Abm 1 Modules

Mt. Carmel College of San Francisco, Inc.
8501, San Francisco, Agusan del Sur, Philippines

Tel. No. (085) 839-2161 • e-mail: mccsf.registrarsoffice@gmail.com
Fundamentals of Accounting
& Management 1
Source: iEduNote.com
This is an introductory course in accounting, business, and management data

analysis that will develop students’ appreciation of accounting as a language of
business and an understanding of basic accounting concepts and principles
that will help them analyze business transactions. (Source DepEd CG)
Fundamentals of Accounting, Business & Management 1 - First Semester, SY 2020-2021 |1

SENIOR HIGH SCHOOL LEVEL

School Year 2020-2021
Subject Fundamentals of Accounting & Management 1

Grade Level Grade 11 Section
Semester First Semester Quarter 1
Module No. 01 Chapter No. 1
Lesson No. 01 Date Week 1
Content The learner demonstrates an understanding of the definition, nature, function,

Standard and history of accounting
Performance The learner shall be able to cite specific examples in which accounting is used
Standard in making business decisions.
Learning The learner…

Competencies 1. define accounting
2. describe the nature of accounting
3. narrate the history/origin of accounting
At the end of the lesson, the learners will be able to:

Specific
1. define accounting
Learning
2. describe the nature of accounting
Outcomes
3. explain the functions of accounting in business
4. differentiate bookkeeping and accounting
5. narrate the history and origin of accounting
Introduction
Accounting is an old discipline that dates back to thousands of years but the one closet to
what we now have dates back to 1400 in Italy. The Italian mathematician, scholar and
philosopher Fra Luca Pacioli published Summa de Arithmetica, Geometrica, Proportioni et
Proporcionalita in 1494. It contain descriptions of the practice of accounting at that time.
Because of this work, Pacioli has been referred to as the “Father of Accounting.”
Accounting is defined as an information system that measures, processes and

communicates information, which are primarily financial in nature, about an identifiable entity

for the purpose of making economics decisions. Accounting has been referred to as the
language of business because it is the communication link between the entity and the users of
financial information. These users of financial information are decision-makers. These decisions-
makers are the management of entity, the employers, the investors, the lenders, the government
and consuming public.
The accounting information system starts with the business activities that are
documented. The documented businesses are measured in terms of money. They are called the
supporting documents for the transactions and economic events.
Pre-Activity
After graduating from high school, Jose Mercado decided to put up a photocopying
business because there was none near the vicinity of the school. Students had to walk far just to
nearest photocopying center. Jose knew that the demand for photocopying services among
high school students is high because teacher after assign readings and lecture notes that should
be photocopied.
Jose opened his photocopying business on July 1, 2015. He rented a commercial space
located in front of the High School fate for Php 5,000.00 per month. He also borrowed Php
50,000.00 in four years. From his personal savings, Jose spent Php 10,000.00 for supplies like
bond papers, staplers, paper clips, and other supplies that he would need in his business. He
also paid Php 2,000.00 for business permits and licenses. And because Jose had to attend to his
classes in a nearby university, he hired a staff with a weekly salary of Php 1,000.00 to operate the
business Jose plans to visit his photocopying shop after his class every day to check on it.
Analysis
In determining the profit of the photocopying business, Jose did the usual cash-in versus
cash-out technique. This technique involves grouping of cash movements into cash-in and cash-
out and simply getting the difference between the two. This technique may suffice for now but
he should really gather financial statements that indicate the correct financial position and
financial performance of his business. However, determining the net profit takes more than just
adding the cash-in and cash-out.

Business Transactions
Business transactions take place once a business ventures starts operation business
transactions are the interaction business and other stakeholders, stakeholders, include but
not limited to, customers, suppliers, investors, and government office. This transaction can be
very simple like buying photocopying supplies or very complex like applying for a bank loan
that requires submission of business and legal documents. Business transactions have to be
identified, measured and documented through an accounting process. Doing so can make
easier for the owner and managers to prepare financial statements for a particular period or
as of a specific time.
Definition of Accounting
There are three widely – accepted definitions of accounting.
According to American Accounting Association (AAA), accounting is the process of

identifying, measuring and communicating economic information to permit informed
judgment and decisions by users of the information.
However, the American Institute of Certified Public Accountants (AICPA) defines

accounting as the art of recording, classifying and summarizing the results thereof.
And lastly, the Accounting Standards Council (ASC) see accounting as a service activity.
Its function is to provide quantitative information, primarily financial in nature, about
economic entities, that is intended to be useful in making economic decisions.
Nature of Accounting
From the three definitions above, we can see the unifying themes that describe the
nature of accounting. Accounting is an art, the word “art” refers to the design of how
something can be performed. It is a behavioral knowledge involving creativity and skill. By
the very nature that accounting activity is systematic, it has definite technique and its proper
application require a particular skill and expertise.
Moreover, accounting deals with transactions that are financial in nature. The definition
of ASC requires that business transactions have to be measured in terms of money. All other
transactions that are non-monetary are not within the scope of accounting.
It can be also be deduced that accounting is a process. A “process” is a systematic serves

of actions directed toward a particular outcome. As a process, accounting performs specific

actions such as identifying, measuring, and communicating financial information. It has to

follow logical steps in the accounting cycle like recording, classifying, and summarizing
financial transactions, and communicating the results after.
In effect, accounting is also an “information system.” An information system is a set of

interrelated components that work together to achieve a common purpose. It also serves as a
repository of collected financial data, proposed financial information, and communicated
financial statements.
Moreover, accounting is a means and not an end. Although accounting has a tangible
output in the form of financial statements, it still underscores the users have the liberty to
make economic decisions based on the management assertions in the financial statements.
Using this logic, accounting indeed paves the way to end and it is not the end itself.
For businessmen, entrepreneurs, managers and stakeholders, accounting is a service

activity. It is concerned with providing the service of ensuring that financial statements are
made available to users on a timely basis.
Functions of Accounting in Business
The functions of accounting in business can be attributed to the three fundamental

objectives of an information system. An information system in itself, accounting performs to
following tasks.
1. To fulfill the stewardship function of the management (or owner).

2. To help interested users come up with informed decisions.
3. To support daily operations of the business.
These tasks validate why accounting is considered as the language of business. It

serves as means of communication between the business and interested users whether
internal or external. It facilitates the smooth flow of information in and out of the business.
The management or owner report on how well the business fares which is a reflection of how
well they manage the business. Interested users, on the other hands, use these reports to
make informed decisions based on the past performance and the current financial conditions
of the business. In management accounting, financial information from accounting are used
to come up with recommendations on how to improve the operational effectiveness and
efficiency of the company.

Difference in Bookkeeping and Accounting
More often, bookkeeping and accounting are mistaken as one and the same. In terms
of scope, accounting is broader as it includes bookkeeping functions. Bookkeeping on the
other hand, is just confined with the recording of monetary transaction which is one part of
accounting process.
History of Accounting
The origins of accounting can be traced from the Renaissance period. Particularly, the
Italian monk and mathematician Frate Luca Bartolomes Pacioli wrote Summa de Arithmetica,
Geometria, Proportioni et Proportionalita (Everything about Arithmetic, Geometry, and
Proportion) which was published in Venice in November 1494. It included a 24-page treatise
on bookkeeping, Particularis de Computis et Scripturiz (Details of Calculation and Recording),
specifically on the subjects of record keeping and double-entry accounting.
Pacioli was born on Bago San Sepolero. He lived in Venice and became the tutor of
three sons of a rich merchant, Antonio de Rompiasi, Pacioli popularized the system of
recording business transactions using memorandum books journal books and ledger books.
This system of bookkeeping was largely influenced by how commercial establishments then
are Venice kept track of their business transactions. This is probably something that he had
learned from his exposure to the Venetian merchants.
Aside from Pacioli, there are also Italian personalities who wrote about double – entry
accounting during that time. However, it is only his work that had a huge impact on the field
of accounting. It is for this reason that he is regarded as the “Father of Modern Accounting.”
Basic Financial Statements
Financial statements are the one of the most important documents in starting your
own business. For one, it helps fulfill the stewardship function means that the business
should be transparent on the performance and standing of the business to its stakeholders.
Financial statements or report reflects that financial standing and economic activities of the
business. These economic activities may relate to transactions that can affect the financial
position, financial performance and cash flow of the business.
A complete set of financial statement being prepared periodically by a business is

composed of the following;
1. Statement of Financial Position

2. Income Statement
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes, composing of a Summary of significant accounting policies and other
explanatory information.
It is important to note that the financial statements are the outputs of the accounting
process.
Objectives of Financial Statements
The objective of financial statement is to provide information about the financial

position, financial performance and cash flows of a business that is useful to key personalities
who are making economic decisions. To meet this objective, financial statements provide
information about a business asset, liabilities, equity, income and expense, contribution by
and contributions to owners and their capacity as owners, and cash flows.
Application
1. Narrate how accounting started.

2. Are bookkeeping and accounting the same? Explain.
3. Explain briefly why accounting is an art? And a process?
4. What are business transactions?
Summary
Accounting is the art of analyzing financial transaction and economic events recording them,
classifying them into accounts, summarizing them reporting and interpreting the results.

Post – Activity
Multiple Choices. Choose the letter of the best answer. Write in on the space provided below.
______ 1. Which of the following is not a basic component of financial statement?

a. Statement of Financial Position
b. Income Statement
c. Statement of Change in cash
d. Statement of Cash Flows
_____ 2. Which of the following is not an output of accounting process?

a. Financial Position
b. Financial Performance
c. Cash Flows
d. All of the above
_____ 3. Which professional organization below defines accounting as a service activity?

a. Accounting Standards Council
b. American Association of Certified Public Accountants
c. American Accounting Association
d. Philippine Institute of Certified Public Accountants
_____ 4. The English translation of Summa de America, Geometrica, Proportione et

Proportionalista is ______________________.
a. Details of Calculation and Recording
b. Everything about Arithmetic, Geometry and Proportion
c. Everything about accounting, Geometry and Proportion
d. Details of Recording and Journalizing
_____ 5. Accounting being regarded as the performance of specific actions such as

identifying, measuring and communicating financial information through the nature of
accounting as__________.
a. Process
b. An art
c. A skill
d. A service activity

Fill in the Blanks. On the space provided, write the term (word or phrase) that is being
described or complete the thought of each statement.
__________________________ 1. The definition provided by the ASC requires that business

transactions have to be measured in term of _________.
_________________________ 2. The three basic functions of accounting in the business are

supportive of the fact that accounting is being regarded as the ________.
_________________________ 3. Unlike accounting _______________ is confined with the recording

of monetary transactions.
_________________________ 4. Because of the enormous impact of his work in the field of

accounting. _________ is being regarded as the “Father of Modern Accounting.”
_________________________ 5. A/An __________ is a set of interrelated components that work

together to achieve a common purpose.
True or False. On the space provided before each number, write TRUE if the statement is
correct and FASLE if the statement is wrong.
___________ 1. A complete set of financial statements has five basic components.
___________ 2. The financial statements are output of accounting process.
___________ 3. Business transactions are limited to interactions being regarded by business

with customers and suppliers.
___________ 4. There is only one acceptable definition of accounting.
___________ 5. Accounting is only applicable to business rendering services because

accounting is a service activity.

References:
Fundamentals of Accountancy, Business and Management by Vibal Group Inc,. and Joy S.
Rabo, Florenz C. Tugas, Herminigilda E. Saledrez, Copyrigth, 2016.
Fundamentals of Accounting, Business and Management 1, by Rex Bookstore, Inc. and

Joselito G. Florendo, Copyright, 2016.
Fundamentals of Accountancy, Business and Management, by The Phoenix Publishing House,

Inc., and Solita A. Frias, Copyright, 2016.
Fundamentals of Accountancy, Business and Management I, The Commission on Higher

Education in collaboration with the Philippine Normal University, Joselito G.
Florendo, Carlsberg S. Andres, Christopher B. Honoracio, Reymond Patrick P.
Monfero, Dani Rose c. Salazar, published by Commission of Higher Education,
2016, Chairperson: Patricia B. Licuanan, Ph.D.
Fundamentals of Accounting, Business & Management 1 - First Semester, SY 2020-2021 | 10



Lesson No. 02 Date Week 2
Content The learner demonstrates an understanding of the external and internal users
Standard of financial information.
Performance The learner shall be able to…

Standard (1) solve exercises and problems on the identification of users of information,
type of decisions to be made, and type of information needed by the users.
(2) cite users of financial information and identify whether they are internal
and internal users

Competencies 1. define external users and gives example
2. define internal users and give examples

Specific
1. identify the internal and external users
Learning
Outcomes
Introduction
Accounting communicates financial information to decision makers. Different decision

makers are users of this accounting information. Users of accounting information are collectively
referred to as stakeholders. These stakeholders can be classified as internal and external users
Pre-Activity
1. Do we have enough cash to pay bills?

2. Can the company afford to give salary increase?
3. How much is the company’s sales growth for the months?
4. How much is the tax payable to the government?

Analysis
Financial information are the basis in making decisions whether is it and internal users or
external users.
INTERNAL USERS
The internal users are those who make decisions that affect the internal operations of
the company. They are the following:
1. Manager. They plan, organize and run a business.
2. Employee/Labor Union. They assess the company’s profitability and stability, its
consequence on their future salary and job security.
3. Owners. They provide the capital to the business. Owners need these
accounting information to help them decide whether they should withdraw or
increase their investments. They are interested to know the results on their
investment.
EXTERNAL USERS
The external users of financial report are those who make their decisions based on the
company’s financial information. They are the following:
1. Potential Investors. They need information to help them decide whether they
should invest or not in the business. Through past performance or operating
results of the company, they would want to know potential return on their
investment should they decide to invest.
2. Credits and Potential Creditors. They assess the credit worthiness and the
capability of the business to pay its obligations including the related interest on
maturity date.

3. Customers. They assess the financial position of their suppliers which is necessary
for them to maintain a stable source of supply in a long term. They are interested
to know whether the business will continue to hones its product warranty.
4. Suppliers. They use the financial statements of their customers to determine

whether the debts owed to them will be paid when due or whether the customer
has enough funds or resources to pay the goods to be delivered or the service to
be rendered.
5. Tax Authorities. The use of financial reports to determine the credibility of the tax
returns filed on behalf of the company. They are interested to know if the business
paid the correct amount of taxes.
6. Regulatory Bodies. They want to ensure that the company’s disclosure of

accounting information is in accordance with the rules and regulations set in order
to protect the interest of the stakeholders who rely on such information. Example
of these regulatory bodies are the Securities and Exchange Commission (SEC) and
the Bangko Sentral ng Pilipinas (BSP).
7. Pubic. They use financial information to know how the business helps the economy
and whether employment is available in the company.
Application (Questions for Discussion)
5. Distinguish the type of information needed by two major groups of users.

6. How does accounting provide important data to internal users?
7. What are the accounting information needed by
a. Investor
b. Creditors

Summary
The accounting information provided to internal and external users can be in the form
of management report, budgets and financial statements.
Post – Activity
A. The following are users of financial statements. Identify if the users mentioned below is
external and internal.
_____________________________ 1. Customers
_____________________________ 2. Bureau of Internal Revenue
____________________________ __ 3. Labor Unions
_____________________________ 4. Factory Manager
_____________________________ 5. Vice-President of Finance
_____________________________ 6. Security and Exchange Commission
_____________________________ 7. Investors
_____________________________ 8. Suppliers
_____________________________ 9. Factory Worker
_____________________________ 10. A Bank Company
B. Multiple Choice. Select the best answer.
1. These are the internal users of financial reports who are interested in determining the
return of investment in the business.
a. Management
b. Employees
c. Owners
d. Creditors

2. The following are the external users who make decisions about their relationship to
the enterprise, except __________.
a. Taxing Authorities
b. Regulatory Agencies
c. Suppliers
d. Employees
3. Which of the following statements about users of accounting information is correct?
a. Management is an external users
b. Tax authorities are internal users.
c. Creditors are external users
d. Employees are external users.
4. The responsibility to review the work of the accountants and issue opinions as to the
fairness of financial statements results with _________.
a. The external auditor
b. The board of directors
c. The internal auditors
d. Management
5. Which of the following is an external user of a company’s financial information?
a. Board of Directors
b. Stockholders in the company
c. Holders of company’s bond
d. Creditors with long-term contracts with the company.
C. True or False. Write TRUE if the statement is correct and FALSE if the statement is
incorrect.
__________________ 1. Potential investors are interested in financial information that will

help them to know the ability of the entity to pay dividends.
__________________ 2. The financial statements provide all the needed information by

makers.
__________________ 3. Financial reports prove information on the ability of the firm to pay
wage increase their employees.

__________________ 4. Creditors make use of financial report to know how the business
used the money lent to the entity.
_________________ 5. Taxing authorities are external users of the financial information with
direct interest in the business.
References:






Lesson No. 03 Date Week 3 to 4
Content The learner demonstrates an understanding of…

Standard 1. Accounting concepts and principles
2. The accounting equation
Performance The learner shall be able to…

Standard 1. Identify generally accepted accounting principles
2. Solve problems applying the accounting equation

Competencies 1. explains the varied accounting concepts and principles
2. solve exercises on accounting principles as applied in various cases

Specific
1. explain the varied accounting concepts and principles
Learning
2. solve exercises on accounting principles as applied in various cases
Outcomes
Introduction
Accounting concepts, principles, and assumption are essential in the practice of

accountancy. Financial statements become more comparable and more useful to users if these
concepts, principles and assumptions are followed by businesses. We can look at these as a set
of rules that govern the accounting process.
Accounting concept, principles, and assumptions serve as the foundation of accounting in

order to avoid misunderstanding and enhance the understanding and usefulness of the financial
statements.

Pre-Activity
The Rule of Life

 when you were young
 in school
 in the workplace
Analysis
Rules impede our freedom, but it is for the common good. Just like all other field of study,
accounting also has concepts, principles, and assumption. Collectively, these concepts, principles
and assumptions serves as a guide and simply, the study of accounting.
Discussion
GENERALLY ACCEPTED ACCOUNTING PRINCIPLE (GAAP)
The Generally Accepted Accounting Principles (GAAP) consist of accounting principles,

standards, rules and guidelines that companies follow to achieve consistency and
comparability in their financial statements. Companies that apply the GAAP help not only
external users of accounting information, but also the management as well. Since the GAAP
enhance the consistency and comparability of company’s financial statements, it will be easier
for external users to examine if the company is doing well currently or in relation to its past
performance. Simultaneously, GAAP also helps management in understanding trends
persistent in the company. Management can also compare past and current performance to
check the strong and weak points of company operations.
The accounting profession is continuously evolving. Due to the rapid advancement of

technology, there are new kinds of transactions encountered today that were not present in
the past. The standards followed by accountants in practice of their profession should also
adapt with the changes. Thus, the GAAP is also being developed and improved continuously.
Another feature of the GAAP is that it is agreed upon by practitioners. Individual in the
accountancy profession are the ones who create accounting standard such as the GAAP. The
formulation, development, and modification of the GAAP go through a rigorous process
involving professional judgment and research.

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
The International Financial Reporting Standards (IFRS) are pronouncements issued by

the International Accounting Standards Board (IASB) that intend to enhance the
comparability of the financial statements of all companies around the world. In light of
globalization, the IFRS will provide a way for users of accounting information to easily
understand the results of operations of companies all around the globe.
In the past, the function of the IASB is performed by the International Accounting
Standards Committee (IASC). The pronouncement of IASC are called International Accounting
Standards (IAS). Up to this day, IASB still address to the IAS in addition to their own
pronouncements – the IFRS.
In the Philippines, the developments of accounting standards that will be used in the
country consider the pronouncements issued by the USA Financial Accounting Standards
Board (FASB) and the IASB (valix et.al, 2013). The Philippine follows the stands of both the IAS
and the IFRS. In contrast, USA follows guidelines provided by GAAP. The Philippines are fully
complaint with the IFRS effective January 2005.
The following factors are considered in the discussion to adapt the IFRS (valix et.al,
2013)
1. Philippine organizations’ support of international accounting standards.

2. Increasing international of business which greatly calls for a common language of
financial reporting.
3. Improvements of accounting standards or removal of free choice of accounting
treatments.
4. International accounting standards being recognized by the World Bank, Asian
Development Bank and World Trade Organization.
PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRS)
The Philippine Financial Reporting Standards Council (FRSC) issues standards to be

used in the Philippines in the form of Philippine Financial Reporting Standards (PFRS).
The PFRS include call the following;
1. Philippine Financial Reporting Standards (PFRS) which corresponds to International

Financial Reporting Standards (IFRS).

2. Philippine Accounting Standards (PAS) which corresponds to International

Accounting Standards (IAS).
3. Interpretations of Accounting Standards issued by the Philippine Interpretations
Committee in accordance with interpretations of the IFRIC and the standing
Interpretation Committee.
UNDERLYING ACCOUNTING ASSUMPTIONS
In the practice of financial accounting, basic assumptions are important to an

understanding of the manner in which data are presented. The following basic assumption
underlines the financial accounting structure.
 Economic Entity Assumption
It assumes that all of the business transactions are considered a distinct entity
from the owner and therefore the two should be treated separately. Any personal
transaction of it owner should not be recorded in the company’s accounting book, and
vice versa, unless the owners personal transaction involves investing or withdrawing
resources from the business. For example, Mr. Alexis Cruz, the owner of Bilis Serbisyo
Repair Shop, bought supplies for school project of his son. This is a personal
transaction of the owner and should not be recorded in the accounting books of the
business.
 Accrual Basis Assumption

It requires that all business transactions and other events are recognized in the
accounting records when they occur, rather that when the cash or equivalent is
received or paid.
It is assumed that revenue is recorded in the period it is earned regardless of
the time the cash is received or collected. The same is true for expense. Expense is
recognized and recorded at the time it is incurred, regardless of the time the cash is
paid. This assumption adheres to the revenue recognition, matching and cost
principles.
 Going Concern Assumption
In the absence of contrary information, a business entity is assumed to remain

in existence for an indeterminate period of time. The current relevance of historical
cost principles is dependent in the going concern assumption.

This assumes that a company will continue to exist long enough to carry out its
objectives and commitments and will not liquidate in the foreseeable future. Because
of this assumption, assets are recorded at their original acquisition cost and not based
on their market value. Assets are assumed to be used for an indefinite period of time
and not intended to be sold immediately. It also allows the company to defer some of
tis prepaid expenses until future accounting periods.
 Monetary Unit Assumption
Economic activities of the Philippine entity are measured and reported in

Philippine Peso. The peso is assumed to remain relatively stable over the years in
terms of purchasing power. It disregards any inflation in the economy in which the
entity operates.
It assumes that only transactions that can be expressed in term of money are
recorded. Hence, any non-financial or non-monetary information that cannot be
measured in terms of money are not recorded in the accounting books. A
memorandum will be used instead.
 Time-Period Assumption
The life of an economic entity can be divided into artificial time period for the
purpose of providing periodic reports on the economic activities of the entity. In
means that financial statements are prepared at equal time intervals.
This assumption requires a business to complete the whole accounting process

of a business over a specific operating time period. It may follow a calendar or fiscal
year. A calendar year is a twelve-month periods that ends on December 31. A fiscal
year is a twelve-month period which may or not end on December 31. It is the
accounting period a company follows for tax purposes. A natural business year is a
twelve-month period which ends on the month when the company is at its lowest. It
may follow a calendar year or a fiscal year.

BASIC ACCOUNTING PRINCIPLES
1. Cost Principle
Cost refers to the amount spent (cash or cash equivalent) when an item was
originally obtained, whether that purchase happened last year or ten years ago,
amount are not adjusted upward for inflation. The amounts shown in financial
statement are referred to as a historical cost amount.
All assets required should be valued and recorded based on the actual cash
equivalent or original cost of acquisition, not the prevailing market value or future
value.
2. Full Disclosure Principle
In the preparation of financial statements the accountant should include

sufficient information to permit the stakeholders to make an informed judgment
about the financial condition of the enterprise.
It certain information is important to an investor or lender using the financial
statements, that information should be disclosed within the statement or in the notes
to the statement. A company usually lists its significant accounting policies at the first
note to its financial statement.
3. Matching Principles
This principle requires that expenses be matched with revenues. It means that
in a given accounting period, the revenue recorded should have an equivalent
expenses recorded, in order to show the true profit of the business. The use of accrual
accounting procedures assist the accountant in allocating revenues and expense
properly among the fiscal period that compose the type of a business enterprise.
4. Revenue Recognition Principle
Revenues are recognized as soon as goods have been sold (delivered to the
customers) or a service has been render, regardless of when the money is actually
received. Revenue is recognized when the earning process is virtually complete and an
exchange transaction has occurred.

5. Materiality Principle
Business transactions may affect the decision of a user of financial information

are considered important or material and thus, must be reported properly. Because of
this constraint, an accountant might be allowed to violate another accounting
principle if an amount is insignificant. Professional judgment is needed to decide
whether an amount is insignificant or immaterial. Ten thousand pesos may not be
material to Ayala Corporation but the same figure is quite material to small business
like Bilis Serbisyo Repair Shop.
6. Conservatism Principle
This principle states that given two options in the valuation of business
transactions, the amount recorded should be the lower rather than the higher value. If
a situation arises where there are two accepted alternative for reporting an item,
conservatism directs the accountants to choose the alternative that will result in less
effect on net income and / or less asset amount. Conservatism helps the accountant
break a tie while remaining unbiased and objective. Similar to materiality principle,
conservatism is modifying constraint that allows the accountant to violate another
accounting principle if there are alternative to be selected.
The basic accounting principle of conservatism leads accountants to anticipate

or disclose losses, but it does not allow a similar action for gains losses and cost are
recorded when they are probable and can be reasonably estimated, while gains are
recorded when they are realized. Thus, probable losses from lawsuits will be reported
on the face of financial statements or in the notes, but probable gains will not be
reported.
7. Objectivity Principle
This principle requires business transaction to have some form of impartial

supporting evidence or documentation. Also, it entails that bookkeeping and financial
recording be performed with independence, that is free of bias and prejudice.
For example, the purchase of merchandise from a vendor requires an invoice to

support the transaction. This invoice should be appeared by the Bureau of Internal
Revenue and state the name of the supplier, the description quantity, and the value of
goods purchased. Utility expenses must be supported by statements of account from
utility companies like Meralco and Maynilad.

OTHER CHARACTERISTICS OF ACCOUNTING INFORMATION
When financial reports are generated by professional accountants, users expect that
the accounting information present is reliable and verifiable. The consistency and
comparability of the accounting information reported are also expected from the
accountants.
To be useful, financial information must be relevant, reliable, and prepared in a

consistent manner. Relevant information helps a decision maker understand a company’s
past performance, present condition and future outlook so that informed decision can be
made in a timely manner. Since, the information needs of individual users may differ; the
manner of presenting information may also be different. Internal users often need more
detailed information than external users. External users might only be interested on the
company’s value or its ability to repay loans, while internal users such as management need a
more comprehensive examination of the company’s financial examination of the company’s
financial performance and condition.
Reliable information is verifiable and objective. Consistent information prepared using

the same methods each accounting period. Consistency thus allows meaningful comparisons
to be made between different accounting periods and between and among different
companies.
THE ACCOUNTING EQUATION
In relation to double-entry bookkeeping, ensuring equal debit effect and credit effect
is fundamental to the universal acceptance of the basic accounting equation. Because of this,
the basic accounting equation should be in balance at all times. This equation is presented
below;
Assets = Liabilities + Owner’s Equity (or Capital)

Assets must equal the sum of liabilities and owner’s equity. The equal sing in the
equation ensure balance of the movement in the three main accounts being used in
accounting. The equal sign also separate the left side (debit) from the right side (credit) of the
equation.
This basic equation serves as the backbone of the entire accounting cycle. All the steps
that go with the accounting cycle should abide by this equation.

DEFINITION OF AN ACCOUNT
The accounting equation “assets equal liabilities plus owner’s equity” perfectly
captures the major accounts. These major accounts, which also happen to be main
classification of accounts, are assets, liabilities and owner’s equity. Owner’s equity includes
revenue and expenses. An account is an individual accounting record of the movements
(increases and decreases) in specific accounts. The movements in these specific accounts are
recorded in “journals” and “ledgers.”
Account Title
Left side for Debit Right side for Credit
Movements in specific accounts are either debit or credit depending upon the
account’s normal balance. Asset accounts have normal balance of debit while liability
accounts and owner’s equity account have normal balance of credit. This is consistent with
how they appear in the basic accounting equation.
DEBIT (left side) CREDIT (right side)
EXPANDED ACCOUNTING EQUATION
Let us expand the accounting equation by including the revenue, expenses, and
withdrawal accounts. The expanded equation will look like this;

+ Revenue
- Expenses
- Withdrawal
Notice that the significant difference between that basic accounting equation and
expanded accounting equation is brought by the transactions (acronym: CREW) that directly
affect change in the owner’s equity account. These are capital contributed and withdrawals
made by the owner and revenues earned and expense incurred during a particular
accounting period.

NORMAL BALANCES AND INCREASES AND DECREASES
It is important that you master the normal balance of each major account and two of
the contra-valuation accounts. Summarized below in a table are the normal balances of
major accounts and contra-valuations accounts and how they move (increase or decrease)
through debit and credit.
Normal Increase Decrease

Balance Through Through
Assets Debit Debit Credit
Liabilities Credit Credit Debit
Owner’s Equity
 Owner’s Capital Credit Credit Debit
 Owner’s Drawing Debit Debit Credit
Revenues Credit Credit Debit
Expenses Debit Debit Credit
Contra – Valuation Accounts
 Allowance for Doubtful Accounts Credit Credit Debit
 Accumulated Depreciation Credit Credit Debit
COMPUTATION OF MISSING AMOUNTS
We shall now proceed with applying the basic accounting equation and expanded
accounting equation by computing missing amounts. The key in solving the missing amounts
is the preservation of the balance in the accounting equations and the knowledge of how
they increase and decrease using debits and credits.
Drill 1: Mr. Pedro Perez started a carwash business on January 1, 2014. His initial investments
were cash amounting to P 50,000.00 and one piece of cleaning equipment worth Php
20,000.00. Compute for the correct total owner’s equity as of January 1, 2014.
Account Title Assets = Liabilities + Owner’s Equity (or Capital)

Cash Php 50,000.00 +
Cleaning Php 20,000.00
Equipment
Total Php 70,000.00

To compute for Owner’s Equity
Account Title Owner’s Equity = Assets + Liabilities

(or Capital)
Perez, Capital Php 70,000.00 = Php 70,000.00 + Php _________________
Using the basic accounting equation, the correct owner’s equity as of January 1, 2014 is Php
70,000.00.
Alternatively
Total Assets Php 70,000.00

Less total liabilities
Total Owner’s Equity Php 70,000.00
Drill 2: Using the same given from drill 1, assume that on January 15, 2014, Mr. Perdo Perez
borrowed Php 40,00.00 cash from his friend to increase the working capital. Working
capital is the difference between current assets and current liabilities. On January 16,
2014, the used of Php 5,000.00 of the money borrowed to buy cleaning supplies.
Computer for the correct total assets as of January 16, 2014.
Answer Drill 2: Continuing from how we computed our answer to Drill 1, total assets can be
computed this way.
Account Title Assets = Liabilities + Owner’s Equity (or Capital)

Cash Php 85,000.00 +
Cleaning Equipment 20,000.00
Cleaning Supplies 5,000.00
Accounts Payable Php 40,000.00
Perez, Capital Php 70,000.00
TOTAL Php 110,000.00 Php 40,000.00 Php 70,000.00
Using the basic accounting equation, the correct total assets as of January 16, 2014 is Php
110,000.00.
Alternatively
Total Liabilities Php 40,000.00

Add, Total Owner’s Equity 70,000.00

Cash was computed this way;
Cash balance, January 1, 2014 Php 50,000.00

Add: Amount borrowed from friend 40,000.00
Deduct: Amount used to buy cleaning supplies 5,000.00
Sub Total Php 90,000.00
Cash balance, January 16, 2014 Php 85,000.00
Drill 3: Ms. Juana Jimenez started a food catering business on January 1, 2014 by December
31, 2014, total assets, totaled Php 150,000.00 and total owner’s equity was Php
90,000.00. Compute for the correct total liabilities as of December 31, 2014.
Answer Drill 3: Using the basic accounting equation, we can derive;
Liabilities = Assets – Owner’s Equity (or Capital)
As such,

Deduct: Total Owner’s Equity 90,000.00
Total Liabilities Php 60,000.00
Using the basic accounting equation, the correct total liabilities as of December 31,
2014 is Php 60,000.00.
Drill 4: In addition to the given in Drill 3, Juana Jimenez reported total catering revenue of
Php 80,000.00 and total expenses of Php 45,000.00 for 2014. Compute for the correct
net income for the year ended December 31, 2014.
Answer Drill 4:
Total Catering Revenue Php 80,000.00

Deduct: total expense 45,000.00
Net Income Php 35,000.00

The correct net income of the food catering business for the year ended December 13,
2014 is Php 35,000.00
Drill 5: Continuing Drill 4, assume that Juana Jimenez had initial investment of Php 50,000.00
cash and there were no other transactions that look place in 2014 that would affect
owner’s equity aside from owner’s cash withdrawal. Compute for the correct cash
withdrawal made by Juana in 2014.

+ Revenue
- Expenses
- Withdrawal
Taking it from the expanded accounting equation, the following transactions

(acronym:CREW) during a particular accounting period directly affect owner’s equity;
1. Capital contribution by the owner (increases owner’s equity)

2. Revenue earned (increases owner’s equity)
3. Expenses incurred (decreases owner’s equity and
4. Withdrawals made by the owner (decreases owner’s equity)
Note that that net effect of item two and three can either result in net income or net
loss. As such, net income or net loss directly affects owner’s equity
Therefore,
Total Owner’s Equity
December 31, 2014 Php 90,000.00
Deduct: Initial Investment Php 50,000.00
Net Income 35,000.00 85,000.00
Total Withdraw made Php 5,000.00
The correct total withdrawals made by Juana, Jiminez during 2014 is Php 5,000.00

Drill 6: Filemon Car Repair Shop started the business with total assets of Php 100,000.00 and
total liabilities of Php 50,000.00 as of January 1, 2014. During the year, the business
recorded Php 140,000.00 in a car repair revenue, Php 85,000.00 in expense, and
Filemon withdrew Php 12,000.00
Required:
1. Compute for the correct balance of Filemon’s Car Repair shop for the year
ended, December 31, 2014.
2. Compute for the correct change (net movement) in Filemon, Capital during
the year 2014.
3. Compute for the correct change (net movement) in Filemon, Capital account
from the beginning of the year to the end of the year.
Answer Drill 6: This drill can be answered using the expanded equation.

+ Revenue
- Expenses
- Withdrawal
Total Car Repair Revenue Php 140,000.00

Deduct: Total Expense 85,000.00
Net Income (Answer to Requirement 1) Php 55,000.00
Net Income Php 55,000.00

Deduct: Withdrawal 12,000.00
Change in Filemon’s, Capital (Answer to Requirement 2) Php 43,000.00
Total Assets, January 1, 2014 Php 100,000.00

Deduct: Total Liabilities, January 1, 2014 50,000.00
Filemon, Capital, January 1, 2014 Php 50,000.00

Add: Change in Filemon, Capital Php 43,000.00

Filemon, Capital, December 31, 2014 93,000.00
Filemon, Capital, December 31, 2014 (Requirement 3) Php 136,000.00
Application
Activity 1: Below are accounting concepts and principles. Match each description to the
correct accounting concept and principles. Write your answer on the Answer Sheets
provided.
Accrual Accounting Economic Entity Assumptions

Going Concern Assumptions Time Period Assumptions
Conservatism Matching Principles
Use of Judgment and Estimates
____________ 1. The indefinite life of a company can be divided into periods of equal length
for the preparation of financial reports.
___________ 2. Income and assets are not overstated and liabilities and expenses are not
overstated.
___________ 3. Income should be recognized in the period when it is earned regardless of
when the payment is received.
____________ 4. The business is separate from the owners, managers, and employees
operating the business
____________ 5. Expenses are recognized in the period as the related revenue.
____________ 6. Approximations made by accountant or the management in the preparation
of financial statements.
____________ 7. It is assumed that the operations of a business will continue indefinitely into
the futures.

Activity 2: Below are accounting concepts and principles. Match each case or transactions to
the correct accounting concepts and principles. Write your answer on the Answer Sheet
provided.
Accrual Accounting Economic Entity Assumptions

Time Period Assumption Matching Principles
Use of Judgment and Estimates
____________ 1. Joe, a business owner, incurs expenses for the repair of his house. This
expense should not be reflected in the financial statement of his business. It
should be considered as a personal expense.
____________ 2. Joe, a car salesman, rendered service for a car company in December. Joe
was able to sale five cars in December. However, he was paid by the company
in January of the next year. Joe’s salary will be recorded as an expense of the
car company in December.
____________ 3. A company prepares financial reports every year for the benefit of the
stockholders.
____________ 4. A company records warranty expense even though it is not entirely sure
when warranties will be performed.
____________ 5. Credit sales are recorded by a company as revenue even though no cash is
received.
Activity 3. Research about the Philippine Financial Reporting Standards (PERS). You will find
out that the PERS is composed of many standards. Choose one standards and find out
the process regarding how that standard was created. Search also the reason why
there is a need for such a standard. Write a 500 words page essay documenting your
research.

Activity 4. Supply the missing amount to satisfy the basic accounting equation. SHOW YOUR
COMPUTATION.
Situation Assets Liabilities Owner’s Equity (or Capital)

A Php 120,000.00 Php 85,000.00 ?
B Php 210,000.00 ? Php 195,000.00
C ? Php 65,000.00 Php 42,000.00
D Php 250,000.00 ? Php 180,000.00
E Php 170,000.00 Php 50,000.00 ?
Summary
 Accrual Accounting – an accounting basis wherein an income is recognized when

incurred irrespective of the timing of each receipt or payment. Accrual accounting
results in more accurate financial statements.
 Cash Basis Accounting – opposite of the accrual basis, recognizes income when cash is
received and recognizes expenses when cash is paid.
 Matching Principle – a concept closely related to accrual accounting which states that
expenses should be recorded in the same period as the related revenues.
 Accounting judgment and estimates – not all items in a company’s accounting records
can be determined precisely. This is the reason why estimates are used. Estimates are
determined using professional judgment; study of historical data and through
research.
 Conservatism – also called Prudence. Prudence means exercising case in decisions
regarding recognition of items in the accounting records. In case of doubt, recognize
liabilities and expenses and do not recognize assets and income.
 Substance over form – the substance of some business transactions differ from their
legal form. A common example of this is contract of lease. If substance differ from
legal form, you should follow the treatment of the transactions based on the
substance.
 Going concern assumption – the assumption that the entity will continue operations
indefinitely into the future. It can be abandoned if there are evidence supporting the
contrary.
 Accounting Entity Assumptions – the assumption that the business is an entity
separate and distinct from the owners, managers and employees. Personal
transactions of owners, managers and employee should not distort the results of the
company.

 Time period Assumption – the assumption that the indefinite life of a company can be
divided into multiple time periods with equal lengths. The result of this is the periodic
presentation of a company’s financial statements. A calendar year is a 12-month
period that ends on December 31. A fiscal year is a 12-month period that ends on any
month.
 Generally Accepted Accounting Principles (GAAP) is a set of accounting principles,
concepts, rules and guidelines that companies follow to enhance the consistency and
comparability of their financial statements.
 International Financial Reporting Standards (IFRS) pronouncement made by IASB that
intend to enhance the consistency and comparability of the financial statements of the
companies all around the world.
 Philippine Financial Reporting Standards (PFRS) – the Philippine version of the IFRS. Its
include the pronouncement of the IFRS which corresponds with the IAS, and the
interpretation of accounting standards by the Philippine Interpretations Committee.
 The accounting equation is stated as Assets = Liabilities + Owner’s Equity.
 The elements of the accounting equation are;
a. Assets – what entity owns
b. Liabilities – what the entity owes to its creditor
c. Equity – what the owners actually own in the entity
 In using the accounting equation, there should always be a dual

effort in the equation to preserve the accounting ideality. Moreover,
such identity should be maintained throughout the whole process of
accounting the transactions.
 The equation to determine the net income (net loss) of a business is
stated as Revenue – Expenses = Net Income (Net Loss).
 A business will have net income if its revenues exceed expenses and
will have a net loss if its revenue are less than the expense.
Post Activity:
Identification. Identify the accounting assumption or principle that suits the statements. Write
your answer on the Answer Sheets provided.
_____________ 1. Ensure that financial information is reported at regular intervals.

____________ 2. This assumptions adheres to the revenue recognition, matching and cost
principles.

____________ 3. The framework, rules and guideline of financial accounting profession with
the purpose of standardizing the accounting concepts, principles and
procedures.
____________ 4. Any personal transaction of its owners should not be recorded in the
business accounting books and vice versa.
____________ 5. Assets are recorded at cost, which equals the value exchanged at the time of
their acquisition.
____________ 6. This assumes that the company will continue to exist long enough to carry
out its objectives and commitment and will not liquidate in the foreseeable
future.
____________ 7. The basic accounting principle that leads accountants to anticipate or
disclose losses, but does not allow a similar action for gains.
____________ 8. Revenue is recognized when earning process is vertically complete and an
exchange transactions has occurred.
____________ 9. This assumption disregards any inflation or deflation in the economy in
which the entity operates.
_____________ 10. Important information to users of financial statement or in the nature to
the statement.
Multiple Choice. Directions: Choose the appropriate letter from the given choices and write
on the Answer Sheet provided.
1. The set of accounting standards followed in the Philippine.
a. IFRS
b. PFRS
c. GAAP
d. FASB
2. Which of the following is not an accounting assumption.
a. Going concern
b. Time period
c. Matching principle
d. Economic entity
3. Which of the following can be considered a fiscal year?
a. January 1 – December 31
b. February 1 – January 31
c. March 1 – December 31
d. October 1 – May 31

4. The Philippine is fully compliant with the IFRS effective.

a. January 2000
b. January 2005
c. January 2010
d. December 2010
5. In which of the following cases can the accounting operation be rewritten as?
a. Assets + Liability = Equity
b. Assets – Liability = Equity
c. Equity – Assets = Liabilities
d. Equity + Assets = Liabilities
6. When an entity buys goods through credit, how will the accounting equation be affected?
a. Increased equity and decreased assets
b. Increased liabilities and decrease assets
c. Increased assets and increase liabilities
d. No effect.
7. When an entity performs secure for each how will the accounting equation be affected?
a. Increase equity and increase assets
b. Increase equity and decrease assets
c. Increase assets and decrease liabilities
d. No effect
8. During the year, the equity of Krystyl Company increase by Php 30,000.00 while its
liabilities decrease by Php 10,000.00. How did Krystel company’s assets change during
the year?
a. Increase of Php 40,000.00

b. Increase of Php 20,000.00
c. Decrease of Php 40,000.00
d. Decrease of Php 20,000.00
9. If the liabilities of Jude company increased by Php 10,000.00 while its equity remained
constant which of the following transactions could correspondingly occur?
a. Investment of additional capital of Php 10,000.00

b. Withdrawal of Capital of Php 10,000.00
c. Incurrence of a bank loan of Php 10,000.00
d. Payment of taxes of Php 10,000.00

10. If the assets of Romel company decreased by Php 10,000.00, which the equity remained
constant, which of the following transactions could correspondingly occur?
a. Withdrawal of capital, Php 10,000.00

b. Decrease in bank deposit of Php 10,000.00
c. Purchase of inventory of credit worth Php 10,000.00
d. Payment of bank loan worth Php 10,00.00
Problem Solving:
1. Carmelita Dresser started operations on July 1, 2014, with Php 200,000.00 from personal
Savings and Php 30,000.00 from a bank loan. During the first year of operation net income
was Php 60,000.00. On December 15, 2014, Carmelita withdrew Php 8,000.00 each. No
additional activities affected owner’s equity in 2014. By December 31, 2018, Carmelita’s
liabilities had increased to Php 57, 600.00. In Carmelita’s December 31, 2017, financial
statements, how much total assets should be reported?
References:




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Mt. Carmel College of San Francisco, Inc.

8501, San Francisco, Agusan del Sur, Philippines

This is an introductory course in accounting, business, and management data

Fundamentals of Accounting, Business & Management 1 - First Semester, SY 2020-2021 |1

SENIOR HIGH SCHOOL LEVEL

Subject Fundamentals of Accounting & Management 1

Content The learner demonstrates an understanding of the definition, nature, function,

Learning The learner…

At the end of the lesson, the learners will be able to:

Accounting is defined as an information system that measures, processes and

Fundamentals of Accounting, Business & Management 1 - First Semester, SY 2020-2021 |2

Fundamentals of Accounting, Business & Management 1 - First Semester, SY 2020-2021 |3

There are three widely – accepted definitions of accounting.

According to American Accounting Association (AAA), accounting is the process of

However, the American Institute of Certified Public Accountants (AICPA) defines

It can be also be deduced that accounting is a process. A “process” is a systematic serves

Fundamentals of Accounting, Business & Management 1 - First Semester, SY 2020-2021 |4

actions such as identifying, measuring, and communicating financial information. It has to

In effect, accounting is also an “information system.” An information system is a set of

For businessmen, entrepreneurs, managers and stakeholders, accounting is a service

Functions of Accounting in Business

The functions of accounting in business can be attributed to the three fundamental

1. To fulfill the stewardship function of the management (or owner).

These tasks validate why accounting is considered as the language of business. It

Fundamentals of Accounting, Business & Management 1 - First Semester, SY 2020-2021 |5

Difference in Bookkeeping and Accounting

Basic Financial Statements

A complete set of financial statement being prepared periodically by a business is

1. Statement of Financial Position

Fundamentals of Accounting, Business & Management 1 - First Semester, SY 2020-2021 |6

Objectives of Financial Statements

The objective of financial statement is to provide information about the financial

1. Narrate how accounting started.

Fundamentals of Accounting, Business & Management 1 - First Semester, SY 2020-2021 |7

______ 1. Which of the following is not a basic component of financial statement?

_____ 2. Which of the following is not an output of accounting process?

_____ 3. Which professional organization below defines accounting as a service activity?

_____ 4. The English translation of Summa de America, Geometrica, Proportione et

_____ 5. Accounting being regarded as the performance of specific actions such as

Fundamentals of Accounting, Business & Management 1 - First Semester, SY 2020-2021 |8

__________________________ 1. The definition provided by the ASC requires that business

_________________________ 2. The three basic functions of accounting in the business are

_________________________ 3. Unlike accounting _______________ is confined with the recording

_________________________ 4. Because of the enormous impact of his work in the field of

_________________________ 5. A/An __________ is a set of interrelated components that work

___________ 1. A complete set of financial statements has five basic components.

___________ 2. The financial statements are output of accounting process.

___________ 3. Business transactions are limited to interactions being regarded by business

___________ 4. There is only one acceptable definition of accounting.

___________ 5. Accounting is only applicable to business rendering services because

Fundamentals of Accounting, Business & Management 1 - First Semester, SY 2020-2021 |9

Fundamentals of Accounting, Business and Management 1, by Rex Bookstore, Inc. and

Fundamentals of Accountancy, Business and Management, by The Phoenix Publishing House,

Fundamentals of Accountancy, Business and Management I, The Commission on Higher

Fundamentals of Accounting, Business & Management 1 - First Semester, SY 2020-2021 | 10

SENIOR HIGH SCHOOL LEVEL

Subject Fundamentals of Accounting & Management 1

Performance The learner shall be able to…

___________ 3. Unlike accounting _ is confined with the recording

_______________ 5. A/An is a set of interrelated components that work

__________________________ 3. Labor Unions