Introduction to FABM 1

1.1 Definition of Accounting

1.2 Nature of Accounting
1.3 History of Accounting
1.4 Branches of Accounting
1.5 Forms of Business Organization
1.6 Types of Organizatuon
2. The 11 Accounting Principles
3. The Debit-Credit Rule
3.1 Assets
3.2 Liabilities
3.3 Capital
3.4 Drawing
3.5 Revenue or Income
3.6 Expenses
4. The Five Major Accounts

Topic 1.1: Definition of Accounting ●

Accounting
"the art of recording, classifying, and summarizing in a significant manner and in
terms of money, transactions and events which are, in part at least of financial
character, and interpreting the results thereof."- AICPA
- is the process of identifying, recording, and communicating economic events of an
organization to interested users. (Weygandt, J.et.al)
Identifying
- this involves selecting economic events that are relevant to particular business
transactions.
Recording
- this involves keeping or chronological diary of events that are measured in pesos. The
diary referred to in the definition are the journals and ledger.
Communicating
- occurs through the preparation and distribution of financial and other accounting
reports.
Topic 1.2: Nature of Accounting●
• Accounting is a service activity
• Accounting is a process
• Accounting is both an art and discipline
• Accounting deals with financial information and transactions.
• Accounting is an information system.
●Topic 1.3: Function of Accounting in Business●
Accounting is the means by which business information is communicated to business
owners and stakeholders. The role of accounting in business is to provide information
for managers and owners to use in operating the business. In addition, information
allows business owners to assess the efficiency and effectiveness of their business
operations.
●Topic 1.4: History of Accounting●
• The Craddle Civilization "CLAY TABLET" of Mesopotamia
- Around 3600 B.C., record-keeping was already commmon from Mesopotamia, China
and India to Central and South America. The oldest evidencr of this practice was the
"Clay Tablet" of Mesopotamia which dealt with commercial transactions at the time such
as listing of accounts receivable and accounts payable.
Take note: The event here is Craddle Civilization of Mesopotamia and the important
thing happened on that year is the discovery of Clay Tablet.
• 14th Century - Double Entry Bookkeeping
- The most important event in accounting history is generally considered to be the
dissemination of double entry bookkeeping by Luca Pacioli, in 14th century Italy. The
Italians of the 14th to 16th centuries are widely acknowledged as the fathers of modern
accounting and were the first to commonly use Arabic numerals, rather than Roman, for
tracking business accounts. Luca Pacioli wrote Summa de Arithmetica, the first book
published that contained a detailed chapter on double-entry bookkeeping.
Take note: Luca Pacioli is the father of modern accounting. He writes the book Summa
de Arithmetica where clearly defined the double-entry bookkeeping.
• French Revolution (1700s)
- The thorough study of accounting and development of accounting theory began during
this period. Social upheavals affecting government, finances, laws, customs and
business had greatly influenced the development of accounting.
• The Industrual Revolution (1760-1830)
- Mass production and the great importance of fixed assets where given attention during
this period.
• 19th Century - The Beginnings of Modern Accounting in Europe and America
- The modern, formal accounting profession emerged in Scotland in 1854 when Queen
Victoria granted a Royal Charter to the Institute of Accountants in Glasgow, creating the
profession of the Chartered Accountant (CA).
●Topic 1.5: Branches of Accounting● - Accounting is divided into several branches to
better serve the needs of different users with varying information needs. • Financial
Accounting - this is the broadest branch and focused and focused on the needs of
external users. - concerned with processing historical data. Examples: The Balance
Sheets Income Statement Statement of Cash flow Government Investors • Management
Accounting - Emphasizes the preparation and analysis of accounting information within
organization. - to provide timely and relevant information on for those internal users
such as managers and employees in their decision making. Example: Cost Analysis
Plans to open up branches Customer list • Government Accounting - The process of
recording, analyzing, classifying, summarizing, communication and interpreting financial
information about the government in aggregate and in details reflecting transactions and
other economic events involved receipt, spending, transfer, usability and disposition of
assets and liabilities. • Auditing TYPES OF AUDITING *External Auditing refers to the
examination of financial statement by an independent CPA with the purpose of
expressing an opinion as to fairness of presentation and compliance with the generally
accepted accounting principles. *Internal Auditing deals with determining the operational
efficiency of the company regarding the protection of the company's assets. • Tax
Auditing - Helps client follow rules by tax authorities. It includes tax planning and
preparation of tax returns. • Cost Accounting - It is very useful in manufacturing
business since they have the most complicated costing process. • Accounting Education
- This branch of accounting deals with developing future accountants, by creating
relevant accounting curriculum. • Accounting Research - Focuses on the search of new
knowledge on the effect of economic event on the process of summarizing, analyzing,
verifying and reporting standardized financial information.
●Topic 1.6: Forms of Business Organizations●
• Sole Proprietorship or Single Business
- The most common form of business organizations.
Example:
Sari-sari Store
Computer Shop
• Partnership
- A form of business owned by two or more person. The details of the arrangement
between the partners are outlined in a written document called articles of partnership.
• Corporation
- Is a business organized as a separate legal entity under the corporation law with
ownership divided into transferable shares of stocks.
• Cooperatives
- Is a duly registered association of person with a common bond of interest, voluntarily
joining together to achieve their social, economic, and cultural needs.
●Topic 1.7: Types of Business Organization●
• Service Business
- This type of business offers professional skills advise and consultations.
Examples:
Barber Shop
Beauty Parlor
Repair Shop
Banks
• Merchandising Business
- This type of business buys at wholesale and later sells the products at retail. They
make a profit by selling prices that are higher than their purchases costs. This type of
business is also known ad "buy and sell".
Examples:
Bookstore
Sari-sari store
Hardware store
• Manufacturing Business
- This busineds buys raw materials and uses them in making a new product, therefore
combining raw materials, labour and expenses into a product for sale later on.
Examples:
Shoe manufacturing business
Car manufacturing business
●Topic 2.1 to 2.11: Accounting Principles● ●Business Entity Principle - a business
enterprise is seperate and distinct from its owner or investor. Example: If the owner has
a barber shop, the cash of the barber shop should be reported separately from personal
cash. ●Going Concern Principle - business is expected to continue indefinitely.
Example: When preparing financial statements, you should assume that the entity will
continue indefinitely. ●Time Period Principle - financial statements are to be divided into
specific time intervals. Example: Philippine companies are required to report financial
statements annually. ●Monetary Unit Principle - amounts are stated into a single
monetary unit. Example: Jollibee should report financial statements in pesos even if
they have a store in the United States. ●Objectivity Principle - financial statements must
be presented with supporting evidence. Example: When the customet paid Jollibee for
their order, Jollibee should have a copy of the receipt to represent as evidence. ●Cost
Principle - accounts should be recorded initially at cost. Example: When Jollibee buys a
cash register, it should record the cash register at its price when they bought it.
●Accrual Accounting Principle - revenue should be recognized when earned regardless
of collection and expenses should be recognized when incurred regardless of payment.
Example: When a barber finishes performing his services, he should record it as
revenue or income. When the barber shop receives an electricity bill, he should record it
as an expense even if it is unpaid. ●Matching Principle - cost should be matched with
the revenue generated. Example: When you provide tutorial services to a customer and
there is a transportation cost incurred related to the tutorial services, it should be
recorded as an expense for that period. ●Disclosure Principle - all relevant and material
information should be reported. Example: The company should report all relevant
information. ●Conservatism Principle - also known as "prudence". In case of doubt,
assets and income should not be overstated while liabilities and expenses should not be
understated. Example: In case of doubt, expenses should be recorded at a higher
amount. Revenue should be recorded at a lower amount. ●Materiality Principle - in case
of assets that are immaterial to make a difference in the financial statement, the
company should instead record it as an expense. Example: A school purchased an
eraser with an estimated useful life of three years. Since an eraser is immaterial relative
to assets, it should be recorded as an expense.
●Topic 3.1 to 3.6: The Debit-Credit Rule●
●Assets
If asset increased, it will be considered Debit.
If asset decreased, it will be considered Credit.
The normal balance must be Debit.
●Liability
If liability increased, it will be considered Credit.
If liability decreased, it will be considered Debit.
The normal balance must be Credit.
●Capital
If capital increased, it will be considered Credit.
●Drawing
If drawing increased, it will be considered Debit.
The normal balance must be Debit.
●Revenue or Income
If revenue or income increased, it will be considered Credit.
The normal balance must be Credit.
●Expense
If expense increased, it will be considered Debit.
The normal balance must be Debit.
Take note: Capital, Drawing, Revenue or Income, and Expense is always increasing.
There is no such thing of decreasing.
●Topic 4.1: Definition of Each Major Account●
• Assets - are the resources owned and controlled by the firm.
• Liabilities - are obligations of the firm arising from the past events which are to be
settled in the future.
• Equity or Owner's Equity - are the owner's claims in the business. It is the residual
interest in the assets of the enterprise after deducting all its liabilities.
• Revenue or Income - is the increase in economic benefits during the accounting period
in the form of inflows of cash or other assets or decreases of liabilities that result in
increase in equity.
• Expenses - are decreases in economic benefits during the accounting period in the
form of assets or incidences of liabilities that result in decreases in equity.
●Topic 4.2: Different Types of Assets●
• Current Assets are assets that can be realized (collected, sold, used up) one year after
year-end date)
• Non-Current Assets are assets that cannot be realized (collected, sold, used up) one
year after year-end date.
• Tangible Assets are physical assets such as cash, supplies, and furniture & fixtures.
• Intangible Assets are non-physical assets such as patents and trademarks.
●Topic 4.3: Account Titles used for Asset Account●
○ Current Assets
• Cash is money on hand, or in banks, and other items considered as medium of
exchange in business transactions.
• Accounts Receivable are amounts due from customers arising from credit sales or
credit services.
• Notes Receivable are amounts due from clients supported by promissory notes.
• Merchandise Inventories are assets held for resale.
• Supplies or Supplies Unused are items purchased by an enterprise which are unused
as of the reporting date.
• Prepaid Expenses are expenses paid in advance. They are assets at the time of
payment and become expenses through the passage of time
○ Non-Current Assets
• Furniture and Fixtures it includes tables, chairs, showcase, counters, and other similar
assets owned and used by the business in its operation.
• Equipment it includes computers, calculators, cash registers, and other similar assets.
• Automobile includes assets used for transporting merchandise.
• Land owned by the business used for building sites and other business purposes.
• Building owned and used by the business in its operation.
●Topic 4.4: Different Types of Liabilities●
• Current Liabilities are liabilities that fall due (paid, recognize as revenue) within one
year after year-end date.
• Non-Current Liabilities are liabilities that do not fall due (paid, recognized as revenue)
within one year after year-end date.
●Topic 4.5: Account Titles used for Liabilities Account●
○ Current Liabilities
• Accounts Payable are amounts due, or payable to suppliers for goods purchased on
account or for services received on account.
• Notes Payable are amounts due to third parties supported by promissory notes.
• Unearned Income is cash collected in advance; the liability is the services to be
performed or goods to be delivered in the future.
• Salaries Payable are unpaid salaries of the employees at the end of the accounting
period.
• Taxes Payable are present obligation due to the government.
○ Non-Current Liabilities
• Loans Payable differs from accounts payable in that. Accounts payable do not charge
interest unless payment is late, and are typically based on the goods or services
acquired.
• Mortgage Payable is the liability of a property owner to pay a loan that is secured by
property.
• Interest Payable are interests incurred mounted from the loan incurred but unpaid at
the end of the period.
●Topic 4.6: Accounts Title used for Capital Account●
• Owner's Equity is the residual interest of the owner from the business. It can be
derived by deducting liabilities from assets.
• Owner's Drawing is an account debited for assets withdrawn by the other for personal
use from the business.
●Topic 4.7: Account Titles used for Income/Revenue Account●
• Sales is the total of merchandise sold.
• Service Income or Service Revenue is the amount of income earned for service
rendered by as service concern.
• Professional Fees is the amount earned by the professionals such as CPAs, doctors,
lawyers, etc. for services they rendered.
• Rent Income is the amouny of rental earned for the period.
• Interest Income amount earned for lending money.
●Topic 4.8: Account Titles used for Expense Account●
• Cost of Sales is the cost of goods purchased and sold or materials manufactured and
sold.
• Advertising Expense ie incurred to promote the product of the business.
• Salaries Expense it is the compensation given to the workers.
• Travelling Expense it is the travelling allowance given to sales agents.
• Supplies Expense amount of supplies used.
• Taxes Expense duties incurred in the current period.
• Utilities Expense amount of power/light and water consumed by the business. This
also include the telephone bill, etc.
• Repairs and Maintenance expenses incurred for repairing the assets of the business.
• Bad Debts or Uncollectible Account Expense is the estimated amounts of losses from
uncollectible accounts of the business.
• Depreciation Expense is the allocated cost of fixed assets in the current period.
• Rent Expense expenses that have been use for rent.