Lesson 1 – BASIC PRINCIPLES OF ACCOUNTING & BOOKKEEPING

I. Accounting
History
 Romans 14:12 – “So then every one of us should give ACCOUNT of himself to God”. Accounting is
believed to have originated from the creations’, giving account to God.

 Luca Pacioli – The Father of Accounting.

The concept and principles of double-entry bookkeeping was first written down in 1494 by an
Italian Monk named Luca Pacioli.

Definition
 There are three accounting definitions:
1. Accounting is a service activity. It functions to provide quantitative information, primarily
financial in nature, about economic entities that are intended to be useful in making economic
decisions with reasoned choices among alternative courses of action.

Quantitative Information refers to Financial Statements (Ex. Balance Sheet, Income Statement,
Cash Flows).

2. Accounting is the process 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 in
character and interpreting the results thereof.

Recording means the writing down of business transactions in the official book of accountants.

Classifying means sorting of business transactions to their specific accounts.

Summarizing is the summing up of the business transactions recorded in the book of accounts.

These three (3) processes comprise the first phase of accounting, which is
referred to as bookkeeping.

Bookkeeping is defined as the systematic and chronological recording of business

transactions, observing therein the fundamental principles of accounting.

A bookkeeper’s work is therefore called bookkeeping.

The word “chronological” means transactions should be recorded in accordance

with the date of the business transactions, from the first day of the month to the
last day of the month.
 These 3 processes – recording, classifying, and summarizing – must be in
terms of:
a. Money – means cash;
b. Transaction – the exchange of values. Values are money, rights,
properties, and services.
c. Event – is the act of happening. In accounting, an event must have an
impact in the business enterprise. The impact could either be positive or
negative. Most of the time, negative account is recorded than positive.
Impact, in this sense, means losses (quantifiable in terms of money) on
the part of the business enterprise, caused by any event.

3. Accounting is a language of business. Since accounting is the language of business, it also

entails communication. Accounting is communicating financial statements to the users.

II. Business Organization

Forms of Business Organization

1. Sole/single proprietorship. The ownership of the business enterprise is only one. Proprietor
refers to male owner, while proprietress refers to female owner.

2. Partnership. The ownership of the business enterprise ranges from two to more persons.
The owners are called partners (whether male or female).

3. Corporation. The ownership of the business enterprise ranges from five to more persons.

The generic name of the owner is called corporator. To be specific, stockholder or

shareholder owns a stock corporation, while member owns Non-stock Corporation. The
ownership of the corporations is divided into shares of stock.

Types of Business Organization

1. Service concern. This is a type of business organization that renders services to their
customers to earn an income.

2. Trading concern. Also called as merchandising concern. This type of business

organization usually buys merchandise and sells to their customers.

3. Manufacturing concern. This type of business organization usually buys raw materials and
converts them into finished products and is sold in the market.
III. Business Forms and Documents

A business document is used for external purposes – these are the business’ sales
invoice, cash sales invoice, charge invoice, official receipt, provisional receipt, etc. The
Bureau of Internal Revenue controls these documents.

Business forms, on the other hand, are used for internal purpose and they do not need to
be registered with the BIR. Examples of these forms are the payroll forms, journal voucher;
cash receipt voucher, check voucher, sales report form, purchase order, canvass sheet,
requisition form, receiving report, warehouse issue slips, etc.

Design of Business Forms and Documents:

i. Sales Invoice (Show a sample picture of Sales Invoice)
Sales invoice is sometimes called the cash sales invoice, charge invoice,
or service invoice. It documents the services rendered or the commodities
sold by the customer.

ii. Provisional Receipt (Show a sample picture of Provisional Receipt)

The provisional receipt is similar to the official receipt. The provisional
receipt is considered as temporary receipt and, therefore, cannot be
considered a good evidence to be kept.

iii. Official Receipt (Show a sample picture of Official Receipt)

Components of the Official Receipt:
a. The name of the business enterprise, the address, and the proprietor
(if single proprietorship);
b. The Tax Identification Number (TIN).
c. The amount.
d. The form of payment.
e. The signature of the authorized person to accept collection.
f. The control number.

iv. Cash Receipt Voucher (Show a sample picture of Cash Receipt Voucher)
Used when there is a cash receipt transaction.

v. Cash Payment Voucher (Show a sample picture of Cash Payment Voucher )

Used when there is a payment transaction.
Lesson 2 – ACCOUNTING CONCEPTS & PRINCIPLES, FINANCIAL STATEMENTS AND USERS

I. Accounting Concepts and Principles

1. Entity concept. This Concept states that the personality of the owner and the
personality of the business are distinct and separate from each other.
Examples of the application of this concept are as follows:
a. When a person opens a business, he will give a name to his business
enterprise. Therefore, there will be two personalities – the person
representing the owner and the name of the business enterprise
representing to the business opened by the owner.
b. Since the owner and the business are separate entities, each can transact
business separately.
c. The business can buy, sell, enter into contracts, pay liabilities, receive
money, deposit money to the bank, and withdraw money from the bank
and many others as if it had one personality.

2. Objectivity principle. Sometimes called the reliability principle. In order to be

objective, the transactions should be verifiable by other parties and are properly
supported with pieces of evidence.

3. Cost principle. This principles state that the transactions have to be recorded at
the amount that one has actually paid for.

4. Materiality principle. This principle states that the materiality of an account is a

matter of professional judgment.

5. Matching principle. This principle states that the reason the business earns an
income is that it simply spends.

6. Accounting period. A period of 12 months. There are two types of accounting

period:
a. Calendar period – a period of 12 months which will end on December 31.
b. Fiscal period – a period of 12 months which will end other than December 31.

7. Revenue recognition. An accounting principle that determines the specific

conditions under which income becomes realized as revenue or income.

8. Conservatism. This is a concept of recognizing expenses and liabilities in the least

amount of time if there is uncertainty of the outcome and certainty of revenue and
assets received.
II. Financial Statement

Financial Statements represent a formal record of the financial activities of an entity.

These are written reports that quantify the financial strength, performance and liquidity
of a company.

The four main types of financial statements:

1. Statement of Financial Position, (formerly called the balance sheet), depicts

the financial position of a business entity and is affected by 1) the economic
resources it owns and controls, 2) its financial structure, and 3) its liquidity and
solvency.

2. Income statement is the statement of the results of operation. It is the

statement that gives information to the users the idea whether the business
enterprise makes profit or losses for a period of time.

3. Statement of Cash flows is the statement that gives information to the users
about the cash sources and the cash uses of the business enterprise during a
given period of time.

4. Statement of changes of equity is the changes in the owner’s capital or

owner’s equity, and is also known as the capital statement.
 III. Users of Financial Statement

1. Business owners. The owners of the business enterprise. They are very particular to what
has happened in their business venture and they can only know it by providing a copy of
its financial statements.

2. Business managers. The work of managers is direct and controls the business enterprise;
they really need the financial statements as reference for their daily routine business
decision-making.

3. Government. It uses the company’s financial statement as its basis for checking the
correctness of the latter’s tax payment.

4. Potentials investors. They usually check first the soundness of the business enterprise
before they plan to invest their money and to assure a fair return of their investment as
well.

5. Creditors. They check on the paying capacity of the customers first to minimize doubtful or
uncollectible accounts.

6. Labor unions. They need the financial statements of the company as their basis to demand
for increase in the salary of their union members.

7. Budget officers/Accountants/Auditors. Budget officers prepare the company budget and

they need its financial statements so they can know the progress of its operation as
compared to its plan.