESSMENTS
Exercise Mod 1-1
Instruction: Give the letter of the correct answer.
1. It is a service activity that provides quantitative information which is financial in nature.
a. Bookkeeping
b. Accounting
c. Journalizing
d. Selling
2. It is the language of the business.

a. Accounting
b. Bookkeeping
c. Journalizing
d. Analyzing
3. The double entry system of accounting was first established by:

a. An Indian Philosopher
b. An Italian Priest
c. An Asian Monk
d. A Middle East Prophet
4. The book of Luca de Pacioli was published in:

a. 1500
b. 1495
c. 1650
d. 1494
5. Accounting is defined as:

a. An art
b. A science
c. A discipline
d. All of the above
6. In the definition of accounting, the transactions and events are expressed in:
a. Monetary value
b. Qualitative nature
c. Quantitative means
d. None of the above
7. An information system may mean as:

a. A manual system
b. A computerized system
c. A customized system designed to fit accounting
d. All of the above
8. Analyzing and interpreting means:

a. Expressing it in a vertical analysis
b. Expressing it in financial ratios
c. Expressing it in a horizontal analysis
d. All of the above
9. The management reports that are generated by an organization is solely for:

a. In-house reporting
b. External reporting
c. Outside agencies’ reporting
d. All of the above
10. Accounting information is helpful to:

a. Decision makers
b. Management users
c. People who have interest in the business
d. All the above
MODULE 2 THE BRANCHES OF ACCOUNTING
OBJECTIVES
 Differentiate the branches of accounting.
 Explain the kind or type of services rendered in each of these branches.
 Identify business organizations that require accounting services.
 Identify the type of accounting services that matches with the branches of accounting.
COURSE MATERIALS
BRANCHES OF ACCOUNTING
The accounting practice specializes on several areas. It does not concentrate itself on
the keeping of records and providing financial reports. It deals on other areas where businesses
have required it. The accountants, after getting a profession, also specialize on these fields
making it their areas of expertise.
At present, accounting has not confined itself to record keeping but has eventually
spread its branches to all corners of business and commercial activities.
The following are the Branches of Accounting:

1. Financial Accounting - this is a branch of accounting wherein it focuses primarily on the
preparation of the financial statements. These financial statements, which serve as the
result of the operations, are used by business organizations to communicate with the
internal and external users.
This particular area of accounting is mostly practiced by a Certified Public Accountant

(CPA), who is licensed by the Professional Regulations Commission (PRC). The reports are
normally required by the owners or shareholders of the organization, government entities,
financial institutions, creditors and suppliers, because these are the official reports that represent
the business organization’s financial performance.
2. Management Accounting - in a business organization, management is very much

dependent on the accountant in all level of activities such as, cost and quality control,
budget preparation, planning, sales and financial forecast, etc. which are relevant to
making strategies and rendering decisions. The in-house information generated by the
accountant for specific purposes will serve as benchmarks to company’s performance.
The reports in this area are commonly required by various departments of the
organization. These are normally customized reports according to the needs of the internal
users to evaluate the organization’s operations performance.
3. Government Accounting - this branch of accounting is practiced by all government

agencies and its employees using their sets of policies, accounts and processes normally
different from private business enterprises. The practice of these accounting is reviewed
by the Commission of Audit (COA).
Government is an independent body with sets of rules, laws and regulations that are
enacted by Congress in conformity with the Philippine Constitutions. The regulatory agency that
has the police powers in the practice of government accounting is the Commission on Audit
(COA); while private businesses are policed by the Securities and Exchange Commission (SEC)
and the Bureau of Internal Revenues (BIR).
4. Auditing - auditing is defined as a “systematic, independent and documented process for

obtaining audit evidence (records, statements of fact or other information which are
relevant and verifiable) and evaluating it objectively to determine the extent to which the
audit criteria (set of policies, procedures or requirements) are fulfilled.
There are two types: (1) External audit, which requires outside auditors from the
business organization purposely to seek independent opinion; (2) Internal audit, a
function of which is done by an employee of the business organization whose function is
to examine internal records and help improve internal processes.
The area of external auditing is carried out by Certified Public Accountants in the public
practice. These accountants are accredited by the Board of Accountancy (BOA). They are the
only accountants who can affix their signatures in the audited financial statements that are
required by the regulating agencies. They are normally auditing firms like Sycip, Gorres &
Velayo (SGV) or accountants who has the profession in public practice. This profession requires
independence which means that the CPA is not associated with the organization being
subjected to the audit.
While the external auditing is a BOA accredited, the internal auditing can be carried out
by an employee of the organization. He can be a CPA or a graduate of accountancy as long as
the person is equipped with auditing skills and experiences. The internal auditor normally reports
directly to the President or Chairman of the Board.
5. Tax Accounting - this is the branch of accounting that focuses on the preparation of tax
returns as required by the Bureau of Internal Revenue (BIR). Accountants can also
employ themselves as tax practitioners and consultants who specialize on taxation.
Accountants in a business organization can also learn tax accounting because this is a
requirement by the BIR, which gives trainings, seminars and guidelines to businesses on the
matters of tax compliance. Other businesses hire consultants or accountants specializing on this
field. This is called outsourcing.
6. Cost Accounting - this branch deals on collating cost information that is useful to set
prices of goods and services for sale. The costs gathered are also essential in the
analysis of improving the quality and efficiency of the business organization’s operations
and in setting price targets to compete with existing markets.
The accountant practicing this area of accounting is employed in a manufacturing set-up.

The job requires accumulation of costs from various departments to become the factory costs of
a particular product.
7. Accounting Education - the persons involved in the primary role of molding future
accountants are educators in the accounting practice. These educators teach the basic
theories and practices which will become the basic foundation and learnings to future
accounting professionals.
Certified Public Accountants (CPA) can also be in the academe to teach and mold future
accountants. This profession requires also accreditation from the Board of Accountancy (BOA)
for academic practice.
8. Accounting Research - is research on the effects of economic events on the process of

accounting, and the effects of reported information on economic events. It involves a
broad range of research areas like financial and management accounting, auditing and
taxation. Accounting research is carried out both by academic researchers and by
practicing accountants.
There are practicing accountants who specializes on research and development and
offer this service to business organizations which are into new business, expansion, merger and
consolidation, buy-out or as a requirement by an external party.
Below are some examples of businesses that require the above type of accounting
services:
Name/Type of Business Accounting Services Required
 A Sari-Sari Store Financial Accounting
Management Accounting
Auditing
Tax Accounting
 A Drug Store Financial Accounting

Auditing
Tax Accounting
 Schools & Universities Financial Accounting

Auditing
Tax Accounting
Accounting Education
Accounting Research
 Paper Manufacturer Financial Accounting

Cost Accounting
Auditing
Tax Accounting
 Grocery Store Financial Accounting

Auditing
Tax Accounting
 Barbershop and Salon Financial Accounting
Auditing
Tax Accounting
 Hardware Store Financial Accounting

Auditing
Tax Accounting
 Bakery/Bake Shop Financial Accounting

Cost Accounting
Auditing
Tax Accounting
 Vulcanizing Shop Financial Accounting

Auditing
Tax Accounting
 Restaurants/Carenderias Financial Accounting

Cost Accounting
Auditing
Tax Accounting
 Gasoline Station Financial Accounting

Auditing
Tax Accounting
 Convenient Store Financial Accounting

Auditing
Tax Accounting
The above examples of businesses in a particular community require not only one area
or branch of accounting, but two or more; depending on the management’s needs and the
requirements of regulating agencies. Hence, several accountants in specialized fields can be
hired by one big company alone.
But common to Small and Medium Enterprise businesses (SME), one accountant
practices multi-tasking responsibilities on several areas of accounting.
Exercise Mod 2-1
1. Branch of accounting that focuses on the preparation of financial statements.
a. Management accounting
b. Financial accounting
c. Auditing
d. Tax accounting
2. This branch of accounting deals on collating cost information that is useful to set prices of
goods and services for sale.
a. Auditing
b. Government accounting
c. Cost accounting
d. Accounting education
3. This branch of accounting tells that the in-house information generated by the accountant
for specific purposes will serve as benchmarks to company’s performance.
a. Financial accounting
b. Management accounting
c. Tax accounting
d. Government accounting
4. This is the branch of accounting that focuses on the preparation of tax returns as
required by the Bureau of Internal Revenue (BIR).
a. Management accounting
b. Financial accounting
c. Auditing
d. Tax accounting
5. This is carried out by Certified Public Accountants in the public practice who should be
accredited by the Board of Accountancy (BOA).
a. External auditing
b. Internal auditing
c. Government accounting
d. Tax Accounting
6. This profession is carried out by Certified Public Accountants in the academe.
a. Government accounting
b. Auditing
c. Accounting education
d. Financial accounting
7. This type of business requires cost accounting.
a. A drug store business
b. A manufacturing business
c. A sari-sari store business
8. This type of business requires management accounting.
a. A manufacturing business
b. A bake shop business
c. A restaurant business
d. All of the above
9. This type of business requires education accounting.
a. A barbershop business
b. A hardware store business
c. A school business
10. This is a type accountant’s profession in the Commission on Audit.
a. Government accounting
b. Accounting research
c. Tax accounting
d. Auditing
MODULE 3. THE USERS OF ACCOUNTING INFORMATION

OBJECTIVES
 Define and explain the internal users of accounting.
 Define and explain the external users of accounting.
 Identify the type or decisions made by each group of users.
 Describe the type of information needed by each group of users.
COURSE MATERIALS
USERS OF ACCOUNTING INFORMATION
The accounting information is prepared to satisfy various users of the business
organization. These users have different interests and purposes in the business; be it for
decision making or a requirement.
This chapter discusses the different types of user of financial information which is the
result of a business operation. This financial information is presented in such a way that it can
communicate to different users. Accounting as the language of the business takes this role.
The users of the accounting information are generally classified into: (1) Internal users,
(2) External users.
Internal Users, as the word itself suggests, are persons working within the organization.
They make actions and decisions pertaining to the internal activities of the business.
Internal users are the persons who are responsible in making a business fail or grow.
They are the decision makers, the support group, the revenue generators or the front-liners.
Each person or group has specific role to play in the organization, which is driven by rewards or
promotion when the business succeeds.
The financial information needed by the internal users takes in the form of financial
reports and management reports.
The financial report which is in the field of financial accounting is prepared by a financial
accountant. The reports, which will be discussed thoroughly in part 2 of this book, are;
a. Statement of Financial Position or also known as Balance Sheet
b. Statement of Income or Statement of Comprehensive Income
c. Statement of Changes in Equity
d. Statement of Cash Flows
e. Notes to the Financial Statements
The above financial reports are used by the stakeholders, financial institutions and
regulating agencies. Internal users who used these reports are the decision makers.
The management report which is in the field of management accounting is prepared by

the management accountant. This may take in the form of a financial or non-financial data which
are customized according to the needs of the users.
Examples of the reports are:
a. Revenue or Sales Reports which are used by the sales group to monitor whether
sales are achieved or not.
b. Human Resources Reports which are used by the HR group to analyze trends on
remunerations and benefits, to monitor tardiness and absences and to study ways of
recruitments and reasons/causes of resignations.
c. Ageing of Accounts Receivable Reports which are used by the Credit/Collection and
Treasury groups to monitor the accounts receivables and to determine availability of
funds.
d. Ageing of Accounts Payable Reports which are used by the Purchasing/Payables

and Treasury groups to manage the funds available.
e. Cost Reports which are used by various cost centers to manage the cost and
expenses of the organization.
f. Inventory Reports which are used by Production and Warehouse groups to monitor
the level of inventories.
The internal users of the financial information are:

Management: for analyzing the organization's performance and position and taking
appropriate measures to improve the company results. They are the decision makers.
Management uses trends, benchmarking and horizontal, vertical and financial ratio
analysis to monitor the company’s performance. The management team is usually called the
captain of the ship. They are normally the highest paid individuals in the organization whose
employment is at the discretion of the owners. They are highly paid because of the risk in the
tenure of their employment which depends on trust and confidence of the owners.
Employees: for assessing business organization's profitability and its consequence on

their future remuneration and job security.
Employees play important roles in the organization. In some businesses where their
source of income is service, the employees are considered as one of the business resources.
Although there are reports that are confidential in nature, some reports like the management
reports are readily available for the consumption of the employees’ interest which is essential for
the growth of the business.
One of the employees’ goals in the organization is to contribute profitability by generating

revenues and to incur minimal costs. This is in line with the organization’s mission and goals.
Another employees’ goal is to seek rewards and promotions by doing better in their respective
responsibilities. They also show loyalty and good service to ensure their job security.
Owners: for analyzing the viability and profitability of their invested capital and
determining any future course of action.
The owners have short-term and long-term goals for their business. One of the short-
term goals is to achieve beyond the profit targets. This goal is in line with management and
employees goal. Profit is used by the owners to reward management and employees for good
performance.
But the long-term goals are what that matter most to the owners. This is to maximize
their wealth- which means investing their income into short or long term investments to generate
more returns for themselves and for their business.
External Users are business enterprises or individuals who have interests in the
business but do not directly involved themselves in the daily activities of the organization.
The external users use financial information to assess the status and viability of the
organization in respect to their needs. They don’t participate in the decision making but they
influence the decisions of management. The reports they need from the organization are the
financial reports which are submitted to and recognized the governing bodies.
The external users are:

Creditors: for determining the credit worthiness of the organization. Terms of credit are
set by creditors according to the assessment of their customers' financial health and
performance. Creditors include suppliers as well as lenders of funds such as banks and other
financial institutions.
Tax Authorities: for determining the correct tax payments and tax returns which will be
filed by the business organization. Example of these tax authorities are the Bureau of Internal
Revenues (BIR), Bureau of Customs (BoC), the local and municipal agencies, etc
Investors: for analyzing the feasibility of investing in the business organization. Investors
want to make sure that they can earn a reasonable return on their investment before they will
commit any financial infusion of resources to the organization.
Business organizations, which are lacking of funds and need expansions or

improvements in their operations, seek investors to infuse funds to their business. The investors
use financial reports to determine the soundness and financial health of the organization.
Customers: for assessing the financial position of its suppliers which is necessary for
them to maintain a stable source of long term supply.
Customers are the life blood of the business because they are the main source of
revenues. They require financial reports to determine whether the organization’s goods or
products or services are worthy to patronize or has excellent qualities to pass on to consumers.
Regulatory Authorities: for ensuring that the business organization's disclosure of

accounting information is in accordance with the rules and regulations to be complied with.
These regulatory agencies include the Securities and Exchange Commissions (SEC),
Bureau of Internal Revenues (BIR), Bangko Sentral ng Pilipinas, etc.
Below are list of some users of financial information that are categorized as internal or
external.
INTERNAL USERS EXTERNAL USERS
- Accounting Assistant - Banks
- Chief Accountant - Insurance Agencies
- Treasury Manager - Vendors
- Admin Assistant - Consumers
- Human Resources Manager - Stock Players or Investors
- Sales Representative - Local municipalities
- Warehouseman - Contractors
- Production Manager - Franchisors
- Chief Finance Officer - Holdings Companies
- Vice Presidents - Auditing Firms
- President
- Board of Directors
- Internal Auditors
EXERCISES/ASSESMENTS
Exercise Mod 3-1
1. He is the user of accounting information who determines the credit worthiness of the
organization.
a. Creditors
b. Owners
c. Investors
d. Regulatory bodies
2. He is the user of accounting information who uses information for analyzing the feasibility
of investing in the business organization.
a. Customers
b. Tax authorities
c. Investors
d. Employees
3. He is the user of accounting information who uses it for assessing the financial position
of supplies of the organization which is necessary for them to maintain a stable source of
long term supply.
a. Customers
b. Tax authorities
c. Investors
d. Employees
4. He is the user of accounting information that uses it for decision making.

a. Management
b. Employees
c. investors
d. All of the above
5. He is the user of accounting information that uses it for assessing business

organization's profitability and its consequence on their future remuneration and job
security.
a. Owners
b. Employees
c. Creditors
d. Customer
6. He is the user of accounting information that assesses whether business organization

pays correct taxes.
a. Tax Authorities
b. Regulatory Authorities
c. Investors
d. Owners
7. He is the user of accounting information which ensures that the business organization's
disclosure of accounting information is in accordance with the rules and regulations to be
complied with.
a. Tax Authorities
b. Regulatory Authorities
c. Investors
d. Owners
8. This is an example of an internal user.

a. Management
b. Owners
c. Employees
d. All of the above
9. This is an example of an external user.

a. Owners
b. Management
c. Banks
10. He is the user of accounting information that uses it to determine any course of action
for the business organization to protect his invested capital.
a. Owners
b. Management
c. Investors
d. Creditors
MODULE 4. THE FORMS OF BUSINESS ORGANZATION
OBJECTIVES
 Know the different forms of organization.
 Differentiate the forms of business according to their type and function.
 Identify the advantages and disadvantages of each form.
COURSE MATERIALS
FORMS OF BUSINESS ORGANIZATION
When you will be into entrepreneurial business, the first decision that you will make is to
select the form of business that you will structure. This includes the rights and obligations of the
capitalists, the definition of ownership controls, personal liability and how funds will be sourced
out.
The decision of going into a business is a long-term goal and the process is also long
and tedious considering the bureaucratic processes in some government agencies. In this
instance, it is right to consult with accountants, lawyers and financial advisors as these persons
are equipped with knowledge to structure a business that is right for you.
In making the right decision and choice for a right business, the following may be
considered:
 The size and nature of business that you want to structure
 The extent of ownership control.
 The business risks and exposures.
 The taxes to be paid up.
 The economic conditions that suit the type of business that you will build up.
 The return of your investments.
 The availability of resources which are the funds, assets and people.
There are three basic forms of business organization: Sole Proprietorship, Partnership
and Corporation.
1. SOLE PROPRIETORSHIP
Most of small businesses start as sole proprietorship which is also called as Single
Proprietorship. Some of these businesses grow big and become big corporations. One best
example is the SM Group owned by Henry Sy. The individual who owns the business runs the
business on a day-to-day basis, normally hands-on on most of its operations. He also assumes
full responsibility of the business in the eyes of law and the public; as the owner and the
business is just considered as one and the same person.
This form of business organization has the following advantages:

a. It is owned by a single person.
b. It is easy and inexpensive to organize.
c. It requires very low capital.
d. The owner has complete control of the business and may make decision as he sees
it fit.
e. It has no special legal requirement upon its formation.
f. The profits go a hundred percent directly to the personal account of the owner.
g. The business is easy to dissolve or liquidate if desired.
The sole proprietorship has also the following disadvantages which a prospective
entrepreneur will consider:
a. The owner is personally liable for the obligation of the business because the owner and
the business itself are not regarded as separate entities.
b. There may be difficulty in raising funds and are often limited to using funds from personal
account or personal loans.
c. There may be hard time attracting high-caliber employees as most prospective
employees are motivated to seek employment with large corporations.
d. Some personal benefits of the owner are not directly deductible from business income
unless these are related to the business itself.
The major advantage of setting up a sole-proprietorship business is that it requires very

low capital at start-up and it is very easy to organize. It has very few requirements, like needing
only to register the company’s name with the Department of Trade and Industry (DTI). Given few
requirements, the business can start it is operations immediately.
Since the business and the owner are regarded as one, anything personally attached to
the owner like SSS/Pag-big/Philhealth, TIN, and his personal resources are totally exposed to
government agencies and to other external parties who have business interest with the
company. This is one major disadvantage because it will mean that the liabilities of the company
extend to the personal properties and resources of the owner.
Some examples of sole proprietorship business are as follows:

o Auto Repair Shop
o Beauty Salon
o Sari-sari Store
o Tailoring Shop
o Gasoline Station
o Hardware Store
o Rice Dealer
o Generika Drug Store
o Barbershop
o Vulcanizing Shop
o Meat and Fish Store
2. PARTNERSHIP
In a partnership set-up, two or more persons share the ownership of the business. Like
the sole proprietorship, the liabilities of the business extend to the personal resources of the
owners. The profits are shared with the partners based on the partnership agreement.
Contained in the partnership agreement are also provisions on how future partners are admitted
or bought out, how to dissolve the partnership, how capital may be contributed and how services
of the partners may be assigned or allocated.
This form of business has the following advantages:

a. It is easy to organize though it requires time to establish it.
b. it is formed by two or more individuals called partners where the ability of raising
more funds is favorable.
c. The profits go directly to the personal accounts of the partners.
d. Employees seeking employment may be attracted to join the business as there are
chances to become a partner.
e. The partnership business will benefit from partners who have complementary skills to
run the business which will not anymore require outside parties.
The partnership has also the following disadvantages:

a. It requires a larger amount of capital.
b. The partners are personally liable for the obligations of the business
c. There is a written agreement between partners on how the business affairs will be
handled; hence, the partners are jointly and individually liable for the actions of other
partners.
d. The profits will be shared by all partners.
e. Disagreement will likely occur in times of decision making.
f. The partnership has limited life as it may end up upon the death or withdrawal of a
partner.
These are some types of partnership that prospective entrepreneurs may consider:
1. General Partnership. In a general partnership, the partners divide the liability and
responsibility of managing the business. The profits or losses are also divided in
accordance with the partnership agreement or in any cases when there is none,
equal sharing is assumed.
2. Limited Partnership. This partnership has limited liability. When we say “limited”, it
means that some of the partners have liabilities up to the extent of their contributed
capital or have limited inputs as regard to management decisions. Forming this type
of partnership is more complex than forming a general partnership.
3. Joint Venture. It is just like a general partnership, but the time is normally limited and
it entails a single project of operation. If there is a repetition of the joint venture
activity, this will be recognized as on-going partnership requiring to be registered as a
continuing partnership wherein the accumulated assets will be distributed upon
dissolution.
Just like the sole-proprietorship business, the partnership bears similarities in terms of
advantages and disadvantages. The partnership will only differ from the sole-proprietorship as
regards to the capital requirements and its registration process. Its business registration is
regulated by the Securities and Exchange Commission (SEC) which has more strict
requirements and regulations than the DTI.
Some examples of partnership business are as follows:

o Auditing Firms, like Sycip Gorres Velayo and Co., Punongbayan & Araullo, Price
Waterhouse Coopers/isla Lipana and Co. etc
o Accounting and Bookkeeping Firms
o Law Firms and Offices
o Some Merchandising Companies
3. CORPORATION
This form of business organization is larger than the partnership. It normally has a
minimum of 50 years legal business life, it has a life of its own and cannot be dissolved easily
even when the ownership changes. It is run by the Board of Directors who are appointed or
elected by the shareholders.
It is considered by law to be a unique entity as it can represent itself to other

personalities; so it can be taxed, it can be sued and it can enter into contractual agreements. It
has separate personality distinct and separate from the owners.
It has the following advantages:

a. It is a business owned by shareholders who have limited liabilities and can only
be held accountable up to the extent of their investments to the corporation.
b. It has legal personality separate and distinct from the owners.
c. It can conduct business in its own name and represent itself as a person.
d. The ownership is by means of shares of stocks and shareholders receive their
share of income through dividends.
e. It can raise additional funds by selling stocks.
f. A corporation may deduct the cost of benefits it provides to officers and
employees.
Though it appears that it is more advantageous to have a corporation than forming a sole
proprietorship and partnership businesses, this form of business has also the following
disadvantages:
a. The process of incorporation requires longer time, money and lots of requirements.
b. This form of business requires a lot of reports and paper works as it is being
monitored by the state and local agencies.
c. Incorporating may result in higher taxes. As dividends paid to shareholders are not
deductible from business income, this income is taxed twice- for a corporate tax and
for a final tax (a tax to shareholders).
Organizing a corporation is more advantageous than organizing a sole-proprietorship

and partnership. In many aspects of its personality, the corporation can act on its own, represent
itself to internal and external parties and have a minimum life of 50 years.
Having its own juridical personality, it is strictly registered and regulated by the Securities
and Exchange Commission (SEC) and subject to the standards of accounting. But unlike the first
two forms of organization, the ownership is by shares of stocks, wherein the control of the
business is through the ownership of majority of the shares of stocks and the distribution of
income is through dividends.
Some examples of corporation business are as follows:

o Colgate Palmolive Phils
o Toyota Motors Phils
o SM Group of Companies
o United Laboratories Phils
o VY Domingo Jewelers
o Philippine Steel Corporation
o Bank of the Phils Islands
o GMA Network, Inc
o Makati Medical Center
o Philex Mining Corporation
Exercise Mod 4-1
Instruction: Write TRUE if the statement is correct or FALSE if the statement is incorrect.
__________ 1.A sole proprietorship business is owned by two or more individuals.
__________ 2.A partnership can conduct business in its own name and represent itself
as a person.
__________ 3.The owners of a corporation are called shareholders and own shares of
stocks.
__________ 4.One of advantages of a partnership is that it is easy to organize but

takes more time to establish it.
__________ 5.The distribution of profits to partnership in a partnership is called

dividends.
__________ 6.A sole proprietorship business is a unique entity that is separate and
distinct from the owners.
__________ 7. A joint venture is just like a general partnership, but the time is normally
limited and it entails a single project of operation.
__________ 8.A sole proprietorship is a business that will be registered in the

Securities and Exchange Commission.
__________ 9.One of the advantages in setting up a partnership is that it has limited

life and can be dissolve by a withdrawal or death of a partner.
__________ 10.One example of a partnership is a law or accounting firm.

MODULE 5. THE TYPES OF BUSINESS ACCORDING TO ACTIVITIES
OBJECTIVES
 Differentiate and compare the types of business according to activities
 Identify the advantages and disadvantages of each type of business
 Identify the business requirements for each type of business
COURSE MATERIALS
TYPES OF BUSINESS
There are several types of businesses depending on how a person sees it. In the
accounting practice, these are only classified into three according to their activities.
These are: (1) service activity, (2) merchandising activity, (3) manufacturing activity.
A Service Business is a type of business that sells intangible products (products with no
physical form) by providing services to customers. This type of business is easy to organize as it
only requires persons and machines to do the services. It also has fewer costs to look into and is
simpler to manage.
If your service business requires machines to do most of the services, it needs less
manpower. And if your business requires people to do it, almost all of your resources are
manpower.
While some of these services like bookkeeping and accounting, housekeeping or tutoring
requires small investments as these only require special skills or knowledge of the individuals,
other service areas require bigger investments of money. These are lawyers, doctors, certified
public accountants and other professionals who make their living by providing professional
services to clients.
There are also persons into entrepreneurial businesses who launch service business that
require extensive investments in terms of money, facilities or equipment. These businesses take
the form of partnerships or corporations.
There are advantages in setting up a service business. Some of these are:

1. It doesn’t maintain an inventory. Inventories are susceptible to losses and
obsolescence if not properly monitored.
2. It will only require expertise in your field. One can eventually expand by way of
replicating these expertise and skills with other people who will eventually form part in
your organization.
3. Costs can easily be managed as this does not require processes and complicated
costings.
4. Profit can easily be managed because revenues are normally determined by a “cost
plus” method.
The disadvantages are:
1. It cannot do variations of products other than expanding into another level of
services.
2. It is difficult to sell as some consumers prioritize goods or products rather than
availing of services as they can do it by their own; other than services requiring
special skills. Services requiring special skills command higher prices.
3. Valuation may be difficult. Unlike businesses which sell hard products or assets that
can be seen, service being an intangible product is somewhat complicted to
determine or to value at.
4. Less demand of services during difficult times. In times of difficulty, availing of
services is less prioritized than buying goods, products or assets.
5. There would likely a high level of getting “mistrust” from customers when a particular
service fails.
6. It is hard to sell. Unlike a product, if you put it on a shelf you will just wait for an
impulsive buyer. For the services to sell, you have to convince potential customers,
which will require positive personality, extensive research and data.
The following are some businesses in the service industry:

Professional Services. These are doctors, lawyers, dentists, accountants, architects,
engineers, pharmacists.
Business Services. These are consulting, training, recruitment, financial planning,

advertising, computer and data processing, banks.
Transportation Services. These are taxi services, car rental, trucking, delivery services,
limousine services.
Personal Services. These are pet grooming, health clubs, catering, salon, barbershops,
tailoring, photography, funeral parlors, wedding planners, hospitals.
Restaurant and Lodging Services. These are restaurants and carenderias, hotels,
resorts.
Social Services. These are child day-care services, individual or family care services.
Maintenance Services. These are plumbing, electrical, landscaping, garbage collection,

appliance and equipment repair, automotive repair.
Utility Services. These are lighting services, water services , communication services,
internet providers.
Entertainment Services. These are film making, actors or actresses, comedy bars, tv
shows.
Information Technology. These are business into computers, computer applications and
software programs. They also produce computer peripherals that are necessary in the
computer business.
Warehousing and Logistics. These are business into warehousing of products and goods
and moving them out for deliveries
A Merchandising Business is a type of business that buys products at wholesale price

and sells the same at retail price without changing the form. Merchandisers can customize or
improve the physical appearance of the product to commend higher price while maintaining its
physical form. They are known as "buy and sell" businesses. They make profit by selling the
products at prices higher than their purchase costs. Examples are general merchandisers like
groceries and hypermarkets, department stores, appliance centers.
This business can cater all types of consumer products purchased from the
manufacturing companies; thus it can maintain wide varieties of products to sell. The downside
is that it will maintain huge inventories, thus retaining slow-moving capital investments.
Some of the advantages and disadvantages of setting up a merchandising business are

the following:
1. High sales will result if merchandising is done the right way. To have it noticed by
consumers is important; this is by way on how the products are displayed and positioned.
2. Merchandises are not manufactured but purchased at their original state and sold without
changing the form. The additional cost on this is the freight cost and sales commissions.
3. Merchandise can be moved swiftly if handled by professional visual merchandiser.
Knowing how to arrange shelves, create attractive displays so that best-selling items
stand out, combining colors and using lighting are critical to consider.
4. The cost component is high in terms of maintaining high level of inventories, the shipping
and delivery costs, the space needed for the store and warehouse, research and product
development.
5. It maintains high volume of inventories for re-sale which requires stringent monitoring.
6. A merchandising business relies on finding and keeping of customers. Sales would not
depend on a one time sale transaction but on how to keep the loyalty of the customers to
patronize the product.
7. Selling merchandises require developing new products, and this is expensive and time
consuming. Instead of manufacturing it themselves, merchandising businesses design
their own products and have it manufactured by a third party. In this way, they will have
to ensure that their products are distinctively different from other products to maintain the
customers’ base.
The following are some businesses in a merchandising industry:

Retail Stores. They purchase products and resell then without changing the forms.
Bookstores. They sell books and magazines from publishers and printers.
Drugstores. They sell drugs, medicines and vitamins from drug manufacturers.
Convenient Stores. They sell variety of products normally at 24-hrs service.
Department Stores. They sell variety of goods like apparel, shoes, bags, etc that are
normally on consignment basis.
Gasoline Stations. They sell processed gas, oil and lubricants for vehicles and household
use.
Hardware Stores. They sell products from the steel industry.
Appliance Centers. They sell appliances of various varieties.
The Manufacturing Business buys products with the intention of using them as raw
materials in making a new product. Thus, there is a transformation of the products purchased,
by combining these elements to form into a finished product. A manufacturing business
combines raw materials, labor, and factory overhead in its production process. The
manufactured goods will then be sold to customers.
This type of business can design or produce products at its own choice, thus catering a
large potential market for larger revenue generations. It only maintains large inventories, costs
and resources requiring large investments.
Like any other businesses, a manufacturing type of business has also some advantages
and disadvantages, as follows:
1. One advantage is job satisfaction. This satisfaction is not only for prospective employees
because manufacturing business creates volume of jobs but also for the owners.
Manufacturing will create new products that will satisfy owners because an item of their
creation will be used and patronized by the consumers.
2. Another advantage is the demand of the product. As population grows and increases, the
demand of consumer products for basic and other necessities also increases. This is so
true in this age of technology.
3. One disadvantage is the cost of investment. Starting a manufacturing business will
required large capital expenditures, high overhead and start-up costs for research and
development and inventory intensive.
4. Another disadvantage is the reliance on raw materials. Manufacturing business uses raw
materials to convert it into finished products that can be sold in the market. These raw
goods can be scarce or expensive at times, and this business has no option but buy
these at high costs than ceasing production.
Some examples of companies in the manufacturing industry are as follows:

a. Chemical Manufactures. These businesses manufacture chemical
products for industrial and household use
b. Energy Manufacturers. These are businesses that produces petroleum
products from hydro carbon or companies that convert a raw mineral
product into energy.
c. Industrial manufacturers. These are businesses into many kinds of
machinery used in farm and factories, machines used in many households
and industrial products such as hardware, glass and paper products.
d. Consumer Products Manufacturers. These are businesses that produce
products for individual and household consumptions like food, cleaning
products, personal care products, etc.
e. Automotive Manufacturers. These are businesses that manufacture
vehicles as a land-based transportation.
.
Business Requirements
The business requirements for the above types of business are common to all. It will only
differ on some special requirements from government agencies that regulate it as there are
industries that will abuse because their products are highly sought or in demand by consumers
or because these are the basic needs.
Some of the special requirements will be applied to businesses that are into:
1. Generation, collection and distribution of electricity which will require endorsement from
the Department of Energy (DOE).
2. Domestic and international air passenger and freight transport which will require
endorsement from the Civil Aeronautics Board (CAB).
3. Tele-communication services which will require endorsement from the National
Telecommunications Commission (NTC).
4. Commercial banking and other monetary activities which will require endorsement from
the Bangko Sentral ng Pilipinas (BSP).
5. Professional organizations which will require endorsement from the Professional
Regulatory Board
6. Amusement and recreational activities which will require endorsement from Philippines
Charity Sweepstakes Office (PCSO).
7. Charitable, rehabilitation and counselling services which will require endorsement from
the Department of Social Welfare and Services (DSWD).
8. Private pre-school, elementary, secondary, college, universities and vocational schools
which will require endorsement from the Department of Education (DepEd), Commission
on Higher Education (CHED) and TESDA.
The common business requirements applicable to all are:

1. Registration with the following:
f. Department of Trade and Industry (DTI) for the trade name of sole
proprietorship business.
g. Securities and Exchange Commission (SEC) for partnerships and
corporations. This is where the name, business purpose, capitalization
and by-laws/agreements of the companies are registered.
h. Bureau of Internal Revenue (BIR) for the tax identification number,
employees and books of accounts.
i. Home Development Mutual Funds (HMDF), Phil. Health Insurance
(PhilHealth), Social Security Services (SSS) for the identification number
and employees.
And other regulatory agencies that require the registration of the business, products and
services, copyrights and trademarks/tradenames.
2. Application of business permits from the local municipalities where the business will
conduct the business.
3. Registration with other government agencies which will regulate the business in the
industry that they will be doing the business.
Exercise Mod 5-1
Instruction: Indicate the type of the business to which the following belongs. Write S= if a service
business, MR= if a merchandising business. MF= if a manufacturing business.
_____1.Robinson Department Store _____16. Boutiques
_____2.Motorcycle Dealers _____17. Furniture Makers
_____3.Philip Morris Tobacco Co. _____18. National Bookstore
_____4. Pizza Hut _____19. Gasoline Stations
_____5.United Laboratories _____20.CarRental
_____6.Barbershop _____21. Tailoring Shop
_____7.Warehousing Business _____22. Hog Dealers
_____8.Mitsubishi Philippines _____23. Star Cinema
_____9.Law firms _____24. Dunkin Doughnut
_____10.Procter & GamblePhils _____25. GMA Nework
_____11.Ligo Sardines _____26. Magnolia IceCream
_____12.Colleges and Universities _____27. Julie’s Bakeshop
_____13.Appliance Store _____28. Watsons Drugstore
_____14.Hypermarkets _____29. Printing Press
_____15.Massage Parlor _____30.Newsstand
.
MODULE 6. ACCOUNTING CONCEPTS AND PRINCIPLES
OBJECTIVES
 Identify the generally accepted accounting principles.
 Explain the various accounting principles and concepts.
 Differentiate the difference of each concepts and principles according to its importance in
accounting.
COURSE MATERIALS
ACCOUNTING CONCEPTS AND PRINCIPLES
Accounting, being the language of business, can effectively communicate with the use of
its concepts and principles. These are widely accepted sets of rules and standards that guide
accountants in the application of accounting and preparation of the financial statements. These
are called the “Generally Accepted Accounting Principles (GAAP)”.
The principles of accounting are also called the characteristics of the financial
statements. This is because as accounting is prepared in according to the concepts and
principles, the results of operations which are the financial statements will bear these concepts
and principles at their characteristics.
Some of the basic concepts and principles are:

Relevance
A relevant information helps users of the financial statement provide a decision correctly,
be it in present situations or future circumstances. These decisions are based on past
performance of the organization and correct past mistakes.
Reliability
Information is reliable if a user of the information can depend on it to be accurate and
faithfully represented. Material omissions in financial statements can reduce the reliability of
information contained in the reports.
Matching Principle
This principle requires that revenues and expenses must be recognized and charged to
the income statement in the accounting period in which these are earned (revenues) and
incurred (expenses). This means that any revenues earned during a period should be charged
with corresponding expenses that relates to it.
Timeliness
Timeliness in accounting is a principle that refers to the need that all accounting
information be presented to the users of the financial statement on time so that they can make
the rightful decisions.
Neutrality
Being free from bias is the requirement of Information contained in the financial
statements on neutrality. The information should reflect a view which is fair and balanced.
Faithful Representation
The financial statements should contain faithfully represented transactions and events
during a period. Faithfull representation means that these transactions and events should be
accounted for in their true economic substance rather than its legal form.
Prudence
When we say prudence, it requires that accountants should exercise a degree of caution
in making significant estimates on the valuation of assets and recording of income (not
overstated) and expenses (not understated); apart from the careful adoption of the policies and
standards.
Completeness
Information contained in the financial statements is reliable if these are completely
provided to the users and decision makers. This should be complete in all material respects.
Single Economic Entity Concept

This suggests that companies associated with each other, a parent-subsidiary
relationship, through the virtue of a common control should be regarded as a single economic
unit and therefore should present one consolidated financial statement to represent the group.
Money Measurement Concept

This means that transactions and events when recorded in the books of accounts should
be measured in monetary terms.
Comparability
Comparability in the financial statement means that one accounting period (present)
must be comparable to another period (past) in order for the users to determine meaningful
conclusions and decisions about the financial affairs of the organization.
Consistency
The concept of consistency means that accounting methods must be applied
consistently; the same methods and techniques must be used in future similar situations. In
changing its accounting policis, one must properly disclose it in the notes to the financial
statements.
Understandability
The transactions and events must be presented in the financial statements in a way that
are easily understandable by the users, who can easily comprehend the accounted/recorded
economic activities that are summarized in the reports.
Materiality
This means that information in the financial statements should have no material omission
or misstatement that could influence the economic decisions of the users. Materiality has no
absolute value; its relevance depends on the decision making needs of the users.
Going Concern
The financial statements are prepared on the assumption that a business entity will
operate as a going concern or will continue to operate in the foreseeable future without the
management’s intention to liquidate the organization or to stop its operational activities.
Accruals Concept
The accrual basis of accounting means that the financial statements are prepared where
income and expenses must be recognized in the accounting periods to which these are incurred.
Substance Over Legal Form

In order to present the true affairs of the organization, the transactions and events must
be recorded in the financial statements in their economic substance rather than just in their legal
form.
Revenue Recognition Principle

This principle of accounting refers to the application of accruals concept in the
recognition of revenue (income). Under this principle, revenue is recognized when it is earned
regardless whether payment for the sale has been received or not by the seller.
Exercise Mod 6-1
Instruction: Identify the following.
_______________ 1.This principle in accounting refers to the need for the accounting
information to be presented to the users in time to fulfill their decision
making needs.
_______________ 2.This requires that accountants should exercise a degree of caution in

the adoption of policies and significant estimates such that the assets and
income of the entity are not overstated whereas liability and expenses are
not under stated.
_______________ 3.This concept suggests that companies associated with each other
through the virtue of common control operate as a single economic unit
and therefore the consolidated financial statements of a group of
companies should reflect the essence of such arrangement.
_______________ 4.This principle in accounting, also known as realization concept, refers to

the application of accruals concept towards the recognition of revenue
(income).
_______________ 5.This is an accounting concept which means that transactions and events
must be recorded in the financial statements in their economic substance
rather than just in their legal form, in order to present the true affairs of the
entity.
_______________ 6.This is one fundamental assumption that financial statements are
prepared on the assumption that a business entity will continue to operate
in the foreseeable future without the need or intention on the part of
management to liquidate the entity or to significantly curtail its operational
activities.
_______________ 7.This is a principle of accounting where income and expense must be

recognized in the accounting periods to which they relate or they are
incurred.
_______________ 8.This principle of accounting states that information is material if its

omission or misstatement could influence the economic decisions of
users.
_______________ 9.This concept means that accounting methods once adopted must be
applied consistently in future; same methods and techniques must be
used for similar situations. Business must refrain from changing its
accounting policy unless on reasonable grounds.
_______________ 10.Financial statements of one accounting period must be comparable to

another in order for the users to derive meaningful conclusions about the
trends in an entity's financial performance and position over time.
_______________ 11.Information is relevant if it helps users of the financial statements

render right decision at a given time and helps predict future trends of the
business or correct past predictions that management has made.
_______________ 12.This principle requires that expenses incurred by an organization must

be charged to the income statement in the accounting period in which the
revenue, to which those expenses relate, is earned.
MODULE 7. THE ACCOUNTING EQUATI0N
OBJECTIVES
 Learn to familiarize the accounting equation.
 Illustrate the accounting equation.
 Apply the accounting equation to simple business transactions noting the increases and
decreases on the basic elements of the equation.
 Apply the accounting equation to simple business transactions affecting the accounts
using a tabular format.
COURSE MATERIALS
The Accounting Equation is the basic tool of accounting where the left side of the equation
shows the resources owned by the business and the right side of the equation shows the
resources that are applied to the business by the outside creditors and the owners.
The Accounting Equation is:
ASSETS = LIABILITIES + CAPITAL
ACCOUNTS ACCOUNTS ACCOUNTS

Examples of Assets
Examples
: of Liability:
Capital accounts:
Petty Cash Fund Accounts Payable
Original Capital Investments
Cash on Hand Notes PayableAdditional Investments
Cash in Bank SSS PremiumOwner's
PayableWithdrawals
Accounts Receivable-Trade
Pag-ibig Payable
Revenues/Expenses
Accounts Receivable- PhilHealth
Others Payable
Gains and Losses
VAT Input VAT Output Payable
Creditable WithholdingUnearned
Taxes Income
Notes Receivable Customers Deposits
Prepaid Expenses Rental Deposits
Land Loans Payable
Building
Transportation Equipment
Office Equipment
Computer, Software & Peripherals
Furniture and Fixtures
Leasehold Improvements
Illustration 1 - Effects of Business Transactions in the Accounting Equation

Business Transactions
1. The owner invested cash to an internet business for P200,000.
2. The business purchased internet equipment in cash for P50,000.
3. The business purchased computer printers on account/credit for P10,000.
4. The business purchased supplies in cash for P2,000.
5. The business collected cash from the internet gamers and users for P50,000.
6. The business paid salaries to employees for P10,000.
7. The business paid communication expenses for P20,000.
8. The business paid electricity bills worth P2,000.
9. The owner withdraws cash for P5,000.
10. The business partially paid the payable incurred in the purchase of computer printers for
P5,000.
11. The owner invested additional cash to the business for P100,000.
12. At the end of the month, physical count of supplies shows consumption of supplies
amount to P1,500.
Effects of Business Transaction in the Accounting Equation
Accounting Equation:
(left side of the equation) = (right side of the equation)
Transaction 1
 Assets = increase in asset
 Liabilities = no effect
 Capital = increase in capital
Explanation: Cash, which is an ASSET, is added to the equation for P200,000 on the left
side; while the same amount is also added to the equation on the right side, as the CAPITAL of
the owner. Take note that at both sides of the equation, the amounts are equal. No effect to the
liabilities as the transaction does not involve a liability.
Transaction 2
 Assets = increase in one form of asset and decrease in another form of asset
 Capital = no effect
Explanation: The transaction involves two forms of ASSETS – one is the internet equipment
which is added to the equation as an asset and the other one is cash being taken out from the
equation as payment. The effect of the two assets is zero, which still makes the accounting
equation equal.
Transaction 3
 Assets = increase in assets
 Liabilities = increase in liabilities
Explanation: There is an increase in ASSETS which is added on the left side of the equation
in the form of computer printers and at the same time an increase in the LIABILITIES on the
right side of the equation as the asset is purchased on account or on credit.
Transaction 4
 Assets = increase in one form of asset and Decrease in another form of asset
Explanation: There is an increase in one form of an ASSET which is added on the left side of
the equation in the form of supplies and a decrease in another form of an ASSET which is
deducted on the left side of the equation in the form of cash. The transaction resulted to zero
which make the equation equal.
Transaction 5
Explanation: There is an increase in the ASSETS on the left side of the equation in the form
of cash and increase in CAPITAL on the right side of the equation in the form of revenues.
Please take note that all revenues and income increase the capital of the owner in the
accounting equation.
Transaction 6
 Assets = decrease in assets
 Capital = decrease in capital
Explanation: There is a decrease of ASSETS on the left side of the equation in the form of
cash payment and decrease of CAPITAL on the right side of the equation in the form of salaries
as expense incurred by the business. Please take note that all expenses incurred by a business
decrease the capital account of the owner.
Transaction 7
cash payment and decrease of CAPITAL on the right side of the equation in the form of
communication expense. All expenses incurred by a business decrease the capital account of
the owner.
Transaction 8
cash payment and decrease of CAPITAL on the right side of the equation in the form of
electricity expense. All expenses incurred by a business decrease the capital account of the
owner.
Transaction 9
cash payment to the owner and decrease of CAPITAL on the right side of the equation in the
form of cash withdrawal by the owner. Please take not that all withdrawals of assets made by
the owner from the business decrease the capital account of the owner.
Transaction 10
 Assets = decrease in asset
 Liabilities = decrease in liabilities
Explanation: There is decrease of ASSETS on the left side of the equation in the form of
cash payment and decrease of LIABILITIES on the right side of the equation in the form of
partial payment to the liability on transaction 3.
Transaction 11
Explanation: There is an increase of ASSETS in the form of cash on the left side of the
equation and increase in CAPITAL on the right side of the equation in the form of additional
capital investment by the owner. All investments made by the owner to the business increase
the capital account of the equation.
Transaction 12
supplies being used to the business and decrease in CAPITAL on the right side of the equation
in the form of supplies usages. Please take note that all supplies taken from the inventory and
used by the business in the operation will be charged as expense, thus reducing the capital
account of the owner.
Illustration 2.
Using the same transactions in illustration 1, let’s assign the amounts of the transactions
in a tabulated sheet that shows the effects of the amounts in the accounting equation.
P5,000.
amount to P1,500.
Solution:
Transaction (A) (B) (C) Net Effect
No. ASSETS = LIABILITIES + CAPITAL B+C=A
1 200,000.00 200,000.00 both sides equal to P200,000
2 50,000.00 both sides equal to zero (0)
(50,000.00)
4 2,000.00 both sides equal to zero (0)
(2,000.00)
6 (10,000.00) (10,000.00) both sides equal to -P10,000
Column Total 316,500.00 5,000.00 311,500.00

Equation Total 316,500.00 316,500.00 both sides equal to P316,500
Illustration 3:
Using the same transactions above, let us assign accounts to the amounts of the
transactions in a tabulated sheet that shows the effects of the amounts and accounts in the
accounting equation.
P5,000.
amount to P1,500.
Solution to Illustration 3
Transaction ASSETS (A) LIABILITIES (B) (C)
No. Cash Internet Computer Supplies = Accounts + CAPITAL Account Specification or
Equipment Printers Payable Breakdown for Capital
1 200,000.00 200,000.00 Capital
2 (50,000.00) 50,000.00
3 10,000.00 10,000.00
4 (2,000.00) 2,000.00
5 50,000.00 50,000.00 Service Revenue
6 (10,000.00) (10,000.00) Salaries expense
7 (20,000.00) (20,000.00) Communication expenses
8 (2,000.00) (2,000.00) Light & Water expenses
9 (5,000.00) (5,000.00) Owners drawings
10 (5,000.00) (5,000.00)
11 100,000.00 100,000.00 Capital
12 (1,500.00) (1,500.00) Supplies expenses
Column Total 254,500.00 50,000.00 10,000.00 2,000.00 5,000.00 311,500.00

Equation Total 316,500.00 316,500.00 both sides equal to P315,500
Exercise Mod 7-1

Instruction: Match column A with column B. Write the letter of the answer to the space provided.
Column A Column B
________1. Owner invested cash for P15,000 A. Increase in assets = Increase in capital
________2. Paid rent of the office space B. Increase in assets= Increase in liabilities
for P5,000.
________3. Purchased supplies for
P1,500 cash. C. Decrease in assets= Decrease in capital
________4. Rendered services to a
customer on credit-P10,000.
________5. Purchased supplies on D. Decrease in asset= Decrease in liabilities
credit for P3,000.
________6. Collected cash from
Customer – P10,000. E. Increase in one asset = Decrease in
another form of asset
________7. Paid the supplies purchased
on credit for P3,000.
________8. Rendered services for cash P30,000.
________9. The owner withdraws cash for P5,000.
________10. Paid salaries to staff for P10,000.
Exercise Mod 7-2

Instruction: State the effects of the following transactions on the assets, liabilities and capital by
writing a plus ( + ) sign if the effect is an increase and minus ( - ) sign if the effect is decrease.
Liabilitie
Transactions Assets s Capital
1 Received initial investment from the owner
2 Purchased supplies on credit
3 Received cash from the bank as loan for 2 yrs
4 Deposited money to the bank
5 Give cash to the owner as drawings
6 Sold merchandise for cash
7 Sold merchandise for credit
8 Paid electricity in cash
9 Purchase merchandise for sale on credit
10 Received returned merchandise from customer
11 Send merchandise for return to supplier
12 Collected cash from customer on account
13 Paid the debt due to the creditor or supplier
14 Paid salary of store helper
15 Purchased computer on account
Exercise Mod 7-3

Instruction: State the effects of the following transactions on assets, liabilities and capital. Write
the amounts on the answer sheet, as provided for. Enclose in parenthesis if the amount is for
deduction.
Transactions Amount
1 Owner invested cash to the business. 50,000
2 Owner invested equipment to the business. 5,000
3 Purchased equipment for cash. 3,000
4 Purchased equipment on credit. 6,000
5 Borrowed money from the bank. 20,000
6 Paid for the equipment purchased on account. 6,000
7 Owner invested additional cash to the business . 50,000
8 Owner withdraws cash. 10,000
9 Purchased supplies for cash. 1,000
10 Partially make payment to the bank. 10,000
11 Paid salaries of employees . 5,000
12 Rendered services to customer on credit. 15,000
13 Paid the telephone bill. 1,500
14 Rendered services for cash. 20,000
15 Collected from customers (item#12). 15,000
16 Supplies used during the period. 500
17 Interest income earned from deposit. 100
18 Incurred repairs for equipment on credit. 2,000
19 Received rental bill on credit. 3,000
20 Paid repairs incurred on credit (Item#18). 2,000
Answer sheet for test material 7-3.

Cash Accts Receivable Equipt Supplies Loans Payable Accts Payable Capital Account Specification
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Exercise Mod 7-4
Instruction: State the effects of the following transactions on assets, liabilities and capital. Write
the amounts on the answer sheet, as provided for. Enclose in parenthesis if the amount is for
deduction.
Business Transactions Amount

1. San Diego invested for an IT business in cash. 150,000
2. Purchased computer in cash. 30,000
3. Purchased supplies on account. 5,000
4. Purchased printer on account. 7,500
5. Paid partial to accounts payable on supplies. 3,000
6. Sold payroll program on account. 50,000
7. Did service repairs to computer for cash. 20,000
8. Partial collection of accounts receivable. 25,000
9. Paid electric bill in cash. 3,000
10. Paid rental space for the month. 15,000
11. Paid payable to suppliers on supplies. 2,000
12. Paid salaries to employees. 25,000
13. Paid telephone bills. 5,000
14. Acquire loan from the bank payable in 1 year. 50,000
15. Owner withdraws cash. 10,000
16. Made partial payment to bank loan. 5,000
Answer sheet for test material 7-4.
A S S E T S = LIABILITIES + CA P I TA L
Accts Offi ce Accts Loans
Cash Supplies Receivable Equipt Payable Payable Capital Account Specification
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
MODULE 8. TYPES of MAJOR ACCOUNTS
OBJECTIVES
 Discuss the five major accounts.
 Know the basic types of accounts, its elements and their classifications.
 Familiarize the chart of accounts for service and merchandising business.
COURSE MATERIALS
MAJOR TYPES OF ACCOUNTS
There are five (5) major or basic types of accounts as components in the financial
statements, namely:
1. Assets
2. Liabilities
3. Capital or Owner’s Equity ( Drawing Account)
4. Revenue or Income
5. Expenses
The accounts in the assets, liabilities and capital (except for the drawings account) are
called real or permanent accounts. This is because these accounts are carried forward to the
next accounting period.
The accounts in the revenues or income and expenses, including the drawing account,
are called nominal or temporary accounts as these are not carried over to the next accounting
period but are closed to the capital account at the end of the accounting period.
Accounts have its normal balances. When we say normal balances, it means how it will
appear when it is summed up in the books of accounts and presented in the trial balance and
financial statements.
There are only two normal balances of an account in the books of accounts- it is either a
DEBIT or it is a CREDIT.
When an account is presented in the trial balance not on its normal balance, it may have
the following reasons that an accountant should correct or make adjusting entries:
1. There is an unrecorded transaction.

2. There is an error in the entries.
3. There is a transaction or items in the transactions needing reconciliation.
4. A transaction may have been recorded twice.
5. There are errors in the posting process.
The following major types of accounts have its normal balances:

a. Assets – the accounts classified in this type have normal balances of a DEBIT, except for
their contra-assets account like Allowance for Uncollectible Accounts and Accumulated
Depreciation which have normal balances of a CREDIT but are presented in the asset
portion.
A DEBIT entry will increase an asset while a CREDIT entry reduces it. It is the other way
around when it comes to contra-asset accounts that have normal credit balances.
b. Liabilities – the accounts classified in this type have normal balances of a CREDIT.
A CREDIT entry will increase a liability while a DEBIT entry will reduce it.
c. Capital – this account is normally a CREDIT while the Drawings Account is a DEBIT.
When the capital account becomes a debit balance, it is termed as CAPITAL DEFICIT.
A CREDIT entry increases the capital account while a DEBIT entry will reduce it and a
DEBIT entry will increase the drawings account while a CREDIT entry will reduce it.
d. Revenues/Income – accounts that are classified under this type have normal balances of
a CREDIT.
On merchandising transactions, the SALES account which is classified under this type is
a CREDIT, while the Sales Discounts account is a DEBIT and the Sales Returns and
Allowances account is also a DEBIT. This will be emphasized in chapter 5.
A CREDIT entry increases the revenues/income account while a DEBIT entry will reduce
it.
e. Expenses – all expenses have normal balances of a DEBIT.
On merchandising transactions, the PURCHASE account has a normal DEBIT balance,

while the Purchase Discount account is a CREDIT balance and the Purchase Returns
and Allowances account is also a CREDIT balance.
A DEBIT entry will increase the expenses account while a CREDIT entry reduces it.
THE ASSETS ACCOUNT

Assets are defined as tangible and intangible items, maybe objects or entities, that the
company owns and have economic value. These assets are also the resources of the company
that bring in revenues or income for the business.
Assets are also grouped according to either their life span/useful life or liquidity – how
quick they can be converted into cash.
Assets can be used to:

1. Settle obligations.
2. Produce goods and services for sale.
3. Barter or exchange with another form of asset.
4. Pay off capital investment in the form of drawings.
Assets are classified as:
1. Current Assets- items that are completely consumed, sold, or converted into cash within one
year or 12 months. These are presented in the trial balance or balance sheet according to
its liquidity- the most liquid comes first like cash.
Examples are:
a. Cash and its equivalents
b. Accounts Receivable
c. Notes Receivable
d. Merchandise Inventory
e. Supplies Inventory
f. Prepaid expenses
2. Non-Current Assets- are tangible or intangible assets with a life span of more than one year
and usually longer which typically not very liquid. The purchase costs of assets such as
machinery, buildings and other equipment are not expensed out as incurred, but rather
depreciated, or expensed out or "written off," over a number of years according to its
estimate lifespan or useful life.
Examples are:
a. Land
b. Building
c. Vehicles
d. Office and Computer Equipment
e. Furniture & Fixtures
f. Goodwill, Copyrights, Patents, Franchises
Tangible assets are those assets with physical forms such as land, buildings, vehicles,
equipment, and inventory.
Intangible assets are things that represent money or value; things such as Accounts
Receivables, patents, contracts, and certificates of investments.
Typical assets in its form as tangible or intangible, whether current or non-current, are as
follows:
Tangible Assets
1. Cash – this is the most liquid form of asset in a business organization. This may
represents cash on hand, cash in bank, petty cash fund and revolving funds. Short-term
marketable securities or instruments are also classified as cash.
2. Merchandise Inventory – these are purchases of various goods or products intended for
sale.
3. Supplies Inventory - these are purchases of various supplies intended for office or
operations use. Once these supplies are put into use for the business, these are
eventually classified as expense.
4. Land, Building, Equipment, Furniture and Vehicles are long-term resources of the
business that serve as support to the day-to-day activities of the business
Intangible Assets
1. Accounts Receivable – these are amounts due from customers who have purchased
goods or services from the seller through sales invoices. This is common commonly
paired with the allowance for doubtful accounts (a contra-asset account), as reserve for
bad debts. The combined balances in the accounts receivable and allowance accounts
represent the net carrying value of accounts receivable.
2. Notes Receivable – this account represents indebtedness of a customer who purchases

goods or services from a seller by way of a promissory note.
3. Prepaid Expenses- these are future expenses paid in advance and the amount that has
not yet expired are reported in the company’s balance sheet as an asset. Examples of
this are prepaid insurance, prepaid taxes and prepaid advertising.
4. Goodwill, Copyrights, Patents, Franchises
THE LIABILITIES ACCOUNT

Liabilities are debts or financial obligations of an individual or company to other
individuals or companies.
The settlement of these debts or obligations is through:

1. Payment in the form of cash.
2. Payment in the form of any asset other than cash.
3. Payment in the form of rendering services.
4. Replacement by another debt or obligation.
5. Conversion of the debt into capital.
6. The creditor may waive his right to collect the existing obligation.
Liabilities are classified as:

1. Current Liabilities – this consists of short-term debts that require payment in one year or
less.
Examples are:
a. Accounts Payable – these are amounts owed by the individual or company to
creditors or suppliers for the purchase of goods and services.
b. Unearned Income – amount received from customer in advance, either as deposit or

down-payment for services that has yet to be performed by the company.
c. Output Vat Payable - this amount represents the tax added to the sale of goods or
services being billed to customers, be it cash or on account.
d. Withholding Tax Payable – this is a payroll liability in which an amount is withheld as

taxes from the salaries of officers and employees for remittance to the Bureau of
Internal Revenue (BIR).
e. SSS Payable- the amount of contribution by employees which is deducted from their
salaries, including the employer share for remittance to the Social Security Services
(SSS).
f. Pag-ibig Payable- the amount of contribution by employees which is deducted from

their salaries, including the employer share for remittance to Pag-ibig Fund.
g. Philhealth Payable- the amount of contribution by employees which is deducted from

their salaries, including employer share for remittance to PhilHealth.
h. Salaries or Wages Payable- these are salaries of employees that are already
incurred but only paid on the next payroll cut-off.
i. Taxes Payable – these are obligations to the governments subsequently paid the
following period.
j. Accrued Expense Payable – these amounts representing expenses already incurred

during the period but not yet paid.
2. Non-Current Liabilities – these are long-term debts that will be settled or paid beyond one
year.
Examples are:
a. Notes Payable – this amount is owed by an individual or company to creditors or
suppliers for goods or services purchased and is evidenced by a written promissory
note to pay the debt in a specified period normally longer than one year.
b. Loans Payable- this amount owed by an individual or company to creditors or banks

and other financial institutions for amount borrowed, normally for a longer period of
time.
THE CAPITAL OR OWNER’S EQUITY ACCOUNT

Equity represents the value of assets after deducting the total of liabilities from the total
of assets. This is also called the residual value or interest of the owner from the business.
These are contributions of the owner to the business, either in cash or non-cash assets like
equipment, vehicles, furniture, etc., drawings and any income or loss from the business.
In a sole-proprietorship business, the capital’s components within the accounting period

are as follows:
Original investment or capital contribution P xxx
Add: Additional investment/contribution xxx
Net income xxx
Total P xxx
Less: Drawings ( xxx)
Net Capital, end P xxx
THE REVENUES OR INCOME ACCOUNT

The income or revenue account comprises the actual money earned over a period of
time from a job, sale of goods or products and services, either in cash or on account.
Examples are:
a. Revenue or income generated from the sale of a commodity or rendering of services
b. Interests received on a bank deposit
c. Gain on the sale of assets
d. Rental received on a leased property
e. Professional fees earned
THE EXPENSES ACCOUNT

An expense is a cost incurred as part of a company's operating activities during an
accounting period which are necessary in the conduct of the trade or business.
Examples are:
a. The cost of goods sold
b. Commissions earned by the sales employees
c. Rent for the office space
d. The cost of the electricity used
e. Advertising that took place
f. Wages and salaries that were incurred
g. Depreciation expenses for the amortization of fixed assets
h. Losses
CHART OF ACCOUNTS
A Chart of Accounts is a created list of accounts used by an organization to define each
item for which money is spent or received. It is used to organize the finances of the entity and to
segregate assets, liabilities, capital, revenue and expenditures in order to give parties who have
interest in the business a better understanding of its financial activities.
Accountants and bookkeepers will refer to this chart of accounts as their reference for all
the transactions that they will record in the books of accounts and as guide to classify and
summarize the accounts.
What is an ACCOUNT in accounting?

It is a record in the general ledger that is used to collect and summarize debit and credit
amounts from a transaction. To summarize the same transactions into one, a specific account is
assigned to it. The accounts used in accounting are commonly and generally accepted in the
accounting practice.
The T-Account is the simplest form of an account because you can summarize
transactions through this without using the general ledger book and can already prepare a trial
balance.
It is literally a broad and very wide letter “T” with the debit on the left side and the credit
on the right side and account name at the center.
Account Title
Debit Credit
A typical example of a chart of accounts for a merchandising business is illustrated below:

CHART OF ACCOUNTS
Account No. Account Title Description
CURRENT ASSETS
100-01 Cash on Hand It includes revolving/petty
cash fund and undeposited
collections that are still on
hand
100-02 Cash in bank Bank deposits either savings,
time deposits or checking
deposits
100-03 Accounts Amount owed to the company
Receivable by the customers through sale
of goods or merchandises
100-031 Allowance for These are reserves or
Uncollectible allowance for uncollectible
Accounts accounts from customers. This
a contra-asset account of
Accounts Receivable
100-04 Notes Amounts owed to the
Receivable company by customers
evidenced by a written
promise of customer to pay a
certain amount of money a
specified time as payment for
goods or merchandised
delivered
100-05 Advances to These are cash advances
employees extended to its employees
either for liquidation of
expenses or deduction from
salary
100-06 Merchandise These are good/products that
Inventory are kept in a warehouse for
sale or unsold items in the
store.
100-07 Office Supplies Items such as bond paper,
folders, fasteners, ballpens,
envelopes, , and other
supplies used in the office
100-08 Store Supplies Items such as bond paper,
folders, fasteners, ballpens,
envelopes, , and other
supplies used in the stores
100-09 Prepaid Insurance policy premium
Insurance paid in advance by the
company
100-10 Prepaid Taxes Taxes, permits and licenses
paid in advance to the
government
100-11 Prepaid These are advance payment or
Advertising deposits intended for
advertisements of the
company
100-12 Prepaid Rent These are normally rental
payments of office or stores
equivalent to 3 or 6 months
paid in advance by the
company to the lessor.
NON-CURRENT ASSETS
101-01 Office Items such as air-conditioning
Equipment unit, computer and printer,
check writer, typewriter,
laptops, communication
equipt, electric fan, cash
registers, etc
101-011 Accumulated This is a contra-asset account
Depreciation- of the office equipment, for
OE the amortization of its cost
over useful years
101-02 Delivery Vehicle used to perform
Vehicle delivery of goods or
merchandises to customers
Depreciation- of the delivery equipment, for
DE the amortization of its cost
over useful years
101-03 Furniture and Items such as filing cabinets,
Fixtures office chairs and tables,
computer table, etc
Depreciation- of the furniture & fixtures, for
F&F the amortization of its cost
over useful years
101-04 Land Land used in the business
101-05 Building Building used in the business
Depreciation- of the building, for the
Bldg amortization of its cost over
useful years
101-06 Service Vehicle Official vehicle used as service
car for officers and employees
Depreciation- of the service vehicle, for the
SV amortization of its cost over
useful years
101-08 Rental Deposit Deposit made by the company
for the space occupied which
can only be withdrawn or
reimbursed at the end of the
leased contract
CURRENT LIABILITIES
200-01 Accounts Amounts owed to suppliers
Payable for the purchase of goods &
services
200-02 Unearned Amount received from
income customer in advance either as
deposit or downpayment for
goods or merchandises that
has yet to be delivered by the
company
200-03 Withholding Amount withheld as taxes
Tax Payable from salaries of officers and
employees for remittance to
the BIR
200-04 SSS Premium Amount of contribution by
Payable employees deducted from
their salary including
employer share for remittance
to SSS
200-05 PhilHealth Amount of contribution by
to PhilHealth
200-06 Pag-ibig Amount of contribution by
to Pag-ibig Fund
200-07 VAT Payable This amount represents the
tax added to the goods or
merchandises being billed to
customers, be it cash or on
account.
NON-CURRENT LIABILITIES
200-08 Notes Payable Amounts owed by the
company to creditors for items
purchased as evidenced by a
written promissory note to
pay the debt in a specified
period normally longer than
one year.
200-09 Loans Payable Amount owed to creditors or
banks and other financial
institutions for amount
borrowed normally for a
longer period of time
CAPITAL ACCOUNTS
300 Capital These are contributions of the
owner to the business, either
in cash or non-cash assets like
equipment, vehicles,
furniture, etc
301 Drawings These are amounts withdrawn
by the owner for personal use
REVENUE/
INCOME
ACCOUNTS
400-01 SALES These are amounts earned for
the sale of goods or
merchandises to customers,
either in cash or on account.
400-02 Sales Returns & These represents goods or
Allowances merchandises that are
returned by customers due to
defect or other reasons
400-03 Sales Discounts These are discounts extended
to customers by either buying
in bulk or being loyal to the
business
400-02 Interest Income These are the amount of
interest earned from bank
deposits or other form of
investments
400-03 Gain on Sale of These are gain in selling
Assets shares held as investment or
gain in selling equipment,
vehicles or furniture
COST OF SALES
ACCOUNT
500-01 Purchases This account is used for
various purchases of goods or
merchandises that are
intended for sale
500-02 Purchase This account is used for goods
Returns & or merchandises that are
Allowances returned to the suppliers for
various reasons, like defect
500-03 Purchase These are discounts extended
Discounts b the suppliers by either
buying in bulk or being loyal
to the products
500-4 Freight In This account in an
inventoriable cost, which
means that it will become part
of the cost of the
products/goods being
purchased. These are expenses
paid in the delivery of the
goods being shouldered by
the buyer
EXPENSE
ACCOUNTS
600-01 Advertising The cost of advertising
expense
600-02 Taxes and These are permits, licenses
licenses and other taxes paid to the
government
600-03 Rent expense This is the rental cost of the
space occupied by the
business
600-04 Insurance These are insurance cost
expense premium paid for equipment,
building, furniture and
employees
600-05 Light and water The amount of electricity and
expense water
600-06 Office supplies The cost of office supplies
expense consumed during the period
600-07 Salaries, Wages The amount of salaries and
& Benefits benefits incurred for the
period
600-08 Gasoline The amount of gasoline
expenses consumed by officers and
employees during official
business travel/trips and
gasoline incurred by delivery
trucks and service vehicles
600-09 Interest expense These are finance cost charged
or Finance costs by banks or other financial
institutions or creditors for the
loan availments
600-10 Representation Cost of entertaining a client in
expenses relation to business functions
600-11 Repairs and These are expenses incurred
maintenance for the repairs and
maintenance of transportation
and other equipment and
furniture of the company
600-12 Depreciation These are the amortization
expense costs of capitalized non-
current assets over the
estimated life of the assets
600-13 Communication These are telephone, cellfone,
expenses internet and other form of
communications incurred by
the company
600-14 Transportation These are fares or
expenses transportation costs incurred
by employees
600-15 Freight Out or These are expenses incurred
Delivery by the seller in the delivery of
Expenses goods to the customers
600-16 Miscellaneous This will be used for expenses
expenses that cannot be classified in the
above accounts
A typical example of a chart of accounts for a service business is illustrated below:
CHART OF ACCOUNTS
Account No. Account Title Description
CURRENT ASSETS
100-01 Cash on Hand It includes
revolving/petty cash
fund and undeposited
collections that are still
on hand
100-02 Cash in bank Bank deposits either
savings, time deposits or
checking deposits
100-03 Accounts Receivable Amount owed to the
company by the
customers through sale
of services
100-031 Allowance for These are reserves or
Uncollectible allowance for
Accounts uncollectible accounts
from customers. This a
contra-asset account of
Accounts Receivable
100-04 Notes Receivable Amounts owed to the
company by customers
promise of customer to
pay a certain amount of
money a specified time
as payment for services
rendered
100-05 Advances to These are cash advances
employees extended to its
employees either for
liquidation of expenses
or deduction from salary
100-06 Office Supplies Items such as bond
paper, folders, fasteners,
ballpens, envelopes, ,
and other supplies used
in the office
100-07 Prepaid Insurance Insurance policy
premium paid in
advance by the company
100-08 Prepaid Taxes Taxes, permits and
licenses paid in advance
to the government
100-09 Prepaid Advertising These are advance
payment or deposits
intended for
advertisements of the
company
100-10 Prepaid Rent These are normally rental
payments equivalent to 3
or 6 months paid in
advance by the company
to the lessor.
NON-CURRENT ASSETS
101-01 Office Equipment Items such as air-
conditioning unit,
computer and printer,
check writer, typewriter,
laptops, communication
equipt, electric fan, etc
101-011 Accumulated This is a contra-asset
Depreciation-OE account of the office
equipment, for the
amortization of its cost
over useful years
101-02 Service Equipment Items used in rendering
services related to the
generation of revenues
Depreciation-SE account of the service
equipment, for the
over useful years
101-03 Delivery Vehicle Vehicle used to perform
delivery of services to
customers
Depreciation-DV account of the delivery
equipment, for the
over useful years
101-04 Furniture and Items such as filing
Fixtures cabinets, office chairs and
tables, computer table,
etc
Depreciation-F&F account of the furniture
& fixtures, for the
over useful years
101-05 Land Land used in the
business
101-06 Building Building used in the
business
Depreciation-Bldg account of the building,
for the amortization of its
cost over useful years
101-07 Service Vehicle Official vehicle used as
service car for officers
and employees
Depreciation-SV account of the service
vehicle, for the
over useful years
101-08 Rental Deposit Deposit made by the
company for the space
occupied which can only
be withdrawn or
reimbursed at the end of
the leased contract
CURRENT LIABILITIES
200-01 Accounts Payable Amounts owed to
suppliers for the
purchase of goods &
services
200-02 Unearned income Amount received from
customer in advance
either as deposit or
downpayment for
services that has yet to be
performed by the
company
200-03 Withholding Tax Amount withheld as
Payable taxes from salaries of
officers and employees
for remittance to the BIR
200-04 SSS Premium Amount of contribution
Payable by employees deducted
from their salary
including employer
share for remittance to
SSS
200-05 PhilHealth Payable Amount of contribution
by employees deducted
from their salary
including employer
Philhealth
200-06 Pag-ibig Payable Amount of contribution
by employees deducted
from their salary
including employer
Pag-ibig Fund
200-07 VAT Payable This amount represents
the tax added to the
service revenues being
billed to customers for
services rendered, be it
cash or on account.
NON-CURRENT LIABILITIES
200-08 Notes Payable Amounts owed by the
company to creditors for
items purchased as
promissory note to pay
the debt in a specified
period normally longer
than one year.
200-09 Loans Payable Amount owed to
creditors or banks and
other financial
institutions for amount
borrowed normally for a
longer period of time
CAPITAL ACCOUNTS
300 Capital These are contributions
of the owner to the
business, either in cash
or non-cash assets like
equipment, vehicles,
furniture, etc
301 Drawings These are amounts
withdrawn by the owner
for personal use
REVENUE/
INCOME
ACCOUNTS
400-01 Service Revenue These are amounts
earned by performing or
delivering of services to
customers, either in cash
or on account.
400-02 Interest Income These are the amount of
interest earned from
bank deposits or other
form of investments
400-03 Gain on Sale of These are gain in selling
Assets shares held as
investment or gain in
selling equipment,
vehicles or furniture
EXPENSE
ACCOUNTS
500-01 Advertising expense The cost of advertising
500-02 Taxes and licenses These are permits,
licenses and other taxes
paid to the government
500-03 Rent expense This is the rental cost of
the space occupied by
the business
500-04 Insurance expense These are insurance cost
premium paid for
equipment, building,
furniture and employees
500-05 Light and water The amount of electricity
expense and water
500-06 Office supplies The cost of office
expense supplies consumed
during the period
500-07 Salaries, Wages & The amount of salaries
Benefits and benefits incurred for
the period
500-08 Gasoline expenses The amount of gasoline
consumed by officers and
employees during official
business travel/trips and
gasoline incurred by
delivery trucks and
service vehicles
500-09 Interest expense or These are finance cost
Finance costs charged by banks or
other financial
institutions or creditors
for the loan availments
500-10 Representation Cost of entertaining a
expenses client in relation to
business functions
500-11 Repairs and These are expenses
maintenance incurred for the repairs
and maintenance of
transportation and other
equipment and furniture
of the company
500-12 Depreciation These are the
expense amortization costs of
capitalized non-current
assets over the estimated
life of the assets
500-13 Communication These are telephone,
expenses cellfone, internet and
other form of
communications
incurred by the company
500-14 Transportation These are fares or
expenses transportation costs
incurred by employees
500-15 Miscellaneous This will be used for
expenses expenses that cannot be
classified in the above
accounts
1.ACTIVITIES/ASSESSMENTS
Exercise Mod 8-1
Instruction: Identify the following by checking the appropriate column whether asset, liability, capital, revenue
or expense account.
Asset Liability Capital Revenue Expense
11. Capital ______ ______ ______ ______ ______
12. Service Revenue ______ ______ ______ ______ ______
13. Prepaid rent expense ______ ______ ______ ______ ______
14. Cash ______ ______ ______ ______ ______
15. Notes payable ______ ______ ______ ______ ______
16. Franchises ______ ______ ______ ______ ______
17. Rental Income ______ ______ ______ ______ ______
18. Purchase discounts ______ ______ ______ ______ ______
19. Sales returns & allow ______ ______ ______ ______ ______
20. Accumulated depreciation ______ ______ ______ ______ ______
21. Accrued expense ______ ______ ______ ______ ______
22. Freight out ______ ______ ______ ______ ______
23. Owner’s drawings ______ ______ ______ ______ ______
24. Unused Supplies ______ ______ ______ ______ ______
25. Interest income ______ ______ ______ ______ ______
26. Merchandise Inventory ______ ______ ______ ______ ______
27. Interest expense ______ ______ ______ ______ ______
28. Cash in bank ______ ______ ______ ______ ______
29. Prepaid insurance ______ ______ ______ ______ ______
30. Taxes & licenses ______ ______ ______ ______ ______
Exercise Mod 8-2
Instruction: State whether each of the following is an asset, liability or
capital. If asset or liability, state the kind whether current or non-current.
Example: Cash Asset Current

Loans Payable Liability Non-current
1. Accrued expense payable ________ ________

2. Unused supplies ________ ________
3. Prepaid insurance ________ ________
4. Furniture & fixtures ________ ________
5. Goodwill ________ ________
6. Building ________ ________
7. Accounts receivable ________ ________
8. Unearned income ________ ________
9. Notes payable ________ ________
10. Owner’s drawings ________ ________
11. Accounts payable ________ ________
12. Merchandise inventory ________ ________
13. Patents ________ ________
14. Salaries payable ________ ________
15. VAT payable ________ ________
Exercise Mod 8-3

Instruction: Check in the space provided whether the asset listed below is tangible or intangible.
Tangible Intangible
1. Accounts Receivable ________ ________
2. Prepaid Rent ________ ________
3. Supplies Inventory ________ ________
4. Copyrights ________ ________
5. Goodwill ________ ________
6. Furniture & Fixture ________ ________
7. Notes Receivable ________ ________
8. Patents ________ ________
9. Vehicles ________ ________
10. Cash in Bank ________ ________
11. Office Equipment ________ ________
12. Merchandise inventory ________ ________
13. Franchises ________ ________
14. Merchandise Inventory ________ ________
15. Cash on Hand ________ ________
Exercise Mod 8-4
Instruction: Check in the space provided whether the normal balance of the account listed below
is a DEBIT or a CREDIT.
DEBIT CREDIT
1. Unearned Income ________ ________
2. Owner’s Drawings ________ ________
3. Used Supplies ________ ________
4. Notes Payable ________ ________
5. Patents ________ ________
6. Rent Expense ________ ________
7. Accumulated Depreciation ________ ________
8. Petty Cash fund ________ ________
9. Interest Income ________ ________
10. Uncollectible Accounts Expense ________ ________
11. Salaries Payable ________ ________
12. Service Revenues ________ ________
13. Salaries and Wages Expense ________ ________
14. Accrued Expenses ________ ________
15. Sales Discounts ________ ________
16. Purchases ________ ________
17. Purchase Returns ________ ________
18. Gain on sale of assets ________ ________
19. Prepaid Advertising ________ ________
20. Insurance Expense ________ ________
Exercise Mod 8-5

Instruction: Check in the space provided whether the account listed below is REAL or NOMINAL
account.
REAL NOMINAL
1. Gain on sale of assets ________ ________
2. Unearned Income ________ ________
3. Merchandise Inventory ________ ________
4. Pag-ibig Payable ________ ________
5. Patents ________ ________
6. Accounts Receivable ________ ________
7. Owner’s Capital ________ ________
8. Owner’s Drawings ________ ________
9. Cash on Hand ________ ________
10. Repairs & Maintenance ________ ________
11. Loans Payable ________ ________
12. Accumulated Depreciation ________ ________
13. Interest Expense ________ ________
14. Accrued Expenses ________ ________
15. Sales Returns ________ ________
16. Sales ________ ________
17. Unused Supplies ________ ________
18. Purchase Discounts ________ ________
19. Prepaid insurance ________ ________
20. Unearned Income ________ ________
MODULE 9. THE BOOKS OF ACCOUNTS
OBJECTIVES
 Identify the uses of the two books of accounts.
 Illustrate the format of the general and special journals.
 Illustrate the format of the general and subsidiary ledgers.
 Learn to record and post simple business transactions to different types of books of
accounts.
COURSE MATERIALS
BOOKS OF ACCOUNTS
The books of accounts are used as a means to record events that transpired in the
course of the business. These events or transactions are inflows and outflows of monetary
activities that a business normally does in its day-to-day operations. These events are then
summarized, analyzed and converted into financial reports termed as financial statements.
These books of accounts are registered with the Bureau of Internal Revenue (BIR) for
compliance and monitoring purposes.
There are two major types of books of accounts, namely: (1) journal, and (2) ledger.
Journalizing is the process of recording the business transactions to the general journal,
and posting is the process of transferring or summarizing the transactions from the general
journal to the general ledger.
Journal – the journal is referred to as the book of original entry. It records business
transaction in chronological order or order of date using the principle of “debit and credit”.
In recording the business transactions to a journal, the bookkeeper or accountant will use
the Journal Entry. This journal entry will also include a short explanation on the nature of the
transaction.
When a transaction has one debit and one credit, it is called simple journal entry. When a
transaction has one debit and two or more credits or two or more debits and one credit or two or
more debits and two or more credits, it is called compound journal entry.
A double entry accounting, was originally introduces in 1494 by Luca de Pacioli, is a

method of accounting that involves recording of transactions wherein two accounts are affected,
one is debited and the other is credited. This method maintains the accounting equation that
both sides of the equation remain equal.
Example of a simple journal entry is:

Debit Credit
Cash 100,000
Capital – B. Abarquez 100,000
To record initial capital contribution of B. Abarquez to the business
Example of a compound journal entry is:
Debit Credit
Cash 11,200
Accounts Receivable 44,800
Vat Output Payable 6,000
Service Revenue 50,000
To record professional services to customer with cash downpayment and balance 7 days
term
In the above examples take note that when you write the credit entry, it should be
indented to the right few spaces from the debit entry; while the short explanation of the
transaction is also indented to the right few spaces from the credit entry.
There are the two types of journal: (1). Special Journal, (2). General Journal.
1. Special Journals – these are designed to simplify the process of classification and
summarization of accounts from transactions.
a. Sales journal- this is a special journal that is used to record sales of goods or
services on credit (which are receivables from customers).
b. Purchase journal- this is a special journal that is used to record all purchase
transactions which are on credit (payable to suppliers).
c. Cash disbursement journal – this is a special journal that is used to record cash
payment of expenses and payables.
d. Cash receipts journal – this is a special journal that is used to record cash sales of
goods or services and cash collections of receivables from customers.
2. General Journal – this journal is used to record transactions using the Journal Voucher
System that cannot be recorded in the special journals.
Ledger - is a book of financial accounts that reflects the financial effects of the business
organization’s transactions after they are recorded to the various journals. This is also called the
book of final entry, because it is where the transactions of an account is summarized.
While journals show the chronological effect of business activity, ledgers show activity by
account type.
Two basic types of ledgers:

a. General ledger- this summarizes the activity for each of the organization’s accounts from
the journals. This is the book where the entries from various journals are being posted.
b. Subsidiary ledgers- these are details of various accounts like accounts receivable and
accounts payable that are kept separately to provide better control of accounts in the
general ledger which need extensive monitoring. These are records that breaks down the
total amount reflected in the general ledger into parts; per customer for the accounts
receivable and per supplier for the accounts payable.
A service business keeps the following books of accounts:

1. General journal
2. General ledger
3. Cash receipt journal
4. Cash disbursement journal
A merchandising business keeps the following books of accounts:

1. General journal
2. General ledger
3. Cash receipt journal
4. Cash disbursement journal
5. Sales journal
6. Purchase journal
Basic Format of Books of Accounts

General Journal
The format used for the various journals takes from the basic format of a general journal,
which has two columns. In actual practice, it is up for the bookkeeper or accountant to revise the
format into several columns when it suits their needs.
COMPANY'S NAME: Page No.

GENERAL JOURNAL
DATE Account Title & Expla na ti on PR DEBIT CREDIT
Date. The first entry will require the month, date and the year. On succeeding entries, only the
month and date is written.
Account Title & Explanation. The first line to be written is the account debited and the second
line, which is indented to the right, is the account credited. The third line which is also indented
to the right from the account credited will be brief explanation of the nature of the transaction.
Posting Reference (PR). This is filled up when the account entry is posted or transferred to
the general ledger. What is written here is normally the account number that is assigned to the
specific account in the general ledger as listed in the chart of accounts. Let’s say if a CASH entry
on page 1 of this general journal will be posted to the general ledger and the CASH has an
assigned account number in the chart of accounts as 100-01, then what is written here next to
the cash entry is PR is 100-01.
Debit. This is the column where the amount of the account being debited is written.
Credit. This is the column where the amount of the account being credited is written.
General Ledger
There are two types of general ledger format that are being used: (1) a two-column
general ledger and (2) a three-column general ledger.
Format of a two-column general ledger:

COMPANY'S NAME: GENERAL LEDGER
Account Ti tl e: Account No.
DATE EXPLANATION PR DEBIT DATE EXPLANATION PR CREDIT
Format of a three-column general ledger:

COMPANY'S NAME: GENERAL LEDGER
Account Ti tl e: Account No.
DATE EXPLANATION PR DEBIT CREDIT BALANCE
Date. What is written here is the date of the journal entry.
Explanation. You can write here a brief description of the account being posted
Post Reference (PR). This is filled up by the page number where the account entry in the
general journal is recorded. Let us say if a CASH entry that is recorded on Page 1 of the general
journal will be posted in this ledger and the general ledger is for Cash, then GJ1 is written.
Debit. Write in this column the debit amount from the general journal.
Credit. Write in this column the credit amount from the general journal.
Balance. This is the difference between the debit transactions and the credit transactions.
Format of a subsidiary ledger:
SUBISDIARY LEDGER
NAME: Account Titl e:
DATE Pa rti cul a rs Ref No. DEBIT CREDIT BALANCE
Date. This is the date of the transaction.
Particulars. The details of the transactions.
Reference No. The source document or accountable document being used in the transaction.
This source documents and accountable documents will be discussed in the next chapter.
Debit. The amount of the transaction being debited.
Credit. The amount of the transaction being credited.
Balance. The difference between the debit transactions and the credit transactions.
In succeeding chapters, the two-column general journal and the three-column

general ledger will be used in recording and posting of the business transactions.
Illustration 4.
Below are business transactions of an Accounts Receivable and their effect to the
books of accounts:
2016
June 1 – XYZ Merchandising sold computer equipment for P50,000 to Mr. Perez, P25,000
cash and the balance on credit per Inv# 1005
June 5- The company sold printers to ABC Company for P10,000 on credit per Inv# 1006
June 10- The company partially collected from Mr. Perez P10,000 per OR#125
Step 1. Recording of business transactions to the general journal

Company Na me:XYZ MERCHNADISING COMPANY Pa ge No. 0 1
GENERAL JOURNAL
DATE Account Title & Expl ana ti on PR DEBIT CREDIT
2016
June 1 Cas h 100-01 2 5 0 0 0
Accounts Receiva bl e 100-03 2 5 0 0 0
Sa les 400-01 5 0 0 0 0
To record s a le of computer equipt
to Mr. Peres
June 5 Accounts Receiva bl e 100-03 1 0 0 0 0

Sa l es 400-01 1 0 0 0 0
To record s a le of printers to
ABC Compa ny on credi t
June 10 Cas h 100-01 1 0 0 0 0

Accounts Recei va bl e 100-03 1 0 0 0 0
To record pa rti al coll ecti oh from
the a ccount of Mr. Perez
Step 2. Posting of journal entries from the general journal to the general ledger.
COMPANY'S NAME: XYZ COMPANY GENERAL LEDGER
Account Title: CASH Account No. 100-01

2016
June 1 Sal e to Mr. Perez GJ 1 2 5 0 0 0
10 Col lection from Mr. Perez GJ 1 1 0 0 0 0 3 5 0 0 0
Account Title: ACCOUNTS RECEIVABLE Account No. 100-03

2016
5 Sal e to ABC Company GJ 1 1 0 0 0 0 3 5 0 0 0
10 Col lection from Mr. Perez GJ 1 1 0 0 0 0 2 5 0 0 0
Account Title: SALES Account No. 400-01

2016
5 Sal e to ABC Company GJ 1 1 0 0 0 0 6 0 0 0 0
Step 3. Posting of receivable entries to the subsidiary ledgers
SUBISDIARY LEDGER
NAME: Mr. PEREZ Account Title: Accounts Receivable
DATE Particulars Ref No. DEBIT CREDIT BALANCE

2016
June 1 Sale of Computers Inv1005 25000
10 Payment of account OR125 10000 15000
NAME: ABC COMPANY Account Title: Accounts Receivable
DATE Particulars Ref No. DEBIT CREDIT BALANCE

2015
June 5 Sale of printers Inv1006 10000 10000
TEST MATERIAL 9-1
Instruction: Identify the following.
_______________ 1.It is the process of recording the business transactions to the general
journal.and posting is the process of transferring or summarizing the
transactions from the general journal to the general ledger.
_______________ 2.It is the book of original entry.
_______________ 3.It is the process of transferring or summarizing the transactions from the
general journal to the general ledger.
_______________ 4.It is the book of final entry.
_______________ 5.These are used as a means to record events that transpired in the
course of the business.
_______________ 6.This is a method of accounting that involves recording of transactions
wherein two accounts are affected, one is debited and the other is
credited.
_______________ 7.These are journals that are designed to simplify the process of
classification and summarization of accounts from the transactions.
_______________ 8.This is a special journal that is used to record cash sales of goods or
services and cash collections of receivables from customers
_______________ 9.This the system used to record transactions to the general journal that
cannot be recorded in the special journals.
_______________ 10.These are details of various accounts like accounts receivable and
accounts payable that are kept separately to provide better control of
accounts in the general ledger which need extensive monitoring.
Exercise Mod 9-2

Instruction: Journalize the following transactions in a general journal.
Business Transactions as of August 31, 2016 of Brian Enterprises:

. Transactions Amount
1. B. Sumanda invested for an IT business in cash. 200,000
2. B. Sumanda invested equipment to the business. 15,000
3. Purchased additional equipment in cash. 30,000
4. Purchased additional equipment on credit. 50,000
5. Borrowed money from bank payable in 1 yr. 50,000
6. Paid for equipment purchased on credit. 50,000
7. B. Sumanda made additional investment in cash. 50,000
8. B. Sumanda makes drawings in cash. 5,000
9. Made partial payment to the bank loan. 5,000
10. Purchase new furniture on credit. 10,000
12. Billed customer for services rendered on account. 55,000
14. Rendered services for cash. 30,000
15. Collected from customers on account. 55,000
16 Paid repairs and maintenance of equipment. 5,000
17. Received rental bill payable next month. 10,000
18. Paid water bill. 3,000
Answer Sheet for Test Material 9-2.

GENERAL JOURNAL
GENERAL JOURNAL
GENERAL JOURNAL
Exercise Mod 9-3
Instruction: Journalize the following transactions in a general journal.
Business Transactions Amount
1. San Diego invested for an IT business in cash. 150,000
2. Purchased computer in cash. 30,000
3. Purchased supplies on account. 5,000
4. Purchased printer on account. 7,500
5. Paid partial to accounts payable on supplies. 3,000
6. Sold payroll program on account. 50,000
7. Did service repairs to computer for cash. 20,000
8. Partial collection of accounts receivable. 25,000
9. Paid electric bill in cash. 3,000
10. Paid rental space for the month. 15,000
11. Paid payable to suppliers on supplies. 2,000
14. Acquire loan from the bank payable in 1 year. 50,000
15. Owner withdraws cash. 10,000
16. Made partial payment to bank loan. 5,000
Answer Sheet for Test Material 9-3.
GENERAL JOURNAL
GENERAL JOURNAL
GENERAL JOURNAL
MODULE 10. THE CYCLE of ACCOUNTING
OBJECIVES
 Describe the nature of business transaction and give examples.
 Identify the different types of source and accountable documents that form part in a
business transaction.
 Learn the rules of debits and credits and apply this in the recording of business
transactions.
 Know the accounting process and apply this to simple business transactions and in the
preparation of financial reports.
 Know the accounting period.
 Learn how to analyze and correct errors from the recorded transactions.
 Prepare appropriate adjusting entries.
 Be able to familiarize the structure and components of the financial statements.
COURSE MATERIALS
The Business Transactions
The accounting equation is an information system of accounting where transactions are
processed, kept and generated into financial reports.
The business transaction affects the information environment. It enters into the
accounting information system, be it manual or computerized, and processed to become the
financial statements. It is referred to as economic event affecting the accounting equation.
These transactions have monetary values which are recorded in the books of accounts
and are summarized in the financial reports.
Characteristics of Business Transactions

A business transaction must have the following characteristics:
1. It must have financial value;
2. It must be supported by a source document (e.g. sales invoice, official receipt,
cash or journal voucher, etc.); and
3. It must have effect in the accounting equation.
A business transaction can either be exchanges of various transactions (there is physical

exchange of values such as sale, purchase, payment, etc.) or transactions that does not require
an exchange (there is no physical exchange e.g. inventory losses, fire loss, depreciation, etc.).
Nature of Business Transactions

A transaction can be: (1) an exchange of assets or services for another form of assets or
services, (2) a promise to pay an obligation between a business and one or more external
parties to a business, (3) an internal event measurable in money such as the use of assets in
operations. Only economic events resulting from past transactions that involve money are
recorded on the books of accounts.
Transactions can either be external (which are usually business transactions or internal
(which are the non-business transactions).
External transactions may include the economic activities by the company with external
parties, like the sale of goods or services, borrowing of cash from banks and financial
institutions, purchase of goods and services, etc.
Internal transactions may include the recording of inventory losses, depreciation of

assets, amortization of prepaid expenses, bank reconciliation and other reconciliation activities
that may result to adjustment and recording of entries in the books.
Business transactions are results of past events. These are evidenced by source
documents, which are financial transactions that come from internal or external sources.
The source document can be an accountable form or an attachment to the accountable

form. The source document and/or accountable form will be the basis of the accountant to
record the transactions in the books of accounts.
Accountable form is pre-numbered and normally a custom-designed form which the

business organization uses internally or externally for its business transactions.
The accountable forms are particular types of forms that require safeguarding due to
their potential value or negotiability. As the name suggests, accountable forms need to be
individually identified and accounted for. Two specific examples of these forms that have value
and can be negotiated are the sales invoices and official receipts.
These are some types of source documents:

As basis for recording of payments:
a. Supplier’s invoice and delivery receipt – these are documents submitted by the supplier
for acknowledgment of the company as proof of delivery of goods or services.
b. Supplier’s debit or credit memo – as basis for adjustment like discounts, additional
charges, change in price, etc.
c. Bank checks and withdrawal slips- the bank checks are either used to pay for purchases
of goods and services or to withdraw funds from the bank. Just like the check, the
withdrawal slip is used in the withdrawal funds from the bank.
d. Payroll summary – this contains salaries, wages and allowances of employees including
deducted contributions for remittance to government agencies.
As basis to record revenues:

a. Sales invoice – this is also an accountable document that serves as proof for the sale of
goods to customers.
b. Delivery receipt- this is also an accountable document that accompanies the sales
invoice in the delivery of goods to customers.
c. Billing invoice- this is also an accountable document that serves as proof for the sale of
services to customers.
As basis to record cash receipts:

a. Official receipt – this is also an accountable document that is issued to customer upon
acceptance of payment for the sale of goods and services, or for the collection of
receivables.
b. Deposit slip – this document serves as proof for the deposit of cash to the bank.
c. Customers’ debit or credit memo- as basis for adjustment of sales like discounts, change
in price, etc.
As basis for adjustment and reconciliation:

a. Bank statement – this is a source for items reflected by the bank and not recorded in the
organization’s books.
b. Statement of Accounts – this document may be coming from a supplier or customer
reflecting its records for reconciliation with the organization’s own records.
Business organizations also design forms for their internal use. The purpose of which is
to strengthen monitoring and control of business transactions within their organization. These
forms are normally pre-numbered to safeguard the forms from potential misuse.
The following are common accountable forms used by business organizations (that
should be pre-numbered for control & monitoring):
a. Purchase Order – this is recorded in the purchase book and triggers the creation of
the accounts payable.
b. Sales Invoice (for merchandising & manufacturing companies) or Billing invoice (for
service companies) which will be recorded in the sales book after consummation of
sales.
c. Delivery Receipt – to support the sale of goods and acknowledge by the customers.
d. Official Receipt – issued as proof of receipt of cash and to be recorded in the receipt
journal.
e. Provisional Receipt- to be issued temporarily for check payments subject to check
clearing.
f. Check or Cash Voucher – document that is prepared to support any form of expenditures
whether through check or cash payment and recorded in disbursement journal.
g. Debit Memo – for anything to be charged by the organization to an employee, supplier or
customer.
h. Credit Memo- this will be issued to customers to reduce the receivable for any discounts
or corrections.
THE DEBIT AND CREDIT OF ACCOUNTING

In recording the business transactions, the double entry accounting method is used
wherein it involves two accounts, one is debited and the other is credited. In this way both sides
of the accounting equation remain equal.
Under the double-entry system, every business transaction is recorded in at least two
accounts. One account will receive a "debit" entry, meaning the amount will be entered on the
left side of that account. Another account will receive a "credit" entry, meaning the amount will
be entered on the right side of that account. The initial challenge with double-entry is to know
which account should be debited and which account should be credited.
This is why we have the Rules of Debit and Credit to guide accountants and
bookkeepers in the double-entry system.
Rules of Debit and Credit

1. Asset accounts:
Normal balance: Debit
Rule: An increase is recorded on the debit side and a decrease is recorded on the credit
side of all asset accounts.
2. Liability accounts:
Normal balance: Credit
Rule: An increase is recorded on the credit side and a decrease is recorded on the debit
side of all liability accounts
3. Capital/Equity accounts:
side of all equity accounts.
4. Drawing account:
Normal Balance: Debit
side of all asset accounts.
5. Revenue/Income accounts:
side of all revenue accounts.
6. Expense accounts:
Normal balance: Debit
side of all expense accounts.
7. Contra accounts:
Normal balance: Opposite to the normal account.
An example: Accounts receivable is an asset account that normally has a debit balance.
The allowance for uncollectible accounts is a contra account to the accounts receivable and
normally has a credit (opposite) balance.
Rule: If the normal balance of the contra account is debit, the increase will be recorded
on the debit side and the decrease will be recorded on the credit side. If the normal balance of
the contra account is credit, the increase is recorded on the credit side and the decrease is
recorded on the debit side.
The Rules of Debit and Credit are shown in a table below:

Account Type Normal In Case of In Case of
Balance Increase Decrease
Asset Debit Debit Credit
Expense Debit Debit Credit
Liability Credit Credit Debit
Revenue/Income Credit Credit Debit
Capital/Equity Credit Credit Debit

Drawings Debit Debit Credit
Opposite Credit, if Debit, if normal
to normal normal balance of
account balance of contra account
contra is credit
account is
Contra Accounts credit
Debit, if Credit, if
normal normal balance
balance of of contra
contra account is debit
account
is debit
The debit and credit can be associated in simple terms as “value received” for the debit
and “value parted with” for the credit.
Let’s do this in a simple business transaction which is an internet business. Consider

yourself as a bookkeeper or accountant of the business.
Illustration 5.
1. The owner invested cash to an internet business.
2. The business purchased internet equipment in cash.
3. The business purchased computer printers on account/credit.
4. The business purchased supplies in cash.
5. The business collected cash from the internet gamers and users.
6. The business paid salaries to employees.
7. The business paid telephone expenses.
8. The business paid electricity bills.
9. The owner withdraws cash.
10. The business paid the payable incurred in the purchase of computer printers.
Solution
Transaction No. Value Received Value Parted With
1 Money Payable to owner
2 Internet equipment Money
3 Computer printers Payable to supplier
4 Supplies Money
5 Money Service fee from gamers
6 Employees services Money
7 Telephone bills Money
8 Electricity bills Money
9 Payment of payable to owner Money
10 Payment of payable to supplier Money
Let’s use the above transactions on debit and credit using the chart of accounts for service
company on Chapter 3:
Transaction No. DEBIT CREDIT
1 Cash Capital
2 Office equipment Cash
3 Office equipment Accounts payable
4 Supplies Cash
5 Cash Service revenue
6 Salaries, wages & benefits Cash
7 Communication expenses Cash
8 Light and water Cash
9 Drawings Cash
10 Accounts payable Cash
THE ACCOUNTING CYLE OR ACCOUNTING PROCESS

The accounting process or the accounting cycle is an entire process or cycle that an
accountant should accomplish to generate useful reports for the internal and external users or
persons who have interests in the business.
The following is the complete process:

Step 1. Analyzing business transactions or source documents
The source documents are documents being created at the beginning of the transaction
that provide evidence or proof of an economic event and may be used to initiate recording into
the journals.
Step 2. Make Journal entries

The accountable forms and source documents will now be recorded in different
accounting journals. These accounting journals are where business transactions make their first
entry in the transaction process.
Step 3. Post to ledger accounts

All transactions being recorded in the journals will now be transferred to the general
ledger to summarize the accounts, per account type. A total for each account will be done on
specific period of report. This is called “FOOTING” or “PENCIL FOOTING”.
Simultaneously, these transactions will also be posted to the subsidiary ledgers per
account details- per customer, per supplier, per payee or depending on how you wanted a
particular account type be monitored.
Step 4. Prepare the trial balance

The trial balance is the list of all accounts with their balances that are lifted from the
general ledger. It is prepared to “prove the equality of debits and credits”.
The trial balance is listed in this order:

1. Assets (arranged according to their liquidity, cash is the most liquid)
2. Liabilities (arranged according to the most current)
3. Capital
4. Drawing
5. Revenue
6. Expenses
Step 5. Make adjusting entries

This is done to correct errors and to record unrecorded transactions.
Step 6. Prepare adjusted trial balance

This report is prepared after the adjusting entries are posted in the worksheet.
Step 7. Prepare financial statements

The following are the financial statements that will be prepared from the adjusted trial
balance:
1. Statement of Financial Position

2. Statement of Income
3. Statement of Cash Flows
4. Statement of Changes in Capital
5. Notes to the Financial Statements
Step 8. Close accounts

The accounts that will be closed and will not be carried over to the next accounting
period are:
- All Revenues
- All Expenses
- Owners drawings
The above are called nominal or temporary accounts which will be closed to the capital
account.
Step 9. Prepare post-closing trial balance
The contents of the post-closing trial balance are the balance sheet accounts or called
real or permanent accounts which will be carried over to the next accounting period.
Step 10. Interpret financial information

This is the last phase of the accounting process. All contents in the financial statements
will now be interpreted using horizontal or vertical analysis, or using the financial ratios. These
interpretations will be very useful in making economic decisions.
The following is The Accounting Cycle:

JOURNALIZING AND POSTING OF BUSINESS TRANSACTIONS
Illustration 6.
The following are business transactions of Visperas Computer Shop for the month of July, 2015.
As bookkeeper of the company, you are to record these transactions in the general journal and
post the entries to the general ledger. Use the chart of accounts for a service company on
Chapter 3.
Date Transactions
July 1 R. Visperas invested to the computer shop in cash for P100,000.
July 2 Purchased computers on credit – P12,000.
July 3 Purchased additional computers for cash – P6,000.
July 6 Purchased airconditioning unit on credit – 10,000.
July 7 R. Visperas invested computer equipment for the computer shop- P50,000.
July 10 Borrowed money from the bank payable in 2 years – P40,000.
July 15 R Visperas made additional investment in cash – P75,000.
July 16 Paid salaries to employees- P15,000.
July 17 Made partial payment to the bank loan – P20,000.
July 20 Purchased new furniture on credit – P10,000.
July 21 Billed customers for services rendered on account -P30,000.
July 25 Collected from customers billed on account – P10,000.
July 27 Rendered services for cash to customers – P45,000.
July 28 Paid telephone bills – P5,000.
July 28 Paid rental of the computer shop – P10,000.
July 29 Received electricity bill – P3,000.
July 30 R. Visperas withdraws cash P5,000.
July 31 Paid water bill – P2,000.
July 31 Paid salaries to employees – P15,000.
Recording of transactions to the general journal:

Company Name: R. VISPERAS COMPUTER SHOP Page No. 0 1
GENERAL JOURNAL
DATE Account Title & Explanation PR DEBIT CREDIT
2016
July 1 Cash 100-01 100 0 00
Visperas Capital 300 1 00 000
To record cash investment of owner
2 Offi ce Equipment 101-01 12 0 00

Accounts Payable 200-01 12 000
To record puchase of computer
equipment on credit

Cash 100-01 6 000
To record puchase of computer
equipment for cash

To record puchase of airconditioning
unit on credit

Visperas Capital 300 50 000
To record investment of owner in
the form of computer equipment
10 Cash 100-01 40 0 00
Loans Payable 200-09 40 000
To record a loan from a bank
payable in 2 years
15 Cash 100-01 7 5 000

Visperas Capital 300 7 5000
To record additional cash investment
of the owner
GENERAL JOURNAL
2016
July 16 Salaries, wages & benefits 500-07 15 0 00
Cash 100-01 15 000
To record payment of salaries to
the employees
17 Loan Payable 200-09 20 0 00

Cash 100-01 20 000
To record partial payment to the
bank loan
20 Furniture and Fixtures 101-04 10 0 00

To record purchase of furnitures
on credit
21 Accounts Receivable 100-03 30 0 00

Service Revenue 400-01 30 000
To record revenue billed on account
25 Cash 100-01 10 0 00
Accounts Receivable 100-03 10 000
To record collection from customer
27 Cash 100-01 45 0 00
Service Revenue 400-01 45 000
To record revenue earned in cash
28 Communication Expenses 500-13 5 0 00

Cash 100-01 5000
To record payment of telephone bills
28 Rent Expense 500-03 1 0 000

Cash 100-01 1 0000
To record payment of rental for
the computer shop
GENERAL JOURNAL
2016
July 29 Light and Water Expense 500-05 3 0 00
Cash 100-01 3 000
To record payment of electricity bill
30 Visperas Drawings 301 5 0 00

Cash 100-01 5 000
To record owner's drawings
31 Light and Water Expense 500-05 2 0 00

Cash 100-01 2 000
To record payment of water bill
31 Salaries, wages & benefits 500-07 15 0 00

Cash 100-01 15 000
To record payment of salaries to
the employees
Posting of journal entries to the general ledger
COMPANY'S NAME: R. VISPERAL COMPUTER SHOP GENERAL LEDGER

Account Title: CASH Account No. 100-01

2016
July 1 Owner investment GJ1 100000
3 Purchase of computer GJ1 6000
10 Bank loan GJ1 40000
15 Owner add'l investment GJ1 75000
16 Salaries of employees GJ2 15000
17 Payment for loan GJ2 20000
25 Collection of receivable GJ2 10000
27 Cash services GJ2 45000
28 Telephone bllls GJ2 5 0 0 0
28 Rental for the month GJ2 10 0 0 0
29 Electricity for the month GJ3 3 0 0 0
30 Owner's drawings GJ3 5 0 0 0
31 Water bill GJ3 2 0 0 0
31 Salaries of employees GJ3 15 0 0 0 189000
Account Title: ACCOUNTS RECEIVABLE Account No. 100-03

2016
July 21 Services on account GJ2 30000
25 Partial collection GJ2 10000 20000
Account Title: OFFICE EQUIPMENT Account No. 101-01

2016
July 2 Purchase on account GJ1 12 0 0 0
3 Purchase in cash GJ1 6 0 0 0
6 Purchase on account GJ1 10 0 0 0
7 Owner's investment GJ1 50 0 0 0 78000
Account Title: FURNITURE & FIXTURES Account No. 101-04

2016
July 20 Purchase on account GJ2 10000 10000
Account Title: ACCOUNTS PAYABLE Account No. 200-01

2016
July 2 Purchase of computer GJ1 12000
6 Purchase of aircon GJ1 10000
20 Purchase of furnitures GJ2 10000 ( 32000)
Account Title: LOANS PAYABLE Account No. 200-09

2016
July 10 2-year loan GJ1 40000
17 Partial payment GJ2 20000 ( 20000)
Account Title: VISPERAS CAPITAL Account No. 300

2016
July 1 Owner's investment GJ1 100000
7 Computers investment GJ1 50000
15 Additional investment GJ1 75000 ( 225000)
Account Title: VISPERAS DRAWINGS Account No. 301

2016
July 30 Owner's cash drawings GJ3 5000 5000
Account Title: SERVICE REVENUE Account No. 400-01

2016
July 21 Services on account GJ2 30000
27 Cash services GJ2 45000 ( 75000)
Account Title: RENT EXPENSE Account No. 500-03

2016
July 28 Rental for the month GJ2 10000 10000
Account Title: LIGHT & WATER EXPENSE Account No. 500-05

2016
July 29 Electricity for the month GJ3 3000
31 Water bill for the month GJ3 2000 5000
Account Title: SALARIES, WAGES & BENEFITS Account No. 500-07

2016
July 16 Salaries of employees GJ2 15000
31 Salaries of employees GJ3 15000 30000
Account Title: COMMUNICATION EXPENSES Account No. 500-13

2016
July 28 Telephone bills GJ2 5000 5000
PREPARATION OF THE TRIAL BALANCE
The trial balance is prepared after posting all the journal entries to general ledger. This is
prepared to prove the equality of the debits and the credits.
The trial balance is the list of all accounts with their balances that are lifted from the general
ledger. It is listed in the following order:
1. Assets (arranged according to their liquidity, cash being the most liquid)
2. Liabilities (arranged from most current to long-term)
3. Capital
4. Drawing
5. Revenue
6. Expenses
Using the problem on Illustration 6, below is the trial balance:

R. VISPERAS COMPUTER SHOP
Trial Balance
July 31, 2016
DEBIT CREDIT
Cash 189,000
Offi ce Equipment 78,000
Furniture and Fixtures 10,000
Accounts Payable 32,000
Loans Payable 20,000
R. Visperas Capital 225,000
R. Visperas Drawings 5,000
Service Revenue 75,000
Salaries, wages & benefits 30,000
Communication Expense 5,000
Rent Expense 10,000
Light and Water Expense 5,000
Total 352,000 352,000
At the end of each entry, like totals, where no additional entries will be made, a
double rule is indicated.
DOUBLE RULE is a double line drawn under an amount when the amounts
above are totals and no other entries will be made.
THE ACCOUNTING PERIOD
The accounting period is the period in which accounting books of any entity are
prepared. It is the period for which books are balanced and the financial statements are
prepared.
Generally, the accounting period consists of 12 months. However the beginning of the
accounting period differs according to the organization’s adaption or practice. It may be a
calendar period or a fiscal period.
A calendar period indicates that a business organization begins accumulating accounting

records at the beginning of January 1 and subsequently stops at the end of December 31. This
annual accounting period imitates a basic twelve-month calendar.
A fiscal period arbitrarily sets the beginning of the accounting period to any date of the
year and financial data is accumulated for one year from this date. For example, a fiscal year
starting April 1 would end March 31 of the following year.
ADJUSTING ENTRIES
Adjusting entries are made in the accounting books at the end of an accounting period.
These are made after a trial balance is prepared. The purpose of adjusting entries is to adjust
revenues and expenses to the accounting period in which they actually occurred. After adjusting
entries are recorded in the accounting journals, they are posted to the general ledger in the
same way as any other accounting journal entries.
There are five types of adjusting entries:

1. Accrued revenues
2. Unearned revenues
3. Accrued expenses
4. Prepaid expenses
5. Depreciation
6. Allowance for uncollectible accounts
Accrued Revenues
If you perform a service for a customer in one month, but don't bill the customer until the
next month, you would make an adjusting entry showing the revenue in the month you
performed the service.
The entry is:

Debit Credit
Accounts Receivable 000
Service Revenue 000
For merchandising business, these are goods delivered during the month but bill the
customer on the next month.
The entry is:
Debit Credit
Accounts Receivable 000
Sales 000
Unearned Revenues
Unearned revenues refer to payments for goods to be delivered in the future or services
to be performed.
The adjusting entry will depend on the method adapted by the organization in recording
the advanced payment:
a. Revenue Method
For example, a tenant paid in advance in September 1, 2016 a rental fee good for one
year amounting to P12,000. The entry in September 1, 2016 will be:
Debit Credit
Cash 12,000
Revenue 12,000
At December 31, 2016, an adjusting entry will be set-up for the actual revenue earned
(Sept to Dec = 4mos or P4,000) and the remaining unused portion as liability (Jan to Aug =
8mos or P8,000).
The adjusting entry at the end of the year will be:

Revenue 8,000
Unearned revenue 8,000
Computation: P12,000/12mos x 8mos( Jan to Aug)
What is left as the revenue amount after the adjusting entry will be P4,000.
b. Liability Method
Referring to the above example, the initial entry will be:
Debit Credit
Cash 12,000
The adjusting entry at the end of the year will be:

Revenue 4,000
What is left as the unearned revenue amount after the adjusting entry will be P8,000.
Accrued Expenses
These are expenses that are already incurred by the business organization but not yet
paid as of the reporting date. A good example of accrued expenses is wages paid to employees.
When a business firm owes wages to employees at the end of an accounting period, they
make an adjusting journal entry by debiting Salaries and wages expense and crediting wages
payable or accrued expense payable.
Example: Weekly wages (Monday to Saturday) are paid every Saturday amounting to
P12,000. If the Saturday is December 28, the 2 days which is December 30 and 31 remain
unpaid at the end of the accounting period. (Dec 29 is a Sunday)
Therefore, the adjusting entry will be:
Debit Credit
Salaries and Wages 4,000
Accrued Expense Payable 4,000
(Computation: P12,000/6days x 2 days)
.
Prepaid Expenses
Prepaid expense is a very descriptive title. Prepaid expenses are assets that are paid for
in advance and gradually get used up during the accounting period.
A common example of prepaid expenses is office supplies. A company buys and pays for
office supplies. Gradually, during the accounting period, the office supplies are used up. As they
are used up, they become an expense. During the month when the office supplies are used, an
adjusting entry is made to debit office supply expense and credit prepaid office supplies.
The adjusting entry will depend on what method the business organization adapts while
recording the initial transaction.
a. Asset method
For example, the business organization purchased supplies in March 1, 2016 for P24,000.
At the end of December 31, 2016, the used up portion which will be charged to expense will be
equivalent to 10 months (March 1 to Dec 31, 2016) and the unused portion which will be an
asset is 2 months (Jan & Feb, 2017).
The entry when the supplies are purchased will be:

Debit Credit
Supplies 24,000
Cash or Accts Payable 24,000
The adjusting entry to charge the used up portion to expenses will be:
Supplies expenses 20,000

Supplies 20,000
(Computation: P24,000/12mos x 10mos March 1 to Dec 31, 2016 = 20,000)
b. Expense method
The entry when the supplies are purchased will be:
Debit Credit
Supplies expense 24,000
Cash or Accts Payable 24,000
The adjusting entry at Dec 31, 2016 to set up the asset portion will be:
Supplies 4,000
Supplies expense 4,000
Depreciation
Depreciation is the process of allocating the cost of an asset, such as machinery or a
piece of equipment, over the serviceable or economic life of the asset. Adjusting entries are a
little different for depreciation. Business owners have to take accumulated depreciation into
account. Accumulated depreciation is just what it says - the accumulated depreciation expense
of a company's assets over the life of the company.
The accumulated depreciation account on the balance sheet is called a contra-asset

account as it is shown as a deduction to the cost of the asset being depreciated. Increases are
recorded as credits in contra-asset accounts.
When an asset is purchased, it depreciates by some amount every month which is

charged to expense while the credit is regarded as contra-asset account that is accumulated
over the estimated life of the asset.
This type of adjusting entry has the following terminologies:

a. Cost of the Asset – this is the amount recorded when the asset is purchased.
b. Salvaged value – also called as scrap value or residual value, this is the estimated
amount of recovery at the end of the asset’s useful life.
c. Estimated useful life – this is an accountant’s fair estimate of the economic life of the
asset.
d. Carrying amount or net book value – this is the difference between the cost of the asset
and the accumulated depreciation.
The formula in the computation of depreciation expense is:
Cost of the asset – Salvaged value

Depreciation expense = Estimated Useful Life
The most common method used in computing depreciation of an asset is the straight line
method.
Straight line depreciation method charges cost evenly throughout the useful life of a fixed
asset. This depreciation method is appropriate where economic benefits from an asset are
expected to be realized evenly over its useful life.
Example: A machinery having a useful life of 5 years is purchased on June 1, 2016. Cost
of the asset is P25,000 whereas its residual value is expected to be P1,000. Calculate
depreciation expense for the year ending December 31, 2016.
Computation:
P25,000 – P1,000
Depreciation expense = 5 years
= P4,800 per year/12 months
= P400 per month x 7 months
= P2,800
Adjusting entry at December 31, 2016:
Debit Credit
Depreciation expense 2,800
Accumulated depreciation 2,800
Allowance for Uncollectible Account

The allowance for doubtful accounts is a reduction of the total amount of accounts
receivable appearing on a company’s balance sheet, and is listed as a deduction immediately
below the accounts receivable line item. This deduction is classified as a contra asset account.
The allowance for doubtful accounts, which is a credit entry, represents management’s
best estimate of the amount of accounts receivable that will not be paid by customers. The debit
entry is charged to expense – Uncollectible account expense.
The adjusting entry is:

Debit Credit
Uncollectible account expense 000
Allowance for uncollectible account 000
There are two methods of computing this adjusting entry:

(a) Based on percentage of account sales for goods sold or services
rendered
Example: The total sales is P100,000 and P25,000 represents cash sales. The balance of
accounts receivable is P30,000. About 5% is proven uncollectible.
Adjusting entry will be:

Debit Credit
Uncollectible account expense 3,750
Allowance for uncollectible account 3,750
(Computation: P100,000-25,000=P75,000 x 5%)
(b) Based on accounts receivable balance

(Computation: P30,000 x 5%)
Take the following cases in providing adjusting entries for allowance for uncollectible
accounts:
Case 1. The balance of allowance for uncollectible account in the books is more than the
required allowance
Sales on account P500,000
Allowance for uncollectible accounts 7,000
About 5% is assumed to be uncollectible. The adjusting entry will be based on the

accounts receivable balance.
Computation:
Accounts receivable P100,000
Uncollectible rate x 5%
Required allowance P 5,000
Allowance balance P 7,000
Difference P 2,000

Debit Credit
Note: The allowance for uncollectible account balance in the books should be reduced
by P2,000 as the required is only P5,000 and not the P7,000.
Case 2. The balance of allowance for uncollectible account in the books is less than the required
allowance.
Cash sales P600,000

Sales on account 400,000
Accounts receivable 50,000
About 2% is assumed to be uncollectible based on sales on account.
Computation:
Sales on account P400,000
Uncollectible rate 2%
Required allowance P8,000
Allowance balance 4,000
Difference P 4,000
Debit Credit
Note: The allowance for uncollectible account balance in the books will be increased by
P4,000 as the required allowance should be P8,000.
THE FINANCIAL STATEMENTS

Financial Statements represent a formal summary of the financial activities of business
organization. These are written reports that quantify the financial strength, financial performance
and liquidity of a company. Financial Statements reflect the financial effects of business
transactions and events on the business.
.
The four main types of financial statements are:
Statement of Financial Position

The Statement of Financial Position, also known as the Balance Sheet, presents the
financial position of an entity as of a given date. It has two forms: (a) account form, (b) report
form. It is comprised of the following three elements:
1. Assets- something a business owns or controls (e.g. cash, inventory, plant and
machinery, etc)
2. Liabilities- something a business owes to someone (e.g. creditors, bank loans, etc)
3. Equity or Capital- what the business owes to its owners. This represents the amount of
capital that remains in the business after its assets are used to pay off its outstanding
liabilities. Equity or capital therefore represents the difference between the assets and
liabilities.
Statement of Income
Statement of Income or Income Statement, also known as the Profit and Loss Statement,
reports the company's financial performance in terms of net profit or loss over a specified period.
Income Statement is composed of the following two elements:
1. Income- what the business has earned over a period (e.g. sales or service revenue,
dividend income, interest income, etc)
2. Expense- the cost incurred by the business over a period (e.g. salaries and wages,
depreciation, rental charges, etc)
Net profit or loss is arrived at by deducting expenses from income. A net profit results when
income exceeds over the expenses and a net loss results when income is less than the
expenses.
Statement of Cash Flow
Statement of Cash Flow or Cash Flow Statement presents the movement in cash and bank
balances over a period. The movement in cash flows is classified into the following segments:
1. Operating Activities-represents the cash flow from primary activities of a business

.
2. Investing Activities- represents cash flow from the purchase and sale of assets other than
inventories (e.g. purchase of a machinery, etc)
3. Financing Activities- represents cash flow generated or spent on raising and repaying
share capital and debt together with the payments of interest and dividends.
There are two methods in preparing the cash flow statement:

a. Direct method- The direct method of presenting the statement of cash flows presents the
specific cash flows associated with items that affect cash flow.
Items that typically include:
- Cash collected from customers
- Interest and dividends received
- Cash paid to employees
- Cash paid to suppliers
- Interest paid
- Income taxes paid
b. Indirect method- Under the indirect method of presenting the statement of cash flows, the
presentation of this statement begins with net income or loss, with subsequent additions
to or deductions from that amount for non-cash revenue and expense items, resulting in
net income provided by operating activities.
The indirect method of presentation is very popular because the information

required for it is relatively easily assembled from the accounts that a business normally
maintains in its chart of accounts.
Statement of Changes in Equity or Capital

Statement of Changes in Equity or Capital details the movement in owner’s equity over a
period. The movement in owner’s equity or capital is derived from the following components:
1. Net Profit or loss during the period as reported in the income statement
2. Owner’s capital initial investment or additional investment
3. Owner’s drawings
4. Gains or losses recognized directly in equity (e.g. revaluation surpluses)
5. Effects of a change in accounting policy or correction of accounting error
FORMATS OF THE BASIC FINANCIAL STATEMENTS
A. Statement of Income
For a merchandising business
(NAME OF COMPANY)
Statement of Income
For the Month Ended July 31_______
Gross Sales 0.00

Less: Sales Returns & Allowances 0.00
Sales Discounts 0.00 0.00
Net Sales 0.00
Deduct: Cost of Sales 0.00
Gross Income 0.00
Less: Expenses
Light and water 0.00
Rent expense 0.00
Advertising expense 0.00
Freight out 0.00
Salaries expenses 0.00
Telephone expense 0.00 0.00
Net Income (loss) 0.00
(NAME OF COMPANY)
Statement of Cost of Sales
Merchandise Inventory, beg 0.00

Add: Purchases 0.00
Freight In 0.00
Total Purchases 0.00
Less: Purchase Returns 0.00
Purchase Discounts 0.00 0.00
Net Purchases 0.00
Total Goods Available for Sale 0.00
Less: Merchandise Inventory, end 0.00
Cost of Sales 0.00
For a service business
(NAME OF COMPANY)
Statement of Income
Service Income 0.00

Less: Expenses
Light and water 0.00
Rent expense 0.00
Advertising expense 0.00
Salaries expenses 0.00
Telephone expense 0.00 0.00
Net Income (loss) 0.00
B. Statement of Changes in Capital
(NAME OF COMPANY)
Statement of Changes in Capital
For the Month Ended July 31_____
Original capital 0.00

Add (Deduct):
Additional investment 0.00
Net income (loss) 0.00
Drawings (0.00)
Net Increase (Decrease) in Capital 0.00
Total Capital, July 31 0.00
C. Statement of financial Position
Account Form:
(NAME OF COMPANY)
As of July 31_____
ASSETS LIABILITIES
Current Assets: Current Liabilities:
Cash 0.00 Accounts Payable 0.00
Accounts Receivable 0.00 Vat Payable 0.00
Supplies 0.00 Total Current Liabilities 0.00
Total Current Assets 0.00
Non-current Liabilities:
Non-current Assets: Loans Payable 0.00
Building 0.00 Notes Payable 0.00
Service Equipment 0.00 Total Non-Current Liabilities0.00
Offi ce Equipment 0.00 TOTAL LIABILITIES 0.00
Furnitures 0.00 CAPITAL
Total Non-Current Assets 0.00 Mr. XXX Capital 0.00
Total Assets 0.00 Total Liabilities & Capital 0.00

Report Form:
(NAME OF COMPANY)
As of July 31_____
ASSETS
Current Assets:
Cash 0.00
Accounts Receivable 0.00
Supplies 0.00
Total Current Assets 0.00
Non-current Assets:
Service Equipment 0.00
Offi ce Equipment 0.00
Furnitures 0.00
Total Non-Current Assets 0.00
Total Assets 0.00
LIABILITIES
Current Liabilities:
Accounts Payable 0.00
Vat Payable 0.00
Total Current Liabilities 0.00
Non-current Liabilities:
Loans Payable 0.00
Notes Payable 0.00
Total Non-Current Liabilities 0.00
Total Liabilities 0.00
CAPITAL
Mr. XXX Capital 0.00
Total Liabilities & Capital 0.00
The report form format of statement of financial position is commonly used by business
organizations.
D. Statement of Cash Flow
Direct Method:
(NAME OF COMPANY)
Statement of Cash Flow
For the Month Ended July 31_____
Cash Flow from Operating Activities:

Cash received from customers 0.00
Cash paid to advertisement (0.00)
Cash paid to telephone (0.00)
Cash paid to salaries (0.00)
Cash paid to light and water (0.00)
Net cash flow from operating activities 0.00
Cash Flow from Investing Activities:

Cash paid for purchase of offi ce equipment (0.00)
Cash received from sale of vehicle 0.00
Net cash flow from investing activities 0.00
Cash Flow from Financing Activities:

Cash investment of owner 0.00
Additional cash investment from owner 0.00
Cash borrowed from the bank 0.00
Cash payment to the bank (0.00)
Cash withdrawal by owner (0.00)
Net cash flow from financing activities 0.00
Net Increase (Decrease) in Cash 0.00

Cash balance, beginning 0.00
Cash Balance, end 0.00
Indirect Method:
(NAME OF COMPANY)
STATEMENTS OF CASH FLOWS
For the Month Ended_______
CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss) 0.00
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation expense 0.00
Changes in assets and liabilities:
Accounts receivables 0.00
Supplies (0.00)
Other current assets 0.00
Accounts payables 0.00
Net cash provided by (used for) operating activities 0.00
CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of office equipment (0.00)
Proceeds from sale of vehicle 0.00
Net cash used for investing activity 0.00
CASH FLOWS FROM FINANCING ACTIVITIES

Cash investment from owner 0.00
Additional cash investment from owner 0.00
Cash withdrawal by owner (0.00)
Cash received from bank loan 0.00
Cash payment of loan (0.00)
Net cash provided by (used for) financing activities 0.00
NET INCREASE (DECREASE) IN CASH 0.00

CASH, beginning 0.00
CASH, end 0.00
The indirect method of cash flow statement preparation is commonly used by business
organizations registered with the Securities and Commission (SEC).
Exercise Mod 10-1

Instruction: Using the answer sheet below, write the accounts and amounts to be debited and
credited. (Refer to the Chart of Accounts for Service Business for the appropriate accounts to be
used).
1. BAA opened a computer repair ship by investing P200,000 to the business.
2. Paid rent for the month on the shop space for P15,000.
3. Purchased shop supplies in cash for P10,000.
4. Purchased additional supplies on credit from Grace’s Trading for P16,500.
5. Rendered computer repairs and collected cash for P55,000.
6. Paid Grace’s Trading for the amount owed from the store.
7. Rendered computer repairs to J. Lumaban on credit for P40,000.
8. Paid salaries to the shop staffs for P20,000.
9. Paid electricity bills for P5,600.
10. Collected from J. Lumaban for repairs extended on credit.
Exercise Mod 10-2

Instruction: Using the answer sheet below, write the accounts and amounts to be debited and
credited. (Refer to the Chart of Accounts for Service Business for the appropriate accounts to be
used).
1. Grace Garcia opened a flower shop by investing P200,000. cash, office equipment
for P10,000 and furniture for P15,000.
2. Paid the rental of the flower shop for P5,000.
3. Purchased flowers as merchandise inventory for sale for P75,000.
4. Purchased supplies on credit for P4,000.
5. Sold merchandise to customers for cash in the amount of P15,000.
6. Sold merchandise to customers on credit for P25,000.
7. Paid salaries to assistant for P12,000.
8. Paid electricity bills for P3,000.
9. Withdraws cash from the business for P3,000.
10. Collected from customer for 20,000.
DEBIT CREDIT
1 Account Amount Account Amount
2
3
4
5
6
7
8
9
10
Exercise Mod 10-3

Instruction: Indicate the normal balance of the following accounts in the adjusted trial balance.
Put X on the space provided.
Debit Credit
1. Accounts receivable ______ ______
2. Supplies ______ ______
3. Accounts payable ______ ______
4. Insurance expense ______ ______
5. Mr. Y Capital ______ ______
6. Telephone expenses ______ ______
7. Cash ______ ______
8. Unearned income ______ ______
9. Mr. Y Drawings ______ ______
10. Accumulated depreciation ______ ______
11. Prepaid insurance ______ ______
12. Rent expense ______ ______
13. Service revenue ______ ______
14. Accrued expense payable ______ ______
15. Allowance for uncollectible accounts ______ ______
16. Used Supplies ______ ______
17. Notes receivable ______ ______
18. Office equipment ______ ______
19. Depreciation expense ______ ______
20. Uncollectible account expense ______ ______
Exercise Mod 10-4

Instruction: Indicate the accounts to be credited on the following accounts that are usually used
in the adjusting entries.
Account to be Credited
1. Allowance for uncollectible expense __________________
2. Unearned revenue __________________
3. Prepaid rent __________________
4. Supplies expense __________________
5. Depreciation expense __________________
6. Salary expense __________________
7. Supplies on hand __________________
8. Revenue __________________
9. Accounts receivable __________________
10. Interest expense __________________
Exercise Mod 10-5

Instruction: Give the adjusting entry of the following.
1. The business has an account receivable balance of P100,000 of which, 10% is

uncollectible.
Debit______________________P
Credit__________________________P
2. Accrued salaries at the end of the year is P25,500.

Debit______________________P
Credit__________________________P
3. One month’s interest on loan has accrued for 7,800.

Debit______________________P
Credit__________________________P
4. The balance of unused supplies in Jan 1 is P12,000. At Dec 31, the balance is now
P10,000.
Debit______________________P
Credit__________________________P
5. Depreciation of furniture is estimated at P13,600.

Debit______________________P
Credit__________________________P
6. Three months of rent has accrued and remained unrecorded for P30,000.
Debit______________________P
Credit__________________________P
7. A service was conducted to a customer for P35,500 in December 31 and was only billed
the following year.
Debit______________________P
Credit__________________________P
8. The company purchased on June 1 a delivery vehicle for P480,000 with an estimated
useful life of 5 years and no salvaged value.
Debit______________________P
Credit__________________________P
9. The company has unearned income balance at Jan 1 for P48,000 which is an advance
payment of a customer for a 3-year service. The earned income of one year is not yet
recorded as of Dec 31.
Debit______________________P
Credit__________________________P
10. The company’s insurance expense of P24,000 has an unexpired portion of P6,000.
Debit______________________P
Credit__________________________P

IM For Principles of Acctg 1st Sem SY 2021 22 SPCPC 1

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IM For Principles of Acctg 1st Sem SY 2021 22 SPCPC 1

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INSTRUCTIONAL MATERIAL

Benjamin A. Abarquez Jr., CPA

This Instructional Material illustrates that accounting serves as an aid in understanding

MODULE 1 INTRODUCTION TO ACCOUNTING

The Practice of Accounting in the Early Civilization

The Beginning of Modern Accounting

The Present Times

b. “Recording” of transactions in various ways, according to the accounting standards

d. “The art of summarizing” business transactions, because an organization has to

e. “Summarizing in a significant manner” means that summarizing must be done a way

g. “Transactions and events which are, in part at least, of financial character”.

h. “Interpreting the results”. Accounting is not only on the aspect of recording,

At present, accounting has become a discipline, no longer regarded as an art. If we say

 It became a discipline. This is because accountancy became a profession and the

 In this era of millennium, accounting has become an information system. Whether it is

The functions of accounting include:

In an organization, rendering a timely and correct decision is very important to correct

2. It is the language of the business.

3. The double entry system of accounting was first established by:

4. The book of Luca de Pacioli was published in:

5. Accounting is defined as:

7. An information system may mean as:

8. Analyzing and interpreting means:

9. The management reports that are generated by an organization is solely for:

10. Accounting information is helpful to:

The following are the Branches of Accounting:

This particular area of accounting is mostly practiced by a Certified Public Accountant

2. Management Accounting - in a business organization, management is very much

3. Government Accounting - this branch of accounting is practiced by all government

4. Auditing - auditing is defined as a “systematic, independent and documented process for

The accountant practicing this area of accounting is employed in a manufacturing set-up.

8. Accounting Research - is research on the effects of economic events on the process of

 A Drug Store Financial Accounting

 Schools & Universities Financial Accounting

 Paper Manufacturer Financial Accounting

 Grocery Store Financial Accounting

 Hardware Store Financial Accounting

 Bakery/Bake Shop Financial Accounting

 Vulcanizing Shop Financial Accounting

 Restaurants/Carenderias Financial Accounting

 Gasoline Station Financial Accounting

 Convenient Store Financial Accounting

MODULE 3. THE USERS OF ACCOUNTING INFORMATION

The management report which is in the field of management accounting is prepared by

d. Ageing of Accounts Payable Reports which are used by the Purchasing/Payables

The internal users of the financial information are:

Employees: for assessing business organization's profitability and its consequence on

One of the employees’ goals in the organization is to contribute profitability by generating

The external users are:

Business organizations, which are lacking of funds and need expansions or

Regulatory Authorities: for ensuring that the business organization's disclosure of

4. He is the user of accounting information that uses it for decision making.

5. He is the user of accounting information that uses it for assessing business

6. He is the user of accounting information that assesses whether business organization

8. This is an example of an internal user.

9. This is an example of an external user.

This form of business organization has the following advantages:

The major advantage of setting up a sole-proprietorship business is that it requires very

Some examples of sole proprietorship business are as follows:

This form of business has the following advantages:

The partnership has also the following disadvantages:

Some examples of partnership business are as follows:

It is considered by law to be a unique entity as it can represent itself to other

1. Accrued expense payable