ENTREPRENEURSHIP

A. Accounting is a service activity, Its function to provide quantitative (measurable) information primarily financial in
nature, about economic entities that is intended to be useful in making economic decisions.
– DEFINITION OF ACCOUNTING
B. Accounting is an information system that measures, processes and communicates financial information about
economic entity.
– DEFINITION OF ACCOUNTING
C. Accounting is an art of recording, classifying and summarizing in a significant manner and in terms of money,
transactions and events which are, in part of least, of a financial character, and interpreting the result.
WHAT IS THE PURPOSE OF ACCOUNTING?
PURPOSE OF ACCOUNTING
– The accounting function is part of broader business system, and does not operate in isolation. It handles the
financial operations of the business but also provides information and advice to other departments. Business
transactions are the economic (financial) activities of the business. Recording these historical events is a
significant function of accounting. Accounts are produced to aid management in planning, control and decision-
making and to comply with regulations.
ELEMENTS OF FINANCIAL STATEMENTS
ASSET is a resource controlled by the enterprise as a result of past events and from which future economic
benefits are expected to flow to the enterprise.
ASSET include cash, cash equivalents, notes receivable, accounts receivable, inventories, prepaid expenses,
property, plant and equipment, investments, intangible assets and other assets.
LIABILITIES are obligations of the entity to outside parties who have furnished resources.
LIABILITIES is a present obligations of the enterprise arising from the past events, the settlement of which is
expected to result in an outflow from the enterprise of the resources embodying economic benefits.
LIABILITIES includes notes payable, accounts payable, accrued liabilities, unearned revenues, mortgage payable,
bonds payable and other debts (obligations) of the enterprise.
EQUITY is a residual interest in the assets of the enterprise after deducting all its liabilities. Equity may pertain to
any of the following depending on the form of the business.
a. In Sole proprietorship, there is only one owner’s equity account because there is only one owner.
b. In partnership, an owner’s equity account exist for each partner.
c. In a corporation, owner’s equity or stockholders’ equity consists of share capital, retained earnings and
reserves representing appropriations of retained earnings among others.
INCOME is increase in economic benefits during the accounting period in the form of inflows or enhancement of
assets or decreases of liabilities that result in increases in equity.
a. Revenue arises in the course of the ordinary activities of an enterprise and is referred to by a variety of
names including sales, fees, interest, dividends, royalties, and rent.
b. Gains represent other items that meet the definition of income and may, or may not, arise in the course of
the ordinary activities of an enterprise. It represent increase in economic benefits and as such are no
different in nature form revenue.
EXPENSES are the decreases in economic benefits during the accounting period in the form of outflows or
depletion of assets or incurrences of liabilities that result in decrease in equity, other than those relating to
disturbance to equity participants.
LOSSES represent other items that meet the definition of expense and may or may not, arise in the course of the
ordinary activities of an enterprise. Losses represent decrease in economic benefits and as such are no
difference in nature from other expenses.
THE ACCOUNT
– The basic summary device of accounting is the ACCOUNT. A separate account is maintained for each element
that appears in the balance sheet (asset, liabilities and equity) and in the income statement (income and
expenses). 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 the “T”
account because of its similarity to the letter “T”. The account has thee parts as shown in the next slide.
THE BASIC ACCOUNTING MODE IS:
ASSET = LIABILITIES + OWNER’S EQUITY
– ACCOUNTING EQUATION
ASSET = LIABILITIES + OWNER’S EQUITY

DEBITS AND CREDITS

– An account is DEBITED when an amount is entered on the left side of the account and CREDITED when an
amount is entered on the right side.
– The account type determines how increases or decreases in it are recorded. Increase in assets are recorded as
debits (on the left side of the account) while decreases in assets are recorded as credits (on the right side of the
account). Conversely, increase in liabilities and owner’s equity are recorded by credits and decreases are
entered as debits.
– DEBITS AND CREDITS
– The rules of debit and credit for income and expenses accounts are based on the relationship of these accounts
to owner’s equity. Income increases owner’s equity and expense decreases owner’s equity. Hence, increases in
income are recorded as credits and decreases as debits. Increases in expenses are recorded as debits and
decreases as credits. These are the rules of debit and credit. The following are the summarize rules:
NORMAL BALANCE OF AN ACCOUNT
– The normal balance of any account refers to the side of the account-debit or credit-where increases are
recorded. Asset, owner’s withdrawal and expense accounts normally have debit balance; liability, owner’s equity
and income accounts normally credit balance. This result occurs because increase in an account are usually
greater than or equal to decreases.
TYPES AND EFFECTS OF TRANSACTIONS
1. Source of Assets (SA). An asset account increases and a corresponding claims (liabilities or owner’s equity)
account increases. Example: Purchase of supplies on account.
2. Exchange of Assets (EA). One asset account increases and another asset account decreases. Example: Acquired
equipment for cash.
3. Use of Assets (UA). An asset account decreases and a corresponding claims (liability or equity) account
decreases. Example: Settled accounts payable, Paid salaries of employee.
4. Exchange of Claims (EC). One claims (liabilities or owner’s equity) account increases and another claims
(liabilities or owner’s equity) account decreases. Example: Received utilities bill but did not pay.
LETS IDENTIFY!
1. Increase in Assets = Increase in Liabilities
2. Increase in Assets = Increase in Owner’s Equity
3. Increase in one Assets = Decrease in another Asset
4. Decrease in Assets = Decrease in Liabilities
5. Decrease in Assets = Decrease in Owner’s Equity
6. Increase in Liabilities = Decrease in Owner’s Equity
7. Increase in Owner’s Equity = Decrease in Liabilities
8. Increase in one Liabilities = Decrease in another Liabilities
9. Increase in Owner’s Equity = Decrease in another Owner’s Equity
TYPICAL ACCOUNT TITLE USED
1. ASSET is classified only into two: current assets and non current assets. An entity shall classify assets as current
when:
a. It expects to realize the asset, or intends to sell or consume it, in its normal operating cycle.
b. It holds the asset primarily for the purpose of trading.
c. It expects to realize the asset within twelve months after the reporting period.
d. The asset is cash or a cash equivalent unless the asset is restricted form being exchanged or used to settle a
liability for at least twelve months after the reporting period.
All other assets should be classified as non-current assets. –
CURRENT ASSETS
a. Cash is any medium of exchange that a bank will accept for deposit. It includes coins, currency, checks, money
orders, bank deposit and drafts.
b. Cash equivalents these are short-term , highly liquid investment that are readily convertible to known amounts
of cash.
c. Notes Receivable is a written pledge that the customer will pay the business fixed amount of money on a certain
date.
d. Accounts Receivable these are claims against customers arising from sale of services or goods on credit.
e. Inventories these are assets which are held for sale in ordinary course of business, in the process of production
for such sale or in the form of materials or supplies to be consumed in the production process or in the
rendering of services.
f. Prepaid Expenses are expenses paid for the business in advance. Its is an asset because the business avoids
having to pay cash in the future for a specific expense. These includes insurance and rent.
NON-CURRENT ASSETS
 A. Property, Plant and Equipment these are tangible assets that are held by an enterprise for use in the production
or supply of goods or services.
B. Accumulated Depreciation
C. Intangible Assets these are identifiable, nonmonetary assets without physical substance held use in the
production or supply of goods or services, for rental to others, or for administrative purposes. These includes
goodwill, patents, copyrights, licenses, franchise, trademark, brand names, secret processes, subscription list
and non-competition agreement.
LIABILITIES
CURRENT LIABILITIES
A. ACCOUNTS PAYABLE account represents the reverse relationship of the accounts receivable.
B. NOTES PAYABLE a note payable is like a note receivable but in reverse sense.
C. ACCRUED LIABILITIES amount owed to others for unpaid expenses. This account includes salaries payable,
utilities payable, interest payable and taxes payable.
D. UNEARNED REVENUES when the business entity receives payment before providing its customers with goods or
services, the amounts received are recorded in the unearned revenue account (liability mode). When the goods
or services are provided to the customer, the unearned revenue is reduced and income is recognized
E. CURRENT PORTION OF LONG-TERM DEBT these are portion of mortgage notes, bonds and other long term
indebtedness which are to be paid within one year from the balance sheet date.
NON-CURRENT LIABILITIES
A. MORTGAGE PAYABLE this account records long term debt of the business entity for which the business entity
has pledged certain assets as security to the creditor.
B. BONDS PAYABLE a business organization often obtain substantial sums of money from lenders to finance the
acquisition of equipment and other needed assets..
– OWNER’S EQUITY
A. CAPITAL this account is used to record the original and additional investments of the owner of the business
entity.
B. WITHDRAWALS when the owner of the entity withdraws cash or other assets, such are recorded in the drawing
or withdrawal accounts rather than directly reducing the owner’s equity account.
C. INCOME SUMMARY a temporary account used at the end of the accounting period to close income and
expenses.
– INCOME STATEMENT
A. INCOME revenues earned by performing services for a customer or client.
B. SALES revenues earned as a result of sale of merchandise.
EXPENSES
A . COST OF SALES cost incurred to purchase or to produce the products sold to customers during the period; also called
cost of goods sold.
B. SALARIES AND WAGES includes all payments as a result of employer-employee relationship.
C. TELECOMMUNICATIONS, ELECTRICITY, FUEL AND WATER EXPENSES
D. RENT EXPENSE rentals of space, equipment and other assets
– INCOME STATEMENT
E. SUPPLIES EXPENSE using supplies in the conduct of daily business.
F. INSURANCE EXPENSE portion of premiums paid on insurance coverage.
G. INTEREST EXPENSE an expense related to use of borrowed funds.
H. DEPRECIATION EXPENSE the portion of the cost of a tangible asset (e.g. buildings and equipment) allocated or
charged as expense during an accounting period.
I. INTEREST EXPENSE an expense related to borrowed funds
J. UNCOLLECTIBLE ACCOUNT EXPENSE the amount of receivables estimated to be doubtful of collection and
charged as expense during an account period.
– CASH FLOW
– The amount of money being transferred into and out of a business, especially as affecting liquidity