FUNDAMENTALS OF ACCOUNTANCY, BUSINESS

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4. Meeting legal requirements.
ACCOUNTING History
-is the process of identifying, recording, Accounting is as old as civilization itself. It
and communicating economic events of has evolved in response to various social
an organization to interested users and economic needs of men. Accounting
(Weygandt, J. et. al) started as a simple recording of repetitive
Identifying- involves selecting economic exchanges.
events that are relevant to a business
transaction
Evolution of Accounting
★ Transactions - economic events of
➔ Cradle of civilization- oldest
an organization
evidence of this practice was the
Recording- involves keeping a
“clay tablet” of Mesopotamia
chronological diary of events that are
which dealt with commercial
measured in pesos.
transactions at the time such as
★ Diary - journals and ledgers
listing of accounts receivable and
Communicating- occurs through the
accounts payable.
preparation and distribution of financial
➔ 14th Century - double-entry
and other accounting reports.
bookkeeping.
Accounting Theory ➔ French Revolution (1700s) -
thorough study of accounting and
Accounting is a systematic recording of development of accounting theory
financial transactions and the began during this period. Social
presentation of the related information upheavals affecting government,
to appropriate persons. finances, laws, customs and
business had greatly influenced
Basic features or nature of accounting: the development of accounting.
➔ Accounting is a service activity. ➔ Industrial Revolution
➔ Accounting is a process. (1760-1830) - mass production
➔ Accounting is both an art and a and the great importance of fixed
discipline. assets were given attention.
➔ Accounting deals with financial ➔ 19th Century - beginnings of
information and transactions. modern accounting in Europe and
➔ Accounting is an information America.
system. ➔ Present - development of modern
Main functions of accounting can be accounting standards and
summarized as follows: commerce
1. Keeping systematic record of USERS OF FINANCIAL INFORMATION
business transactions.
➔ External users - people or
2. Protecting properties of the
organizations outside of the
business.
company
3. Communicating results to various
1. Customers- determine if it will be
parties connected with the
secured to transact with the
business.

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business by analyzing the latter’s invest more or make managerial
accounting information. This is changes.
significant if they plan to build a
ACCOUNTING PRINCIPLES
long-term relationship with the
business. 1. Business entity principle -
2. Creditors – lend their resources separate entity concept states that
(usually money) to the business in a business enterprise is separate
exchange for a fee or interest. and distinct from its owner or
-they examine the business’ investor
financial statements and ensure 2. Monetary unit principle -
that the business has the capacity accounts should be stated in
to repay before they grant loan to single monetary unit
the business. 3. Objectivity principle - financial
3. Potential investors – put their statements must be presented
resources (usually money) in a with supporting evidence
business hoping to earn a decent 4. Cost principle- accounts should
return. be recorded initially at cost
-examine the business’ financial 5. Time period principle - define
statements to determine if the time in which financial statements
business has the capacity to pay are to be divided into specific time
dividends and thereby decide intervals
whether to invest in that business. 6. Matching principle- the cost
4. Government – examine financial should be matched with the
statements to verify its accuracy revenue generated
and to regulate and ascertain tax 7. Accrual accounting principle -
liabilities of businesses. revenue should be recognized
5. Academe – it uses financial when earned regardless of
reports for academic purposes collection, and expenses should
➔ Internal users - people within the be recognized when incurred
company regardless of payment.
1. Management – study financial Cash basis principle- revenue is
statements to do management recorded when collected and
prerogatives such as hiring, expenses should be recorded
advertising, investing, changes in when paid
operations, and so on. 8. Conservatism principle- also
2. Employees – look at financial known as prudence
statements to determine if -in case of doubt, assets and
salaries, bonuses, promotions, and income should not be overstated
other benefits or incentives they while liabilities and expenses
receive are appropriate and should not be understated
sufficient. 9. Materiality principle- in case
3. Owners or stockholders – they assets are immaterial to make a
want to know if their investment difference in the financial
yields acceptable returns and do statements, the company should
corresponding decision whether to record it as an expense

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10. Going concern principle- business computation process because it
is expected to continue indefinitely eliminates the need to make variations of
11. Disclosure principle- all relevant a formula
and material information should
FIVE TYPES OF MAJOR ACCOUNTS
be reported.
ACCOUNTING EQUATION
ASSETS
ASSETS = LIABILITIES + OWNER’S -all economic resources owned by the
EQUITY company and are expected for future gain.
★ Assets- resources you control that -include property and rights of value
have resulted from past events owned by the company
and can provide you with ● Tangible assets- physical entities
economic benefits such as land, buildings, vehicles,
★ Liabilities- present obligations equipment, and inventory.
that have resulted from past ● Intangible assets- represent
events and can require you to give money or value such as Accounts
up resources when settling them Receivable, patents, contracts, and
★ Equity- simply assets minus certificates of deposit
liabilities 2 Types of Assets:
-other terms for equity are 1. Current Assets - cash and other
“capital”, “net assets”, and “net assets that are expected to be
worth” converted to cash within a year
Expanded Accounting Equation- Accounts under current asset:
ASSETS = LIABILITIES + EQUITY + ● Cash- money
INCOME - EXPENSES ● Accounts Receivable- oral
★ Income- increases in economic promises to entity to
benefits during the period in the receive cash at a later date
form of inflows our enhancement ● Notes Receivables-
of assets or decreases of liabilities amounts due from clients
that result in increases in equity supported by promissory
★ Expenses- decreases in economic notes
benefits during the period in the ● Inventories- assets held
form of outflows or depletions of for resale
assets or increases of liabilities ● Supplies- items purchase
that result in decreases in equity by an enterprise which are
-If income is greater than expenses, the unused as of the reporting
difference is profit date
-If income is less than expenses, the ● Prepaid Expense-
difference is loss expenses paid in advance.
In accounting, amounts in parentheses are They are assets at the time
negative amounts. of payment and become
In accounting, to “squeeze” means to expense through the
come up with an unknown amount in a passage of time.
given formula. “Squeezing” simplifies the

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● Accrued Income- revenue -Accrued Liabilities- already incurred but
earned but not yet not yet paid
collected 2. Non-current liabilities- payable
● Short term investments- for a period longer than one year
made by the company that Examples:
are intended to be sold -Mortgage payable- with collateral in the
immediately form of real properties
2. Non-current assets- not likely to -Bonds payable- certificate of
turn to unrestricted cash within indebtedness
one year. It is also referred to as
long-term assets. OWNER’S EQUITY
Examples: -defines how much your business
● Long-term investments- held by currently worths
an enterprise for the accretion of 2 Types of Equity:
wealth 1. Contribution (Investments) -
● Property, plant, and equipment - start-up capital or a later infusion
used in the production or supply of cash
-land, building, equipment, 2. Drawing (Withdrawals)- owners
furniture and fixtures often want some of the profit
● Intangible assets returned
-Trademark- unique symbol or INCOME or REVENUE
words used to represent a -money the business earns
business -other names include profit, net profit,
-Goodwill- represent why good and “bottom line”
still exist -temporary or nominal accounts
-Patents- exclusive right granted -balance is reset to zero at the beginning
for invention of each new accounting period
-Copyright- intellectual property Account titles under income:
LIABILITIES ● Service Revenue- earnings made
-debts or obligations payable by business that is into the
2 Types of Liabilities: rendering services
1. Current liabilities- to be paid ● Interest Income- represents
within 12 months income credited by the bank
Examples: ● Sales- earning made from selling
-Accounts Payable of goods or merchandise
-Notes Payable ● Professional fees- earning by
-Loan Payable - liability to pay bank or professionals
other financing instituition EXPENSES
-Utilities Payable- telephone services, -money the company spends that allow a
electricity, water company to operate
-Unearned Revenues- advanced Examples:
payments before goods or services are -Salaries or wages expense
provided -Utilities expense
-Supplies expense

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-Insurance expense -The date of the transaction which is
-Depreciation expense entered in the Date column.
-Uncollectible accounts expense -A brief explanation of the transaction
-Interest expense which appears on the line below the
credit account title. A space is left
between journal entries and makes the
CHART OF ACCOUNTS
entire journal easier to read.
-list of all your company’s accounts used -The column titled Ref. which is left blank
-helps to identify where the money is when the journal entry is made. The
coming from and where it is going column is used later when the journal
-foundation of the financial statements entries are transferred to the ledger
-map of the business accounts.
Assigning numbers in the chart of -The debit account title which is entered
accounts: first at the extreme left margin of the
First digit- major accounts column headed “Account Title and
1 - assets Explanation,” and the amount of the credit
2 - liabilities is recorded in the Debit column.
3 - equity -The credit account title which is indented
4 - income and entered on the next line in column
5 - expense headed “Account Titles and Explanation,”
Second digit- sub-classification and the amount of the credit is recorded
Third digit- specific account name in the Credit column.
Example: 210- Accounts Payable
Simple entry - involve only two accounts,
First digit- liability account
one debit and one credit.
Second digit- current liability Compound entry - requires three or more
Third digit- accounts payable accounts
BOOKS OF ACCOUNTS ➔ Special Journal
1. Journal -used to record specific types of
-referred to as the book of original high-volume information
entry -used to facilitate efficient and practical
-shows the debit and credit effects recording of similar and recurring
on specific accounts transactions
➔ General Journal Commonly used special journals:
-most basic journal a. Cash Receipts Journal- record all
-has spaces for dates, account cash received
titles and explanations, references, -record transaction involving
and two amount columns. receipt or collection of cash
The journal makes significant -the source document is the
contributions: Official Receipts or Cash receipts
-discloses in one place the complete issued
effects Format:
-provides a chronological record -The date of the transaction is entered in
-prevent or locate errors the Date column.
A complete entry consists of:

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-a brief explanation of the transaction is -major categories of receipts, such cash
entered in the description column. sales and collection of accounts
-column titled Ref. (Reference) which is receivable are provided with separate
left blank when the journal entry is made. columns. These transactions are frequent
The column is used later when the journal and repetitive items, therefore a separate
entries are transferred to the ledger column is provided.
accounts. -the column sundry is used for various
-the Debit Cash column represents the miscellaneous and less regular items,
amount of cash received for a particular such as capital investment, receipt of loan
transaction. proceeds, among others.
-major categories of receipts, such as cash c. Sales Journal (Sales on Account
sales and collection of accounts Journal)
receivable are provided with separate -record all sales on credit
columns. These transactions are frequent -the source document for this is
and repetitive items, therefore a separate the charge invoice or sales invoice
column is provided. to various clients.
-the column sundry is used for various Format:
miscellaneous and less regular items, -the date of the transaction is entered in
such as capital investment, receipt of loan Date column.
proceeds, among others. -a brief explanation of the transaction is
b. Cash Disbursements Journal entered in the description column or the
-used to record all transactions involving name of the customer
cash payments -column titled Ref. which is left blank
-the source documents are check voucher, when the journal entry is made. The
cash receipts from suppliers or vendors column is used later when the journal
Format: entries are transferred to the ledger
-the date of the transaction is entered in accounts.
the Date column. -the Charge Invoice Number or Sales
- a brief explanation of the transaction is Invoice Number represents the identifying
entered in the description column. number of source documents issued to
-column titled Ref. which is left blank the customer when the sale was made
when the journal entry is made. The -the Debit Accounts Receivable column
column is used later when the journal represents the amount of the sale
entries are transferred to the ledger transactions indicated in the charge
accounts. invoice
-the Check or Voucher number represents -the Credit Sales column represents the
the identifying number of the check amount of the sale transactions indicated
issued for the related cash payment. Most in the charge invoice.
of the time, a check or cash voucher d. Purchase Journal (Purchase on
accompanies the disbursement. The Account Journal)- record all
voucher number may be used as the purchases of inventory on credit
alternative for this column. -record recurring transactions of
-the Debit cash column represents the purchases on account
amount of cash received for a particular
transaction.

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-the source document for purchase ● The account portion refers to the
journal are the invoices from the account title
supplier ● The account number is an
Format: assigned number for each account
-the date of the transaction is entered in title to facilitate ease in recording
the Date column. and cross-referencing
-a brief explanation of the transaction is ● The Date column identifies when
entered in the description column or the the transaction happened
name of the customer ● The item represents the source
-column titled Ref. which is left blank journal and the nature of the
when the journal entry is made. The transactions.
column is used later when the journal ● The Reference identifies the page
entries are transferred to the ledger number of the general or special
accounts. journal from which information
-the Charge Invoice Number or Sales was taken.
Invoice Numbers represents the ● The Debit and Credit columns are
identifying number of the source used in recording the amount of
document issued by the supplier when transactions from the general
the items, goods, or merchandise were journal or special journal
delivered to the company when the ● The Balance column represents
purchase was made. the running balance of the account
-the Debit Purchases column represents after considering the debit and
the amount of the goods purchases as credit amounts. If the running
indicated in the charge invoice from the balance amount is positive, the
supplier account has a debit balance
-the Credit Accounts Payable column whereas if it has a negative
represents the amount of goods or items running balance, the accounts has
purchased on credit from the supplier. a credit balance.
The amount is indicated in the charge Posting- process of transferring
invoice by the supplier. information from the journal to the ledger.
Debits in the journal are now
2. Ledger - the accounts and their related correspondingly posted as debits in the
amounts as recorded in the journal are ledger, and credits in the journal are
posted periodically likewise posted as credits in the ledger.
-also called “book of final entry” because Steps in posting:
all the balances in the ledger are used in -from the journal, copy the date of the
the preparation of financial statements. transaction to the ledger
-also referred to as the T-Account -under the journal reference (J.R.) column
➔ General Ledger - groupings of all of the ledger, copy the page number of
accounts used in preparation of the journal
financial statements. -under the debit column in the ledger,
-controlling account because it transfer the debit amount from the
summarizes all the activities that journal. Similarly, under the credit column
have taken place as recorded in its in the ledger, transfer the credit amount
subsidiary ledger from the journal.

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-after posting the amount to the ledger, note: wag po entirely mag-rely dito. may
write the account number in the posting mga examples sa modules na mas madali
reference (P.R.) column on the journal. intindihin.

➔ Subsidiary Ledger- group of like

accounts that contains the
independent data of a specific
general ledger.
-maintained if individualized data
is needed for a specific general
ledger account
-amount of these subsidiary
ledgers should equal the balance
in the Accounts Payable general
ledger.
● The upper portion indicates the
name of the vendor or supplier.
● The vendor number is an assigned
number for each vendor as
reference in keeping the records of
a supplier.
● The Date column identifies when
the transaction happened.
● The description column describes
the nature of transaction.
● The Reference identifies the page
number of the general or special
journal from which the information
was taken.
● The Debit and Credit columns
reflect the various effects of every
transaction to the record of the
supplier.
● The Balance column provides the
running balance of every supplier.
The total running balance for all
subsidiary ledgers should equal
the Accounts Payable general
ledger.

NORMAL BALANCES