Accounting Concepts and Principles

1. Business Entity Concept

2. Historical Cost Concept
3. Going Concern Assumption
4. Matching
5. Accrual Basis of Accounting
6. Prudence
7. Time Period
8. Stable Monetary Unit
9. Materiality
10. Cost Benefit
11. Full Disclosure
12. Consistency

Standards
International Financial Reporting Standards US GAAP
International Accounting Standards
Philippine Financial Reporting Standards
Philippine Accounting Standards
Interpretations

Regulatory Bodies
a. SEC
b. BIR
c. BSP
d. CDA

Conceptual Framework
Qualitative Characteristics
1.1 Fundamental Qualitative Characteristics
-Relevance- Predictive Value, Confirmative Value, Materiality
-Faithful Representation- Complete, Neutral, Free from error
1.2 Enhancing Qualitative Characteristics
-Comparability
-Verifiability
-Timeliness
-Understandability
Accounting Equation
Assets= Liabilities+Equity
Assets= Liabilities+Equity+Income-Expenses

Problem 1
Assets Liabilities Equity
1 780,000.00 290,000.00 490,000.00
2 990,000.00 720,000.00 270,000.00
3 1,060,000.00 890,000.00 170,000.00
4 1,420,000.00 1,060,000.00 360,000.00
5 2,950,000.00 1,920,000.00 1,030,000.00

Problem 2
Assets Liabilities Equity Income Expense
1 590,000.00 380,000.00 130,000.00 210,000.00 (130,000.00)
2 490,000.00 280,000.00 40,000.00 350,000.00 (180,000.00)
3 860,000.00 220,000.00 360,000.00 360,000.00 (80,000.00)
4 360,000.00 160,000.00 90,000.00 180,000.00 (70,000.00)
5 870,000.00 410,000.00 170,000.00 480,000.00 (190,000.00)
Account is the basic storage of information in accounting. It is a record of the increases and
decreases in a specific item of asset, liability, equity, income or expense.

Parts of Account
1. Account Title- Item Description
2. Debit Side- the left side of the account
3. Credit Side- the right side of the account

5 Major Accounts
1. Assets Balance Sheet
2. Liabilities Balance Sheet
3. Equity Balance Sheet
4. Income- Revenue/Gain Income Statement
5. Expenses- Expenses/Losses Income Statement

Chart of Accounts
List of all the accounts used by a business.

Common Account Titles

Assets
Cash
Accounts Receivable
Allowance for bad debts
Notes Receivable
Inventory
Prepaid Expense

Liabilities
Accounts Payable
Interest Payable
Salaries Payable
Utilities Payable
Unearned Income

Equity
Owner's Equity
Drawings

Income
Service Fees
Sales
Interest Income
Gains

Expenses
Cost of Sales
Freight-out
Salaries Expense
Rent Expense
Bad debts Expense
Depreciation Expense
Losses

Problem 4: Normal Balance

Account Titles Normal Balance

1. Accounts Receivable DR
2. Bad debts expense DR
3. Building DR
4. Notes Payable CR
5. Rent Expense DR
6. Owner's Equity CR
7. Interest Income CR
8. Cash DR
9. Gain CR
10. Computer Equipment DR
11. Depreciation DR
12. Utilities Payable CR
13. Freight-out DR
14. Rent Income CR
15. Unearned Income CR
 Cash
DR CR
Books of Accounts
1. Journal
2. Ledger

Types of Journals
1.1 Special Journal
1.1.1 Sales Journal
1.1.2 Purchase Journal
1.1.3 Cash Receipts Journal
1.1.4 Cash Disbursement Journal
1.2 General Journal

Kinds of Ledgers 40,000

2.1 General Ledger
2.2 Subsidiary Ledger 5,000
Accounts Payable- Client B 10,000
Accounts Payable- Client C 25,000
Accounting Cycle for Service Business
1. Identifying and analyzing
2. Journalizing
3. Posting
4. Unadjusted Trial Balance
5. Adjusting Entries
6. Adjusted Trial Balance
7. Financial Statements
8. Closing Entries
9. Post-closing Trial Balance
10. Reversing Entries

Adjusting Entries- recorded at the end of an accounting period to alter the ending balances in ledger.

Types of Adjusting Entries

Accruals- To record a revenue or expense that has not yet been recorded through a standard accounting transaction.

Accrued Expense- refers to an expense that is recognized on the books before it has been paid; the expense is recorded
in the accounting period in which it is incurred.

Example: B Company paid its employees every 1st week of the next month for the work rendered for the last month.
For December, the computed amount of salary is 25,000. What is the adjusting entry considering the company uses
the calendar period of accounting?

Dec-21 Jan-22
Salaries Expense 25,000.00 Salaries Payable 25,000.00
Salaries Payable 25,000.00 Cash

Accrued Income- refers to revenue that's been earned, but has yet to be received.

Example: B Company received a 60, 30% 500,000 promissory note from a client. The interest is normally paid the
following month. How much is interest income for this month?
Interest= Principal x Rate x Time
25,000.00
Dec Jan
Interest Receivable 12,500.00 Cash 12,500.00
Interest Income 12,500.00 Interest Receivable 12,500.00

Deferrals- To defer a revenue or expense that has been recorded, but which has not yet been earned or used.

Unearned revenue- is money received by an individual or company for a service or product that has yet to be provided
or delivered.

Example: In December 1, B Company received 500,000 as an advance for a service to be rendered on December and
January, next year. What is the adjusting entry considering the company uses the calendar period of accounting?
12/1/2021
Liability Method Income Method
Cash 500,000.00 Cash 500,000.00
Unearned Revenue 500,000.00 Revenue 500,000.00

12/31/2021 12/31/2021
Unearned Revenue 250,000.00 Revenue 250,000.00
Revenue 250,000.00 Unearned Revenue 250,000.00

Estimates- To estimate the amount of a reserve, such as the allowance for doubtful accounts or the inventory
obsolescence reserve.

Depreciation Expense- Depreciation is an accounting method of allocating the cost of a tangible or physical asset over
its useful life or life expectancy.

Example: B Entity bought an equipment for 500,000 with an expected useful life of 5 years on Jan.1 2019
1-Jan-19
Equipment 500,000.00
Cash 500,000.00

Depreciation Expense 100,000.00

Accumulated Depreciation 100,000.00

Bad debts expense- Bad debts expense is also referred to as uncollectible accounts expense or doubtful accounts
expense. Bad debts expense results because a company delivered goods or services on credit and the customer did not
pay the amount owed.

Example: B company estimates that 45,000 of its receivables will not be received.

Bad Debts Expense 45,000.00

Allowance for Bad Debts 45,000.00

Prepaid Expenses- Future expenses paid in advance.

Example: B Company paid its rent for 2 years for 240,000 on January 1, 2020.

Asset Method Expense Method

1-Jan
Prepaid Rent 240,000.00 Rent Expense 240,000.00
 Cash 240,000.00 Cash 240,000.00

31-Dec
Rent Expense 120,000.00 Prepaid Rent 120,000.00
Prepaid Rent 120,000.00 Rent Expense 120,000.00
 1

6
nces in ledger.
7

accounting transaction.

d; the expense is recorded

dered for the last month.

ring the company uses

25,000.00

st is normally paid the

earned or used.

hat has yet to be provided

dered on December and

riod of accounting?
 or the inventory 2021 2022 2023
100,000.00 20,000.00 100,000.00 84,000.00 68,000.00
5 16,000.00 16,000.00 16,000.00
ble or physical asset over 84,000.00 68,000.00 52,000.00

on Jan.1 2019

r doubtful accounts
and the customer did not
 DR CR Cash OE
Cash 320,000.00 DR CR DR CR
OE 320,000.00 320,000.00 240,000.00 320,000.00
Cash 200,000.00 200,000.00 108,000.00
Loans Payable 200,000.00 260,000.00 15,000.00
Equipment 240,000.00 50,000.00
Cash 240,000.00 780,000.00 413,000.00 - 320,000.00
Prepaid Rent 108,000.00 367,000.00 320,000.00
Cash 108,000.00
Cash 260,000.00
Revenue 260,000.00 Prepaid Rent Revenue
Utilities Expense 15,000.00 DR CR DR CR
Cash 15,000.00 108,000.00 260,000.00
Drawings 50,000.00
Cash 50,000.00

108,000.00 - 260,000.00
108,000.00 260,000.00
2024 2025
52,000.00 36,000.00
16,000.00 16,000.00
36,000.00 20,000.00
 Loans Payable Equipment Unadjusted Trial Balance
DR CR DR CR Account DR
200,000.00 240,000.00 Cash 367,000.00
OE
Loans Payable
Equipment 240,000.00
- 200,000.00 240,000.00 - Prepaid Rent 108,000.00
200,000.00 240,000.00 Revenue
Ulitities Exp 15,000.00
Drawings 50,000.00
Ulitities Exp Drawings Interest Expense
DR CR DR CR Interest Payable
15,000.00 50,000.00 Depreciation Expense
Accumulated Depreciation
Rent Expense
Salaries Expense
Salaries Payable
15,000.00 - 50,000.00 - Balance 780,000.00
15,000.00 50,000.00

Adjustments:
Interest 2,000.00

1 Interest Expense 2,000.00

Interest Payable

Annual Depreciation 60,000.00

Monthly Depreciation 5,000.00

2 Depreciation Expense 5,000.00

Accumulated Depreciation

3 Rent Expense 18,000.00

Prepaid Rent

4 Salaries Expense 8,000.00

Salaries Payable
al Balance Adjustments Adjusted Trial Balance Income Statement
CR DR CR DR CR Revenue
367,000.00 Utilities Expense
320,000.00 320,000.00 Interest Expense
200,000.00 200,000.00 Depreciation Expense
240,000.00 Rent Expense
18,000.00 90,000.00 Salaries Expense
260,000.00 260,000.00 Net Income
15,000.00
50,000.00 Statement of Financial Position
2,000.00 2,000.00 Cash
2,000.00 2,000.00 Prepaid Rent
5,000.00 5,000.00 Equipment
5,000.00 5,000.00 Accumulated Dep.
18,000.00 18,000.00 Total Assets
8,000.00 8,000.00
8,000.00 8,000.00
780,000.00 33,000.00 33,000.00 795,000.00 795,000.00

2,000.00

5,000.00

18,000.00

8,000.00
 260,000.00
15,000.00
2,000.00
5,000.00
18,000.00
8,000.00 (48,000.00)
212,000.00

of Financial Position
367,000.00 Loans Payable 200,000.00
90,000.00 Interest Payable 2,000.00
240,000.00 Salaries Payable 8,000.00
(5,000.00)
692,000.00 Total Liabilities 210,000.00

OE, Beg 320,000.00

Net Income 212,000.00
Drawings (50,000.00)
Total Owners' Equity 482,000.00