BASIC

ACCOUNTING
CONCEPTS AND
PRINCIPLES

Hector H. Balading, CPA

LEARNING OBJECTIVE:

• Define Accounting.
• Identify with ease the major
elements that directly compose the
fundamental accounting equation.
ACCOUNTING
It is a service activity. Its function is
to provide quantitative information,
primarily financial in nature, about
economic entities, that is intended to
be useful in making economic
decision. (Accounting Standards
Council)
Accounting is the art 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
character, and interpreting the results
thereof. (American Institute of
Certified Public Accountants)
 FOUR PHASES OF
ACCOUNTING

1. RECORDING

- A systematic and chronological

recording of business transactions,
observing therein the fundamental
principles of accounting.
FOUR PHASES OF
ACCOUNTING

2. CLASSIFYING

- the sorting of business

transactions to their
specific accounts.
- this is the phase where
items are sorted and
grouped.
FOUR PHASES OF
ACCOUNTING

3. SUMMARIZING
- After each accounting period, data
recorded are summarized through
financial statements.

4. INTERPRETING
- analyzing to evaluate the liquidity,
profitability and solvency of the business
organization.
ACCOUNTING
ASSUMPTIONS
• are the basic notions or fundamental premises
on which the accounting process is based.

1. Going concern assumption

2. Accounting entity
3. Time period
4. Monetary unit
GOING
CONCERN

• It means that in the absence of

evidence to the contrary, the
accounting entity is viewed as
continuing in operation
indefinitely.
ACCOUNTING ENTITY

• Accounting entity is the

specific business
organization. Under this
assumption, the entity is
separate and distinct
from the owners,
managers, employees
who constitute the
entity.
 FORMS OF BUSINESS
ORGANIZATION

SOLE PARTNERSHIP CORPORATION

PROPRIETORSHIP - an artificial being created
- a business owned and by operation of law, having
operated by two or more the rights of succession and
- a business owned by only persons who contributes the powers, attributes and
one person resources into the entity. properties expressly
authorized by law or incident
to its existence.
TIME PERIOD
• This assumption requires that
indefinite life of an entity is
subdivided into time periods or
accounting periods which are
usually of equal length for the
purpose of preparing financial
reports.
MONETARY UNIT
The monetary unit assumption has two
aspects:

• QUANTIFIABILITY – the assets,

liabilities, equity, income and expenses
should be stated in terms of a unit of
measure.
• STABILITY OF THE PESO – the
purchasing power of the peso is stable
and that its instability is insignificant
and therefore may be ignored
GENERAL PURPOSE
FINANCIAL
STATEMENTS (PAS 1)

• Statement of Comprehensive
Income
• Statement of Other
Comprehensive Income
• Statement of Changes in Equity
• Statement of Cash flows
• Statement of Financial Position
• Notes to Financial Statements
ELEMENTS OF FINANCIAL STATEMENTS:
FINANCIAL POSITION
• ASSET – a present economic resource controlled by the entity
as a result of past events. An economic resource is a right that
has potential to produce economic benefits.

 Cash on Hand  Building

 Cash in Bank  Furniture and Fixtures
 Accounts receivable  Office equipment
 Notes receivable  Delivery equipment
 Merchandise inventory
 Prepayments
 Land
ELEMENTS OF FINANCIAL
STATEMENTS: FINANCIAL POSITION

• LIABILITY – is a present obligation of the entity to transfer an

economic resource as a result of past events.

 Accounts payable
 Notes payable (supported by a promissory note)
 Bonds Payable
ELEMENTS OF FINANCIAL
STATEMENTS: FINANCIAL POSITION

• EQUITY – the residual interest in the assets of the enterprise after

deducting all its liabilities.

 Withdrawal
 Dividends
 Owner’s Equity
 Common Stock
ILLUSTRATION:
• Mr. Ong started his ASSETS LIABILITIES EQUITY
milktea shop by
investing P30,000.00
into his business and P40,000.00 P10,000.00 P30,000.00
borrowing P10,000.00
from his friend.
ELEMENTS OF FINANCIAL STATEMENTS:
FINANCIAL PERFORMANCE
• INCOME – is increase in economic benefit during the accounting
period in form of inflows or enhancements of assets or decreases of
liabilities that result in increases in equity, other than those relating to
contributions from equity participants.

• Service Income
• Sales
ELEMENTS OF FINANCIAL STATEMENTS:
FINANCIAL PERFORMANCE

• EXPENSES – are decreases in economic benefits during the

accounting period in the form of outflows or depletions of assets or
incurrence of liabilities that result in decrease in equity, other than
those relating to distributions to equity participants.

• Cost of Sales
• Salaries and Wages
• Rent Expense
• Depreciation Expense
• Interest expense
 During the period, Mr. Ong earned income of
P25,000.00 and incurred expenses of
ILLUSTRATION: P12,000.00, all of which were collected in cash.
On the other hand, he paid P4,000.00 partial
payment of his debt to his friend.

ASSETS LIABILITIES EQUITY INCOME EXPENSES

Beginning P40,000.00 P10,000.00 P30,000.00 P0 P0
Balance
Income earned 25,000.00 25,000.00
Expenses paid (12,000.00) 12,000.00
Debt paid (4,000.00) (4,000.00)
Balance P49,000.00 P6,000.00 P30,000.00 P25,000.00 P12,000.00
THE ACCOUNT
• The basic summary device of accounting
is the account. A separate account
maintained for each element that appears
in the balance sheet (assets, liabilities and
equity) and in the income statement
(income and expense). Thus, an account
may be defined as a detailed record of the
increases, decreases and balance of each
element that appears in an entity’s
financial statements. The simplest form of
the account is known as “T-account”
because of its similarity to the letter “T”.
 NORMAL
BALANCES
OF
ACCOUNT
S
 EXERCISE: BASIC ACCOUNTING MODEL
For each transaction, indicate whether the assets (A), liabilities (L) or owner’s
equity (OE) increased (+), decreased (-) or did not change (0) by placing the
appropriate sign in the appropriate column.

A L OE
a. Received cash as investment.
b. Rendered services to customers.
c. Paid rental expenses.
d. Paid cash to settle accounts.
e. Paid cash to owner for personal use.
 EXERCISE: BASIC ACCOUNTING MODEL
For each transaction, indicate whether the assets (A), liabilities (L) or owner’s
equity (OE) increased (+), decreased (-) or did not change (0) by placing the
appropriate sign in the appropriate column.

A L OE
a. Received cash as investment. + 0 +
b. Rendered services to customers. + 0 +
c. Paid rental expenses. - 0 -
d. Paid cash to settle accounts. - - 0
e. Paid cash to owner for personal use. - 0 -
Seatwork
Identify the normal balance of the account. Indicate if it is Debit or
Credit.
Account Normal Balance
1. Account Receivable
2. Dividends
3. Prepaid Expense
4. Furniture and Fixture
5. Interest Payable
6. Direct Material
7. Cost of Goods Sold
8. Cash Deposits
9. Gains in Disposal of Asset
10. Depreciation Expense
Time’s up!
Seatwork
Identify the normal balance of the account. Indicate if it is Debit or
Credit.
Account Normal Balance
1. Accounts Receivable Debit
2. Dividends Credit
3. Prepaid Expense Debit
4. Furniture and Fixture Debit
5. Interest Payable Credit
6. Raw Materials Debit
7. Cost of Goods Sold Debit
8. Cash Deposits Debit
9. Gains on Disposal of Asset Credit
10. Depreciation Expense Debit