Accounting is a service activity.
It’s function themselves to contribute money,
is to provide quantitative information, property,
primarily financial in nature, about 3. Corporation - a corporation is a
economic entities that is intended to be business owned by its stockholders
useful in making economic decisions
o An information system that Fundamental Concepts
measures, processes and 1. Entity Concept - an organization or a
communicates financial information section of an organization stands apart
about an economic system from other organizations and
individuals
Type of Businesses
1. Services - sells people’s time (ex.
software development, accounting,
legal services)
2. Trader - buys and sells products (ex.
wholesale, retail)
3. Manufacture - designs products,
aggregating components and
assembling finished products (ex.
2. Periodicity Concept - equal time
vehicle assembly, construction,
periods for reporting purposes
engineering, electricity, water, food
3. Stable Monetary Concept - each peso
and drink, chemicals, media,
has the same purchasing power at any
pharmaceuticals)
time
4. Raw Materials - grows or extracts
The set of rules, procedures, assumptions,
raw materials (ex. farming, mining,
postulates, and concepts followed in
oil)
recording business transactions and events,
5. Infrastructure - sells the utilization
and in the preparation of general purpose
of infrastructure (ex. transport,
financial statements is called generally
hotels, telecoms, sports facilities,
accepted accounting principles (GAAP)
property management)
6. Financial - receives deposits, lends
Elements in the Statement of Financial
and invests money (ex. bank,
Position/ Balance Sheet
investment house)
1. Asset - present economic resource
7. Insurance - pools premiums of
controlled by the entity as a result of
many to meet claims of a few (ex.
past events. It is a right to produce
insurance)
economic benefits
Forms of Business Organizations
2. Liability - present obligation of the
1. Sole Proprietorship - this business
entity to transfer an economic resource
organization has a single owner
as a result of past events
called the proprietor who generally
3. Equity - the residual interest in the
is also the manager.
assets of the entity after deducting its
2. Partnership - a partnership is a
liabilities
business owned and operated by
two or more persons who bind
Elements in the Statement of Financial Because every business transaction affects
Performance/ Income Statement at least two accounts, our accounting
1. Income - increases in assets, or system is known as a double-entry system
decreases in liabilities that result in
increases in equity other than relating
to contributions from holders of equity
claims
2. Expenses - decreases in assets or
increases in liabilities that result in
decreases in equity other than relating
to distributions to holders of equity
claims
Transactions and events are the starting
points in the accounting cycle
The Basic Equation
These original written evidences contain
1. Assets (what it owns)
information about the nature and the
2. Liabilities (what it owes to others)
amounts of the transactions
3. Owner's Equity (the difference between
The journal is a chronological record of the
assets and liabilities)
entity’s transactions. A journal entry shows
Assets = Liabilities + Owner’s Equity
all the effects of a business transaction in
terms of debits and credit.
The Expanded Accounting Equation
Whenever cash is received, debit Cash.
Assets = Liabilities + Owner’s Capital - Owner’s
Whenever cash is paid out, credit Cash.
Drawings + Income – Expenses
Revenues and gains are recorded in
accounts such as Sales, Service Revenues,
Typical Account Titles Used
Interest Revenues (or Interest Income), and
1. Assets - Current (Cash, Cash
Gain on Sale of Assets
equivalents, Notes Receivable, Accounts
The ledger collects all data necessary prior
Receivable, Inventories, Prepaid
to the preparation of financial statements
Expenses,) Non-Current (Property, Plant
Posting means transferring the amounts
and Equipment, Accumulated
from the journal to the appropriate
Depreciation, Intangible Assets)
accounts in the ledger
2. Liabilities - Current (Accounts Payable,
Footing is the process of adding the debit
Notes Payable, Unearned Revenues,
and the credit money columns of the ledger
Current Portion of long-term debt)
and finding their balances
NonCurrent (Mortgage Payable, Bonds
The footing of accounts ends the posting
Payable)
process. The next step in the accounting
3. Owner’s Equity - Capital, Withdrawals,
cycle which is the preparation of the trial
Income Summary
balance may be started.
4. Income - Service Income, Sales
Trial balance is the listing of the debit and
5. Expenses - Cost of Sales, Salaries or
credit balances of accounts from general
Wages, Utilities, Rent, Supplies,
ledger
Insurance, Depreciation, Uncollectible
Accounts Expense, Interest)
The trial balance has the following purposes:
1. It proves the equality of debit and credit
2. It determined nominal accounts to be closed
3. It serves as a basis for making draft financial
statements.
The term trial balance itself suggests that
this statement proves the fundamental
concept that debit should be equal to credit
in all instances.
To debit an account means to enter an
amount on the left side of the account.
To credit an account means to enter an
amount on the right side of an account.
