Review of Accounting

Process (CHAPTER
1)
OBJECTIVES
1. Review the basic principles and concepts learned in
accounting.
2. Identify and explain the basic steps in the accounting process
(Accounting cycle).
3. Analyze transactions, prepare journal entries and post the
entries to the ledger.
4. Make adjusting entries and produce financial statements.
Accounting
• Is an 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
results thereof. (AICPA)
Importance of Accounting in
Business
Importance of Accounting in
Business
Purpose of F/S
• F/S are a structured representation of the financial position and
of the transactions undertaken by an entity that is useful to a
wide range of users in making and evaluating decisions about
the allocation of resources.
• Specifically, the objectives of F/S in the public sector are to
provide information useful for decision-making, and to
demonstrate the accountability of the entity for the resources
entrusted to it.
• F/S can also have a predictive/prospective role, providing
information useful in predicting the level of resources required
for continued operations and the resources that may be
generated by them.
ACCOUNTING STANDARDS
• are authoritative statements of how a particular type of transactions
and other events should be reflected in the financial statements.

PICPA – Philippine Institute of Certified Public Accountants

ASC – Accounting Standards Council

SFAS – Statement of Financial Accounting Standards

GAAP – Generally Accepted Accounting Principles

Philippine Accountancy Act of 2004 (R.A 9298) when a new set of

standard setting body known as PFRSC - Phil. Financial Reporting
Standards Council was created by the PRC - Phil. Regulation
Commission upon the recommendation of the Board of Accountancy to
replace ASC. Because of this recent development the ASC’s SFAS is now
known as Phil. Accounting Standards (PAS).
ACCOUNTING ASSUMPTIONS
1. Accounting Entity Concept or Separate entity Assumption
2. Going Concern or Continuity Concept or Assumption
3. Time-Period Assumption
• Calendar Year – January to December 31
•Fiscal Year – begin on the 1st day of the month except January and
will end on the last day of the 12th month completing the 1 year
period.
• Natural Business Year – a 12th month period that ends on any
month when the business is at the lowest or experiencing slack
season.
4. Unit of Measure (monetary Conversion)
5. Accrual Basis Assumption
Basic Financial Statements

Balance Sheet Statement of Financial Position

Income Statement Statement of Comprehensive Income

Cash Flows Statement Statement of Cash Flows

Statement of Changes in Net Assets Statement of Changes in Equity

 Statement of Financial Position or Balance
Sheet
• shows the financial position of an enterprise as of a particular or specific date
and measures and evaluates in terms of enterprise’s
1. Liquidity – the ability of the enterprise to meet currently maturing
obligations
2. Solvency – the ability of cash over the longer term to meet maturing
obligations.
3. Financial Structure – the source of financing for the assets of the
enterprise. It indicates how much is borrowed capital and how much
is equity capital.
4. Capacity for adaptation – the financial flexibility of the enterprise to use
its available cash for unexpected requirements and investment
opportunities.
Balance Sheet Elements
Assets Liabilities and Equity

-Current Assets Liabilities

-Noncurrent Assets -Current Liabilities

-Noncurrent Liabilities
• Resources owned by the business
• Present obligations
• Controlled as a result from past events
• Resulting from past events
• Embodying future economic benefits
• The settlement of which is expected to
or service potential
result in an outflow of resources
embodying economic benefits or
service potential

Equity
The residual interest

Total Assets Total Liabilities and Equity

 Statement of Comprehensive Income or
Income Statement
• shows the performance of the enterprises for a given period of
time.
• The performance is primarily measured in the level of income
earned by the enterprise through effective and efficient
utilization of its resources.
• This financial report shows the Revenues, Expenses and
Operating results which could either be profit or loss
• It answers the questions: Does the business make a profit”
Does the business incur a loss?
 Income Statement Elements

Economic
Income - Expenses = result
of the year
Increases in economic Decreases in economic
benefits benefits
 Statement of Changes in Equity
• summarized the changes in equity for a given period of time
• The beginning equity of the owner is increased by the additional
investment and profit. Correspondingly, it is decreased by
withdrawal and loss.
• The use of the above term depends upon the forms of business
enterprise, as:
Statement of Changes in Owner’s Equity – for sole proprietorship
Statement of Changes in Partner’s Equity – for a partnership
Statement of Changes in Shareholder’s Equity – for a corporation
 Statement of Changes in Net assets/Equity (Sole
Propriertorship and Partnership Pro-forma)

Beginning Capital xxx

Add:Net Income xxx
Addt’l. investments xxx xxx
Total xxx
Less: Withdrawals xxx
Ending Capital xxx
 Statement of Cash Flows
• provides information about the details of changes in cash
position of the business during a given period
• This shows the sources and uses of cash
• It is the statement of cash receipts and cash disbursements
• It is classified into the following activities:
a. Operating
b. Investing
c. Financing
 Statement of Cash Flows Pro-Forma

• Cash flows from operating activities xxx

• Cash flows from investing activities xxx
• Cash flows from financing activities xxx
Net increase (decrease) in cash xxx
Add: Beg. Cash balance xxx
Ending Cash Balance xxx
CHART OF ACCOUNTS
• List of account titles that is prepared by the accountant
beforehand to guide the bookkeeper describing the exchanges
of values
• Arranged according to assets, liabilities, owner’s equity, income
and expense and the same arrangement we see in the ledger.
• Sample of Chart of Accounts on the next slide
DEBITS
VS
CREDITS
T - accounts
Left side Right side
is the is the credit
debit side
side
The Balance Sheet Equation

• Assets = Liabilities + Owner’s Equity

Asset Accounts

• Left side of the balance sheet

equation

• Normal asset balance is a debit

Assets are Debit Balance
Accounts
• Assets go up
with a debit Assets
Debit Credit
• Assets go down
with a credit
Liabilities

• Right side of the balance sheet

equation

• Normal liability balance is a

credit
Liabilities are Credit Balance
Accounts
Liabilities go Liabilities
up with a credit Debit Credit
Liabilities go
down with a
debit
Owner's Equity
Two Accounts:
Capital: records the owner’s
investment in the business
Withdrawals: records the owner’s
personal drawings from the
business
Capital is a Credit Account
M. Reimer,
Capital goes Capital
up with a credit Debit Credit
Capital goes
down with a
debit
Withdrawals is a Contra Debit
Account
M. Reimer,
Withdrawals
Withdrawals Debit Credit
goes up with a
debit
Withdrawals
goes down with
a credit
A Contra Account

Is linked with another account

Has an opposite balance to its
counterpart
Reduces the value of its
counterpart
Income Statement Equation

• Revenues – Expenses = Profit or

Loss
Revenues are Credit Balance
Accounts
Revenue
Debit Credit
Revenues go
up with a credit
Revenues go
down with a
debit
Expenses are Debit Balance
Accounts
Expenses go
up with a debit Expenses
Debits Credits
Expenses go
down with a
credit
Expense Accounts
• Incur costs while doing daily
business

• Show a consumption of assets to

generate revenues
Review
Left side Right side
is the debit is the credit
side
side
Accounts that go up with a debit
and down with a credit
• Assets

• Withdrawals

• Expenses
Accounts that go up with a credit
and down with a debit

• Liabilities

• Capital

• Revenues
 Double Entry System of
Accounting
• Every financial transaction gives rise to two
accounting entries;
• Each entry shows dual effect of the transaction
on the accounting equation.
• Note: A transaction is an agreed upon transfer of
value from one party to another which affects the
amount, nature or composition of an entity’s
assets, liabilities or equity.
• The double entry rule says :
For every debit entry there must be a
corresponding credit entry

IN SHORT
• Debit the receiver and credit the
giver.
 The Accounting Equation

Assets = Liabilities + Owner’s Equity

The resources owned The rights of the

by a business The rights of the owners
creditors, which
represent debts of the
business

44
The Expanded Accounting Equation

Assets = Liabilities + Owner’s

Equity (+Income, - Expense)
 Analysis of Transactions

• A business transaction is an economic event or

condition that directly changes an entity’s financial
condition or directly affects its results of operations.
• In every transaction, there is an exchange of values:
a value received(debit) and value parted with
(credit)
 Analysis of Transactions
State the value received and the value parted with.
During the month of May, Mirabeno Company had the following
transactions:

a.Paid salaries for May, P54,000.

Debit, Salaries Expense Credit, Cash
b.Acquired equipment on credit, P90,000
Debit, Equipment Credit, Accounts Payable
c.Purchased supplies in cash, P3,000.
Debit, Supplies Credit, Cash
d.Additional investment by the owner, P120,000.
Debit, Cash Credit, Mirabeno, Capital
e.Received payment for services rendered, P18,000.
Debit, Cash Credit, Service Income
f.Made payment on equipment acquired
Debit, Accounts Payable Credit, Cash
g.Billed customers for services performed, P48,000.
Debit, Accounts Receivable Credit, Service Income
h.Withdrew cash for personal use, P4,500
Mirabeno, Withdrawal Credit, Cash
i.Received payment from customers,P9,000
Debit, Cash Credit, Service Income
j.Paid utilities, P2,000.
Debit, Utilities Expense Credit, Cash
STEPS OF THE ACCOUNTING
PROCESS
1. Journalizing
2. Posting
3. Trial Balance
4. Adjusting Entries
5. Worksheet
6. Financial Statements
7. Closing Entries
8. Post-Closing Trial Balance