Accounting

Concepts and
Terminologies

Debit Credit
1. Understand key concepts of
Accounting and Economics in
Business
2. Prepare a chart of accounts
Objective Outline
1 What Is Accounting?

Understand key concepts of Accounting and

2 Economics in Business
 

Explain the functions of accounting in

3 business
What is
Accounting
?
Accoun = Explain
t
 ACTIONS

Accounting Explaination
TRANSACTIONS
 Identifying Recording

Communicating

ACTIONS

Accounting Explaination
TRANSACTIONS
 What is Accounting?
“The American Accounting Association (AAA) defines accounting as
“the process of identifying, measuring, and communicating economic
information to permit informed judgments and decisions by the users of
information.”

“The American Institute of Certified Public Accountants (AICPA)

defines accounting as the art of recording, classifying and summarizing
in a significant manner and in terms of money, transactions and events
which are part at least of a financial character and interpreting the results
thereof.”

“Accounting is a service activity. Its function is to provide quantitative

information, primarily financial in nature that is intended to be useful in
making economic decisions. ” (Accounting Standard Council - ASC)
What Is Accounting?
Simplest
definition

Accounting is
Accounting deals with recognized and
financial information “Language of characterized as a
and transactions. Business” storehouse of
information.
 Importance of accounting

ANALYSIS PURPOSE/ DECISION MAKING

Importance of accounting

RECORD KEEPING
 Importance of accounting

PREVENTION OF FRAUD AND DISCOVERY OF FRAUD

 5 main types of accounts used in
accounting
1.Asset
2.Liability
3.Equity
4.Revenue
5.Expense
1. owner invested cash amounting to
1,500,000
2. owner invested land amounting to
3,000,000
3. received cash amounting to 800,000
because of a bank loan
4. purchased supplies worth 10,000 cash
5. purchased furniture's worth 20,000 on
account
6. owner withdrew 50,000 cash for
personal use
7. paid 400,000 of the bank loan
ACTIVITY : Classify following as
Assets, liabilities and Owners equity.
• Account Receivable • Account
Payable
• Loan from Bank • Capital
• Building • Machinery
• Expenses Payable • Net Income
Recording Business Transactions

James Conner establishes her own

business and calls it Conner’s
Whitewater Adventure. Conner’s
Whitewater Adventure is a sole
proprietorship, a one-owner business.
Transactions:

Transaction (a) – Conner deposited

90,000 in a bank account in the name of
the business.
1. What accounts are involved?
2. What are the classification of the accounts
involved?
3. Are the accounts increased or decreased?
4. Is the equation in balance after the
transactions have been recorded?
Transaction (b) - Conner bought equipment,
paying cash, 38,000.
Transaction (b) - Conner bought equipment,
paying cash, 38,000.
Transaction (c) - Company bought
equipment on account from Signal Products,
4,320.
Transaction (c) - Company bought
equipment on account from Signal Products,
4,320.
Transaction (d) - Company paid Signal
Products, a creditor, 2,000 on account.
Transaction (d) - Company paid Signal
Products, a creditor, 2,000 on account.
Transaction (e) - Owner invested equipment
with a fair market value of 5,200 in the
business.
Transaction (e) - Owner invested equipment
with a fair market value of 5,200 in the
business.
Group Activity
Accounting equation
Example: Oliver Beer begins a business by investing P7,000 of his own money. The accounting equation would be:

Assets = Equity
Cash 7,000 = Owner’s investment 7,000
If Oliver Beer then borrowed 5,000 from the bank to provide the business with additional cash, the accounting equation would be:

Assets = Liabilities + Owner’s Equity

Cash 12,000 = Loan 5,000 +Owner’s investment
7,000 A L + O/E
 Asset Accounts
*Cash *Short-term Investments
*Accounts Receivable *Accrued Revenues

/Receivables
*Prepaid Expenses *Inventory
*Supplies *Long-term Investments
*Land *Buildings
*Equipment *Vehicles
*Furniture and Fixtures
 Liabilities Accounts
*Short-term Loans Payable
*Current Portion of Long-term Debt
*Accounts Payable
*Accrued Expenses
*Unearned or Deferred Revenues
*Installment Loans Payable
*Mortgage Loans Payable
 Owner’s Equity Accounts
*Paid-in Capital
*Common Stock.
*Paid-in Capital in Excess of Par Value -
Common Stock
*Retained Earnings.
July 1 - Paolo Reyes started a delivery service on July 1, 2013. The following transactions occurred during
the month of July. He invested PHP800,000 cash and Cars amounting to PHP200,000
July 1 - Paolo Reyes started a delivery service on July 1, 2013. The following transactions occurred during
the month of July. He invested PHP800,000 cash and Cars amounting to PHP200,000
July 2 – Reyes borrowed PHP100,000
cash from PNB for use in his business.
July 2 – Reyes borrowed PHP100,000
cash from PNB for use in his business.
July 7 – Bought tables and chairs from
Orocan and paid PHP45,000 cash
July 7 – Bought tables and chairs from
Orocan and paid PHP45,000 cash
July 15 – Various equipment were purchased
on account from Fortune for PHP55,000
July 15 – Various equipment were purchased
on account from Fortune for PHP55,000
July 18 – Reyes made a cash
withdrawal of PHP5,000 for personal
use
July 18 – Reyes made a cash
withdrawal of PHP5,000 for personal
use
July 20 – The account due to Fortune
was paid in cash
July 20 – The account due to Fortune
was paid in cash
The following table summarizes the effects of these
transactions on the accounting equation
 Balance Sheet
• The assets of a business and the claims on these assets may be expressed in
the form of a Balance Sheet. The balance sheet is a general financial report. It
consists of a list of the assets owned by a business and a list of people who
have a claim on those assets at a given date.
• A balance sheet is an important report that an accountant draws up for the
owner or manager of a business.
• A balance sheet uses the ‘Duality Concept’ which states that total assets always
equals total equities (A= L +O/E).
• This means that for every transaction, the total debit always equals the total
credit and at least 2 accounts are affected.

A L + O/E
 Further classification
• Assets and liabilities are further classified into current and non current.
• Current assets are assets that can be liquidated (converted into cash) within 12 months. Examples:
debtors, inventory, bank.
• Non current assets are assets that take longer than 12 months to be converted to cash. Examples:
vehicles, furniture, plant and equipment, investments, goodwill.
• Current liabilities are debts that must be repaid in less than 12 months. Examples: bank overdraft,
creditors.
• Non current (deferred) liabilities are debts that take longer than 12 months to repay. Examples:
Mortgage and other long term loans.
Layout of a balance sheet (T format)

A single line means

the sum of and total is
written in the next
column on the right.

A double line means

the final total. They
must be aligned.
Layout of a balance sheet (Narrative format)
Based on the
formula: O/E= A-L

Must add this

phrase

Total balanced
amount should be:
Net equity = net asset.