2018

by: MARK G. JAVILLONAR

Narra National High School

Name of Student: _________________________________________

Address: _________________________________________________
 Content:

Content Standards:
The learners demonstrate an understanding of the definition, nature, function, and
history of accounting
Performance Standards:
The learners shall be able to cite specific examples in which accounting is used in
making business decisions.
Learning Competencies:
The learners should be able to:
1. define accounting
2. describe the nature of accounting
3. explain the functions of accounting in business
4. narrate the history/origin of accounting

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Definition of Key Terms:
Accounting
- is the art of analyzing financial transactions and economic events, recording them, classifying
them into accounts, summarizing them, reporting and interpreting the results.
- is defined as an information system that measures, processes, and communicates information
which are primarily financial in nature, about an identifiable entity for the purpose of making
economic decisions.
- Accounting is an old discipline that dates back to thousands of years, but the one closest to
what we now have dates back to 1400 in Italy.
Fra Luca Pacioli
- referred to as the “Father of Accounting”.
- an Italian mathematician, scholar, and philosopher who published Summa de Arithmetica,
Geometrica, Proportini et Proporionalita in 1494 which contained descriptions of the practice of
accounting at that time.
Bookkeeping
- is the initial activity or clerical part of accounting. It is the HOW of accounting.
- it enables the owner of the business to check on his financial progress.
- it is the recording of business transactions to its respective journals and ledger in a prescribed
manner.
Auditing
- the critical part of accounting as it confirms the credibility of financial statements and protects
the confidence of financial users. It verifies the truthfulness and compliance of financial reports
with the generally accepted accounting principles.
- it usually answers the question “how true?”.

Accounting Process

Analyzing Recording Classifying Interpreting Reporting Summarizing

Figure 1: ACCOUNTING PROCESS

Analyzing
- is the first phase of the accounting process. This is where transactions entered into, economic
events that have taken place are being examined and evaluated and determine its effects on
the business.
Recording
- involves writing the effects of the transactions and events that have been analyzed.
- this recording may be done manually or electronically which includes the entering of
information in the accounting books.
Supporting Accounting Documents

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 - also called source documents. It refers to documents that supports business activities
that are measured in terms of money.
- are the forms, evidences, or legal/official papers that support to economic
transactions.
Journals
- also known as the “book of original entry”. These are accounting books where
analyzed transactions and economic events are recorded. It provides a chronological
record of transactions with explanations and clear references.
- are classified as general and special. Special Journal are the (1) cash receipts book,
(2) cash disbursements book, (3) sales book, and purchases book. General Journal is
the book used to record some transactions and events may not be conveniently
group in the special journal.
Journal Entry
- are the accounting record written in journal. Classified as a simple journal entry – one
debit and one credit or a compound journal entry – more than one debit or more than
one credit or both.
Classifying
- is the sorting or grouping of similar transactions and events into specific account titles. It is the
process of grouping into specific category of various economic transactions which are similar
and identical in nature.
Summarizing
- is the process that involves grouping together the various accounts referred to in the
classifying process. This is where the accounts are grouped into assets, liabilities, owner’s
equity, revenue, cost and expenses.
Reporting
- involves the preparation of financial summaries called financial statements.
- summarizing the total financial information for a given period in order that economic
transactions can be read and understood in a condensed format.
Financial Statements
- are formal reports prepared by accountants or bookkeepers which show the financial
effects of transactions and other events by grouping them into broad classes
according to elements of financial statements.
- these are written or documentary media where the (1) results of the operation
(income statement), (2) financial position (balance sheet), and (3) cash flows (cash
flows statements) are communicated to the users of information.
Interpreting
- is the last step and the analytical phase in the accounting process.
- It is the step that directs attention to the significance of various matters and relationships.
- This step involves the computation of relationship of figures from the financial reports and
schedules.
- It is a combination of figures and narrations based on the figures presented.

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Figure 2: ACCOUNTING INFORMATION SYSTEM

Documents or Supporting Analyzing, Recording,

Business Activities
Accounting Papers Classifying, Summarizing

Decisions by Users of Reporting w/ Financial

Financial Statements Statements

Double Entry System

- is based on the dual aspect concept which says that in every transaction, two effects of
recording are to be made – the value received (debit) and the value parted with (credit).
- it is a processing system that involves entering the two effects of every transaction.
- The first description of the double entry system appeared more than 500 years ago in a
mathematics book written by Fra Luca Pacioli.

Business Entity Concept:

The entity or business entity for which the accounting is to be done must be clearly identified and
distinguish properly the transactions and events whether those are the entity’s or for personal of the
business owners.
Business entity may be (1) a sole proprietorship, (2) a partnership, or (3) a corporation. It could
also be a profit or nonprofit organization. It may be engaged in service, merchandising, or manufacturing.

Purpose of Financial Statements

The purpose of financial statements is to provide information about financial position, result of
operation, and cash flows of enterprises and of individuals. Financial statements show the results of
management’s stewardship of the resources entrusted to. It should fairly present the financial position,
financial performance and the cash flows of an enterprise in accordance with generally accepted accounting
principles.

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 Financial statements consist of a balance sheet, an income statement and a cash flows
statements.
Figure 3: BALANCE SHEET ILLUSTRATED
X & Y Enterprise
Balance Sheet
As of December 31, 20xx
ASSETS
Current Assets
Cash P 315,000.00
Accounts Receivable P 30,000.00
Allowance for Bad Debts (600.00) 29,400.00 P 344,400.00
Non-Current Assets
Service Vehicle 125,000.00
Accumulated Depreciation Expense (1,875.00) 123,125.00
TOTAL ASSETS P 467,525.00

LIABILITIES & CAPITAL

Liabilities
Accounts Payable P 75,000.00
Accrued Salary Payable 2,500.00 P 77,500.00
EQUITY
X & Y Capital 390,025.00
TOTAL LIABILITIES & CAPITAL P 467,525.00

Balance Sheet
- shows the financial status/condition of the business at any given time. It is also known as the
Statement of Financial Position.
- The date at the header of the BS starts with the word “As of” meaning it can be prepared
anytime as long as the business has assets.
- It can be prepared in two forms – Account form (arranged horizontally) and report form
(arranged vertically).
- Entries in the Balance Sheet is arranged according to business elements: (1) Current Assets,
(2) Non-Current Assets, (3) Current Liabilities, (4) Non-Current Liabilities, and (5) Equity or
Capital (Ending).
Figure 4: INCOME STATEMENT ILLUSTRATED
X & Y Enterprise
Income Statement
For the Month Ended December 31, 20xx

Enterprise Revenue P 110,000.00

Less: Operating Expenses
Salaries Expense P 7,500.00
Bad Debts 600.00
Depreciation Expense 1,875.00 9.975.00

NET INCOME P 100,025.00

Income Statement
- Shows the result of business operation for a given period. It is being prepared only after the
business has engaged in activities.

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 - The date in the header are written either “for the year ended” or “for the month ended”
represents that the financial statement is prepared after sales and expenses have been
incurred.
- It consists of revenues, expenses and the net income/loss.
Figure 5: CASH FLOW STATEMENT ILLUSTRATED

X & Y Enterprise
Cash Flows
For the Month Ended December 31, 20xx

Cash Flows from Operating Activities:

Collection of Accounts Receivables P 80,000.00
Payment of Accounts Payable (50,000.00)
Payment of Salaries Expense (5,000.00)
Net Increase from Operating Activities 25,000.00
Cash Flows from Investing Activities:
__________
Net Increase/Decrease from Investing Activities
Cash Flows from Financing Activities:
Initial Capital P 300,000.00
X & Y Personal Drawings (10,000.00)
Net Decrease from Financing Activities 290,000.00
Net Cash Balance P 315,000.00
Add: Beginning Balance Dec. 1, 20xx -
Cash Balance Ending Dec. 31, 20xx P 315,000.00

Cash Flow Statement

- Shows the use of cash for a certain period. It bears the same ending Cash balance reflected in
the Trial Balance, Balance Sheet and the General Ledger.
- It consists of the following:
(1) Cash flows from operating activities – cash inflows and outflows for operation activities
received and disbursed by the business.
(2) Cash flows from investing activities – cash flows intended for investment purposes such
as purchase of land, equipment and assets.
(3) Cash flows from financing activities – shows the sources of business financing and equity
from the owner.

Users of Financial Statements

Preparation and presentation of financial statements are primarily the management’s responsibility.
FS are being prepared whether for profit or nonprofit. Common FS that are prepared for some individuals
are the statement of assets and liabilities.
The users of financial statements and their reasons:
1. Investors - To determine whether to buy, hold or sell their investments in
equity ownership in the business, and to assess the ability of the
investee to pay dividends or to pay returns to investors
2. Employees - To determine the stability and profitability of employers and the
ability of the employer to pay salaries and fringe benefits.
3. Lenders - To determine the ability of the borrowers to be on time in paying

6
 the loans granted to them by the creditors.
4. Suppliers - To determine the ability of the customer to pay debts as they fall
due, and the ability of the customer to remain as continuing buyer.
5. Customers - Determine the ability of the enterprise to be a continuing source of
supply, and the ability of the company to exist over a long period of
time.
6. Government Agencies - To determine the capacity of the enterprise to pay taxes and its tax
compliance; to provide the bases for monitoring and regulating the
activities of enterprises and individuals.
7. Public - To determine the activities of the enterprise and contribution of the
economy in the form of (a) number of employees, (b) ownership of
assets, (c) prices of their products, (d) patronage of local suppliers,
(e) patronage by customers.
8. Management - To determine the activities of the enterprise for planning,
organizing, leading and controlling.

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NAME: ___________________________________________ SCORE: ___________________
SECTION: _________________________________________ DATE: ____________________
EXERCISE 1-1
Direction: Read the questions carefully, select letter of the correct answer and write it on the space before
the item number.
__________ 1. The financial statements that reports assets, liabilities and owner’s equity is called what?
a. Balance Sheet c. Cash Flows Statement
b. Income Statements d. Changes in Owner’s Equity
__________ 2. It is a processing system that involves entering two effects of every transaction.
a. Accounting System c. Business Entity Concept
b. Double Entry System d. Two-Point Entry System
__________ 3. Which of the following provides a chronological record of transactions with explanations and
clear references?
a. Income Statement c. Cash Flows Statement
b. Balance Sheet d. Journal
__________ 4. This involves writing the effects of the transactions and events that have been analyzed.
a. Analyzing c. Recording
b. Reporting d. Classifying
__________ 5. Which of the following does not conform to the Business Entity Concept?
a. It is not proper to record, as a business expense, the restaurant bill of the owner’s birthday party.
b. It is improper to record as business expense the house rental of the partner in the partnership.
c. It is wrong to show, as an income of a corporation, salaries of a stockholder from its subsidiary.
d. It is not correct to show, as an increase in owner’s equity, the net income incurred in a year’s
business transactions.
EXERCISE 1-2
Direction: Identify the financial statement user who may be interested in:
__________________________________ 1. Taxes to be paid and already paid by taxpayer.
__________________________________ 2. Price of gasoline
__________________________________ 3. Net profit for the year
__________________________________ 4. Relation of cash available and loans to be paid
__________________________________ 5. Volume of production
__________________________________ 6. Fringe benefits
__________________________________ 7. Ability to pay borrowings
__________________________________ 8. Return of capital
__________________________________ 9. Operational expenses
__________________________________ 10. Volume of supplies

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EXERCISE 1-3
Direction: Select the correct answer from the list of options inside the box and write it on the space before
the item number.

Reporting Analyzing Summarizing

Classifying Interpreting Recording

__________________________________ 1. The process of preparing balance sheets, income statement

and statement of cash flows.
__________________________________ 2. Accountants look at the documentary pieces of evidence or
proof of the enterprise’s transactions.
__________________________________ 3. The accounts are grouped into assets, liabilities, owner’s
equity, revenue, cost and expenses.
__________________________________ 4. The step where sorting of similar transactions and events into
specific account titles is done.
__________________________________ 5. Considered as the analytical phase of accounting.

9
 Content:

Content Standards:
The learners demonstrate an understanding of the varied branches and areas of accounting,
particularly
1. financial accounting
2. management accounting
3. government accounting
4. auditing
5. tax accounting
6. cost accounting
7. accounting education
8. accounting research
Performance Standards:
The learners shall be able to…
1. make a list of business within the community on the types of accounting services they
require
2. solve exercises in the identification of the branches of accounting described through the
types of services rendered
Learning Competencies:
The learners should be able to:
1. differentiate the branches of accounting.
2. explain the kind/type of services rendered in each of these branches
3. explain the functions of accountants in public accounting, commerce and industry,
government, and education or academe.

10
The Accounting Profession
Over the years, the practice of accounting and auditing has grown into a profession. Accounting is
a service activity which function is to provide quantitative information, primarily financial in nature, about
economic entities that are intended to be useful in making economic decisions.
Accountancy is deemed qualified as a profession as it possesses the following:
a. Members of the accountancy profession are all Certified Public Accountants (CPA);
b. They have their own body of language as they use terminologies that are unique and distinct to
CPAs;
c. It adheres to a Code of Ethics promulgated by the Board of Accountancy; and
d. Practitioner of accounting are members of Philippine Institute of Certified Public Accountants
(PICPA), a national organization of public accountants.

Certification of Accountants
Accountants may be certified by certifying body of either government office, such as Professional
Regulation Commission (PRC), or a professional organization. It adds value to the accountants, just like the
specializations of other professionals. Noncertified accountants, however, can still be employed in different
forms of business and nonbusiness organizations.
Certified Public Accountant (CPA) is an accountant who passed the examination conducted by
the Board of Accountancy under the administration of the Philippine Professional Regulation Commission.
Certified Management Accountant (CMA) is an accountant who passed the examination
administered by the Institute of Management Accountants of the National Association of Accountants.
Certified Internal Auditor (CIA) is an accountant who has passed the uniform examination by the
Institute of Internal Auditors.

Branches of Accounting
Financial accounting – focuses on the recording and classifying business transactions, and the periodic
preparation and presentation of financial statements to be used by internal and external users. It is primarily
concerned in processing historical data. In preparing financial statements, strict compliance with generally
accepted accounting principles or GAAP is observed.
Management accounting – also known as managerial accounting, focuses on providing information for use
by internal users, the management. This branch deals with the needs of the management rather than strict
compliance with generally accepted accounting principles. Managerial accounting involves financial
analysis, budgeting and forecasting, cost analysis, evaluation of business decisions, and similar areas.
Government accounting – branch of accounting that is involved in the identification of sources and uses of
resources consistent with the provisions of city, municipal, provincial or national laws. The government
collects and spends huge amount of public funds annually so it is necessary that there is proper custody
and disposition of these funds.
Auditing – considered as the most significant service to the public amongst branches of accounting since
an audit is the independent examination of financial reports to ensure fairness of reports that the
management submits to the users outside the business entity.
External auditing refers to the examination of financial statements by an independent party with the purpose
of expressing an opinion as to fairness of presentation and compliance with GAAP.

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Internal auditing focuses on evaluating the adequacy of a company's internal control structure by testing
segregation of duties, policies and procedures, degrees of authorization, and other controls implemented by
management.
Tax accounting - Tax accounting helps clients follow rules set by tax authorities. It includes tax planning
and preparation of tax returns. It also involves determination of income tax and other taxes, tax advisory
services such as ways to minimize taxes legally, evaluation of the consequences of tax decisions, and other
tax-related matters. Accountants specializing in this branch of accounting aims to comply with the laws but
are also in constant legal search for means to minimize tax payments.
Cost accounting - Sometimes considered as a subset of management accounting, cost accounting refers
to the recording, presentation, and analysis of manufacturing costs. Cost accounting is very useful in
manufacturing businesses since they have the most complicated costing process. Cost accountants also
analyze actual and standard costs to help managers determine future courses of action regarding the
company's operations.
Accounting education – shall constitute in a person involved in an educational institution which involve
teaching of accounting, auditing, management advisory services, finance, business law, taxation and other
technically related subject (Frias, S. & Pefianco, E., 2016).
Accounting research - is research on the effects of economic events on the process of accounting, and the
effects of reported information on economic events. It encompasses a broad range of research areas
including financial accounting, management accounting, auditing and taxation. It is carried out both by
academic researchers and by practicing accountant.
“Indeed the very role of accounting research is in part to make both accounting and our knowledge of it
different, to move forward our understandings of accounting and, at times, the practice of accounting itself.”
—Anthony Hopwood, in his address to the 2006 American Accounting Association annual meeting

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NAME: ___________________________________________ SCORE: ___________________
SECTION: _________________________________________ DATE: ____________________
EXERCISE 2-1
Direction: Write on the space provided the word TRUE if the statement is correct and FALSE if it is not.
_______________ 1. All Members of the accountancy profession are certified public accountants.
_______________ 2. Accountants who provide accounting services on a fee basis and their staff are
engaged in private accounting.
_______________ 3. Management Accounting is also known as managerial accounting that is focused on
the recording and classifying business transactions and prepares and presents financial
reports.
_______________ 4. Tax Accounting is an accounting that ensure compliance to statutes alongside
minimizing tax payments.
_______________ 5. Cost accounting also analyzes actual and standard costs to help managers determine
future courses of action regarding the company's operations.
EXERCISE 2-2
Direction: Briefly differentiate the following:
1. Cost Accounting vs. Management Accounting
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
2. Accounting Education vs. Accounting Research
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
3. External Auditing vs. Internal Auditing
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

13
NAME: ___________________________________________ SCORE: ___________________
SECTION: _________________________________________ DATE: ____________________
EXERCISE 2-3
Direction: List business/agency within the community on the following branches of accountancy:
1. Auditing

2. Cost Accounting

3. Tax Accounting

4. Accounting Education

5. Financial Accounting

EXERCISE 2-4
Direction: identify branch of accounting where you may find the following may be working
1. Financial Accountant ____________________________
2. CPA Board Exam Reviewer ____________________________
3. Bookkeeper ____________________________
4. Professor ____________________________
5. Budget Officer ____________________________
6. Tax Consultant ____________________________
7. Chief Accountant ____________________________
8. Municipal Accountant ____________________________
9. COA Commissioner ____________________________
10. Junior Audit Staff ____________________________

14
 Content:

Content Standards:
The learners demonstrate an understanding of the various forms of business
organization, as follows:
1. sole / single proprietorship
2. partnership
3. corporation
4. cooperatives
Performance Standards:
The learners shall be able to…
1. differentiate the forms of business organization in terms of nature of ownership
2. make a list of existing business entities in their community and identify the form of
business organization
Learning Competencies:
The learners should be able to:
1. differentiate the forms of business organization
2. identify the advantages and disadvantages of each form

15
The Legal Forms of Business in the Philippines
In the Philippines, businesses are legally registered based on the ownership. The different legal
forms of business have its unique characteristics, advantages and disadvantages. The table below
discusses the different forms of businesses by ownership in the Philippines. Accounting procedures depend
on which form the organization takes.
Legal Form of Advantages Disadvantages Tax Rate
Business
Single Proprietorship 1. Simple to create or 1. Unlimited The business income is taxed as personal
A business owned and set up and easy to personal liability income. The applicable tax rate is as follows:
managed by one discontinue 2. Limited skills and a. Less than P10,000 is 5%
individual 2. Least costly form capabilities b. P10,000-but less than P30,000 is 500 +
of business 3. Limited access to 10% of excess over P10,000
ownership to begin capital c. P30,000 – but less than P70,000 is
with 4. Lack of continuity P2,500 + 15% of the excess over
3. Larger profit of the business P30,000
incentive entity d. P70,000 – but less than P140,000 is
4. Total decision- P8,500 + 20% of excess over P70,000
making authority e. P140,000 – but less than P250,000 is
P22,500 + 25% of excess over
P140,000
f. P250,000 – but less than P500,000 is
P50,000 + 30% of excess over the
P250,000
g. P500,000 is P125,000 + 32% of the
excess over P500,000
Partnership 1. Easy to establish 1. Limited control of For taxable partnerships, the tax rate is 32%
A business formed by 2. Complementary business of the net taxable income from all sources.
two or more people who skills of partners 2. Profits are shared (Note: some partnerships are exempted from
co-own the entity for 3. Larger pool of 3. Decisions are income tax, others are taxed like
making money capital made by the corporations)
4. Risks are shared partners and are
binding to all
4. Unlimited liability
of debts
5. Joint property
investment by all
partners
Corporation 1. Greater ability to 1. Longer time to set The corporate tax rate is 30% of the net
A business formed by attract capital up taxable income from all sources
at least five parties. 2. Transferable 2. Involve more
This business entity is ownership expenses
considered a “legal 3. Continuity of life 3. Potential loss of
person” in the context 4. Limited liability control by the
of the law, which allows founder(s)
it to conduct business 4. Major decisions
acts that a natural are not done by
person can do and this the owners
include the following: without the
that the entity has legal approval of the
right and board
responsibilities; can sue 5. More rules and
and be sued in court; regulations to
can own and dispose comply with
property; can enter into
contracts
Cooperative 1. Earnings are tax 1. Control of Tax exempted
A business entity exempted business is
formed by producers, 2. Limited liability shared
traders, or consumers 3. More people 2. Decisions made

16
wherein individual benefit from the by the board must
members can avail of profits made by the be accepted by
its services. There are enterprise the general
different types of 4. Greater ability to membership
cooperative and these attract capital
are credit cooperative,
marketing cooperative,
service cooperative,
farmer’s cooperative,
fisherfolks cooperative,
electric cooperative and
multipurpose
cooperative
Comparison of the four (4) forms of Business Organization
Sole Proprietor Partnership Corporation Cooperative
Ownership One owner Two or more owners Five or more owners
Capitalization Depends on the needs Depends on the needs Depends on the type
of the business of the business of business as
prescribed by law
Life or term of Dependent on the Dependent on the Fifty years and
existence owner partners renewable
Management structure Managed by the sole Managed by one or Managed by the board
proprietor more partners of directors
Profit distribution To sole owner To partners based on To stock holders
agreement or based based on declaration
on law of the board of
directors
Reporting To: To: To: To:
requirements -Municipal mayor -Municipal mayor -Municipal mayor -Municipal mayor
- DTI - DTI - DTI - CDA
- BIR - SEC - SEC (Cooperative Dev't
- SSS - BIR - BIR Authority)
- HDMF - SSS - SSS - BIR
- PhiHealth - HDMF - HDMF - SSS
- PhiHealth - PhiHealth - HDMF
- PhiHealth

Classification of Partnership:
Partnership may be classified according to the type of business operation as follows:
a. Marketing or trading partnership is those engaged in buying and selling of goods without changing
its physical form. (Ex: grocery store owned by two or more persons)
b. Manufacturing partnership refers to enterprises that purchases raw materials and produces new
product by converting said raw materials into a finished product. (ex: a peanut butter production
house)
c. Service partnership is engaged in professional (pertains to service offered by lawyers, accountants
and the like) or non-professional (includes repair shop, tailoring shops, transport companies and
any similar businesses) services.
Partnership may also be classified according to liability:
a. General partnership – all partners of the business/enterprise are general partners who are all liable
for partnership debts to the extent of their personal property after all the assets have been
exhausted.
b. Limited partnership – having one or more member who are general partner and one or more limited
partners.

17
 Classification of partners as to their liability for partnership debts or obligations:
a. General partner – refers to partners who are all liable for partnership debts to the extent of their
personal property after all the assets have been exhausted.
b. Limited partner – are those whose liability for partnership debts is limited to his capital contribution
c. General-limited partner – one who has all the rights, powers, and subject to all restrictions of a
general partner whose liability is limited to his general contribution.
Group of partners according to contributions:
a. Capitalist partner – contributes money or property to the capital of the partnership
b. Industrial partner – contributes work, labor or industry to the partnership
c. Capitalist-industrial partner – contributes both money or property and his work or industry to the
partnership

Corporate formation
Corporation is the form of business organization that is believed to be the hardest to set up due to
its legal requirements. It requires promoter who undertakes to form a corporation, or causes it to be formed
for a specific purpose or purposes; and who further undertakes to procure for the corporation, the capital,
rights, property and organization necessary to achieve such purpose or purposes.
All corporations organized under the Corporate Code shall file with the Securities and Exchange
Commissions (SEC) articles of incorporation. The SEC shall have absolute jurisdiction, supervision and
control over all corporations, partnerships or associations who are grantees of primary franchises &/or
licenses or permits issued by the government to operate in the Philippines.

18
NAME: ___________________________________________ SCORE: ___________________
SECTION: _________________________________________ DATE: ____________________
EXERCISE 3-1
Direction: Select the correct answer and write it on the space before the item number.
___________ 1. Which of the following best describes the characteristics of a partnership?
a. Limited ability to raise capital, unlimited personal liability of owners
b. Ability to raise large amounts of capital; limited personal liability of owners
c. Limited ability to raise capital; limited personal liability of owners
d. Ability to raise large capital; unlimited personal liability of owners
___________ 2. Which of the following statements is true?
a. Stockholders are personally liable for the liabilities of the corporation if the corporation is unable to
pay
b. Normally, stockholders can only sell their ownership interests when the corporation terminates
c. Partners are personally liable for the liabilities of the partnership if the partnership is unable to pay
d. Partners can normally transfer their partnership interests with ease.
___________ 3. From the accounting viewpoint, which of the following stands INCORRECT?
a. The sole proprietorship is generally distinct from its proprietor
b. Partnership is owned by at least two individuals
c. A corporation is a business owned by its stockholders
d. Cooperatives are tax exempted
___________ 4. It refers to a partner who shares either cash or property as funds to be utilized in the
business operations.
a. Limited partner
b. Capitalist partner
c. Industrial partner
d. General partner
___________ 5. This is a classification of partnership business which operation focuses on buying of goods
and converting it into another product to be sold at a different amount.
a. Marketing partnership
b. Service partnership
c. Manufacturing partnership
d. Limited partnership

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NAME: ___________________________________________ SCORE: ___________________
SECTION: _________________________________________ DATE: ____________________
EXERCISE 3-2 Direction: Write TRUE if the statement is correct, FALSE if it is not.
___________ 1. Partnership tends to be small service-type businesses and retail establishments.
___________ 2. Accounting considers sole proprietorship as a separate organization, distinct from the
personal affairs of the owners.
___________ 3. Corporation is a separate legal entity from its stockholders who are not personally liable for
the corporation’s debt.
___________ 4. Non-Professional partnerships are a pool of talents and expertise.
___________ 5. Management that may be dependent on the capacity of the owner is one of the
disadvantages of sole proprietorship.
___________ 6. Partnership is much easier to organize than sole proprietorship
___________ 7. Capitalization of a Corporation will depend on the type of business as prescribed by law.
EXERCISE 3-3 Direction: Enumerate two advantages and two disadvantages of the ff:
1. Sole proprietorship
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
2. Partnership
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
3. Corporation
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
4. cooperative
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

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 Content:

Content Standards:
The learners demonstrate an understanding of the types of business according to
activities, particularly:
1. service business
2. merchandising business
3. manufacturing business
Performance Standards:
The learners shall be able to…
1. differentiate the types of business according to activities
2. make a list of businesses in their community according to their activities
Learning Competencies:
The learners should be able to:
1. compare and contrast the types of business according to activities
2. identify the advantages, disadvantages, and business requirements of each type

21
Three (3) Types of Businesses according to activities
a. Trading or Merchandising Business
- this is a type of business activity where an entrepreneur deals with buying and selling of
goods. An entrepreneur buys items and sells them in the same form but with an additional
price from the actual cost of purchase of items.
- Capital is the essential element of this type of business.
- Examples are: Bookstores, Groceries, Shoes Store, Hardware store, Radio and Electronics
Store, Assorted goods store, and others.
- This business activity involves buying the products in bulk selling at a retail price with
considerable profits.
o Retailing refers to selling of goods and services directly to the end user or consumer
in small quantities. Kinds of retailer are the following
 Department stores offers wide variety of product lines such as clothing,
shoes, bags, beauty products, furniture and household goods.
 Supermarket sells variety of food and household products
 Specialty stores sells different items or units for one kind or limited product
lines.
 Convenience stores operates 24/7, and retail prices are higher than those of
supermarkets yielding higher turnover.
 Superstores are very large stores that sells a wide variety of merchandise
 Factory outlets pertains to a store that sells products made usually by one
company and often at reduced prices.
 Direct selling is one-on-one or face-to-face selling and selling process may
be done at any place.
o Wholesaling pertains to selling goods in big quantities or volume.
b. Manufacturing Business
- Engaged in buying raw materials, convert them into products and then sell these products to
other companies or to final users.
- The manufacturing process can be labor intensive (requires workers for manual processing) or
capital intensive (uses machinery for production).
- In accounting, part of the manufacturing cost which represents work completed is transferred
to Finish Goods Inventory while incomplete work remains in Work in Process. The total of the
costs of direct materials, direct labor and factory overhead are referred to as the
manufacturing cost or cost of production.
- Elements of manufacturing costs are defined as follows:
o Direct materials pertain to all materials that form part of the finished product.
o Direct labor is labor used in manufacturing a product which can be charged directly to
that particular product.
o Factory overhead refers to indirect elements of cost incurred to produce a finished
product, which may be in form of indirect materials, indirect labor or other indirect
expenses.
Figure 4: The flow of operations of a Manufacturing Concern

Purchase of Raw Processes raw materials Sells finished goods

PROCESS
INPUT

OUTPUT

materials applying direct labor and

factory overhead

22
 c. Service Business
- This type of business involves the selling of one’s specific skills and knowledge that renders
satisfaction and utility to others depending on the needs of the prospective customers or target
clients.
- It will depend mostly on what skills an individual has acquired from formal or non-formal
education/training, from friends, lifestyle, hobby, and his own entrepreneurial characteristics
that formulate business idea.
- “doing work for others”.
Comparison of the Types of Business
Trading or Manufacturing Service
Merchandising
Activity Buys goods and sells Converts raw materials Does work for others
to finished goods
Nature of Revenue Sales sales service income
Cost & Expenses Cost of goods sold and Cost of goods Cost of service and
selling and manufactured and sold, administrative expenses
administrative expenses and selling and
administrative expenses
Form of Business Sole proprietorship or partnership or corporation
Size Small or medium size or large enterprise

23
NAME: ___________________________________________ SCORE: ___________________
SECTION: _________________________________________ DATE: ____________________
ACTIVITY:
Interview at least one business establishment under each type of businesses to know the advantages and
disadvantages of each types. Output will be presented to the class.

EXERCISE 4-1 Directions: Write the letter T if the statement is correct, F otherwise.
___________ 1. Operation of a service business can be as complicated as the manufacturing business.
___________ 2. Shopping malls are in the service business of leasing.
___________ 3. Telecommunications, Entertainment and Banking are under the Trading business.
___________ 4. Manufacturing business required to be of a large enterprise.
___________ 5. Procurement of materials for a certain product is an INPUT.
___________ 6. PROCESS pertains to the manufacturing concern that deals with conversion of raw
materials into a new product.
___________ 7. Superstores are combined supermarket and department store.
___________ 8. When goods are sold in considerable amount is called retailing.

24
NAME: ___________________________________________ SCORE: ___________________
SECTION: _________________________________________ DATE: ____________________
EXERCISE 4-2 Directions: Choose the correct answer. Write the letter of the correct answer on the space
before the item number.
_____________ 1. It includes all activities related to the sale of goods and services direct to consumers.
a. Wholesaling c. Retailing
b. Manufacturing d. Purchasing
_____________ 2. Which of the following is not involved in purchasing?
a. Obtaining goods in right amounts c. Preparing a market list
b. Keeping record of purchases d. Checking all goods received
_____________ 3. In the selling process, this individual is the link between producer and consumer.
a. Wholesaler c. Manufacturer
b. Retailer d. Producer
_____________ 4. It refers to costs related to manufacturing raw materials to a new product.
a. Price c. Operational cost
b. Administrative expenses d. Production cost
_____________ 5. Which of the following pertains to the finished product or the outcome of production?
a. Input c. Output
b. Process d. Throughput

EXERCISE 4-3 List twenty (20) different establishments located in the community and categorize it using
the three types of business

25
 Content:

Content Standards:
The learners demonstrate an understanding of accounting concepts and principles
Performance Standards:
The learners shall be able to identify generally accepted accounting principles
Learning Competencies:
The learners should be able to:
1. explain the varied accounting concepts and principles
2. solve exercises on accounting principles as applied in various cases

26
Fundamental Concepts
There are several fundamental concepts bring about accounting process. The following are being
considered by accountants in recording business transactions:
Entity Concept – it is considered the most basic concept in accounting. This concept pertains to a process
where each entity is evaluated separately or the transactions of different entities should not be accounted
for together.
Periodicity Concept – this concept allows the users to obtain timely information to serve as a basis on
making decisions about future activities.
Stable Monetary Unit Concept – this concept allows accountants to add and subtract peso amounts as
though each peso has the same purchasing power as any other peso at any time. It is also being used as a
basis in ignoring the effects of inflation in the accounting records.

Concepts of Capital and Capital Maintenance

Under Financial Concept of capital, such as invested money or invested purchasing power, capital is
synonymous with the net assets or equity of the enterprise. A profit is earned only if the financial (or money)
amount of the net assets at the end of the period exceeds the financial (or money) amount of assets at the
beginning of the period, after excluding any distributions to and contributions from owners during the period.
Under a Physical Concept of capital, such as operating capability, capital is regarded as the productive
capacity of the enterprise based on, for example, units of output per day. Profit is earned only if the physical
productive capacity (or operating capability) of the enterprise (or the resources or funds needed to achieve
that capacity) at the ends of the period exceeds the physical productive capacity at the beginning of the
period, after excluding any distributions to and contributions from owners during the period.
The difference between the above-mentioned concepts of capital maintenance is the treatment of the effects
of changes in the prices of assets and liabilities of the enterprise

Basic Principles
Previously, accountants in different countries rely on their own accounting organizations and
guidelines. The Philippines, alongside other countries, uses International Financial Reporting Standards
(IFRS) which was issued by the International Accounting Standard Board (IASB), one of the two major
standard-setting bodies in the world. IASB aims to develop single set of understandable and enforceable
global accounting standards, and to unite the National Accounting Standards, International Accounting
Standards and the International Financial Reporting Standards.
The Framework for the Preparation and Presentation of Financial Statements (based on the
International Accounting Standards Committee Framework) sets out the concepts that underlie the
preparation and presentation of financial statements for external users.
Accounting guidelines are being followed in accounting processes. The Generally Accepted
Accounting Principles (GAAP) is a set of guidelines and procedures that constitute acceptable accounting
practice at a given time. Accountants, in order to produce useful information, adhere to the following
principle:
Objectivity Principle. This principle is beneficial in ensuring the accuracy and usefulness of accounting
records and statements since accounting records are based on information that flows from activities
documented by objective evidences.

27
Historical Cost. This principle states that acquired assets should be recorded based on actual cost and not
based on the management’s.
Revenue Recognition Principle. Revenue is recognized only when goods are delivered or services are
rendered.
Expense Recognition Principle. Expenses should be recognized in the accounting period in which goods
and services are used up to produce revenue and not when the entity pays for those goods and services.
Adequate Disclosure. Requires all relevant information that would affect the user’s understanding and
assessment of the accounting entity be disclosed in the financial statements.
Materiality. Financial reporting is only concerned with information that is significant enough to affect
evaluations and decisions.
Consistency Principle. This principle is concerned in using the same accounting method from period to
period to achieve comparability over time within a single enterprise. Changes is permitted if justifiable and
disclosed in the financial statements.

Users and Their Information Needs

1. Investors need information to help them determine whether they should buy, hold or sell.
2. Employees are interested in information about the stability and profitability of their employers and
their ability to provide remuneration, retirement benefits and employment opportunities.
3. Lenders are interested in information that enables them to determine whether their loans and the
related interest will be paid when due.
4. Supplier and other trade creditors are interested in information that enables them to determine
whether amounts owing to them will be paid when due.
5. Customers are interested in information about the continuance of an enterprise, especially when
they have long-term involvement with, or are dependent on the enterprise.
6. Government and their Agencies are interested in the allocation of resources and therefore, the
activities of the enterprise, and for the purpose of regulation and determination of taxation policies
and as a basis for national income
7. Public are interested in financial statements of an enterprise as it assists them by providing
information about the trends and recent developments in the prosperity of the enterprise and the
range of its activities.
Objectives of financial statements are to provide information about:
1. Financial position - the statement of financial position or the balance
sheet shows the assets, liabilities, and owner’s equity of a
business at a specified date.
2. Operating Performance - the statement of income or profit and loss
statement shows the net income or net loss for a period of
time.
3. Cash Flows - the statement of cash flows shows the source of
cash and the uses of cash for a period of time.

Qualitative Characteristics of Financial Statements

1. Understandability – users are supposed to have a reasonable knowledge of business and
economic activities as well as accounting and willingness to study the information with reasonable
diligence

28
 2. Relevance – information has relevance when it influences decision of users by helping them
evaluate past, present or future events, or confirming, correcting their past evaluation.
3. Materiality – information is material if its omission or misstatement could influence the economic
decisions of users taken on the basis of financial statements. Materiality depends on the size of the
item or error judged in the particular circumstances of its omission or misstatement.
4. Reliability – information has reliability when it is free from material error and bias and can be
depended upon by users to faithfully represent that which it either purports to represent or could
reasonably be expected to represent
5. Faithful representation – to be reliable, information must represent faithfully the transactions and
other events it either purports to represent or could reasonably be expected to represent.
6. Substance – it is necessary that transactions and other events are accounted for and presented in
accordance with their substance and economic reality, and not merely their legal form.
7. Neutrality – information in the financial statements are neutral if it is free from bias. Financial
statements are not neutral if, by the selection or presentation of information, they influence the
making of decision or judgment in order to achieve a predetermined result or outcome.
8. Prudence – it does not permit bias. It is the inclusion of caution in the exercise of judgment needed
in making the estimates required under conditions of uncertainty, such that assets or income are
not overstated and liabilities or expenses are not understated. This attitude is often expressed in
the statement “to anticipate no profits and provide for all probable and estimable losses”.
9. Completeness – information must be complete within the bounds of materiality and cost. An
omission can cause false or misleading information and thus be unreliable and deficient.
10. Comparability – the measurement and display of the financial effect must be carried out in a
consistent way throughout and over time for that enterprise and in a consistent way for different
enterprises. Users must be able to compare the financial statement of an enterprise through time in
order to identify trends in its financial position and performance. The need for comparability should
not be confused with mere uniformity and should not be allowed to become an impediment to the
introduction of improved accounting standards.

Constraints on Relevant and Reliable Information

1. Timeliness – undue delay in the reporting of information may lose its relevance. It must be
communicated early enough to be used for the economic decisions that might influence. In order
for the management to achieve balance between relevance and reliability, the overriding
consideration is how the economic decision-making needs of users can be best satisfied.
2. Balance between Benefits and Cost – the benefits derived from information should exceed the cost
of providing it. The evaluation of benefits and costs is substantially a judgmental process. Initially,
costs are not necessarily borne by those users who enjoy the benefits and often, the benefits of the
information are enjoyed by a broad range of external users.
3. Balance between Qualitative Characteristics – the aim is to achieve an appropriate balance among
the characteristics in order to meet the objective of financial statements. The relative importance of
the characteristics in different cases is a matter of professional judgment.
4. Fair Presentation – financial statements are frequently describes as presenting fairly the financial
position, performance and changes in financial position of an enterprise. The application of the
principal qualitative characteristics and of appropriate accounting standards normally results in
financial statements that convey what is generally understood to be presenting such information
fairly.

29
Underlying Assumptions
Accrual Basis
Generally Accepted Accounting Principles (GAAP) require that a business use the accrual basis
which means revenues are recorded as they are earned and expenses as they are incurred. Under this
basis, the effects of transactions and other events are recognized when they occur and not as cash or its
equivalent is received or paid. Transactions are recorded in the accounting records and reported in the
financial statements, except for the cash flow statement, of the periods to which they relate. In accrual
accounting, the timing of cash flows is relatively immaterial for determining when to recognize revenues and
expenses.
Going Concern Assumption
The financial statements are normally prepared on the assumption that an enterprise is a going
concern and will continue in operation for the foreseeable future. An entity is going concern unless
management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to
do so.
This assumption underlies the depreciation of assets over their useful lives. If an entity expects to
liquidate in the near future, its assets are valued at their worth at liquidation rather than original cost.

Recognition of Elements of Financial Statements

Recognition is the inclusion in the Balance Sheet or Income Statement of an item that meets the
definition of an element and satisfies the criteria for recognition.it involves the interpretation of an item in
words (account titles and description) and by monetary units (in peso). Monetary value is usually historical
cost, which is the amount of cash or cash equivalents paid or to be paid, of the fair value of the
consideration given to acquire at the time of their attainment.

An item that meets the definition of an element should be recognized as follows:

Elements When Where
Assets When it is probable that the future economic benefit will flow to the Balance Sheet
entity and the asset has a cost or value that can be measured
reliably.
Liabilities When it is probable that an outflow of resources embodying Balance Sheet
economic benefits will result from a settlement of a present
obligation and the amount at which the settlement will take place
can be measured reliably.
Income When an increase in future benefits related to an increase in an Income Statement
asset or a decrease of a liability has arisen than can be measured
reliably.
Expense When a decrease in future economic benefits related to a Income Statement
decrease in an asset or an increase of a liability has arisen that
can be measured reliably.
Measurement of elements of financial statements
Measurement is the process of determining the monetary amounts at which the elements of the
financial statements are to be recognized and carried in the balance sheet and income statement. This
involves the selection of particular basis of measurement such as historical cost, current cost, realizable
(settlement) value and present value.

30
NAME: ___________________________________________ SCORE: ___________________
SECTION: _________________________________________ DATE: ____________________
EXERCISE 5-1: Read the questions carefully, select the letter of the correct answer and write it on the
space before the item number.
___________ 1. It pertains to a process where each entity is evaluated separately or the transactions of
different entities should not be accounted for together.
a. Periodicity concept c. Stable monetary concept
b. Entity concept d. Physical concept
___________ 2. Which of the following constraints on relevant and reliable information holds that the
relative importance of the characteristics in different cases is a matter of professional judgment?
a. Fair presentation c. Balance between benefits and cost
b. Balance between qualitative characteristics d. Timeliness
___________ 3. The need for which qualitative characteristics of financial statements should not be
confused with mere uniformity and should not be allowed to become a barrier to the introduction of improved
accounting standards?
a. Comparability c. Completeness
b. Substance d. Reliability
___________ 4. Which of the following might cost the relevance of financial information used for formulating
economic decisions?
a. Relevance c. Completeness
b. Substance d. Timeliness
___________ 5. Which of the following is recognized when it is probable that any future economic benefit
will flow to the entity and has a cost or value that can be measured reliably?
a. Liability c. Asset
b. Expense d. Income
___________ 6. An underlying assumption which suggests the continuation of an accounting entity in the
absence of evidence to the contrary is what?
a. Accounting entity c. Substance
b. Going concern d. Accrual basis
___________ 7. Historically, managers, investors, and accountants have generally preferred that possible
errors in measurement be in the direction of understatement of net income and net asset.
a. Materiality c. Relevance
b. Neutrality d. Prudence
___________ 8. It refers to the amount of cash or equivalents paid or to be paid.
a. Monetary value c. Historical cost
b. Current cost d. Present value

___________ 9. Which of the following are having differences in terms of treatment of effects of changes in
the prices of assets and liabilities of the enterprise?
a. Periodicity and entity c. Financial and physical
b. Stable monetary unit and periodicity d. Revenue recognition and Expense recognition
___________ 10. Which of the following is concerned in using the same accounting method from period to
period to achieve comparability over time within a single enterprise?
a. Materiality c. Objectivity principle
b. Periodicity concept d. Consistency principle

31
NAME: ___________________________________________ SCORE: ___________________
SECTION: _________________________________________ DATE: ____________________
EXERCISE 5-1: Match each numbered term with the letter of the category. Write the letter of your answer
on the space before the number.
a. Users of accounting information
b. Underlying assumptions
c. Constraints
d. Elements of financial statements
e. Qualitative Characteristics of Information
f. Concepts
___________ 1. Going concern
___________ 2. Owner’s Equity
___________ 3. Fair presentation
___________ 4. Creditors
___________ 5. Understandability
___________ 6. Timeliness
___________ 7. Periodicity
___________ 8. Assets
___________ 9. Accrual
___________ 10. Physical

32
 Content:

Content Standards:
The learners demonstrate an understanding of the accounting equation
Performance Standards:
The learners shall be able to solve problems applying the accounting equation
Learning Competencies:
The learners should be able to:
1. illustrate the accounting equation
2. perform operations involving simple cases with the use of accounting equation

33
The Account
Account is referred to as the basic summary device of accounting. An account may be defined as
detailed record of the increases, decreases and balances of each element that appears in an entity’s
financial statements. The “T” Account is known as the simplest form of account due to its resemblance to
the letter T. It has three parts as shown below:

Account Title

Left side or DEBIT Right side or CREDIT

side side

The Accounting Equation

It is the most basic tool of accounting. The equation shows the resources controlled by the
enterprise, the present obligations of the enterprise and the residual interest in the assets. Assets must
always equal with the combined liabilities and owner’s equity.

ASSETS = LIABILITIES + OWNER’S EQUITY

Interest in Outsider Insider

Business Assets

Assets are on the left side of the equation opposite the liabilities and owner’s equity. This explains
why increases and decreases in assets are recorded in the opposite manner as liabilities and owner’s equity
are recorded. The result of operations is either a net income or a net loss. In rare cases, the result of
operations is neither a net income nor a net loss, or zero. A zero result is breakeven where total revenue
equals total cost and expense.
The equation can be best illustrated on the following examples:
Example #1: When total assets are P500, 000.00 and liabilities is P200, 000.00, how much will owner’s
equity be? The equation may appear as follows:
ASSETS - LIABILITIES = OWNER’S EQUITY
P500, 000.00 - P200, 000.00 = P300, 000.00

Example #2: If an enterprise’s liabilities and owner’s equity are amounting to P55, 000.00 and P50, 000.00
respectively, how much is the asset?
ASSETS - LIABILITIES = OWNER’S EQUITY
P105, 000.00 - P55, 000.00 = P50, 000.00

Example #3: The sum of liabilities P500, 000.00 and owner’s equity P250, 000, is the total asset of P750,
000.00

LIABILITIES P500, 000.00 ASSETS

+ + = P750, 000.00
OWNER’S EQUITY P250, 000.00

34
Debits and Credits – The Double-Entry System
Accounting is based on a double-entry system. The double entry system is based on normal
balance of an accounting element or account. A debit side entry must have a corresponding credit side
entry. Each transaction must have at least two accounts and the debits for the transaction must always
equal to the total credits. Dr. and Cr. are abbreviations for debit and credit respectively.

Rules of Debit and Credit

The normal balances of an account which refers to the usual position of an account in the T-
account are the bases of the rules of Debit and Credit.
Following are the rules of Debit and Credit:
Rule #1: Assets: Debit to increase the amount of asset
Credit to decrease its amounts
Rule #2: Liabilities: Credit to increase the amount of liability
Debit to decrease the amount of liability
Rule #3: Owner’s Equity: Credit to increase the capital account
Debit to decrease the amount of owner’s equity
Rule #4: Revenue: Credit to increase the revenue account
Debit to decrease its amount
Rule #5: Expenses: Debit to increase the expense account
Credit to decrease the amount of expense
BALANCE SHEET ACCOUNTS
Assets Liabilities and Owner's Equity
Debit Credit Debit Credit
(+) (-) (-) (+)
Increases Decreases Decreases Increases

INCOME STATEMENT ACCOUNTS

Debit for decreases in Owner's Equity Credit for Increase in Owner's Equity
Expenses Income
Debit Credit Debit Credit
(+) (-) (-) (+)
Increases Decreases Decreases Increases
Effects of Transactions
Every transaction or event has a dual but self-balancing effect on the accounting equation. These
events may be grouped into nine types of effects as follows:
1. Increase in Assets = Increase in Liabilities
2. Increase in Assets = Increase in Owner’s Equity
3. Increase in one Asset = 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 one Liability = Decrease in another Liability
8. Increase in Owner’s Equity = Decrease in Liabilities
9. Increase in one Owner’s Equity = Decrease in another Owner’s Equity

35
NAME: ___________________________________________ SCORE: ___________________
SECTION: _________________________________________ DATE: ____________________
EXERCISE 6-1: For each transaction, indicate whether the asset (A), Liabilities (L), or owner’s equity (OE)
increased (+), decreased (-) or did not change (0) by placing the appropriate sign in the appropriate column.

Transactions A L OE
1 Received cash as additional investment
2 Purchased supplies on account
3 charge customers for services made on account
4 Rendered services to cash customers
5 paid cash for rent on building
6 Collected Account Receivable in full
7 Paid cash for supplies
8 Returned supplies purchased on account
9 Paid cash to settle accounts
10 Paid cash to owner for personal use

EXERCISE 6-2: Analyze the Transactions below and complete the accounting equation.
1. Pepe stated his business by depositing P200, 000.00 in a bank account in the name of Alyas Robin
Hood Restaurant at BDO Puerto Princesa Branch.

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash = + Pepe, Capital
= +

2. Computer equipment amounting P 50,000.00 is acquired on a cash basis. The effect of the
transaction on basic equation will be:
ASSETS = LIABILITIES + OWNER’S EQUITY
Cash + Equipment = + Pepe, Capital
bal: P200,000.00 + - = - + P200,000.00
+ = - +
bal: + = - +

3. Pepe withdrew P15, 00000 from Alyas Robin Hood Restaurant for his personal use.

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash + Equipment + Service Vehicle = Notes Payable + Pepe, Capital
P150,000.00 + P50,000.00 + P100,000.00 = P100,000.00 + P200,000.00
+ + = +
+ + = +
=

36
4. Service vehicle is acquired by issuing a P100, 000.00 note payable to Toyota Palawan. The note is
due on December 31, 2017.
Assets (Increase) = Liabilities (Increase)
Service Vehicle Notes Payable
Dr (+) Cr (-) Dr (-) Cr (+)

5. Alyas Robin Hood Restaurant paid P20, 000.00 to Ordiz Building for rent on the space for the
months of January, February and March.
Assets (Decrease) = Assets (Increase)
Cash Prepaid Rent
Dr (+) Cr (-) Dr (+) Cr (-)
P200,000.00

37
 Content:

Content Standards:
The learners demonstrate an understanding of the five major accounts, namely,
1. assets
2. liabilities
3. capital
4. income
5. expenses
Performance Standards:
The learners shall be able to define, identify, and classify accounts according to the five
major types
Learning Competencies:
The learners should be able to:
1. discuss the five major accounts
2. cite examples of each type of account
3. prepare a Chart of Accounts

38
Elements of Financial Statements
Asset It 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.
Liability It is a present obligation of the enterprise arising from past events, the settlement of which is
expected to result in an outflow from the enterprise of resources embodying economic
benefits.
Equity It is the residual interest or remainder of the asset of the enterprise after deducting all its
liabilities.
Income It is an increase in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decrease of liabilities that result in increases in equity, other
than those relating to contributions from equity participants.
Expenses These are decreases in economic benefits during the accounting period in the form of
outflows or depletions of assets or incidences of liabilities that result in decreases in equity,
other than those relating to distribution to equity participants.

ASSETS
Current Assets, pertains to assets that are (1) expected to be realized in, or is intended for sale or
consumption in the entity’s normal operating cycle, (2) is held primarily for the purpose of being traded, (3) is
expected to be realized within twelve months after the balance sheet date, and (4) is cash or cash
equivalents, unless it is restricted from being changed, or used to settle a liability for at least twelve months
after the balance sheet date.
Cash on Hand – any item on hand with monetary value that a bank will accept for deposit. Ex:
coins, currency, checks, postal money orders, and express money orders.
Cash in Bank - all amounts currently on deposit with the bank in the name of the business. Cash
deposited in savings and/or checking accounts.
Accounts Receivable – amount collectible on open accounts of the customers arising from credit
sales or credit services.
Allowance for Doubtful Accounts – amount estimated uncollectible on receivable in compliance
with the principle of conservatism (contra valuation account of Accounts Receivable)
Notes Receivable – promissory note received by the business from its debtors and/or customers.
Accrued Interest Receivable – the interest earned on notes receivable but not yet received in cash
Supplies – laboratory supplies, medical supplies, office supplies bought but not yet used.
Inventories – assets held for sale in the normal operation of the business, the process of
production for sale, or supplies and materials on hand.
Prepayments like Prepaid Rent and Prepaid Insurance – expenses in advance but still unused for
the current period. They are assets at the time of payment and become expenses through the
passage of time.
Noncurrent Asset,
Land – the site owned by the business on which building is constructed.
Building – the structure owned by the business used in the operation of the business.

39
 Furniture and Fixtures – items used by the business include store furnishings such as display
racks, showcases, containers, desks, chairs, tables and cabinets.
Equipment – machinery used in a business like computers, machineries used in packaging,
sorting, delivery, firefighting equipment, etc.
Vehicles – transportation used in transporting commodities, people and services.
Accumulated Depreciation – periodic costs of using a depreciable plant and equipment (Contra
valuation account of property, plant and equipment).
Other Property, Plant & Equipment – are fixed assets not included above.
Other Assets,
Patent – assets that protect new inventions and covers how things work, what they do, how they do
it, what and how they are made.
Copyright – the legal right to be the only one to reproduce, publish and sell book, musical
recordings, videos, etc. for a certain period of time.
Goodwill – intangible asset that arises as a result of the acquisition of one company by another for
a premium value. The value of a company’s brand name, good customers’ relations, good
employee relations or propriety technology.
LIABILITIES
Current Liabilities are liabilities when it (1) is expected to be settled in the normal course of the enterprise’s
operating cycle or (2) is due to be settled within twelve months of the balance sheet date.
Accounts Payable – an obligation or debt to creditors for money borrowed or merchandise and/or
assets bought on credit.
Notes Payable – a promissory note issued by the business to its creditors for money borrowed or
merchandise bought on credit.
Unearned Revenue – a pre-payment received in advance for goods or services to be rendered.
Withholding Tax Payable – amount of income tax withheld from the salary of employees in behalf
of BIR that the employer has to remit to BIR on the specified due date.
Accrued Liabilities – amounts owed to others for unpaid expenses. This account includes salaries
payable, utilities payable, interest payable and taxes payable.
Non-current Liabilities
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.
Bonds Payable – business organizations often obtain substantial sums of money from lenders to
finance the acquisition of equipment and other needed assets by issuing bonds. The bond is a
contract between the issuer and the lender specifying the terms of repayment and the interest to be
charged.
CAPITAL/OWNER’S EQUITY
Capital – the account is used to record the original and additional investments of the owner of the
business entity. The account title bears the name of the owner (ex: Calasagsag, capital).

40
 Drawing or Withdrawals – it is a temporary account used to record initially the amount taken by the
owner from the business.
Income Summary – it is a temporary account used at the end of the accounting period to close
income and expenses. This shows the net income or nt loss for the period before closing to the
capital account.
INCOME – represents the earnings of the business from sales of goods or services rendered.
Sales – an account used to summarize sale of goods of a trade or a merchandising business.
Sales Return and Allowances – amount incurred for the defective goods returned by customers
from sale.
Sales Discount – reduction in the price of a product or service that is offered by the seller, in
exchange for cash or early payment of the buyer.
Service Income – revenues earned by performing services for a customer or client such as laundry
services by a laundry shop.
Professional fees – the earnings derived from services rendered by a professional (ex: accounting
services by a CPA firm)
Interest Income – earnings representing the time value of money derived from a promissory notes
received by the business.
Gain on Sale of Other Assets – the income derived from the sales of assets in the business
operation.
Miscellaneous Income – other income not specified above.
EXPENSES
Cost of Sales – the value of merchandise sold; the cost incurred to purchase the products sold to
customers during the period.
Purchases – acquiring or buying of goods in cash or credit basis.
Salaries or Wages Expense – amount paid to services rendered by the employees in the operation
of the business. It includes all payments as a result of an employer-employee relationship such as
salaries or wages, 13th month pay, cost of living allowance and other related benefits.
Freight In – amount paid for the freight of goods purchased.
Freight Out – amount paid for the freight of goods sold.
Supplies Expense – amount of supplies consumed or used by the entity during the period.
Insurance Expense – amount paid for the insurance during the current period.
Taxes and Licenses Expense – cost of local and national taxes that are incurred and required to be
paid in connection with the conduct of business.
Utilities Expense – expenses related to use of electricity, water, internet for the operation of the
business.
Doubtful Accounts Expense or Bad Debts Expense – estimated amount of losses from uncollected
account arising from credit sales of the current period.

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 Repair and Maintenance – expenses incurred in maintaining fixed properties.
Depreciation Expenses – the portion of the cost of a tangible asset such as buildings and
equipment, allocated or charged as expense during an accounting period.
Bad Debts – a debt that is not collectible and therefore worthless to the creditor.
Interest Expense – an expense related to use of borrowed funds.
Miscellaneous Expense – other expenses incurred not classified above.

Chart of Account
It is also known as group of account titles. It is a listing of all the accounts in the general ledger. To
set up a chart of accounts, various accounts to be used by the business must be first defined.
Each account is accompanied by a reference number. Small businesses may use two to three-digit
account numbers. Chart of Accounts is arranged according to five accounting elements: Assets, Liabilities,
Capital, Revenue and Expense.

Sample Chart of Account:

THE HEARTTHROB'S GENERAL MERCHANDISE
Chart of Accounts

Account Account
Account Title Account Title
Code Code
110 Cash in Bank 301 The Heartthrob’s, Capital
111 Cash on Hand 302 The Heartthrob’s, Drawings
112 Petty Cash 401 Sales
113 Accounts Receivable 402 Sales Returns & Allowances
114 Allowance for Bad Debts 403 Sales Discounts
115 Notes Receivable - short term 404 Gain on Sale of Land, (Buildings, Equipment, etc)
116 Merchandise Inventory 405 Miscellaneous Income
117 Supplies 501 Purchases
118 Prepaid Rent 502 Purchase Returns & Allowances
119 Prepaid Insurance 503 Purchase Discounts
120 Land 504 Freight-In
121 Building 505 Salary Expense
122 Accumulated Depreciation-Building 506 Rent Expense
123 Office Equipment 507 Utilities Expense
124 Accumulated Depreciation-Office Equipment 508 Supplies Expense
201 Accounts Payable 509 Bad Debts
202 Notes Payable-short term 510 Depreciation Expense
203 Accrued Salary Payable 511 Freight-Out
204 Unearned Revenue 512 Miscellaneous Expense
205 SSS/Philhealth/GSIS/PAGIBIG Payable
206 Bank Loans Payable-Long Term

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NAME: ___________________________________________ SCORE: ___________________
SECTION: _________________________________________ DATE: ____________________
EXERCISE 7-1: Prepare chart of Account based on the following transactions of The Fabulous Boutique:

10-Jan Received cash as additional investment, P500,000.00

12-Jan Purchased supplies on account, P5,000.00
13-Jan charge customers for services made on account, P7,000.00
24-Jan Rendered services to cash customers, P15,000.00
5-Feb paid cash for rent on building, P5,000.00

EXERCISE 7-2: Write TRUE if the statement is correct, FALSE if it is not.

__________________ 1. Expenses related to use of electricity, water, and internet for the operation of the
business is called Utilities Expense.
__________________ 2. Accounts are also considered as group of accounts.
__________________ 3. Defining what various accounts to be used by the business is vital in preparing the
chart of accounts.
__________________ 4. The chart of accounts is arranged according to the five basic elements of
accounting in any order.
__________________ 5. Liabilities are the so called “what the business owed” while Assets are the “what
the business owned”.

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 Content:

Content Standards:
The learners demonstrate an understanding of the two major types of books of
accounts, namely, journal and ledger
Performance Standards:
The learners shall be able to differentiate a journal from a ledger and identify the types
of journals and ledgers
Learning Competencies:
The learners should be able to:
1. identify the uses of the two books of accounts
2. illustrate the format of a general and special journals
3. illustrate the format of a general and subsidiary ledger

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Book of Accounts
Pertains to a set of books used to record transactions and events that are financial in nature.
These books are intended for manual recording. The book of accounts is the (1) Journal, the book of original
entry, and the (2) Ledger, the book of final entry.

Journal
It is a chronological record of the entity’s transactions. It shows all the effects of a business
transaction in terms of debit and credit. The nature and volume business transactions determine the number
and type of journals needed.
The General Journal is the book used to record some transactions and events may not be
conveniently group in the special journal. It is the simplest journal. The standard content of the General
Journal is the following:
1. Date. The year and month are not rewritten for every entry unless the year or month changes
or a new page is needed. On the first line of the date column of a journal page, write the year.
2. Account. Titles and explanation. The account to be debited is entered at the extreme left of the
first line while the account to be credited is entered slightly indented on the next line. A brief
description of the transaction is usually made on the line below the credit. Generally, leave a
line after each entry.
3. P.R (posting reference). This will be used when the entries are posted, that is, until the
amounts are transferred to the related ledger accounts.
4. Debit. The debit amount for each account is entered in this column.
5. Credit. The credit amount for each account is entered in this column.
Illustrated sample of Journal entry:
Transaction: On January 10, 2017, the supplies purchased on account dated December 31, 2016
amounting to P50, 000.00 was settled.

Journal page 1
Date
Account Titles & Explanation P.R. Debit Credit
1 2000
2 Jan 10 Accounts Payable 220 P 5 0 0 0 0 00
3
Cash 110 P 5 0 0 0 0 00

4 To record payment of A/P

5

3. Posting
1. Date 2. Account 4. Debit 5. Credit
Reference
Special Journal, due to number or volume of entries, it may be inconvenient to record all of it in
the two-column journal, thus, the use of special journal. Special Journals are the (1) cash receipts book, (2)
cash disbursements book, (3) sales book, and purchases book. General Journal is the book used to record
some transactions and events may not be conveniently group in the special journal. Below are the column
headings of the special journals:

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 a. Sales Journal or Sales Book – a journal in which all outgoing merchandise or sales are
recorded.
Sales Invoice Accounts Receivable Cash Sales
Date Customer's Name Terms
Number Sales Cr. Dr. Sales Cr.
1
2
3
4
5

b. Purchases Journal or Purchases Book – a journal in which all incoming merchandise

invoices or purchases are recorded.
Purchase Purchases Dr.
Supplier's Name Terms
Invoice No. Accounts Payable Cr.
1
2
3
4
5

c. Cash Receipts Journal or Cash Receipts Book – is a book used to record all collections
made in cash.
Received Accounts Sales Discount
Date OR No. Perticulars Cash Dr. Cash Sales Cr.
From Receivable Cr. Dr.

d. Cash Disbursements Journal or Cash Disbursement Book – journal which all cash
disbursements are recorded.

Vo u c h e r Check Paid A c c o unts Other Post

Date Particulars Cash Cr. Debit Credit
No . No. No. P a ya b le D r. Accounts Ref

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 e. Check Disbursement Journal – a journal which all outgoing check disbursements are
recorded.

Sample:
Transactions of Heartthrob’s General Merchandise for the month of January 2017:
2-Jan-17 Initial Capital of Heartthrob’s General Merchandise amounting P150, 000.00
4-Jan-17 Received payment from customers on cash basis, P70, 000.00
16-Jan-17 Purchased Office supplies on account worth P30, 000.00
20-Jan-17 Mr Del Rosario and Mr Iranon, owners of Heartthrob’s General Merchandise
withdrew P25,000.00 each for personal use.
31-Jan-17 Paid salaries of employees amounting P15, 000.00

General Journal page 1

Date Account Titles & Explanation P.R. Debit Credit
1 2017
2 Jan 2 Cash 101 P 1 5 0 0 0 0 00
3 Heartthrob Gen. Mdse, Capital 301 P 1 5 0 0 0 0 00
4 to record initial capital of Heartthrob Gen. Mdse
5
6 4 Cash 101 7 0 0 0 0 00
7 Sales 401 7 0 0 0 0 00
8 to record sales revenue on cash basis
9
# 16 Office Supplies 102 3 0 0 0 0 00
11 Accounts Payable 201 3 0 0 0 0 00
12 to record supplies purchased on account
13
# 20 Heartthrob Gen. Mdse, Drawings 302 5 0 0 0 0 00
15 Cash 101 5 0 0 0 0 00
# to record owner's withdrawals
17
# 31 Salaries Expense 501 1 5 0 0 0 00
# Cash 101 1 5 0 0 0 00
# to record payment of salaries
21

Ledger
A grouping of the entity’s accounts is referred to as ledger. General Ledger is the “reference book”
of accounting system and is used to classify and summarize transactions, and to prepare data for basic
financial statements. All accounts in the chart of accounts are assigned a page with page number. The

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column headings are Date, Particulars, Folio or Posting Reference, Debit Money Column and Credit Money
Column. All entries in the general journal are posted in the general ledger.
The account in the general ledger are classified into two general groups:
1. Balance Sheet or Permanent Accounts (Assets, liabilities and owner’s equity); and
2. Income Statement or temporary accounts (income and expenses). Temporary or nominal
accounts are used to gather information for a particular accounting period. At the end of the
period, the balances of these accounts are transferred to a permanent owner’s equity account.
Subsidiary Ledgers are records of the increase (plusses), decrease (minuses), and balances of
certain general ledger accounts like:
1. Accounts Receivable Subsidiary Ledger – for customers (debtors) account. Set up a ledger
page for each customer. Write customer’s name and address, assign a page number or
reference. Each column will be labeled as follows:
Customer Name
Address Page
Sales Invoice Official Receipt
Date Number Number Debit Increas Credit Decreases Balance

Date, for date of supporting documents

Sales Invoice Number, for the sale on account (Debt)
Official Receipt Number, for cash collection (Credit)
Debit amount, for increase
Credit amount, for decrease
Balance, net of increase and decrease

2. Accounts Payable – for suppliers (creditors) account, set up a ledger page for each creditor.
Write its name and address. Assign a page number or reference and follow below label
headings:
Date, for date of supporting documents
Purchase Invoice Number, for purchases on account
Check/Cash Voucher Number, for payment
Debit amount, for increase
Credit amount, for decrease
Balance, net of increase and decrease

48
Suppliers Name
Address Page

Check Voucher Purchase

Date Number Invoice Number Debit Increas Credit Decreases Balance

It is important to know the running balance of dues from customers or debtors, as well as the
running balance due to suppliers or creditors.

Posting
It means transferring the amounts from the journal to the appropriate accounts in the ledger. Debits
in the journal are posted as debits in the ledger, and credits in the journal as credits in the ledger. The steps
are as follows:
1. Transfer the date of the transaction from the journal to the ledger.
2. Transfer the page number from the journal to the journal reference (J.R.) column of the ledger.
3. Post the debit figure from the journal as a debit figure in the ledger and the credit figure from
the journal as a credit figure in the ledger.
4. Enter the account number in the posting reference column of the journal once the figure has
been posted to the ledger.
The Ledger

Account Title: Cash Account Code: 101

Date Remarks J.R. Particulars Debit Credit Balance
1 2017
2 Jan 2 GJ1 P 150,000.00 P 150,000.00
3 4 GJ1 70,000.00 220,000.00
4 20 GJ1 P 50,000.00 170,000.00
5 31 GJ1 15,000.00 155,000.00

Account Title: Office Supplies Account Code: 102

Date Remarks J.R. Particulars Debit Credit Balance
1 2017
2 Jan 16 GJ1 P 30,000.00 P 30,000.00

Account Title: Accounts Payable Account Code: 201

Date Remarks J.R. Particulars Debit Credit Balance
1 2017
2 Jan 16 GJ1 P 30,000.00 P 30,000.00

49
 Account Title: Heartthrob Gen. Mdse, Capital Account Code: 301
Date Remarks J.R. Particulars Debit Credit Balance
1 2017
2 Jan 2 GJ1 p 150,000.00 P 150,000.00

Account Title: Heartthrob Gen. Mdse, Drawings Account Code: 302

Date Remarks J.R. Particulars Debit Credit Balance
1 2017
2 Jan 20 GJ1 P 50,000.00 P 50,000.00

Account Title: Sales Account Code: 401

Date Remarks J.R. Particulars Debit Credit Balance
1 2017
2 Jan 4 GJ1 P 70,000.00 P 70,000.00

Account Title: Salaries Expense Account Code: 501

Date Remarks J.R. Particulars Debit Credit Balance
1 2017
2 Jan 31 GJ1 P 15,000.00 P 15,000.00

Leger Accounts after Posting

At the end of an accounting period, the debit or credit balance of each account must be determined
to enable us to come up with a trial balance.
o Each account balance is determined by footing (adding) all the debits and credits.
o If the sum of an account’s debits is greater than the sum of its credits, that account has a debit
balance.
o If the sum of its credits is greater, that account has a credit balance.

50
NAME: ___________________________________________ SCORE: __________________
SECTION: _________________________________________ DATE: ___________________
EXERCISE 7-1: Write DEBIT if the statement is true, CREDIT if it is false.
_____________ 1. Every transaction affects a minimum of two accounts.
_____________ 2. The ledger is sometimes called the book of original entry
_____________ 3. In some transactions, the accounting equation may not be maintained.
_____________ 4. Book of Accounts are set of books used to record transactions and events that are
financial in nature.
_____________ 5. Post the debit figure from the journal as a debit figure in the ledger and the credit figure
from the journal as a credit figure in the ledger.

NAME: ___________________________________________ SCORE: __________________

SECTION: _________________________________________ DATE: ___________________
EXERCISE 7-2: Prepare a Journal and Ledger on the transaction below:
Transaction:
- On December 15, 2016, the ABM Grocery paid the Prudential Insurance, Inc amounting P15,
000.00 for a one-year comprehensive insurance coverage on the store’s delivery vehicle.
- Dec. 31, 2016, paid salaries of the enterprise’s employees amounting P25, 000.00.

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 Content:

Content Standards:
The learners demonstrate an understanding of the business transactions and their
analysis, to include definition and nature of business transactions, types of source or business
documents, and the rules of debits and credits
Performance Standards:
The learners shall be able to identify business and nonbusiness transactions,
enumerate the types of business documents, recite the rules of debit and credit, and apply these
to simple cases
Learning Competencies:
The learners should be able to:
1. describe the nature and gives examples of business transactions
2. identify the different types of business documents
3. analyze common business transactions using the rules of debit and credit
4. solve simple problems and exercises in the analyses of business transaction

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 BUSINESS TRANSACTIONS are economic events that affects the financial position of a business. It is
recorded in terms of money. Every financial transaction can be analyzed or expressed in terms of its effects
on the accounting equation.
Analysis of transaction is the process of studying a transaction to determine its economic effect
(in terms of money) on the entity’s accounting equation. The effect of transactions may be an increase or
decrease in assets, liabilities, and owner’s equity.

ASSETS = LIABILITIES + OWNER’S EQUITY

The above equation shows a two claimants or interests on the company’s assets. They are
outsiders or the creditors and the insiders or entity owners. The accounting equation may also be restated
as follows:

ASSETS - LIABILITIES = OWNER’S EQUITY

ASSETS - OWNER’S EQUITY = LIABILITIES

Accounting Cycle
It refers to a series of sequential steps or procedures performed to accomplish the accounting
process. Below are the steps in the accounting cycle:

Step 1 Identification of events to be recorded

Aim: to gather information about transactions or events generally through the source
documents.
During the Step 2 Transaction are record in the Journal
accounting Aim: to record the economic impact of transactions on the firm in a journal, which is a form
period that facilitates transfer to the accounts.
Step 3 Journal entries are posted to the ledger
Aim: to transfer the information from the journal to the ledger for classification
Step 4 Preparation of a Trial Balance
Aim: to provide a listing to verify the equality of debits and credits in the ledger
Step 5 Preparation of the Worksheet including Adjusting Entries
Aim: to aid in the preparation of financial statements
Step 6 Preparation of the Financial Statements
Aim: to provide useful information to decision-makers
Step 7 Adjusting Journal Entries are Journalized and Posted
Aim: to record the accruals, expirations of deferrals, estimations and other events from the
At end of the
worksheet
accounting
Step 8 Closing Journal Entries are Journalized and Posted
period Aim: to close temporary accounts and transfer net income to owner’s equity
Step 9 Preparation of a Post-Closing Trial Balance
Aim: to check the equality of debits and credits after the closing entries
Step 10 Reversing Journal Entries are Journalized and posted
Aim: to simplify the recording of certain regular transactions in the next accounting period.

At the start of
the next period

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Business Documents
Transactions and events can be analyzed as to how they affect performance and financial position
with the use of source or business documents. Following are the different business documents:
1. Official Receipt (OR), is the document supporting cash received. It bears an OR number that is
usually pre-printed.
2. Sales Invoice or Purchase Invoice, is a proof of sales for the seller and a proof of purchase for
the buyer. It is the basis of collection at time of sale or cash collection at a future due date.
3. Purchase Order (PO), it could be done orally but for the purpose of authorized purchases, a
written purchase order is a requirement. It makes clear the preliminary agreement between the
buyer and the seller as to the product subject of the sale and the term of sale.
4. Cash or Check Disbursement Voucher, sup ports issuances of bank checks. Prior to the
preparation of bank disbursement checks, the CDV is approved. The CDV shows the
signatures of the preparer, reviewer, and approving officer. The person receiving the check
acknowledged that the check has been received. The CDV is supported by proofs like
purchase invoices, statement of accounts, and other written demands for payments.
5. Bank Check, is cash. The check is given to those with checking or current accounts. The
journal entries where asset cash is credited should indicate the check number, check date,
payee and amount.
6. Deposit Slip, or bank deposit slip may show not only cash collection, but the sum of cash
received for a particular period. The bank validation is a proof that the cash deposits have
been received by the depository bank. The validation deposit slips serve as additional
evidence for journal entries (debits) to the cash account.
7. Journal Voucher, is a document for journal entries for nonrecurring transactions and some
events. These transactions and events, when journalized, affect (increase and decrease)
assets, liabilities, owner’s equity, income and expenses.
8. Statement of Account, are commonly used by utility companies like Meralco PLDT, GLOBE
and those rendering professional services.
9. Promissory Note, is the proof of an obligation to pay in cash. It is signed by the debtor-
borrower in favor of the creditor-lender. A PN can be issued for money borrowed or purchase
of an asset or payment at a future time.

Analyzing Business Transaction

Transaction 1: A cash received per Official Receipt amounting P100, 000.00 on January 5, 2017 for Chelsea
additional investment.
Value received: Cash
Accounting element affected: Asset
Account to be debited: Cash on Hand
Amount to be debited: P100, 000.00

Value parted with: claim of the owner in the business

Accounting element affected: Owner’s Equity
Account to be credited: Chelsea, Capital
Amount to be credited: P100, 000.00

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Rules of Debit and Credit
The normal balances of an account which refers to the usual position of an account in the T-
account are the bases of the rules of Debit and Credit.
Following are the rules of Debit and Credit:
Rule #1: Assets: Debit to increase the amount of asset
Credit to decrease its amounts
Rule #2: Liabilities: Credit to increase the amount of liability
Debit to decrease the amount of liability
Rule #3: Owner’s Equity: Credit to increase the capital account
Debit to decrease the amount of owner’s equity
Rule #4: Revenue: Credit to increase the revenue account
Debit to decrease its amount
Rule #5: Expenses: Debit to increase the expense account
Credit to decrease the amount of expense

BALANCE SHEET ACCOUNTS

Assets Liabilities and Owner's Equity
Debit Credit Debit Credit
(+) (-) (-) (+)
Increases Decreases Decreases Increases

INCOME STATEMENT ACCOUNTS

Debit for decreases in Owner's Equity Credit for Increase in Owner's Equity
Expenses Income
Debit Credit Debit Credit
(+) (-) (-) (+)
Increases Decreases Decreases Increases

Trial Balance
It is a list of all accounts with their respective debit or credit balances. It is prepared to verify the
equality of debits and credits in the ledger at the end of each accounting period or at any time the postings
are updated. The procedures in the preparation of the Trial Balance are the following:
1. List the account titles in numerical order
2. Obtain the account balance of each account from the ledger and enter the debit balances in
the debit column and the credit balances in the credit column.
3. Add the debit and credit columns
4. Compare the totals
The Trial Balance helps in minimizing accounting errors. When the totals are equal, the trial
balance is in balance. This provides an interim proof of accuracy of the records but it does not signify the
absence of errors. Trial Balance could be equal but not necessarily and immediately means that it is correct.

55
Illustrated Trial Balance
A sample trial balance below is based on the transactions/event and journal entries in page 52 and
ledger entries in page 54.

Heartthrob’s General Merchandise

Trial Balance
January 31, 2017

Account Code Account Title

101 Cash P 155,000.00
102 Office Supplies 30,000.00
201 Accounts Payable P 30,000.00
301 Heartthrob Gen. Mdse, Capital 150,000.00
302 Heartthrob Gen. Mdse, Drawings 50,000.00
401 Sales 70,000.00
501 Salaries Expense 15,000.00
P 250,000.00 P 250,000.00

56
NAME: ___________________________________________ SCORE: ___________________
SECTION: _________________________________________ DATE: ____________________
EXERCISE 8-1: Prepare a Trial Balance for the Transaction analyzed and posted in journal and ledger on
Exercise 7-2 in page 56.

57
 REFERENCES

Ballada, W. (2000), Basic Accounting Made Easy 2000 Edition. Philippines

Frias, S., & Pefianco, E. (2016). Fundamentals of Accountancy, Business, and Management:
A Textbook in Basic Accounting 1. Philippines: Phoenix Publishing House, Inc.

Peria, M. (2014). Journalizing Transactions. Philippines: TESDA-PPSAT

Small Enterprises Research and Development Foundations, Inc. SERDEF (2013) Windows
to Entrepreneurship: A Teaching Guide. Philippines

Teaching Guide for Senior High School FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND
MANAGEMENT 2 (2016) Commission on Higher Education K to 12 Transition Program
Management Unit

http://www.accountingverse.com/accounting-basics/types-of-accounting.html

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