FUNDAMENTAL OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT

ACCOUNTING Users of Accounting Information

- is the systematic process of measuring and reporting Internal Users - those who are directly involved in
relevant financial information about the activities of an managing the business
economic organization or unit
a. Business owners
- is the art of recording, classifying, and summarizing
b. Board of directors
(money, transaction, and events)
c. Managerial personnel
- service activity
- Its function is to provide quantitative information, External Users
primarily financial in nature, about economic entities,
that is intended to be useful in making economic - those that do not have the authority to demand
decisions. financial reports
- who are not directly involved in managing the business
Four Aspects of Accounting a. Existing and potential investors
b. Lenders and creditors
 Recording
c. non-managerial employees
 Classifying
d. Customers
 Summarizing
 Interpreting Business - It is an activity where goods or services are
exchanged for money
BRANCHES OF ACCOUNTING

1. Financial Accounting - It focuses on general purpose

financial statements.
Form of Business Ownership Formation / Registration
 General purpose financial statements are those
Organization
that cater to the common needs of a wide range of
external users. One
Sole proprietor Registered with the DTI
2. Management Accounting - It involves the individual
accumulation and communication of information for
use by internal users. Formed by contractual
More than
3. Government Accounting - refers to the accounting for Partnership agreement
one
Registered with the SEC
the government and its instrumentalities, focusing
attention on the custody of public funds, the purpose or
purposes to which such funds are committed. More than Formed by operation of law
Corporation Registered with the SEC
4. Tax Accounting - It is the preparation of tax returns and one
rendering of tax advice
5. Cost Accounting - It is the systematic recording and
analysis of the costs of materials, labor, and overhead Formed in accordance w/ the
At least 15
Cooperative Cooperative Code Registered
incident to the production of goods or rendering of people
with the CDA
services
TYPES OF BUSINESS ACCORDING TO ACTIVITIES
Accounting Concepts and Principles
Service Business - It offers services as its main product
set of logical ideas and procedure that guide the rather than physical goods (school, hospitals, banks)
accountant in recording and communicating economic
``information Merchandising Business - Is one that buys and sells goods
without changing their physical form
Generally Accepted Accounting Principles (GAAP)
1. General merchandise resellers (grocery stores,
• These are broad, general statements or “rules” and department stores, etc.)
“procedures” that serve as guides in the practice of 2. Distributors and dealers (rice wholesalers, vegetable
accounting dealers, etc.)
• These are standards, assumptions, and concepts
with general acceptability. Manufacturing Business - Is one that buys raw materials
• These are measurement techniques and standards and process them into final products
used in the presentation and preparation of (factories, technology companies, car manufacturers)
financial statements.
Basic Accounting Principles
 Historical Cost - All assets are recorded at the cost of
acquisition and this cost is the basis for all subsequent
accounting for the assets
 Accrual Principle - It suggests that incomes and expenses
should be recognized as and when they are earned and
incurred
 Adequate Disclosure - States that all material facts that
will significantly affect the financial statements must be
indicated
 Materiality - This refers to the relative importance of an
item or event
 Consistency - Means that approaches used in reporting
must be uniformly employed from period to period to
allow comparison of results between time periods
 Monetary Unit Principle - Means that money is used as a
unit measurement and only business transactions that
has monetary value are recorded using a single currency
 Matching Principle - Means that expenses are matched
to the income earned during the period
 Conservatism Principle - Means that in situations where
there are two possibilities, choose the one that will have
the least favorable effect on the financial statements
Basic Accounting Concepts
 Separate Entity Concept - The business is viewed as a
separate person, distinct from its owner/s
 Periodicity - Is the concept behind providing financial
accounting information about the economic activities
of an enterprise for specified time periods
 Calendar Year – Jan 1 – Dec 31
 Fiscal Year – Starts on any month and ends twelve
months after the starting period
 Going Concern Assumption - The business is assumed
to continue to exist for an indefinite period of time
 Objectivity Principle - States that all business
transactions that will be entered in the accounting
records must be duly supported by verifiable evidence

BASIC ACCOUNTING EQUATION Illustration of the effects of the transaction in the accounting elements.
ASSETS LIABILITIES EQUITY
In relation to double-entry bookkeeping, ensuring equal debit
July 1 - Paolo Reyes started a delivery service on July 1, 2013. The following
effect and credit effect is fundamental to the universal transactions occurred during the month of July. He invested PHP800,000
acceptance of the basic accounting equation. cash and Cars amounting to PHP200,000.
Cash PHP 800,000 PHP 1,000,000
Cars PHP 200,000 - capital

July 2 – Reyes borrowed PHP100,000 cash from PNB for use in his business.
Assets – are the resources you control that have resulted
from past events and can provide you with future economic Cash PHP 900,000 PHP100,000 - loan PHP 1,000,000
Cars PHP 200,000 - capital
benefits.
July 7 – Bought tables and chairs from Orocan and paid PHP45,000 cash.
Liabilities – are your present obligations that have resulted
from the past events and can require you to give up resources Cash PHP 855,000 PHP100,000 - loan PHP 1,000,000
when settling them. Cars PHP 200,000 - capital
Furniture PHP 45,000
Equity – is simply assets minus liabilities. Other terms for July 15 – Various equipment were purchased on account from Fortune for
equity are “capital”, “net assets”, and “net worth”. PHP55,000.
Cash PHP 855,000 PHP100,000 – loan PHP 1,000,000
Note: Cars PHP 200,000 - capital
Assets must be equal the sum of liabilities and owner’s equity. The Furniture PHP 45,000 PHP 55,000
equal sign ensures balance of the movement in the three main Equipment PHP 55,000 - account payable
accounts being used in the accounting. The equal sign also separates
the left side(debit) from the right side (credit) of the equation.
July 18 – Reyes made a cash withdrawal of PHP5,000 for personal use.

Cash PHP 850,000 PHP100,000 – loan PHP 1,000,000

Cars PHP 200,000 - capital
Furniture PHP 45,000 PHP 55,000 PHP 5,000
Equipment PHP 55,000 - account payable withdraw

Determining profit through operation July 20 – The account due to Fortune was paid in cash
(liability)
Determining profit through operation Cash PHP 795,000 PHP100,000 – loan PHP 1,000,000
Cars PHP 200,000 - capital
Accrual basis of accounting vs Cash basis– accrual basis Furniture PHP 45,000 PHP 5,000
recognizes revenue when earned and recognizes expenses Equipment PHP 55,000 withdraw
when incurred
Under the expense recognition principle, expenses can be recognized as: (1) matching; (2) systematic allocation, or; (3) direct association.

Profit measures the performance of the company. If the revenue exceeds expenses, then it is a net profit; otherwise, it is a net loss.

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TYPES OF MAJOR ACCOUNTS & CHART ACCOUNTS LIABILITIES

Account – basic storage of information in accounting CURRENT LIABILITIES - Liabilities that fall due (paid,
FIVE MAJOR ACCOUNTS: recognized as revenue) within one year after year-end date.
Examples include Accounts Payable, Utilities Payable and
1. ASSETS - are the resources owned and controlled by Unearned Income.
the firm.
Accounts Payable are amounts due, or payable to,
2. LIABILITIES - are obligations of the firm arising from
suppliers for goods purchased on account or for services
past events which are to be settled in the future.
received on account.
Notes Payable are amounts due to third parties
supported by promissory notes.
Accrued Expenses are expenses that are incurred but not
3. 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.
4. 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. Income includes revenue and gains.
5. EXPENSES - are decreases in economic benefits during the accounting period in the form of outflows of assets or incidences
of liabilities that result in equity decreases

ASSETS

CURRENT ASSETS are assets that can be realized (collected, sold, used up) one year after year-end date. Examples include Cash,
Accounts Receivable, Merchandise Inventory, Prepaid Expense, etc.

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.
Allowance for bad debts – the aggregate of estimated losses from uncollectible accounts receivable.
Notes Receivable are amounts due from clients supported by promissory notes.
Inventories are assets held for resale
Supplies 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. (Supplies, rent insurance)
Accrued Income is revenue earned but not yet collected
Short term investments are the investments made by the company that are intended to be sold immediately

NON-CURRENT ASSETS are assets that cannot be realized (collected, sold, used up) one year after year-end date. Examples
include Property, Plant and Equipment (furniture, building, land), long term investments, etc.

 Property, Plant and Equipment are long-lived assets which have been acquired for use in operations.
 Long term Investments are the investments made by the company for long-term purposes
 Intangible Assets are assets without a physical substance. Examples include franchise and copyright.

Tangible Assets are physical assets such as cash, supplies, and furniture and fixtures.

Intangible Assets are non-physical assets such as patents and trademarks

BALANCE SHEET (or the statement of financial position) The account titles in the chart of accounts shown above are
It is one of the components of a complete set of financial numbered in the following manner:
statements. The balance sheet shows the financial position
1. The first digit in the 3-digit numbering refers to the major
of a business.
types of accounts:
INCOME STATEMENT (or the statement of profit or loss)

It is a sub-component of the statement of comprehensive

income, which is also one of the components of a complete
set of financial statements. The income statement shows
the profit or loss of a business.

CHART OF ACCOUNTS 2. The second digit in the 3-digit numbering refers to the
account titles and the sequence on how they are listed in the
- a listing of the accounts used by companies in their chart of accounts.
financial records.
- helps to identify where the money is coming from and 3. The third digit in the 3-digit numbering, if not zero, signifies
where it is going. that the account is contra account or an adjunct account to a
- the foundation of the financial statements related account.

BOOK OF ACCOUNTS AND DOUBLE – ENTRY SYSTEM

A business maintains 2 books of accounts, namely;

Journal and Ledger

1. JOURNAL
- is referred to as the book of original entry.
- It is the accounting record where business transactions
are first recorded.
- Business transactions are recorded in the journal
entries.
- The recording process is called journalizing.
2. LEDGER
- a systematic compilation of a group of accounts.
- It is used to classify the effects of business transactions on
the accounts.
- also called the “book of secondary entries” or the “book
of final entries” because it is used only after business
transactions are first recorded in the journals, the process
of recording in the ledger is called “posting”.
TYPES OF JOURNALS

 Special Journal – is used to record transactions of a similar nature. Special journals simplify the recording process, thus
providing an efficient way of recording and retrieving of information.

Common examples of Special Journals

o Sales journal – used to record sales on account
o Purchases journal – used to record purchases of inventory on account
o Cash receipts journal – used to record all transactions involving receipts of cash
o Cash disbursement journal – used to record all transactions involving payments of cash

 General Journal – all other transactions that cannot be recorded in the special journals are recorded in the general journal.
The general journal is the most basic journal. Typically, a general journal has spaces for dates, account titles and explanations,
references, and two amount columns.

 The journal makes several significant contributions to the recording process:

 It discloses in one place the complete effects of a transaction.
 It provides a chronological record of transactions.
 It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily
compared
NORMAL BALANCES OF ACCOUNT 1. Preparing the unadjusted trial balance – the balances of
The normal balance of an account is on the side where the general ledger accounts proved as to the quality of
an increase in that account is recorded. debits and credits. The unadjusted trial balances serve as
basis for adjusting entries.
2. Preparing the adjusted entries – the accounts are
updated as of the reporting date on an accrual basis by
recording accruals, expiration of deferrals, estimations,
and other events often not signaled by new source
documents.
3. Preparing the adjusted trial balance (or worksheet
ACCOUNTING CYCLE preparation) – the equality of debits and credits are
represents the STEPS rechecked after adjustments are made. The adjusted trial
or procedures used to balance serves as basis for the preparation of the
record transactions financial statements.
and prepare financial 4. Preparing the financial statements – these are the
means by which the information processed is
statements. communicated to users.
5. Closing the books – this involves journalizing and posting
STEPS IN THE ACCOUNTING CYCLE closing entries and ruling the ledger. Temporary accounts
are closed and the resulting profit or loss is transferred to
1. Identifying and analyzing business documents or an equity account.
transactions. – the accountant gathers information 6. Preparing the post–closing trial balance – the equality of
from source documents and determines the effect of debits and credits are again rechecked after the closing
the transactions on the accounts. process. (optional)
2. Journalizing – the identified accountable events are 7. Recording of reversing entries – reversing entries are
recorded in the journals. usually made at the beginning of the next accounting
3. Posting – information from the journal is transferred to period and are made to simplify the recording of certain
the ledger. transactions in the next accounting period. (optional)

JOURNAL ENTRY

- the process of recording business transactions in a

systematic and chronological manner (following the Guidelines for Journal Entry:
order of the date in which they occurred) in an official A complete journal entry should include the following
book of accounts. 6components:
The general journal is an accounting book with pages that 1. Date of the transaction
are divided into five columns with the following headings: 2. Debit entry (account title and account number)
3. Debit amount
1. Date – contains the date when the transaction 4. Credit entry (account title and account number)
occurred. 5. Credit amount
2. Particulars – contains the account titles affected by the 6. A brief explanation of the transaction
transaction, and a brief explanation of the transaction.
Simple Journal Entry - When an entry has only one debit and
one credit

Compound Journal Entry - When an entry has two or more

3. Posting Reference (P/R) / Account Number (Accnt#)
- contains the account number of the affected account. This is used to reference the other book of accounts in case of an
error in the recording, or if the debit and credit amounts do not balance.
4. Debit – the money column where the debit amount is recorded.
5. Credit – the money column where the credit amount is recorded