Bookkeeping

- a process of recording “systematically” the business transaction in a “chronological

manner.”

Accounting
- The art of recording, classifying, summarizing in a significant manner and in terms of
money, transactions, and events which are, in part at least, of a financial character,
and interpreting the result thereof.

NATURE OF BUSINESSES

 Service Concern

the business derives its income from services rendered to clients in the case of professional
services or to customers

 Merchandising

the business is engaged in buying goods or commodities or any form of finished products and
sells these at a profit, it might be at a retail or wholesale basis
 Manufacturing

the business is engaged in buying of raw materials and supplies to be processed or manufactured,
converting them into finished products for sale or profit

 Agriculture

- the business is engaged in planting of crops and sells its products either in raw
or finished form at a profit
LEGAL FORMS OF BUSINESS

 Sole Proprietorship

- simplest form of business organization where capital is owned and provided

by only one person called the “Proprietor” who may manage the business by
himself or hire another person to do so

 Partnership

- the capital of the business is owned or provided by two or more people called
“Partners” who should set forth agreements among themselves which include
among others, the initial investments among partners, how profit and loss is to
be divided and settlement to be made upon death and withdrawal of a partner
embodied in the “Articles of Co-Partnership” they have executed

 Corporation

- the biggest and most complicated form of business organization

- organized by at least five (5) but not more than fifteen (15) people called
“Incorporators”
- its capital (Capital Stock) divided into units (Shares) and each share has a
designated value (Par Value)
- maximum number of years to exist is 50 years and can extend its life by
amending the “Articles of Incorporation”

 Cooperatives

- operate similarly to a corporation

- have its Board of Directors who are selected from among its members

THE BASIC ACCOUNTING ASSUMPTIONS

The basic accounting assumptions are generally accepted guidelines that help accountants in
preparing a complete set of financial statements.
The five (5) Basic Accounting Assumptions are as follows:
Accounting Entity Assumption

Basically, the accounting entity assumption is the same as the business entity principle. In this
system, a business firm is considered a separate and distinct entity from its owner. The
accounting entity assumption calls for the separation of accounting records between a business
firm and its owner.

Going Concern Assumption

Every financial statement reports a business firm’s capacity and performance based on the
understanding that the business will continue its operations indefinitely – except if there is
evidence that the business firm will close its operations in the near future.
Time Period Concept
The time period concept holds the idea that business transactions should be recorded when they
occur. Recording of business transactions should be done within the course of the business firm’s
operating period – either at a fiscal year or a calendar year known as accounting period.
Accounting period can be a period of:
1 month - Where financial statement are prepared at the end of every month.
The shortest accounting period and call on a Monthly Basis
3 months - Where financial statements are prepared at the end of every three
months. This is called Quarterly Basis.
6 months - Where financial statements are prepared at the end of every six
months. This is called Semi-Annual Basis or Semestral Basis
12 months - Where financial statements are prepared at the end of every twelve
months. This is called yearly or annual basis
The accounting period of less than a year is called Fiscal Period and the financial being prepared
and are being referred to as interim financial statements.
Three (3) Annual Accounting Periods
Calendar Year - The accounting period will begin in January 1 and will
end on December 31 of the same year
Fiscal Year - The accounting period will begin on the first day of any
month of the year except January and will end on the last
day of the twelfth month completing the one year period.
Natural Business Year - Is a twelve month period that ends on any month when
the business is at the lowest or experiencing slack session
Monetary Value/Unit Assumption
The monetary value assumption also known as the monetary unit assumption holds that each
business transaction is expressed in terms of a common unit of measure – a common currency
that has legal tender.
Accrual Basis Accounting
In its simplest terms, the accrual basis accounting assumes that income is recognized when
earned regardless of the date of payment. On the other hand, expenses are recorded when
incurred regardless of whether it was paid in cash or in credit terms.
 THE ACCOUNTING CYCLE

FINANCIAL STATEMENTS
- designed to serve the needs of variety of users, particularly owner and creditors
- its objective is to provide information about the financial position, performance and
cash flows of an enterprise that is vital in making a sound economic decisions
Four (4) Basic Financial Statements
1. BALANCE SHEETS
- Financial statement which shows the financial position of an enterprise as a
particular date.
- Consists of three (3) sections (Assets, Liabilities, Owner’s Equity)
- Always dated as:
“As of specific date”
- Measures and evaluates in terms of the enterprise’ liquidity, solvency, financial
structure and capacity for adaptation
- Represents the equation :
ASSETS = LIABILITIES + OWNER’S EQUITY
2. INCOME STATEMENT
- Financial statement which shows the performance of the enterprise for a given period
of time
- Represents the equation:
PROFIT (LOSS) = REVENUE – EXPENSES
 - The period covered maybe:
“For the month ended” “For the quarter ended”
“For the year ended” “or any accounting period that my be chosen”
3. STATEMENT OF CHANGES IN EQUITY
- Financial statement that summarizes the changes in equity for a given period of time
- The beginning equity of the owner is increased by the additional investment and net
income and decreased by withdrawal and net loss
4. STATEMENT OF CASH FLOWS
- Financial statement that provides information about cash inflows (Receipts) and cash
outflows (Payments) of an entity for a given period of time which are being
classified
ELEMENTS OF A FINANCIAL STATEMENT
1. Assets
- resources controlled by the enterprise as a result of past transactions and events and
from which future economic benefits are expected to flow the enterprise
2. Liabilities
- Present obligations of an enterprise arising from past transactions or events, the
settlement of which is expected to result in an outflow from the enterprise of
resources embodying economic benefits
Essential Characteristics of a LIABILITY
- The liability is the present obligation of a particular enterprise (enterprise’ liability
must be identified)
- The liability arises from past transactions or events (liability is not recognized
until it is incurred)
- The settlement of the liability requires an outflow of the resources embodying
economic benefits (the obligation of the enterprise is to transfer cash and non-cash
resources or provide services at some future time)
3. Owner’s Equity / Capital
- Residual interest in the assets of the enterprise after deducting all its liabilities

Owner’s Equity / Capital = Assets - Liabilities

Terms used in reporting the equity of an enterprise depending on what form of

enterprise so as:
1. Owner’s Equity for a proprietorship
2. Partner’s Equity for a partnership
3. Stockholder’s Equity / Shareholder’s Equity for corporation
Drawing or Personal
 - amount of cash or value of the property that the owner has invested in the
enterprise but later withdrawn for personal use
4. Revenue and Gains
Revenue
- Gross inflow of economic benefits during the period arising in the course
of ordinary activities of an enterprise when those inflows result in increase
in equity, other than those relating to contributions from owners
Gains
- Income from activities and events that do not form part of the ordinary
course of the business operation

BASIC CHART OF ACCOUNT

The chart of accounts is a numerical listing of all identified accounts used by a company to
record transactions. As part of the accounting cycle, the chart of accounts is used in the
journaling process (i.e., performing journal entries) and also serves as the title for each ledger.
All the accounts will be filed under one of five categories:

 Assets (What is owns)

 Liabilities (claim of creditors)
 Owner’s Equity (claim of the owner)
 Revenue (Income)
 Expenses
  Example Chart of Accounts
 Davao Laundry Services
 Chart of Accounts

Balance Sheets Account Income Statement Accounts
(Permanent Account) (Temporary Account)

Account Account
Account Title Account Title
No. No.
ASSETS INCOME
111 Cash 441 Laundry Income
112 Accounts Receivable
112-A Estimated Uncollectible Accounts EXPENSES
113 Laundry Supplies Inventory 551 Uncollectible Accounts
114 Laundry Equipment 552 Depreciation Expense
114-A Accumulated Depreciation 553 Salaries Expense
LIABILITIES 554 Rent Expense
221 Notes Payable 555 Utilities Expense
222 Account Payable 556 Taxes and Licenses
223 Accrued Advertising 557 Advertising Expense
OWNER’S EQUITY 558 Interest Expense
331 S. Santos, Capital
332 S. Santos , Drawing
333 Income & Expense Summary

 5. Expenses and Losses
Expenses
- Gross outflow of economic benefits during the period in the course of
ordinary activities of an enterprise when those outflow result in decrease
in equity, other than those relating to distribution to owners
Losses
- Represents decreases in assets or increases in liabilities arising from that
activities or events that are outside the ordinary course of the business
operation

PROFIT = REVENUES > EXPENSE

LOSS = REVENUES < EXPENSE

IDENTIFYING BUSINESS DOCUMENTS

Source Documents
The actual sequence of events begins with the
identification of transactions, those that are considered as
accountable and those that are not. The rule is, only
transactions and events which are of financial bearing to
the business are being recognized.
The basis of identifying transactions are the
supporting business documents that are on file or yet to be
filed as evidence of transactions to assure the reliability
and verifiability of accounting records.
The most common documents of a service concern are the following:
 Official receipts
- a written acknowledgment
- a specified note that shows money
which has been received as an
exchange for products or services
- aims to provide an assurance that the
party has paid for the expenses of the
products which it has purchased
- can be printable or online and their
format and pattern can vary depending
upon the requirements of the company
 Purchase orders
 - Written authorization for a supplier to ship products at a specified price,
which becomes a legally binding contract once the supplier accepts it.
 Receiving reports
- Document used within a firm, upon receiving the shipment of merchandise to
formally record quantities and description.
 Cash vouchers
- a small form that is used to document a disbursement (payment) from a cash
fund. Cash vouchers are also referred to as cash receipts and can be
purchased from office supply stores.
 Checks, etc.

ACCOUNT TITLES
- identifications or brief descriptions of items that fall to same kind, class or nature
Here are the different account titles which we have classified into Balance Sheet (financial
position) and Income Statement (performance).
BALANCE SHEET ACCOUNTS
(Permanent Accounts)
ASSETS (classified into two, namely: current assets and non – current assets – PAS No. 1)
Current Assets – all assets that are expected to be realized, sold or consumed within the
enterprise’s normal operating cycle (the interval of time from the date of acquisition of
merchandise inventory, sell the inventory to customers and the ultimate collection of cash from
the sale)
 Cash
- account title to describe money, either in paper or in coins and money
substitutes like check, postal money orders, bank drafts and treasury
warrants. When cash is within the premise of the business, the account title
is “Cash on Hand” and “Cash in Bank” if deposited in the bank
 Petty Cash Fund
- The account title for money placed and set aside for petty or small expenses.
This exists when business used the imprest system of keeping cash.
 Cash Equivalents
- per PAS No. 7, cash equivalents is defined as short-term, highly liquid
instruments that are readily convertible into cash and they present
insignificant risk of changes in values because of changes in interest rates
 Notes Receivable
- This is a promissory note that is received by the business from the customer
arising from rendering of services, sales of merchandise, etc.
 Accounts Receivable
- The account title for amounts collectible arising from services rendered to a
customer or client on credit or sale of goods to customers on accounts. This
constitutes an oral or verbal promise to pay by a customer or client
  Allowance for Bad Debts
- This is an “asset offset” or a “contra-asset” account. It provides for possible
losses from uncollected accounts. Although this is not actually an asset, it is
classified as such because it is shown as a deduction from the Accounts
Receivable which is a current asset account.
 Accrued Interest Income
- the amount of interest earned on a Notes Receivable which is not yet
collected. (If the note is interest bearing).
 Advances to Employees
- The account title for amounts collectible from employees for allowing them
to make cash equivalents which are deductible against their salaries or
wages
 Inventories
- Per PAS No. 2, these are assets which are (1) held for sale in the ordinary
course of business; (2) in the process of production for such sale; or (3) in
the form of materials or supplies to be consumed in the production process
or in the rendering of services
 Prepaid Expenses
- account title for expenses that are paid in advance but are not yet incurred or
have not yet expired such as Prepaid Rental, Prepaid Insurance, Prepaid
Interest, Prepaid Advertising, etc.
 Unused Supplies
- An account title for cost of stationery and other supplies purchased for use
but are left on hand and still unused. The account title should be specified as
to “Unused Office Supplies” if intended for the office, “Unused Shop
Supplies” in intended for the shop, etc.

Non-Current Assets – all other assets not classified as current

 Property & Equipment
- Tangible assets which are held by an enterprise for use in production or
supply of goods and services, for rental to others, or for administrative
purposes, and are expected to be used during more than one period
 Land
- Account title for the site where the building used as office or store is
constructed
 Building
- Account title for a finished construction owned by the business where
operations and transactions took place
 Equipment
- Includes calculators, typewriters, adding machines, computers, steel filing
cabinets, etc. If these are used in the office, the account title is “Office
Equipment” and if used in the store, “Store Equipment”. Trucks, jeeps, vans,
automobiles and other kinds of motor vehicles are used exclusively for
delivering goods, the account title is “Delivery Equipment”
 Furniture & Fixtures
 - Includes chairs, tables, counters, display cases, etc.
 Accumulated Depreciation
- This is an “asset offset” or “contra asset” asset and also called “Valuation
account” which is shown as a deduction from property and equipment
 Intangible Assets
- Identifiable non-monetary assets without physical substance (PAS No. 38)
- E.g. patents, copyrights, franchises, trademarks, goodwill and others
LIABILITIES (classified into two namely: current liabilities and non-current liabilities)
Current Liabilities – are financial obligations of the enterprise which are (a) expected to be
settled in the normal course of the operating cycle; (b) due to be settled within one year from the
balance sheet date
 Accounts Payable
- An account title for a financial obligation of an enterprise that constitutes
an oral or verbal promise to pay
 Notes Payable (short-term)
- Same as Accounts Payable in nature but only the obligation is evidenced
by a promissory note. The enterprise is the one who issued the note.
 Accrued Expenses
- These are expenses that incurred by the enterprise but are not yet paid.
This normally occurs when the accounting period ended such as rent,
salaries, interest, taxes payable, etc.
 SSS Premium Payable
- Refers to the amount due and payable by the enterprise to the Social
Security System. This is composed of both employer and employees share
of SSS contributions
 Philhealth Premium Payable
- Refers to the amount due and payable by the enterprise to the Philippine
Health Insurance Corporation. This is composed of both employer and
employees share of Philhealth contributions
 Pag-ibig Premium Payable
- Refers to the amount due and payable by the enterprise to the Home
Development Mutual Fund. This is composed of both employer and
employees share in Pag-ibig contributions
 Withholding Tax Payable
- Refers to the amount due and payable by the enterprise to the Bureau of
Internal Revenue for the tax withheld from employees
 Pre-collected Income or Unearned Income
- This is an account title for an income collected or received in advance and
is not yet considered “earned”
Non-Current Liabilities – are financial long term obligations for the enterprise which are due
and payable for more than one year. This is usually occurs in a corporate form of organization
 Notes Payable (long - term)
 - Same nature with that of Notes Payable (short – term) but only, this
requires payment for more than a year
 Mortgage Payable
- a financial obligation of an enterprise which requires a fixed or tangible
property to be pledged as a collateral to ensure payment
OWNER’S EQUITY
 Capital
- Center of owner’s concern because this may increase or decrease anytime
as a result of business operation. In the normal course of operation, Owner’s
Equity will be increased by “Income” and decreased by “Expenses”
- The owner’s capital investment is indicated by the use of the owner’s
name with a word “capital” written after the name which is separated by a
“comma”. For example, “J. Dela Cruz, Capital”
 Withdrawal
- The owner’s withdrawal is likewise indicated by the use of the owner’s
name with the word “Drawing” or “Personal” written after the name which
is separated by a “comma”. For example, “J. Dela Cruz, Drawing” or
“J.Dela Cruz, Personal”
 Income & Expense Summary
- This is a temporary account created at the end of the accounting period
where Income and Expenses are temporarily closed to this account
INCOME STATEMENT ACCOUNTS
(Temporary Accounts)
Income or Revenue
 Sales
- In general, this represents revenue derived from the sale of merchandise
 Service Income
- In general, this is the account title used for all types of income derived
from rendering of services and also called “Service Revenue”
 Professional Income
- The account title generally used by professionals for income earned from
the practice of their profession or maybe specified as “Accounting or
Auditing Fees Income” for Accountants, “Legal Fees Income” for Lawyers,
“Dental Fees Income” for Dentists, “Medical Fees Income” for Doctors, etc.
 Rental Income
- for income earned on buildings, space or other properties owned and
rented out by the business as the main line of its activity
 Interest Income
- For income received by the business arising from an amount of money
borrowed by a customer and is usually covered by a promissory note. This is
typical in lending institution
 Miscellaneous Income
 - For income earned by the business which is not the main line of its activity
and could not be clearly classified
Expenses
 Cost of Sales or Cost of Goods Sold
- Cost to produce and sell the goods
 Interest Expense
- An expense incurred from borrowed money and separately shown as a
deduction from Operating Income before arriving as Net Income
 Rent Expense
- For the amount paid or incurred for use of property, usually premises
 Repairs & Maintenance
- For expenses incurred in repairing or servicing the buildings, machineries,
vehicles, equipment, etc., which are owned by the business
 Stationery & Off ice Supplies Expense
- The stationery, envelopes, clips, fasteners, etc., used in the office will bear
the account title as “Office Supplies”, if use in the store “Store Supplies” or
another title may be used to describe the kind of supplies used
 Salaries Expense
- For compensation given to employees of a business
 Bad Debts
- For the anticipated loss that the business may incur arising from
uncollectible accounts
 Depreciation Expense
- For the allocated portion of the cost of property and equipment or fixed
assets
 Taxes & Licenses
- For the amount paid for business permits, licenses and other government
dues except the Income Tax paid which is not allowed by law as a deduction
 Insurance Expense
- Account title for the expired portion of the insurance premium paid
 Utilities Expense
- The account title for Telephone, light and water bills and also include
gasoline, lubricants and oil
 SSS Contribution
- account title for the employer’s share on SSS contribution
 PhilHealth Contribution
- account title for the employer’s share on Philhealth contribution
 Pag-Ibig Contribution
- account title for the employer’s share on Pag-ibig contribution
 Miscellaneous Expense
- Any amount paid as expense which is not significant enough to warrant a
particular classification
After familiarizing yourself with the commonly used account titles and before proceeding into
the accounting process, let yourself be acquainted the different things to master in the
bookkeeping world.