What is Accounting?

ACCOUNTING IS A
SERVICE
ACTIVITY.
ITS FUNCTION IS TO PROVIDE
QUANTITATIVE INFORMATION,
PRIMARILY FINANCIAL IN
NATURE, ABOUT ECONOMIC
ENTITIES THAT IS INTENDED
TO BE USEFUL IN MAKING
ECONOMIC DECISION.
STAKEHOLDERS

• Investors
• Lenders
• Suppliers and other trade creditors
• Employees
• Customers
• Governments and their agencies
• Public
Recording Phase

The recording phase includes collecting information about

economic transactions and the recording of these transactions in
the appropriate accounting records. A transaction is an economic
event that changes an asset, a liability, or an equity account
balance; hence. it must be recorded. Accounting records, on the
other hand, include business documents, journals, and ledgers.

Transactions are recorded in terms of debits and credits (double-

entry system). Debit is the left side of an account while credit is
the right side of an account.
1. Documentation

This is the process of preparing or receiving

appropriate business documents. Business
documents are original source materials
which serve as evidence of transactions.
They include official receipts, sales invoices,
purchase invoices, credit memoranda, and
debit memoranda.
2. Journalizing

This is the process of recording transactions

for the first time in the accounting books
called journals.
3. Posting

This is a group of related accounts

and is called the book official entry.
The objective of posting is to
classify the effects of transactions
on specific asset, liability, equity,
income and expense accounts.
Summarizing Phase

The summarizing phase includes the

steps necessary for the preparation of
periodic summary reports.
4. Preparing a trial balance

This is the process of

preparing a summary of the
balances of the accounts in
the general ledger known as
the trial balance.
5. Compiling adjusting data
This is the process of gathering
and putting together various
data necessary to update the
balances of certain accounts in
the books of the
a. Accrued Expense
Accrued expense this is an
expense incurred but not yet
paid as of the statement of
financial position (balance sheet)
date, such as interest accrued
on notes payable.
Example 1:
The ABC Company has an outstanding 90-
day, 12% note payable dated December 1,
2024 amounting to P200,000. The interest
is payable upon maturity of the note. The
company's accounting period or financial
year is the calendar year, that is, January I
to December 31
Example 2:
DEF Company salaries pays every Friday,
the end of a five-day work week. The total
salaries for the week ending January
3,2025 is P150,000.
b. Accrued Income
This is income earned but not
yet received or collected as of
the statement of financial
position (balance sheet) date,
such as accrued interest on
notes receivable.
Example 1:
GHI Company received a 3-
month, 12% note dated
December 1, 2024 amounting to
P100,000. Interest is receivable
upon maturity of the note.
c. Prepaid Expense
This is an expense paid or
acquired in advance such as
insurance premium.
Example 1:
On May 1, 2024, JKL Company
paid insurance premium of .
P30,000 covering a period of
one year beginning on this date.
d. Unearned /income
This is income already collected
but not yet earned as of the
statement of financial position
(balance sheet) date, such as
rental income collected in
advance.
Example 1:
On September 1, 2024, MNO
Company received P240,000
representing rental of an office
space for one year beginning on
this date.
e. Depreciation of PPE and
other cost allocation
Depreciation is defined in PAS
16 as the systematic allocation
of the depreciable amount of an
item of property, plant and
equipment over its useful life.
Example 1:
PQR Company acquired an office
equipment on October 1, 2023
for P310,000. The asset has an
estimated useful life of 5 years
and an estimated residual value
of P10,000.
f. Uncollectible Accounts
These represent customers'
accounts that may no longer be
collected or that may possibly
become bad debts.
f. Uncollectible Accounts
PAS 39 provides that trade
accounts receivable should be
reported in the statement of
financial position at amortized
cost.
f. Uncollectible Accounts
Amortized costs is defined as the
amount at which the receivable is
measured at the time it was first
recognized minus any payments and
minus any reduction (directly or
through the use of an allowance
account) for uncollectibility.
Example 1:
STU Company's trial balance dated
December 31, 2014, contains the following
information: Accounts receivable P 350,000
debit Allowance for uncollectible accounts
2,000 credit Sales 1,850,000 credit.
Estimated uncollectible accounts amounted
to P6,050.
g. Inventory
Adjustment for inventory is necessary
if the periodic inventory system is
used. Under the periodic inventory
system, the company does not record
the physical movement of goods.
6. Preparing a work sheet
This step is optional but it
facilitates the preparation of the
financial statements.
7. Preparing the financial
statements
This is the end product of the
accounting process.
Financial Statements
• statement of financial position as at the end of the period;
• a statement of profit and loss and other comprehensive income
for the period.
• a statement of changes in equity for the period;
• a statement of cash flows for the period;
• notes, comprising a summary of significant accounting policies
and other explanatory information; and
• a statement of financial position as at the beginning of the
preceding comparative period when an entity applies an
accounting policy retrospectively or makes a retrospective
restatement of items in its financial statements, or when it
reclassifies items in its financial statements.
8. Adjusting and closing the books

The balances of the nominal

(temporary) accounts, which
consist of income, expense. and
drawing accounts, are then
closed to Income Summary
account.
8. Adjusting and closing the books
The balance of the Income Summary
account is then transferred to the
owner's equity (capital) account. A
debit balance in the Income Summary
account represents a loss while a credit
balance represents a profit.
8. Adjusting and closing the books

The balance of the owner's

drawing account is closed to
owner's equity (capital) account.
When the closing process is
completed, all nominal accounts
will have zero balances.
9. Preparing a post-closing trial
balance
It contains only the real
accounts (assets, liabilities and
equity); the balances of these
accounts are carried forward to
the next accounting period.
9. Preparing a post-closing trial
balance
A post-closing trial balance is
prepared to check the equality
of debits and credits after
journalizing and posting the
closing entries.
10. Reversing the accounts

These adjustments include accrued

expenses, accrued revenues,
prepaid expenses recorded under
the expense method and deferred
revenues or income recorded under
the revenue method.