REVIEWER
• Financial – It is financial in nature
DEFINITION OF ACCOUNTING
• Service Activity.
• Just like how doctors provide
medication services to their
patients, Accountants provide
accounting services to their
clients such as handling their
finances, however with fees.
Thus, the reason why Accounting
is a service activity.
• The function of accounting is to
provide quantitative information,
primarily financial in nature.
• Quantitative Information talks
about numbers.
• However, in accounting, we are
not just talking about numbers.
Accounting talks about
information that is financial.
• Remember: what we do about
accounting is about “how
much”.
• About economic entities that is
intended to be useful in making
economic decisions.
• As businesses are provided with
accounting information with
regards to their financial status
(whether it is net income or loss),
the owners or managers can
make decisions to further
improve their company.
• Making reasoned choices among
alternative courses of action.
NATURE OF ACCOUNTING
• Art – because accounting is a
designed process that will give us an
output in the end.
because in accounting, we are
always talking about “how much?”
• Process – Accountants follow and
do step-by-step procedures until the
yet end of the financial statements.
• Information System – As there are
vast amount of data and
information in Accountancy
because this is a recording, thus
regarded as an information system.
FUNCTIONS OF ACCOUNTING
• Maintenance of systematic records
• Business needs record keeping
methodologies; they need to
keep those records, which is why
accounting is a very helpful tool
for those needs.
• Financial results of an entity can be
communicated
• Accounting can give
owners/managers of a company
the events that happened in the
operation.
• As accounting is used as a
communication tool, we can
regard it as the “Language of
Business.”
• Meeting legal requirements
• Protecting assets of a business
• The Assets or the reorder
resources of a business can be
protected because the
company has a proper record-
keeping methodology that
allows a company to keep track
of their resources with the use of
accounting.
• Assistance to management
• Because Accounting gives
information about the
operations of an entity.
 REVIEWER

BRANCHES OF ACCOUNTING
• Financial Accounting
• A branch of accounting wherein Financial Management
Accounting Accounting
we communicate the financial
results of a business entity through a
tool which we call FINANCIAL
STATEMENTS. Cost Accounting

• Information about cost is used by

Does the accounting
Financial Accounting

process
both Financial Accounting [Income
Statement purposes] and
Record Classified Summarized Management Accounting
[Management reports for decision-
The final output results to making]
FINANCIAL STATEMENTS
• Government Accounting
• Branch of Accounting which deals
• Management Accounting with the receipts and disposition of
• Branch of Accounting in which we public finance.
collect information to be used by • Auditing
the management. • More on checking and verification
• The outputs in management to know what we are doing is
accounting are primarily used for correct.
managerial decision-making. [The • TYPES OF AUDITING:
things the business needs to 1. Internal Auditing
strengthen, stop, etc.] Branch of Auditing in which
you are checking the
Difference between fa & ma operations of the company if
it is in line with the
• Financial Accounting reports the
management policies.
operations of the company in
2. External Auditing
totality.
An Auditor checks the
• On the other hand, Management
financial statements on its
Accounting is more flexible. It gives
accuracy and if it is in line
of detailed information about the
with the financial report
operations of the company.
framework.
• Tax Accounting
• Cost Accounting • Providing tax services to entities.
• Branch of Accounting that talks • Accounting Education
about anything that the company • Teaching accounting as a
has sacrificed to pay cost. profession.
• Cost Accounting provides • Accounting Research
information regarding all the costs • Conducting accounting related
and sacrifices that the company research.
has incurred.
 REVIEWER

TOPIC OUTLINE INTERNAL USERS:

➢ What information can be
generated in accounting? • Investors
➢ Who are the users of this • Investors look at the accounting
information? information to identify the stability
of company and worth the
THE USE OF ACCOUNTING INFORMATIONS investment.
• Creditors
• Resources • To determine if the company can
• Obligations truly fulfill their obligation to pay for
• Profitability Of the company the loan they would like to acquire
• Capital (Note: All of this can be seen on its due.
• Cash Flow in a financial statement)
• Customers
• Those dependent with the firm are
curious about the business
2 KINDS OF USERS: continuity.
• Employees
1. Internal Users • They are considered external users’
• People inside the company. In internal users are people who
simple terms, they are the people handle the decision-making.
who do the decisions for the Whereas, employees do work but
company and it comes along with not much with the decisions
the curiosity of the company’s related to the company.
stability. • Employees need to know the
• They need the accounting accounting information to know if
information primarily for decision- the company is still stable and has
making. (MA) the capability to pay their wages.
2. External Users • Suppliers
• To know if the company has the
capability to pay the goods or
INTERNAL USERS:
products the suppliers will provide.
• Owners • Tax Authorities
• They are the one who provides the • To know if the company is
capital to the business and assess if compliant and pay the right
it needs funding. amount of taxes.
• Thus, the owners need the • Government
accounting information to be • To know if the company follows the
updated about the status of their rules and regulations.
company. • General Public
• Managers • People who are curious about
• The managers need the financial business terms can look at
information because they are the accounting information and know
ones who pan and organize the the new trends in business.
firm.
 REVIEWER
TOPIC OUTLINE
➢ Define, explain, and differentiate
the four (4) forms of business
organizations.
➢ Identify the advantages and
disadvantages of each form of
business organizations.
4 Forms of Business Organizations:
1. Sole Proprietorship
2. Partnership
3. Corporation
4. Cooperatives
SOLE PROPRIETORSHIP
• Also referred to as a sole trader or a
proprietorship.
• It is an unincorporated business that
has one owner.
• This type of business is easy to
established or dismantle due to lack of
government involvement, making
them popular to small business owners
and contractors.
• Ex: When a person has the capital to
DISADVANTAGES:
support their business idea, then they
can quickly start-up their business.
ADVANTAGES:
• Easy to Form
• When a sole proprietor has funds to
support his business idea and ready
to start their business, they can with
ease.
• Effort-Reward Relationship
• When the efforts of a sole
proprietor are given to the business,
he will then receive and enjoy the
reward.
• Full Control
• Since he/she is the only owner of
that sole proprietorship type of
business, then he/she has the full
control of the business.
• Quick Decisions
• Since the owner is the sole owner of
the business, he doesn’t need
anyone to advise him on what to
do.
• Economical and Efficient Operations
• Since establishing the business is
easy and the business is a bit small,
then the operations of the business
is efficient.
• Personal Touch
• Being the only owner entails that
they can give their business some
personal touch to what they really
want to do in the business.
• Keep the Business Simple, Dynamic,
and Flexible
• Because the owner can enjoy the
personal touch and control over
their business, the business itself is
dynamic and flexible.
• Small Size
• Usually, sole proprietorship doesn’t
really go big because of the limited
capital.
• Limited Life
• Sole proprietorship tends to stop as
a sole proprietor because they
need funding; the company enters
partnerships or corporations.
• Lacks Professional Skills and Talent
• As a starting small business, the
company would not have any
manager or staff; the sole owner of
the company is the only brain in
improving the business.
 REVIEWER
• Unlimited Liability
• In any case or scenario that the
business owner takes up loans to
continue the business but still fail to
succeed, even their personal
assets can be affected.
• Ex: Creditors taking their personal
assets as alternative payment for
their loans.
ADVANTAGES:
• Growth Prospects
• People encounter growth
prospects problem when it comes
to sole proprietorship type of
business for the earlier said factors.
• Ex: Many competitors since
establishing a sole proprietorship
type of business is easy, small in size,
etc.
• Limitation of Capital
• Capital or Funds in this type of
business is limited since there is only
one owner, with no other people
such as investors to give extra
capital.
• Risk of Wrong Decisions
• As the sole owner of the business,
they are at risk of making the wrong
decisions because there are no
other people who can give out
advice to them with regards to
their decision-making.
PARTNERSHIP
• By the contract of partnership two or
more person bind themselves to
contribute money, property, or
industry to a common fund, with the
intention of dividing the profits among
themselves.
• Ex: A group of three friends would like
to start a bakery business. One is rich;
thus, she can provide the capital/fund
to start the business. The second has a
property wherein they can start-up the
business. And lastly, the third friend
knows how to bake (industry).
• Two or more persons may also form a
partnership for the exercise of a
profession. [Article 1767 Civil Code of
the Philippines] (Ex: Accounting & Law
Firms)
• Bridging the Gap in Expertise and
Knowledge
• Having partners in a firm helps to fill
the lack of knowledge and skills of
other members in the group; thus, a
group becomes complete in
knowledge and expertise.
• More Cash (and properties)
• More funding opportunities
because in a partnership type of
business, you can partner with
other people.
• More Business Opportunities
• Since partnership comprises of
multiple individuals, they also have
their own connections and can
surely advertise their business to be
known, which gives more business
opportunities.
• Moral Support
• Each person in the partnership can
gain moral support since they are
acquainted with one another or
even more so, friends.
• New Perspective
• In a partnership where two or more
people are involved, they gain
new perspective and opinions
when it comes to decision- making
which helps in making better
decisions for the company.
 REVIEWER
DISADVANTAGES:
• Loss of Autonomy
• In a partnership type of business,
two or more depending on the
number of partners in the company
makes the decision and cannot
avoid disagreements.
• Emotional Issues
• There are also emotional issues to
consider when it comes to
partnership most especially when it
comes to the relationship between
partners.
• Future Selling Complications
• When it comes to decisions with
regards to the company.
• Ex: Partner A wants to enter a
contract while Partner B doesn’t.
• Unlimited Liability
• General Point here is that like sole
proprietorship, partners can also
use their personal asset to pay for
the company’s liabilities.
CORPORATION
• An artificial being created by
operation of law, having the right
succession and the powers, attributes,
and properties expressly authorized by
law or incidental to its existence.
o A corporation is like a human
being (as artificial), it can file a
case against people and vice
versa.
o Remember that it is created by
operational law; without any
approval of any legal
prospective here, the operation
will not proceed.
o A corporation has a right of
succession, so in any case of
the owners would change, the
corporation will still continue.
ADVANTAGES:
• Limited Liability
• The creditors cannot go after the
personal assets of the shareholders
to answer the liabilities of the
corporation. (There is really a
boundary between the owners
and the corporation itself.)
• Source of capital
• The company has a big source of
capital because once the business
sells shares, the company gets
money.
• Ownership transfer
• If a shareholder doesn’t want to
become a shareholder of the
company anymore, they can just
simply sell their shares to other
people. Thus, the ownership can
be transferred to the buyer.
DISADVANTAGES:
• Double Taxation
• In a sense that the profits of a
corporation is being taxed already;
however, when those profits are
already distributed to the
shareholders of a corporation, it will
also be taxed again.
• Independent Management
• The owners of a corporation will
create a management that will
really look into the operations of
the company. And sometimes, the
decisions of the management is
different from the owners, which
causes an agency problem.
o Why? Because the
management is the agent
that works for the principal,
and the principal of the
business are the owners of
the corporation.
• Forming a corporation cost more
 REVIEWER
COOPERATIVES TOPIC OUTLINE
➢ Define and differentiate the
• People-centered enterprises owned,
controlled and run by and for their different activities of business
members to realize their common organizations.
economic, social, and cultural needs
and aspirations.
• Remember that cooperatives are
being built because there is only a 3 Types of Businesses:
common goal.
1. Services
2. Merchandising
ADVANTAGES: 3. Manufacturing
• Lower Costs
• Further Marketing Reach
SERVICE INDUSTRY
• Because a cooperative has many
members, they can work for the
• A business that generates income by
providing services (for a fee).
company.
• Democratic organization • Common Examples: Barbershop,
Salon, Spa, Travel Agency, etc.
• The goal of a cooperative is to let
• Professional Business Examples: IT
the members of the cooperative
Solutions Firm, Law Firm, Accounting
enjoy the benefits of the
Firms, etc.
cooperative.

MERCHANDISING INDUSTRY
DISADVANTAGES:
• Buying and selling goods.
• Big Investors don’t get much
• A company that purchases goods
attracted
from a supplier, in which these goods
• In a cooperative, one member, will be sold to customers.
one vote only. Unlike in a • Ex: Grocery Store, K-pop Store, etc.
corporation that the number of
votes that the shareholder can
give in a shareholders meeting is MANUFACTURING INDUSTRY
equal to the number of shares that
• A company that purchases raw
they bought.
materials, in which these raw materials
• Lack of membership and will undergo a process, until it
participation becomes finished goods to be sold to
• Basically, since people are not customers.
attracted in entering a • In manufacturing, the company
cooperative for of business, it will prepares the goods to be sold.
result to lack of membership and • Ex: Ice Cream company = Buys
especially participation. ingredients/raw materials, process the
raw materials, and then sell the
processed goods.
 REVIEWER

INCOME MEASUREMENT PER BUSINESS

1. SERVICE 3. MANUFACTURING
Service Revenue xxx Sales Revenue xxx

Less: Operating Expenses (xxx) Less: Cost of Goods Sold (xxx)

Net Income (Loss) xxx Gross Profit xxx

Less: Operating Expense (xxx)
Ex: A barber shop earned P60,000 during
the month of April. Salaries paid to barbers Net Income (Loss) xxx
amounted to P20,000, utilities paid for is
P6,000, and rent of the space for the Ex: A car manufacturing company sold 2
barber is P5,000. How much is the net cars totaling P3,000,000 during the month
income of the barber shop? of April. Car parts and materials used for
these cars amounted to P600,000, labor
Service Revenue 60,000 costs paid amounted to P800,000 and
Less: Operating other indirect costs to manufacture the
Expense cars amounted to P100,000. Salaries paid
Salaries Expense 20,000 to office employees amounted to
Utilities Expense 6,000 P50,000, utilities paid is P20,000 and rent of
Rent Expense 5,000 (31,000) selling area and office space is P10,000.
Net Income 29,000 How much is the net income of the car
company?
2. MERCHANDISING
Sales Revenue 3,000,000
Sales Revenue xxx Less: Cost of
Less: Cost of Goods Sold (xxx) Goods Sold
Materials 600,000
Gross Profit xxx
Labor 800,000
Less: Operating Expense (xxx) Overhead 100,000 (1,500,000)
Net Income (Loss) xxx Gross Profit 1,500,000
Less: Operating
Ex: A grocery store earned P225,000 from Expense
selling their goods during the month of Salaries 50,000
April. These goods sold were first Utilities 20,000
purchased at an amount of P160,000. Rent 10,000 (80,000)
Salaries paid to employees is P25,000, Net Income 1,420,000
utilities paid is P4,000 and rent of selling
area is P6,000. How much is the net
income of the grocery?
Sales Revenue 225,000
Less: Cost of Goods Sold (160,000)
Gross Profit 65,000
Less: Operating Expense (35,000)
Net Income 30,000
 REVIEWER

ACCOUNTING CONCEPTS AND PRINCIPLES ACCRUAL BASIS OF ACCOUNTING

TOPIC OUTLINE
➢ Define and explain the different
accounting concepts prevailing
➢ Explain the generally accepted
accounting principles
• Revenue is recorded when earned.
• Expenses are recorded when it
happens.
• Regardless of when cash is received or
paid.

CASH VS ACCRUALS
GENERALLY ACCEPTED
Cash Accruals
ACCOUNTING PRINCIPLES (GAAP)
Revenue Received Earned
• Refer to a common set of accounting Expenses Paid Incurred
principles, standards, and procedures
issued by the Financial Accounting GOING CONCERN
Standards Board (FASB).
• An accounting term for a company
2 GENERALLY ACCEPTED ACCOUNTING that is financially stable enough to
meet its obligation, continue its
PRINCIPLES IN THE PHILIPPINES:
business for the foreseeable future and
1. Philippine Financial Reporting that the company’s closure is not
Standards (PFRS) imminent.
2. Philippines Accounting Standards • This is a guiding principle that we
(PAS) record transactions as if there’s no
closure.
These are adapted from the IFRS
(International Financial Reporting Standards) MONETARY UNIT
and IAS (International Accounting
• Transactions are express in a monetary
Standards)]
unit of measure.
• These are our grading principles on • In the Philippines, we record
how to record transactions transactions in Philippine Peso.
appropriately.
• It helps for consistency and uniformity TIME PERIOD
in of how we report transactions.
• Transactions are summarized and
DIFFERENT ACCOUNTING ASSUMPTIONS reported at regular time intervals/
• In actual practice, we usually report
ECONOMIC ENTITY/ ACCOUNTING ENTITY financial reports/statements annually
that can be either:
• The personal transactions of the owner
o Calendar year- January 1-
are separate from that of the business
December 31
he/she owns.
o Fiscal Year- Any starting point +
• Anything that happens to the business
12 months.
doesn’t relate to the owner personally.
• A border between the personal
transaction of the owner and the
business transaction itself.
 REVIEWER
DIFFERENT ACCOUNTING CONCEPTS/PRINCIPLES
COST PRINCIPLE/HISTORICAL COST
• Amounts shown in financial reports are
historical cost/ original acquisition
cost.
• We record transactions on how much
it was when it happened that time.
FULL DISCLOSURE PRINICIPLE
then the item is considered to be
material.
• If the error/misstatement changes or
affects your decision, then the item is
considered material.
• Usually use in audit.
Example:
For a company with a cash of P 5,000 and
there’s missing P 1,000, that is materials
because it may affect the owner’s
decision about the business.

• Sufficient information for informed CONSERVATISM

judgement.
• Accountants should include all of the
• If there are two acceptable
information needed so that the
alternatives in a situation, choose
readers of the financial statements will
the alternative that will result in
have good judgements and decisions
lesser income or resource; in short,
when it comes to the business.
the accountant will choose the
MATCHING PRINCIPLE option wherein the business is at a
disadvantage.
• Matching revenues with expenses to • We don’t want our Financial
know the profit of the business, if the Statement (FS) to look too
company incurred income or loss. glamorous.
• This is the concept of the net income.
OBJECTIVITY
REVENUE RECOGNITION PRINCIPLE
• Recording and reporting process
• Recognize revenue when goods are should be performed with
sold or services are rendered, independence which is free from
regardless of cash receipt. bias.
o You record revenue when it
happens and not when cash is
received from the customer.

DIFFERENT ACCOUNTING CONSTRAINTS

MATERIALITY
• In accounting, this refers to the impact
of an omission or misstatement of
information in a company’s financial
statements on the user of those
statements.
• If it is probable that users of the
financial statements would have
altered their actions if the information
had not been omitted or misstated
 REVIEWER
QUALITATIVE CHARACTERISTICS OF USEFUL
FINANCILA INFORMATION
2 KINDS OF QUALITATIVE CHARACTERISTICS:
1. Fundamental- These are the
characteristics that accountants
should possess.
2. Enhancing- to further improve.
FUNDAMENTAL CHARACTERISTICS
RELEVANCE
• When it influences the economic
decisions of users by helping them
evaluate past, present, or future
events, or confirming or correcting,
their past evaluations.
• An item is considered relevant
when it has an effect on you. In
professional term, an item is
relevant if it has both predictive
value and confirmatory value.
o Predictive Value- we are
able to predict what can
happen in the future and
make a decision for the
company.
o Confirmatory Value- you are
able to confirm what
happened in the past.
FAITHFUL REPRESENTATION
• A Balance sheet should faithfully
represent the transactions and other
events that result in assets, liabilities,
and equity of the enterprise.
• Financial Statement (FS) should be
complete, neutral, and free from error
o Complete- all the transactions
are recorded appropriately
and all the disclosure has been
put in.
o Neutral- it should be free from
bias.
o Free from error- Financial
Statement shouldn’t have an
error.
ENHANCING CHARACTERISTICS
VERIFIABILITY
• The items in the Financial Statement
(FS) are verifiable.
• There may be supporting documents
that can verify that it is really what
happened.
COMPARABILITY
• This has 2 kinds which are:
1. Intra comparability- comparing
our own Financial Statement (FS)
with our own Financial Statement
(FS) of different years.
[Own Financial Statement (current)
vs Own Financial Statement
(different years]
2. Inter comparability- comparing
our Financial Statement (FS) to
other companies within the same
industries.
[Our Financial Statement vs other
companies Financial Statement
(within the same industry)]
Example: Food to food.
• The measurement and display of the
financial effect of like transactions and
other events must be carried out in a
consistent way throughout and over
time.
UNDERSTANDABILITY
• Users are assumed to have a
reasonable knowledge of business
and economic activities as well as
accounting and a willingness to study
the information with reasonable
diligence.
TIMELINESS
• We should eventually record the
transactions when it happened
because if the transactions are not
timely then the reports are not relevant
anymore.
 REVIEWER
THE ACCOUNTING EQUATION DEFINITION OF CAPITAL/EQUITY
TOPIC OUTLINE • Residual interest in the assets of the
➢ Define and explain what assets, entity after deducting all its liabilities.
liabilities, and capital are.
➢ Solve problems relative to the
accounting equation.
WHAT IS THE ACCOUNTING EQUATION?
Assets = Liabilities + Equity/ A = L + E
DEFINITION OF ASSET Other Form of Equation are:
• These are resources of the company
used in operations/ operating the Liabilities = Assets - Equity/ L = A - E
business.
• Example: Cash, Land, Building, Equity = Assets - Liabilities/ E = A - L
Machines, etc.
• A resource controlled by the entity as SAMPLE PROBLEMS
a result of past events and from which
future economic benefits are Problem 1: A company has assets of
expected to flow to the entity.
P1,000,000 and has liabilities of P400,000. How
much is the capital?
o An asset is a resource since a
business truly uses assets for the
Equation: E= A – L
sake of the company.
Solution: 1,000,000 – 400,000
o Controlled by the entity = There
Answer: Capital/Owner’s Equity= P600,000.
is ownership.
o Past Event – Example: You Problem 2: B Company has liabilities of
bought a land, which result to P500,000 and capital of P700,000. How much
you owning it. You bought are the assets?
office supplies, which results to
you having office supplies. Equation: A = L + E
o As we utilize these assets for the Solution: 500,000 + 700,000
company’s operation, we Answer: Assets= P1,200,000.
expect that this will bring future
economic benefits. Problem 3: C Company has assets of
P4,000,000 and capital of P2,800,000. How
DEFINITION OF LIABILITIES
much are the liabilities?
• In Tagalog, utang.
• Anything that the company loans that Equation: L = A – E
they will need to pay in the future is Solution: 4,000,000 – 2,800,000
considered as a liability. Answer: Liabilities= P1,200,000.
• A present obligation of the entity
arising from past events, the
settlement of which is expected to
result in an outflow from the entity of
resources embodying economic
benefits.
 REVIEWER
MAJOR ACCOUNTS
TOPIC OUTLINE
➢ Define and explain each element of
financial statements.
➢ Provide examples of each type of
element.
➢ Prepare chart of accounts.
3 ELEMENTS OF FINANCIAL STATEMENTS:
1. Assets
2. Liabilities
3. Capital
ASSETS
• There are two major classifications of
assets: Current Assets and Non-
Current Assets.
CURRENT ASSETS
• under Philippine Accounting
Standard 1 (PAS 1), “Presentation of
Financial Statements” an entity shall
classify assets as current when:
A. It expects to realize the asset, or
intends to sell or consume it, in its
normal operating cycle;
B. It holds the asset primarily for the
purpose of trading;
C. It expects to realize the asset within
twelve months after the reporting
period; or
D. The asset is cash or cash
equivalent, unless, the asset is
restricted from being exchanged
or used to settle a liability for at
least twelve months after the
reporting date.
• Current assets include cash and those
assets which can be readily
converted into case or sold or
consumed within one year or normal
operating cycle.
o Normal operating cycle refers
to the time span during which
case is used to acquire goods
and services, which in turn are
sold to customers, who in turn
pay for their purchases with
cash.
COMMON EXAMPLES OF CURRENT ASSETS
1. Cash – normally consists of coins and
currencies on hand, money orders,
and some checks from customers,
and deposit in bank accounts.
Basically, it is the company’s money.
2. Trading Securities – also known as
Temporary Investments. These are
short-term investments of funds which
are available for current operations
and intended to be held for
generating short-term profits from
fluctuations in value.
3. Receivables – represent amounts
collectible from customer, clients and
other person for goods, services or
money given. These include:
a. Accounts Receivable – these
are collectibles from customers
arising from sale of goods or
services on open accounts
without any formal written
promise to pay.
b. Notes Receivable – these are
collectibles which are
supported by formal promises
to pay in the form of promissory
notes.
c. Other Receivables such as
Accrued Interest Receivable,
Advances to Officers and
Employees, and Dividends
Receivable.
➢ Allowance for Doubtful
Accounts, sometimes
termed as Allowance
for Bad Debts, is a
contra-asset account or
valuation account.
 REVIEWER
4. Inventories – assets that are held for
COMMON EXAMPLES OF CURRENT ASSETS
sale in the ordinary course of business,
in the process of production for such
1. Fixed Assets – also known as Property,
sale or in the form of materials or
supplies to be consumed in the Plant and Equipment (term normally
production process or in rendering of used for a manufacturing firm). These
services. are tangible assets which are held by
a. In a merchandising firm, the an enterprise for used in production or
title used for inventories is supply of goods and services, for
Merchandising Inventories. rental to others, or for administrative
b. For a manufacturing firm, purposes, and are expected to be
inventory accounts include used for more than one accounting
Raw Materials Inventory, Work- period.
in-Progress Inventory, Finished a. Land – a lot or real estate
Goods Inventory and Factory owned and used by a firm as
Supplies. building site, parking area and
5. Prepaid Expenses – are expenses
other business operations.
paid and recorded as assets before
i. It should be noted that
they are used or consumed. Examples
land for current sale as
of these expenses paid in advance
include Prepaid Rent, Prepaid in case of subdivided
Insurance, and Prepaid Advertising. lots is a current asset.
ii. Land held for
➢ Part of this sub- speculation or for future
classification is office sale should be classified
supplies and store as long-term
supplies such as investment.
stationery, ball pens, b. Building – structure used to
erasers, envelopes and house the office, store or
other supplies not yet factory.
used. It can be in the c. Equipment – includes among
form of Office Supplies others:
or Store Supplies i. Machinery – may be
depending on its composed of
purpose. stamping machines,
ovens, etc.
NON-CURRENT ASSETS ii. Furniture and fixture –
• under PAS 1, all other assets that tables, chairs, etc.
cannot be classified as current are iii. Office Equipment –
classified as non-current. This includes ballpen, computers,
tangible, intangible, operating and etc.
financial assets of long-term nature.
Accumulated Depreciation is a contra-asset
account representing usage of asset or expired
cost of the asset up to the present. It is also a
contra-asset because it is deducted from the
appropriate fixed account (except for land that
increases its value over time) to produce the book
value for the asset.
 REVIEWER
2. Long-term Investments – assets by an
enterprise for the accretion of wealth
through distribution such as interest,
royalties, dividends, and rentals, for
capital appreciation or for other
benefits to the investing enterprise
such as those obtained through
trading relationships. It is defined as
assets not directly identified with the
operating activities of the business.
a. Investments In Stocks
investments in the capital stock
of a corporation.
b. Investment In Bonds
Investments in government or
corporation bonds.
c. Investment Property
investment in real properties
(land and/or building) being
held by the company for
capital appreciation purposes
or to earn additional income
(i.e., rentals)
d. Fund or non-current purposes
like Plant Expansion Fund,
which is cash set aside for
future purchase of additional
property.
3. Intangible Assets – identifiable non-
monetary assets without physical
substance held for use in the
production or supply of goods or
services, for rental to others, or for
administrative purposes.
a. Patent – an exclusive right
granted by the government to
an inventor enabling him to
control the manufacture, sale,
or other use of his invention for
a specified period of time.
b. Copyright – an exclusive right
granted by the government to
an author, composer, or artist
enabling him to publish, sell or
otherwise benefit from their
work.
c. Trademark – a symbol, sign or
name used to mark a product
to distinguish it from other
products.
d. Franchise – a right or privilege
granted by the franchisor to a
franchisee.
e. Goodwill – value of all
favorable attributes that relate
to a business enterprise like
– good name, capable staff and
personnel, high credit
standing, reputation for fair
– dealings, reputation for
superior products, etc. It arises
when expected earnings
– exceed normal earnings.
4. Other Non-current Assets – include
other long-term items which cannot
be appropriately classified under the
usual asset categories.
a. Advances to Officers and
Employees – not collectible
within one year
b. Restricted Cash Accounts –
such as Cash in Closed Banks
c. Long-term Installment
Receivables
d. Non-productive Property or
property no longer used in
operations. These are simply
known as ‘IDLE ASSETS’
e. Damaged Inventory – not yet
declared as loss of the
enterprise.
LIABILITIES
• Present obligations of an enterprise
arising from past transactions or
events,
• There are two major classifications of
assets: Current Liabilities and Non-
Current Liabilities.
 REVIEWER
CURRENT LIABILITIES
• under PAS 1, an entity shall classify
liability as current when:
a. It expects to settle the liability
in its normal operating cycle;
b. It holds the liability primarily for
the purpose of trading
c. The liability is due to be settled
within twelve months after the
reporting period; or
d. It does not have an
unconditional right to defer
settlement of the liability for at
least twelve months after the
reporting period.
• Liabilities, such as trade payables and
accruals for employees and other
operating costs, are classified as
current liabilities since they are to be
paid within one year or the normal
operating cycle whichever is longer.
COMMON EXAMPLES OF CURRENT LIABILITIES
1. Accounts Payable – refers to
indebtedness that arise from
purchase of goods, materials, supplies
or services in an open charge
account, that is, it is not evidenced by
any written promise to pay.
2. Notes Payable – when a promissory
note is issued as evidence of the
indebtedness that arise from
purchase of goods, materials, supplies
or services or in place of an open
charge account for such purchases.
3. Communications Payable - may
include obligations to companies for
postage, telephone and telegraph
and similar services received by the
business.
4. Utilities Payable – obligations to utility
companies like electric companies,
water companies, etc.
5. Taxes and Licenses Payable –
payables to the government in the
form of business and transfer taxes,
income taxes. Business permits, etc.
6. Withholding Tax Payable, SSS
Payable, PhilHealth Payable, PAGIBIG
Payable – payables to government
agencies like Bureau of Internal
Revenue, etc.
7. Unearned Revenue – represents
obligations for goods or services that
a company must provide or deliver in
a future accounting period in return
for an advance payment from a
customer like in the case of Unearned
Interest Income, Unearned Rent
Income, and Unearned Subscriptions
Revenue.
8. Accrued Expenses – also known as
Accrued Liabilities, these are
expenses that have been incurred but
not yet paid like in the case of
Accrued Salaries Payable and
Accrued Interest Payable.
NON-CURRENT LIABILITIES
• UNDER PAS 1, all other liabilities not
classified as current should be
classified as non-current liabilities.
COMMON EXAMPLES OF NON-CURRENT
LIABILITIES
1. Long-term Notes Payable – an
obligation evidenced by a promissory
note that is to be paid beyond one
year.
2. Bonds Payable – a liability supported
by a formal unconditional promise
made under seal to pay a specified
sum of money at a determinable
future date, and to make periodic
interest payments at a stated rate
until the principal is paid.
3. Mortgage Payable – a long-term
obligation to a financial institution.
 REVIEWER
OWNER’S EQUITY/CAPITAL b. Rent Income – revenue earned
from renting out commercial
• The term used in reporting a firm’s
spaces (like apartments,
equity depends on the kind of
condominiums, market stalls)
business organization it is.
c. Interest Income – revenue
a. If it is a sole proprietorship, the
earned for lending money.
term “OWNER’S EQUITY” would
d. Commission Income – revenue
be more appropriate.
earned by real estate brokers,
b. A partnership’s capital can be
insurance agencies, travel
referred to as “PATNERS”
agencies, etc.
EQUITY”
e. Sales – principal revenue of
c. For a corporation,
both merchandising and
“STOCKHOLDERS’ EQUITY” or
manufacturing concerns from
“SHAREHOLDERS’ EQUITY”
selling goods to customers.
• The owner’s equity comes from two
sources:
Sales Returns and Allowances
a. Net Investment = Investments –
is a contra-revenue account
Drawings
which represents merchandise
b. Net Income = Income –
returns from customers and/or
Expenses
deductions from the original
(b.1) Income
sales price.
(b.2) Expense
o Sales Returns – refers to the
merchandise returned at
COMMON EXAMPLES OF OWNER’S EQUITY
selling price by the
In a sole proprietorship, the following items customers due to defects,
are considered: inferior quality or not in
accord with the customer’s
1. (NAME OF OWNER), CAPITAL – the
specifications.
total of the initial and additional
o Sales Allowances – refers to
contributions made by the owner,
cases when the customer
which is increased by profits and
would be willing to keep
decreased by losses and owner’s
the merchandise, if the
withdrawals.
seller is willing to grant a
2. (NAME OF OWNER), DRAWING or
deduction from the selling
(NAME OF OWNER), PERSONAL –
price.
represents cash or other assets taken
by the owner for personal use. Sales Discount is a contra-
3. Income – increases in economic revenue account that refers to
benefits during the accounting period the reduction in the amount to
in the form of the inflows or be paid by a customer as a
enhancements or assets or decreases result of early payment of an
of liabilities that result in increases in invoice.
equity.
a. Service Revenue/ Professional 4. Expenses – are decreases in
Fees/Income from Fees – economic benefits during the
revenue earned from selling accounting period in the form of
services. outflows or depletions of assets or
 REVIEWER
incidences of liabilities that result in
decreases in equity. These are
decreases in owner’s equity resulting
from the costs of goods and services
used up in the course of earning
revenues.
a. Advertising Expense – refers to
cost of publications on
newspapers, radio, television,
calling cards and other costs of
promoting the business.
b. Communications Expense –
refers to cost of all means of
communications used during
the period like telephone,
telegraph services and
postage.
c. Delivery Expense – also known
as “Freight out or
“Transportation Out”.
represents the cost of gasoline,
oil and other related expenses
in transporting goods to
customers.
d. Depreciation Expense – refers
to the portion of the total cost of
fixed assets allocated to
current operations.
e. Insurance Expense – refer to
insurance premium paid or
payable to an insurance
company. (This account is used
when the prepaid insurance
was used; it becomes an
expense)
f. Interest Expense – refers to the
cost of borrowing funds used
by the business. Also known as
”Finance Cost”
g. Rent Expense – refers to
charges on the right to occupy
shop or office space or enjoy
the use of other properties or
assets belonging to another
party.
h. Repairs and Maintenance
Expense – refers to the cost of
repairing and servicing certain
assets like buildings and office
equipment.
i. Representation Expense –
refers to the cost of entertaining
customers and prospective
clients and others.
j. Salary Expense – refers to the
compensation or remuneration
in whatever form given to
employees for the services
they render to the company or
firm.
k. Supplies Expense – refers to the
cost of ballpens, erasers and
other supplies used or
consumed by the enterprise.
It l. Taxes and Licenses – refer to
business taxes, licenses, and
other fees due to the
government.
m. Utilities Expense – refers to the
cost of electricity and water
consumed during the current
accounting period.
n. Purchases – refers to the
merchandise acquired or
bough during the period, which
is intended to be sold in the
ordinary course of business.
➢ Purchase Returns and
Allowances is a contra-
expense account,
which refers to the
reduction from the
amount the company
should pay for the
merchandise.
➢ Purchase Discount is a
contra-expense
account that refers to
the discount taken by
the company for early
payment.
 REVIEWER
o. Freight In or Transportation in –
refers to the cost of
transporting items bought for
resale from its point of origin to Note: If the account’s number starts with 3,
the point of destination. (A then it would mean that it belongs to owner’s
delivery expense but equity or capital.
shouldered by the buyer)
p. Cost of Merchandise Sold – the
value of items sold to the
customers, which is computed
by adding the beginning
inventory, purchases and Note: If the account’s number starts with 4,
freight in to come up with the then it would mean that it is a revenue
merchandise Available for Sale account.
and deducting inventory.

PREPARE CHART OF ACCOUNTS

• Is a listing of the names of the
accounts that a company has
identified and made available for
recording transactions.

Example for Chart of Accounts:

Note: If the account’s number starts with 5,

then it would mean that it is an expense
account.

Note: If the account’s number starts with

1, then it would mean that it is an asset.

Note: If the account’s number starts with

2, then it would mean that it is a liability.
 REVIEWER
BOOKS OF ACCOUNTS
TOPIC OUTLINE
➢ Differentiate the use of a journal from
a ledger.
➢ Illustrate the format of general journal
and special journal.
➢ Illustrate the format of a general
ledger and a subsidiary ledger.
➢ Learn what is a T-account
GENERAL JOURNAL
• It is also called “Book of Original
Entry.”
• The importance of the general journal
in accounting is to keep track of each
individual event.
• Each transaction is recorded as soon
as it takes place.
What is a “SPECIAL JOURNAL”?
• Journals designed for transactions
that are repetitive and recurring,
which the use of a general journal
would be inefficient.
GENERAL LEDGER
• The purpose of the ledger is to track
broad trends and overall shifts in
funds.
• It provides an accurate record of all
financial transactions. It helps you
compile a trial balance, so your books
balance. It makes filing tax returns
easy because you have expenses
and income is in one place. These
include cash flow statement, income
statement, and balance sheet.
• It serves as the basis for the income
statement, cash flow statement, and
the balance sheet.
2 Kinds of General Ledger:
➢ Nominal Ledger
o it gives information on
expenses, income,
depreciation, insurance, etc.
➢ Private Ledger
o It gives private information like
salaries, wages, capitals, etc.
o Used to keep the accounts
relating to the directors and
possibly other highly
confidential accounts.
o Generally, access to the
private ledger is restricted to
certain authorized personnel; it
is not accessible to everyone.
o Private ledger does not mean
ledgers of private companies.
THE T-ACCOUNT
• is an accounting device used to
record increases and decreases in
the different elements of accounting
caused by the business transactions
that have transpired.
• Means of accumulating in one place
all the information about the changes
in specific financial statement items.
• It consists of three parts:
o The account title
o The left or debit side
o The right or credit side
• The T-account is a simple and direct
means of recording transactions.
However, in practice, a somewhat
more complicated form of the
account is needed in order to record
more information; thus, Accountants
use a general ledger.
 REVIEWER
ANALYSIS OF BUSINESS TRANSACTION RULES OF DEBIT AND CREDIT
TOPIC OUTLINE • Transactions are exchanges of values.
➢ Define a business transaction. • For every value received, there is a
➢ Differentiate external transactions value parted to it.
from internal transactions. • Therefore, in every transaction, there
➢ Analyze business transactions and is a dual or double effect – receiving
their effects on the accounting (debit) and giving (credit) of value –
equation. that affects at least two accounts
which would either increase or
GENERAL JOURNAL decrease. This method Is known as
Double Entry Bookkeeping System.
• All business enterprises become a
party, directly or indirectly, to various
financial activities or events. If these NORMAL BALANCE
activities and events occurring during Debit Credit
a given period of time, affect the Assets + -
business’ financial position and are Liabilities - +
capable of being assigned monetary Owner’s Equity - +
values, they are referred to as Drawing + -
business transactions. Expenses + -
Revenue - +
A transaction is defined as exchange of
values that are equal or which are presumed • The term “debit” comes from the word
to be equal. In other words, accounting “debitum”, meaning “what is due”,
presupposes that in any transaction, for and “credit” comes from “creditum”,
every value given away, there is an equal defined as “something entrusted to
and compensating value received. It must another or a loan”.
have the following characteristics: • The abbreviation for debit is DR and
1. It must be for a sum certain in money; for credit is CR.
2. It must be supported with genuine o One theory asserts that the DR
source document, such as sale of and CR come from the Latin
goods or services, must be evidenced past participles of debitum and
by an invoice; a collection of cash, by creditum which are “debere”
an official receipt; a cash payment, and “credere”.
by a disbursement voucher;
3. It must have a two-fold effect on the
elements of accounting.

RECORDING AND CLASSIFYING

• Double Entry System
o is a processing system that
involves entering the two
effects of every transaction.