Nature of Accounting

FUNDAMENTALS OF
ACCOUNTANCY ●​ Science or Art
BUSINESS AND ●​
●​
Information System
Social Force
MANAGEMENT 1 ●​ Profession
THIRD QUARTER REVIEWER ●​ Service Activity
Team President, Academics Committee ●​ System/Process
●​ “Language of Business”
​

LESSON 1: INTRODUCTION TO Functions of Accounting

ACCOUNTING
●​ accounting functions in business can be
What is Accounting? attributed to the three fundamental
objectives of an information system.
American Institute of Certified Public ○​ To fulfill the stewardship function of the
Accountants (AICPA) management (or owners)
○​ To support the daily operations of the
●​ Accounting is the art of recording, business
classifying, and summarizing in a ○​ To help interested users come up with
significant manner, in terms of money, informed decisions.
transactions, and events, which are in part
at least of a financial character, and Bookkeeping vs. Accounting
interpreting the results thereof.
●​ Accounting is broad, while bookkeeping is
Philippine Institute of Certified Public specific.
Accountants (PICPA)
Accounting vs. Accountancy
●​ Accounting is a process of identifying,
measuring, and communicating ●​ Accounting refers to the nature of the work,
economic information to permit informed while Accountancy refers to the profession.
judgment and decisions by users of the
information. Objectives of Financial Statements

American Institute of Certified Public ●​ to provide information about the financial

Accountants (AICPA) position, financial performance, and cash
flows of an entity that is useful to a wide
●​ Accounting is a service activity. Its function range of users when making economic
is to provide quantitative information, decisions.
primarily financial in nature, about economic
entities that are intended to be useful in Key dates in Accounting
making economic decisions.​
●​ 1494

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 ○​ Luca Pacioli, an Italian mathematician, ○​ The Philippines fully complies with the
published the Summa de Arithmetica, International Financial Reporting
Geometria, Proportioni et Standards (IFRS).
Proportionalita. Which introduced
double-entry bookkeeping.​
The Accounting Process
●​ 1923
○​ The Philippines' first Accountancy Law, 1st Analyzing the business
Republic Act (RA) 3105, was passed. documents or
transactions
This law created the Board of
Accountancy (BoA). 2nd Journalizing

●​ 1975 3rd Posting

○​ In the Philippines, the Accountancy Law 4th Preparing the financial
was revised and passed under statements
Presidential Decree No. 692
5th Preparing the adjusting entries
●​ 1981
6th Preparing the unadjusted trial
○​ The Philippine Institute of Certified balance
Public Accountant (PICPA) created the
Accounting Standards Council (ASC) to 7th Preparing the closing entries
establish and improve the generally
8th Preparing a post-closing trial
accepted accounting principles balance
(GAAP) in the Philippines.​
9th Preparing the reversing entries
●​ 1997
○​ The Philippines started transitioning
from applying American-based Three Important Activities in the Accounting
accounting standards (SFAS or Process
Statements of Financial Accounting
Standards) to applying International Identifying
Accounting Standards (IAS).​
●​ means the recognition or nonrecognition
●​ 2004 of “accountable” events. An event is
○​ The Professional Regulation accountable or quantifiable when it affects
Commission (PRC) created the assets, liabilities, and equity.​
Financial Reporting Standard Council
(FRSC). Measuring
○​ The RA 9298, Philippine Accountancy
Act of 2004 was passed into law by ●​ is the process of determining the monetary
former Pres. Gloria Arroyo.​ amounts at which the elements of the
financial statements are to be recognized
●​ 2005 to present

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 and carried in the balance sheet and income issuance of an attest report that is in
statement. accordance with professional standards.
​ ○​ External Auditing
​ ○​ Tax Preparation and Planning Service
○​ Management Consultancy or Advisory
Communicating Services​

●​ is the process of preparing and Private Accounting

distributing accounting reports to
potential users of accounting information; ●​ accountants can be employed in executive
hence, accounting has been called the positions in companies. They can assume
“universal language of business.” the positions of vice president for finance
○​ Recording​ and chief accountant (controller). They can
■​ It is popularly called journalization. also work as internal auditors or budget
■​ involves the routine and mechanical officers. They are directly involved in the
process of committing to writing management of the company’s operations.
business transactions and events on ○​ Financial Accounting
the books accounts in chronological ○​ Management Accounting
sequence in accordance with ○​ Tax Accounting
established accounting rules and ○​ Cost Accounting
procedures. ○​ Budgeting
○​ Classifying ○​ Internal Auditing
■​ Sorting or grouping similar and ○​ Accounting Information System
interrelated transactions and events
into their respective classes by Government Accounting
posting them to the ledger.​
○​ Summarizing ●​ CPAs can be hired in many accounting and
■​ refers to the preparation of financial accounting-related positions in
statements. government agencies and units such as
​ the Bureau of Internal Revenue, Department
LESSON 2: BRANCHES OF of Budget and Management, Department of
ACCOUNTING ​ Finance, and Commission on Audit.

Accounting Education
Sectors of Accounting (RA 9298)
​
Public Practice ●​ accountants can also be instructors in
colleges and universities offering
●​ In this sector, accountants provide their accounting subjects. They educate
clients with different business and aspiring accountants and equip them with
accounting services. They perform or offer knowledge and skills through accounting
to perform any activity that will result in the subjects and business law subjects for their
future profession.​

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 Branches/Areas of Accounting ●​ auditing (or specifically external auditing) is
the examination of financial statements by
Financial Accounting an independent certified public accountant
to express an opinion on the fairness with
●​ Primarily concerned with the recording of which the financial statements are prepared.
business transactions and the eventual ○​ External Auditing
preparation of general purpose reports (i.e., ■​ Examines financial statements to
financial statements) that are intended for determine the fairness with which
internal and external users. the financial statements are
●​ Strict compliance with generally accepted prepared.
accounting principles or GAAP is observed ○​ Internal Auditing
in preparing financial statements. ■​ independent, objective assurance
●​ Area of accounting that emphasizes and consulting activity designed to
reporting to external users such as creditors add value and improve an
and investors. organization’s operations and
processes to achieve its objectives.
Management Accounting ​
Tax Accounting
●​ Accumulation and preparation of
financial reports for internal users only. ●​ includes preparing tax returns and
●​ This branch deals with the needs of the determining tax consequences of specific
management rather than strictly complying proposed business endeavors.
with generally accepted accounting ●​ includes tax planning and preparation of tax
principles. returns. It also involves the determination of
●​ Managerial accountants work within income tax and other taxes, tax advisory
companies and organizations to direct services such as ways to minimize taxes
internal financial processes; monitor costs, legally, evaluation of the consequences of
sales, spending and budgets; conduct tax decisions, and other tax-related matters.
audits; identify past trends and predict future
needs; and assist company leaders with Cost Accounting
financial decisions.
Government Accounting ●​ a discipline that focuses on techniques or
methods for determining the cost of a
●​ Encompasses of analyzing, classifying, project, process, or service to plan and
summarizing, and communicating all control activities, improve quality and
transactions involving the receipt and efficiency, and make decisions.
disposition of funds and property of the ●​ identifies, defines, measures, reports, and
national government and its political analyzes the direct and indirect costs of
instrumentalities and interpreting the results producing and marketing goods and
thereof. services.​

Auditing Accounting Education

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 ●​ involves teaching accounting, auditing, ●​ EXISTING AND POTENTIAL INVESTORS
management advisory services, finance, ○​ they are concerned with the risks
business law, taxation, and other technically inherent in and returns provided by their
related subjects in an educational institution. investments (whether they should buy,
hold, or sell their investments)
Accounting Research ○​ to enable them to assess the ability of
the entity to pay dividends.
●​ Accounting research examines how
individuals, organizations, and ●​ LENDERS AND OTHER CREDITORS
governments use accounting and the ○​ interested in information that enables
consequences of these practices. them to determine whether their loans,
○​ Academic Accounting Research interest thereon, and other amounts
■​ addresses all areas of the they owe will be paid when due.
accounting profession and ○​ for potential lenders/creditors, use this
examines issues using the scientific information as a basis for ascertaining
method; it uses evidence from whether to grant loans and determine
various sources, including financial the amount of loan and other terms and
information, experiments, computer matters.
simulations, interviews, surveys,
historical records, and ethnography. OTHER USERS
○​ Research by Practicing Accountants
■​ focuses on solving immediate ●​ EMPLOYEES
problems for a single client or small ○​ interested in the stability and profitability
group of clients (e.g., of the entity and helping them assess
decision-making on the the ability of the entity to provide
implementation of new accounting remuneration, retirement benefits, and
or auditing standards, the other opportunities.
presentation of unusual transactions
in the financial statements, and the ●​ CUSTOMERS
impact of new tax laws on clients). ○​ interest in information about the
​ continuance of the entity when they
LESSON 3: USERS OF FINANCIAL have a long-term involvement with or
are dependent on the entity.
INFORMATION
●​ GOVERNMENT AND THEIR AGENCIES
CLASSIFICATION OF USERS ○​ use this information to regulate the
entity's activities, determine taxation
Under the new Conceptual Framework for policies, and as a basis for national
Financial Reporting, the users of financial income and similar statistics.
information may be classified into:
●​ PUBLIC
PRIMARY USERS

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 ○​ assist the public by providing ○​ They analyze financial data to evaluate
information about the trend and range of company growth, performance, and
its activities. potential returns on investment.
●​ CREDITORS/LENDERS
OTHER CLASSIFICATION OF USERS ○​ They rely on financial statements to
assess the organization’s ability to repay
INTERNAL USERS loans or credit, without having direct
access to internal financial data.
●​ individuals who have direct access to ●​ AUDITORS
financial information at any point in time. ○​ They examine financial data
●​ within an organization (involved in the independently to ensure that it complies
business). with accounting standards and
regulations, but they do not have
Examples: permanent access to the organization’s
●​ OWNERS internal financial information.
○​ They have direct access to financial ●​ PUBLIC
data to assess profitability and make ○​ They access publicly available financial
strategic decisions. information, but they do not interact
●​ MANAGERS directly with its financial operations.
○​ They use financial information to plan, ●​ RESEARCH SCHOLARS
manage operations, and evaluate ○​ They rely on publicly accessible
performance. financial data to conduct research,
●​ EMPLOYEES without direct access to the
○​ They are part of the organization and organization’s internal financial systems.
rely on financial information to ●​ TAX AUTHORITIES
understand salaries, benefits, and ○​ They use financial statements to assess
company performance. taxes but don’t have direct access to the
organization’s internal operations.
EXTERNAL USERS ●​ CONSUMERS
○​ They rely on publicly available
●​ external users are individuals or entities information to evaluate a company’s
outside the organization (not connected products and services but don’t have
with the business) who rely on accounting access to the company’s financial
information for decision-making. details.
●​ individuals who don’t have ready access to ●​ SUPPLIERS
financial information. ○​ They use financial data to determine if
●​ outside the organization (not connected with the organization can meet payment
the business). obligations, but they aren’t involved in
the organization’s internal management.
Examples: ●​ MEMBERS OF NON-PROFIT
●​ INVESTORS ORGANIZATIONS
○​ They rely on financial reports to
understand how funds are being used,

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 but they don’t have direct access to SOLE PROPRIETORSHIP
internal data.
●​ a sole proprietorship is a business owned
by only one person. It is easy to set up and
*TIP! is the least costly among all forms of
ownership.
Just remember, if they are PART of the ●​ The owner faces unlimited liability,
organization and HAVE DIRECT access to financial meaning the creditors of the business may
data, they are INTERNAL users.
go after the owner's personal assets if the
If they are OUTSIDE the organization and rely on business cannot pay them.
PUBLICLY AVAILABLE financial information, they
are EXTERNAL users. ORGANIZATION OF SOLE PROPRIETORSHIP

1.​ Register a business name with the

Department of Trade and Industry (DTI) to
DIRECT USERS
acquire a Certificate of Registration
(renewable every five years);
●​ they’ll use and make decisions based on the
2.​ Register with the Barangay Office where the
financial reports.
business is going to be located to acquire a
Barangay Certificate of Business
Examples:
Registration;
Owners, Managers, Investors, Creditors
3.​ Register with the Mayor’s Office to acquire a
Mayor’s Permit;
INDIRECT USERS
4.​ Register with the Bureau of Internal
Revenue (BIR) to acquire a Certificate of
●​ they’ll process and make the financial Registration (BIR Form 2303);
information but will not be the ones to 5.​ Register with the Social Security System
analyze and make decisions. (SSS), Philippines Health Insurance
Company (PhilHealth), and Pag-IBIG Fund.
Examples:
Accountants
ADVANTAGES DISADVANTAGES

LESSON 4: FORMS OF BUSINESS Easiest to establish Limited amount of

and terminate capital
ORGANIZATIONS
Requires little Limited life
●​ Forms of business organizations refer to the amount of capital in
categories of business according to the setting up Unlimited liability
number of owners, which are as follows:
Freedom and Difficulty in managing
1.​ Sole Proprietorship
control in business day-to-day operations
2.​ Partnership operations
3.​ Corporation
4.​ Cooperative Ownership of all Limited opportunities

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 acquire a Certificate of Registration (submit
profits of employees for
promotion Articles of Co-Partnership);
Minimum legal 2.​ Register with the Barangay Office where the
requirement business is going to be located to acquire a
Barangay Certificate of Business
Registration;
PARTNERSHIP
3.​ Register with the Mayor’s Office to acquire a
Mayor’s Permit;
●​ a contract whereby two or more persons
4.​ Register with the Bureau of Internal
bind themselves to contribute money,
Revenue (BIR) to acquire a Certificate of
property, or industry into a common fund
Registration;
to divide profits among themselves
5.​ Register with the Social Security System
-​ Article 1767, Civil Code of the PH
(SSS), Philippines Health Insurance
Company (PhilHealth), and Pag-IBIG Fund.
CHARACTERISTICS OF A PARTNERSHIP

1.​ Mutual Agency

2.​ Unlimited Liability ADVANTAGES DISADVANTAGES
3.​ Limited Life
It is easy and Unlimited liability of
4.​ Mutual Participation in Profits inexpensive to the partners
5.​ Legal Entity organize.
6.​ Co-ownership of contributed assets Managerial difficulties
7.​ Income Tax Participation in the (i.e., the likelihood of
business by more dissension and
TYPES OF PARTNERS than one person disagreement
makes it possible between or among
for closer partners)
1.​ Capitalist supervision of all
2.​ Industrial the partnership Limited life or easy
3.​ General activities. dissolution
4.​ Limited
Fewer regulations
compared to a
TYPES OF PARTNERSHIP corporation

1.​ Trading
CORPORATION
2.​ Non-trading
3.​ General
●​ It is an artificial being created by
4.​ Limited
operation of law, having the right of
succession and the powers, attributes, and
properties expressly authorized by law or
ORGANIZATION OF PARTNERSHIP
incident to its existence.
- Section 2, Revised Code of the PH
1.​ Register the partnership with the Securities
and Exchange Commission (SEC) to

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CHARACTERISTICS OF A CORPORATION
The corporation’s It is not easy to
power of organize because of
1.​ Separate Legal Entity – Artificial Being succession enables complicated legal
2.​ Creation by Operation of Law it to enjoy a requirements and high
3.​ Right of Succession continuous costs in its
4.​ Powers, Attributes, Properties Authorized by existence. organization.
Law
Large-scale The limited liability of
5.​ Ownership is divided into shares business its shareholders may
6.​ Board of Directors undertakings are weaken its credit
made possible capacity.
TYPES OF CORPORATION because many
individuals can It is subject to rigid
invest their funds. governmental control.
1.​ Stock
2.​ Non-Stock The liability of its It is subject to more
3.​ Public shareholders is taxes.
4.​ Private limited to the extent
5.​ Domestic of their investment Its centralized
in the corporation. management restricts
6.​ Foreign
shareholders' more
7.​ Open active participation in
8.​ Closely-held/Family corporate affairs.

ORGANIZATION OF CORPORATION
REPUBLIC ACT NO. 11232

1.​ Register the corporation with the Securities

“Revised Corporation Code of the Philippines”
and Exchange Commission (SEC) to
acquire a Certificate of Registration;
●​ Consolidation of Senate Bill No. 1280 and
a. Articles of Incorporation
House Bill No. 8374
b. By-laws
●​ Signed on February 20, 2019, and published
2.​ Register with the Barangay Office where the
on February 23, 2019, in Manila Bulletin &
business is going to be located to acquire a
Business Mirror.
Barangay Certificate of Business
Registration;
3.​ Register with the Mayor’s Office to acquire a
Mayor’s Permit;
4.​ Register with the Bureau of Internal
Revenue (BIR) to acquire a Certificate of
Registration;
5.​ Register with the Social Security System
(SSS), Philippines Health Insurance
Company (PhilHealth), and Pag-IBIG Fund.

ADVANTAGES DISADVANTAGES

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 ●​ a duly registered association of persons
OLD CC REVISED CC
with a common bond of interest who have
Existence Not exceeding Perpetual voluntarily joined together to achieve a
50 years but can Existence lawful common, social, or economic end,
be extended making equitable contributions to the capital
Signatories in the Incorporators Incorporators and required and accepting a fair share of the
articles of Treasurer risks and benefits of the undertaking in
incorporation accordance with universally accepted
cooperative principles.
Residency The majority of No requirement;
requirement the however, the - RA 6938, An Act to Ordain A
incorporators Corporate Cooperative Code of the Philippines
and directors secretary and ●​ it can be incorporated or unincorporated.
must be treasurer should ●​ it usually requires at least 15 members.
residents of the still be Filipino
Philippines.
PRINCIPLES OF COOPERATIVES
Number of Not less than 5 Not more than 15
Directors/Trustees but not more
than 15 1.​ Open and Voluntary Membership
2.​ Democratic Control
Number of No concept of Introduced OPC 3.​ Limited Interest on Capital
Stockholder One Person 4.​ Division of Net Surplus
Corporation
(OPC) 5.​ Cooperative Education
6.​ Cooperation among Cooperatives

SEC. 116. One Person Corporation PRINCIPLES OF COOPERATIVES

A Person Corporation is a corporation with a 1.​ Credit Cooperative

single stockholder, provided only a natural 2.​ Consumers Cooperative
person, trust, or estate may form a One Person 3.​ Producers Cooperative
Corporation. 4.​ Marketing Cooperative
5.​ Service Cooperative
Banks and quasi-banks, pre-need, trust, 6.​ Multi-purpose Cooperative
insurance, public and publicly-listed companies,
and non-chartered government-owned and PRINCIPLES OF COOPERATIVES
-controlled corporations may not incorporate as
One Person Corporations: Provided, further, That 1.​ Prepare a general statement to help
a natural person who is licensed to exercise a measure the cooperative’s chance of
profession may not organize as a One Person success.
Corporation to exercise such profession except 2.​ Draft the cooperative’s by-laws.
as otherwise provided under special laws. 3.​ Draft the articles of cooperation.
4.​ Secure bond of accountable officer(s).
5.​ Execute Treasurer’s Affidavit
COOPERATIVE 6.​ Complete the Pre-Membership Education
Seminar (PMES)

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 7.​ Register the cooperative with the the products at prices higher than their
Cooperative Development Authority (CDA). purchase costs.
Examples: grocery stores, convenience stores,
ADVANTAGES DISADVANTAGES clothing stores, distributors, and other resellers.

Unlimited life. The Difficulty in obtaining

ADVANTAGES DISADVANTAGES
change of members capital through investors.
does not dissolve the
More opportunities to Managing inventory
business. Lack of membership and
attract customers
participation.
Perishable goods
Democratic
Less conversion
organization
costs Profits are usually highly
dependent on prices set
by suppliers.
LESSON 5: TYPES OF BUSINESS
ACCORDING TO ACTIVITIES
MANUFACTURING BUSINESS
SERVICE BUSINESS
●​ engaged in the production of items to be
●​ a service type of business that provides sold. It involves the purchasing and
intangible products (products with no converting of raw materials to finished
physical form). Service-type firms offer goods. This type of business incurs
professional skills, expertise, advice, and overhead costs aside from the wages and
similar products. materials used to produce goods.

Examples: salons, repair shops, schools, banks, Examples: car companies, electronic companies
accounting firms, and law firms

ADVANTAGES DISADVANTAGES
ADVANTAGES DISADVANTAGES
Continuous demand Maintenance of
Absence of inventory Services are harder to for manufactured production facilities
value goods
No production Managing inventory
facilities to maintain
High conversion costs
Skilled expertise &
customization

OPERATION CYCLE
MERCHANDISING BUSINESS

●​ the operating cycle is the average period of

●​ This type of business buys products at
time required for a business to make an
wholesale prices and sells them at retail
initial outlay of cash to produce
prices. They are known as "buy and sell"
goods/services, sell the goods/services, and
businesses. They make a profit by selling

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 receive cash from customers in exchange 2.​ Qualitative characteristics of useful financial
for the goods/services. information
3.​ Definition, recognition, and measurement of
the elements from which financial
statements are constructed
4.​ Concept of capital and capital maintenance

PURPOSE OF CONCEPTUAL FRAMEWORK

1.​ To assist the Financial Reporting Standards

Council (FRSC) in developing accounting
standards
2.​ To assist the preparers of financial
statements in applying accounting standards
and in dealing with issues not yet covered
by GAAP.
3.​ To assist the FRSC in the review and
adoption of International Accounting
Standards (IAS)
4.​ To assist users of financial statements in
interpreting the information contained in the
financial statements
[OPERATION CYCLE OF MANUFACTURING] 5.​ To assist auditors in forming an opinion as to
whether financial statements conform with
LESSON 6: ACCOUNTING Philippine GAAP
ASSUMPTIONS AND PRINCIPLES 6.​ To provide information to those interested
parties.

CONCEPTUAL FRAMEWORK FOR FINANCIAL

QUALITATIVE CHARACTERISTICS
REPORTING
FUNDAMENTAL (RFr)
●​ It is a complete, comprehensive, single
document that summarizes the terms and
●​ Relevance
concepts that underlie the preparation and
○​ The capacity of the information to
presentation of financial statements.
influence a decision
●​ Conceptual Framework for Financial
1.​ Predictive Value
Reporting is NOT an accounting standard.
2.​ Confirmatory Value
●​ Faithful representation
SCOPE OF CONCEPTUAL FRAMEWORK
○​ Financial reports represent economic
phenomena or transactions in words
1.​ The objective of financial reporting and numbers (Free CoNe)
1.​ Completeness

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 2.​ Neutrality ECONOMIC ENTITY
3.​ Free from error
●​ the entity is separate from the owners,
ENHANCING (VCUT) managers, and employees who constitute
the entity.
●​ Understandability
○​ requires that financial information must MONETARY UNIT
be comprehensible or intelligible if it is to
be useful. ●​ QUANTIFIABILITY
●​ Comparability ○​ it means that the A-L-C-I-E should be
○​ enable users to identify and understand stated in terms of a unit of measure,
similarities and dissimilarities among which is the Philippine Peso
items.
a.​ Intracomparability ●​ STABILITY OF THE PESO
b.​ Intercomparability ○​ it means that the purchasing power of
●​ Verifiability the peso is stable or constant, and its
○​ It means that different knowledgeable instability is insignificant and, therefore,
and independent observers could agree may be ignored.
that a particular depiction is a faithful
representation.
●​ Timeliness
○​ information that is available to TIME PERIOD
decision-makers in time to influence
their decisions. The older the ●​ the indefinite life of the entity is subdivided
information, the less useful it is. into periods or accounting periods, which
are usually of equal length to prepare
ACCOUNTING ASSUMPTIONS financial reports.

●​ basic notions or fundamental premises on

which the accounting process is based. *NOTE!
●​ These are the “givens,” and they exist
without saying. CALENDAR YEAR - It follows the standard
January 1 – December 31 cycle.
●​ serve as the foundation or bedrock of
accounting to enhance the understanding
and usefulness of the financial statements. FISCAL YEAR - Any 12-month period that does
not necessarily start on January 1.
GOING CONCERN
INTERIM - Refers to shorter reporting periods
within a fiscal year, such as monthly or quarterly
●​ also known as continuity assumption financial statements.
●​ The entity is viewed as continuing to operate
indefinitely without evidence to the contrary.

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ACCRUAL ACCOUNTING MATCHING PRINCIPLE

●​ In accrual accounting, the effects of ●​ Those costs and expenses incurred in

transactions and events are recognized earning the revenue should be recorded in
when these occur and not as cash or its the same period.
equivalent is received or paid, and these are
recorded and reported in the financial REVENUE RECOGNITION
statements of the periods to which these
relate. ●​ This principle states that revenues are
●​ accrual accounting means that income is recognized as soon as goods have been
recognized when earned regardless of sold (delivered to the customers) or a
when received and expense is service has been rendered, regardless of
recognized when incurred regardless of when the money is received.
when paid.
OBJECTIVITY PRINCIPLE

●​ it requires business transactions to have

impartial supporting evidence or
documentation. It entails that bookkeeping
and financial recording be performed
independently, free of bias, and completely.

COST-BENEFIT

ACCOUNTING PRINCIPLES/CONCEPTS ●​ cost is a pervasive constraint on the

information that can be provided by financial
COST PRINCIPLE reporting.
●​ the benefit derived from the information
●​ cost refers to the amount spent when an should exceed the cost incurred in obtaining
item was initially obtained, whether that the information.
purchase happened last year or ten years
ago; amounts are not adjusted upward for CONSERVATISM
inflation.
●​ under conservatism, when alternatives exist,
FULL DISCLOSURE PRINCIPLE the alternative with the least favorable
impact on equity shall be chosen.
●​ In preparing financial statements, the ●​ Managers and accountants generally prefer
accountant should include sufficient that possible measurement errors be
information to permit the stakeholders to understated rather than overstated in net
make an informed judgment about the income and net assets.
financial condition and performance of the ●​ In case of doubt, “record any loss and do not
enterprise. record any gain.”

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SUBSTANCE OVER FORM OFFICE SUPPLIES

●​ if there is a conflict between substance and ●​ supplies being used by the business.
form, the economic substance of the
transaction shall prevail over the legal form. PREPAID EXPENSES

LESSON 7: MAJOR ACCOUNTS​ ●​ expenses the business pays in advance

(e.g., prepaid rent and insurance).
ASSETS
PROPERTY, PLANT, AND EQUIPMENT
ASSETS
●​ Fixed assets
●​ resources controlled by the entity as a result ○​ Office/Store Equipment
of past events and from which future ○​ Furniture & Fixtures
economic benefits are expected to flow to ○​ Land
the entity. ○​ Buildings
○​ Vehicles/Transportation Equipment
CASH ○​ Accumulated Depreciation
■​ Contra-asset account: used to
accumulate the periodic
●​ includes cash on hand as well as current depreciation of property, plant, and
and other accounts maintained with banks equipment.
○​ Undeposited currency & coins
○​ Petty cash funds INTANGIBLE ASSETS
○​ Demand deposits
○​ Foreign currencies
●​ identifiable non-monetary asset without
○​ Other short-term funds
physical substance but are expected to
provide future economic benefits to the
ACCOUNTS RECEIVABLE
company.
○​ Franchise, Copyright, Patent,
●​ are claims against debtors or customers Trademarks
arising from services rendered on account
and/or sale of merchandise on account
CURRENT NON-CURRENT

NOTES RECEIVABLE Cash Prepaid Property, Plant and

Expenses, Accounts Equipment, Intangible
Receivable, Supplies Assets, Long-term
●​ claims supported by a promissory note.
(on hand), Investments
Merchandise
MERCHANDISE INVENTORY Inventory

●​ goods on hand and are available for sale. ​

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​ MORTGAGE PAYABLE

LIABILITIES ●​ long-term debts secured by collateral.

LIABILITIES
CURRENT NON-CURRENT

●​ Present obligations of the entity arising from Accounts Payable, Mortgage Payable
past events, the settlement of which are Notes Payable,
expected to result in an outflow from the Utilities Payable,
Unearned Revenue,
entity of resources embodying economic Salaries Payable
benefits

ACCOUNTS PAYABLE EQUITY/CAPITAL

●​ amounts due to creditors for assets acquired WORKING CAPITAL

on account. It is also called trade payable.
●​ working capital measures a company's
NOTES PAYABLE liquidity, operational efficiency, and
short-term financial health.
●​ amounts due to creditors, evidenced by a ○​ Current Assets - Current Liabilities​
written promise to pay. This includes loans
from banks. CAPITAL/EQUITY

SALARIES PAYABLE ●​ claim of the owner on the assets of the

business
●​ unpaid salaries of employees at the end of ●​ owner’s residual interest in an entity's assets
the accounting period. remains after deducting its liabilities.
●​ Owner’s Equity
UTILITIES PAYABLE ●​ Owner’s Drawing
○​ used when the owner withdraws or
●​ unpaid electric and water bills. takes cash or other assets from the
business for personal use.
UNEARNED REVENUE
INCOME
●​ revenue collected by the business in
advance. INCOME

INTEREST PAYABLE ●​ gross inflow of economic benefits during the

period in the form of inflows or enhancement
●​ interest due on borrowed funds. in assets or decrease in
​ liabilities that increase equity,
other than those relating to contributions

​
 ●​ from the owner/s ●​ accounts that reset/do not carry over from 1
○​ Sales calendar/fiscal year to another
■​ commonly used revenue account by ○​ Income
merchandising and manufacturing ○​ Expense
business
○​ Service Revenue LESSON 8: ACCOUNTING
■​ Used by service business
○​ Professional fees
EQUATION
○​ Rent Income
THE ACCOUNTING EQUATION
○​ Interest Income

ACCOUNTING EQUATION
EXPENSES

EXPENSES ●​ ASSETS = LIABILITIES + EXPENSE

○​ A = L + E
●​ Gross outflow of economic benefits during
the period in the ordinary activities when THE EXPANDED ACCOUNTING EQUATION
these outflows result in a decrease in equity
other than those relating to distribution to ●​ DRAWINGS + EXPENSES + ASSETS =
owners LIABILITIES + EQUITY +
○​ Salaries and Wages Expense INCOME/REVENUE
○​ Taxes and License Expenses ○​ D + E + A = L + E + I/R
○​ Rent Expense ■​ DEALER
○​ Advertising Expense ​
○​ Insurance Expense
○​ Depreciation Expense DOUBLE-ENTRY BOOKKEEPING
○​ Utilities Expense
○​ Transportation Expense DOUBLE-ENTRY BOOKKEEPING
○​ Supplies Expense
○​ Repairs and Maintenance ●​ double-entry bookkeeping is a method of
recording business transactions that
ACCOUNTS recognizes the dual effect of a transaction.
●​ each transaction is recorded by debiting and
REAL ACCOUNT crediting accounts. Every debit entry has a
corresponding credit entry with an equal
●​ accounts that carry over from 1 amount.
calendar/fiscal year to another ​
○​ Assets
○​ Liabilities LESSON 9: RULES OF DEBIT AND
○​ Equity/Capital
CREDIT
NOMINAL ACCOUNT

​
 DEBIT AND CREDIT credit (right column) is added to them,
and reduced when a debit (left column)
●​ Debit (Dr.) and Credit (Cr.) are the two is added
fundamental aspects of double-entry
accounting. Each financial transaction EXCEPTION TO THE RULE!
affects at least two accounts, one debited
and the other credited. “Dividends” (or withdrawals for a
non-corporation) is an equity account but with
a normal debit balance.
DEBIT CREDIT

LEFT side of an RIGHT side of an

account account 3.​ Accumulated Depreciation & Sales
Returns and Allowances
○​ these contra accounts reduce the
COMMON MISCONCEPTION
balances of the accounts with which
they are paired.

4.​ Equal Amount

○​ the total amount of debits must equal
the total amount of credits in a
transaction.
This misunderstanding often arises because
people associate debits with gains and credits 5.​ Double-entry bookkeeping
with losses, which is incorrect. In reality, the effect ○​ regardless of the elements in the
of a debit (Dr.) and a credit (Cr.) depends on the business transaction, a journal entry will
type of account being affected. always have at least one debit and one
credit.
For example, a debit increases the balance in
asset and expense accounts, while a credit DOUBLE-ENTRY BOOKKEEPING
decreases it. However, the opposite is true in
liability, equity, and revenue accounts—a credit ●​ double-entry bookkeeping is a method of
increases the balance, while a debit decreases it. recording business transactions that
RULES OF DEBIT AND CREDIT recognizes the dual effect of a transaction.
This means that, for every value received,
1.​ ASSETS, EXPENSE & DRAWING there is a corresponding value parted with
○​ These accounts contain a debit balance. or given up.
Hence, it will increase when a debit (left
column) is added to them and reduced ●​ In double-entry bookkeeping, each
when a credit (right column) is added transaction is recorded by debiting and
crediting accounts. Every debit entry has a
2.​ LIABILITY, EQUITY, REVENUE corresponding credit entry with an equal
○​ These accounts contain a credit amount.
balance. Hence, it will increase when a

​
 SUMMARY ●​ a chronological record of the entity’s
transactions
●​ shows all the effects of a business
Account Normal Balance Balance transaction in terms of debits and credits
Balance Increased Decreased
●​ “Book of original entry”
By By

Asset Debit Debit Credit GENERAL JOURNAL

Liability Credit Credit Debit ●​ Date

○​ the year and month are not rewritten for
Equity Credit Credit Debit every entry unless the year or month
changes or a new page is needed.
Revenue Credit Credit Debit ●​ Account Titles and Explanations
○​ The account to be debited is entered at
Expense Debit Debit Credit
the extreme left of the first line, while the
account to be credited is entered slightly
REMEMBER! indented on the following line. A brief
transaction description is usually made
The normal balance of an account is on the on the line below the credit.
side, represented by increases in the account
balance. ●​ Posting Reference (P.R)
○​ This will be used when the entries are
posted. The account numbers of the
LESSON 10: BOOKS OF accounts debited and credited are
ACCOUNTS, JOURNALIZING AND written in this column after they are
posted to the ledger.
POSTING OF BUSINESS ●​ Debit
TRANSACTIONS​ ○​ The debit amount for each account is
entered in this
CHART OF ACCOUNTS Column.
​ ●​ Credit
CHART OF ACCOUNTS ○​ The credit amount for each account is
entered in this column.
●​ a listing of all accounts and their account
numbers in the ledger SPECIAL JOURNAL
●​ arranged in the financial statement order.
●​ The accounts should be numbered flexibly ●​ Sales Journal
to permit indexing & cross-referencing.​ ●​ Purchases Journal
●​ Cash Receipts Journal
JOURNAL ●​ Cash Disbursements Journal

JOURNAL JOURNAL ENTRY

​
 ●​ Simple Entry ​
Posting Transactions in the Ledger
○​ Two accounts are affected
●​ Compound Entry 1st Locate the debit and credit ​
○​ Three or more accounts are accounts in the ledger in the
journal entry.
required ​
2nd Enter the transaction date, and ​
LEDGER in the ledger's posting ​
​ reference column, enter the
LEDGER journal page from which the
entry originates.
​

3rd Record the debit and credit

●​ “grouping of the entity’s accounts”
amounts in their respective
●​ The accounting system's “reference book” is accounts as they appear in the
used to classify and summarize journal.
transactions. ​
4th Enter in the posting reference
●​ “Book of final entry”
column of the journal the
●​ commonly known as the “T-account” account number to which the
the amount was posted.
GENERAL LEDGER
●​
●​ often called the ledger, which refers to a —--------------------- END ---------------------​
group of accounts. ​
References
SUBSIDIARY LEDGER Powerpoints and Recorded Lectures from Sir Karl
Wisdom Lorenzo
●​ a device used to store the details of certain
general ledger accounts.
​

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