INTRODUCTION TO ACCOUNTING

1. Definition of Accounting
 Definition
Accounting is the process of identifying, recording, classifying, summarizing, and
interpreting financial transactions to provide useful information for decision-making.
 Simple meaning: It’s like keeping a diary of all the money that comes in and goes out of a
business, then making reports so owners and other people can understand the financial
health of the organization.
 Example: If you own a small bakery, accounting keeps track of your sales, expenses (flour,
sugar, rent), and profit.

2. Scope of Accounting
Accounting covers different activities, such as:
1. Recording – Writing down all transactions in books or a computerized system.
Example: Recording daily sales in a cash register.
2. Classifying – Grouping similar transactions together.
Example: Putting all sales under “Income” and all rent payments under “Expenses.”
3. Summarizing – Preparing reports such as the Income Statement or Balance Sheet.
Example: End-of-month sales report.
4. Interpreting – Analyzing reports to guide decisions.
Example: Deciding whether to expand your store based on increasing profits.
5. Communicating – Sharing financial results with stakeholders.
Example: Presenting financial statements to investors.

3. Brief History of Accounting

 Ancient times: People used clay tablets, stones, and tally sticks to record transactions (e.g.,
Mesopotamia around 5000 B.C.).
 Middle Ages: Luca Pacioli, an Italian mathematician, published a book in 1494 explaining
double-entry bookkeeping — still the foundation of modern accounting.
 Modern era: With computers, accounting has become faster, more accurate, and more
accessible. Today, we use accounting software like QuickBooks, SAP, or Xero.

4. Forms of Business Organization

1. Sole Proprietorship – Owned by one person.
o Simple to start, owner keeps all profits.
o Example: A small sari-sari store.
2. Partnership – Owned by two or more people who share profits and responsibilities.
o Example: Two friends running a café together.
3. Corporation – A separate legal entity owned by shareholders.
o Owners have limited liability.
o Example: Jollibee Foods Corporation.
4. Cooperative – Owned and managed by members for their mutual benefit.
o Example: Farmers’ cooperative selling rice.

5. Users of Financial Information

1. Internal Users – Those inside the organization:
o Owners – to know profits and financial position.
o Managers – to make decisions and plan operations.
o Employees – to assess job stability and bonuses.
2. External Users – Those outside the organization:
o Investors – to decide whether to invest.
o Creditors (banks, suppliers) – to know if the business can repay debts.
o Government – for taxation and regulation.
o Customers – to know if the business is stable and can deliver products/services.

Accounting is the language of business — it records, processes, and communicates financial

information so users can make informed decisions.

Basic Accounting Concepts & Principles (IFRS-Based)

Underlying Assumptions & General Principles
1. Business Entity Concept
 Meaning: The business is treated as separate from its owner(s). Business records must not
mix with personal transactions.
 Example: If the owner buys a personal car, it is not recorded in the business books.

2. Periodicity (Time Period Assumption)

 Meaning: The life of a business is divided into equal time periods (monthly, quarterly,
yearly) for reporting purposes.
 Example: A company prepares annual financial statements from January 1 to December
31.

3. Going Concern Concept

 Meaning: The business is assumed to continue operating in the foreseeable future unless
there is evidence otherwise.
 Example: Assets are recorded at cost, not liquidation value, because the company plans to
keep operating.

4. Monetary Unit Assumption

 Meaning: Transactions are recorded in a single stable currency; effects of inflation are
usually ignored in accounting records.
 Example: All transactions of a Philippine company are recorded in Philippine Peso.

5. Accrual Basis
 Meaning: Income and expenses are recorded when earned or incurred, not when cash is
received or paid.
 Example: If a service is done in December but payment is received in January, revenue is
still recorded in December.

6. Historical Cost Principle

 Meaning: Assets are recorded at their purchase price, not at current market value.
 Example: Land bought for ₱2,000,000 in 2010 is still recorded at ₱2,000,000 in the books
even if its market value is now ₱5,000,000.

7. Revenue Recognition Principle

 Meaning: Revenue is recorded when it is earned, not when cash is received.
 Example: A store delivers goods on March 28, payment due in April. Revenue is recorded
in March.

8. Expense Recognition Principle (Matching Principle)

 Meaning: Expenses are recorded in the same period as the revenue they help generate.
 Example: Salaries for December are paid in January but recorded as December expense.

9. Other Basic Principles & Assumptions

 Full Disclosure Principle: All important financial information must be reported.
o Example: Notes to financial statements include details of a pending lawsuit.
 Materiality Principle: Only significant amounts affecting decisions should be recorded in
detail.
o Example: Buying a ₱200 stapler is recorded as expense immediately.
 Consistency Principle: Same accounting methods must be applied from period to period.
o Example: If depreciation uses straight-line method this year, the same method
should be used next year unless justified.

FINANCIAL STATEMENTS OVERVIEW

1. Basic Definitions
 Financial Statements – Formal reports showing a business’s financial position and
performance.
 Example: The Statement of Financial Position shows assets, liabilities, and equity of ABC
Trading as of Dec. 31, 2024.

2. Basic Accounting Equation

  Formula:
Assets = Liabilities + Equity
 It means what the business owns equals what it owes plus the owner’s investment.
 Example: If a business has ₱100,000 assets and owes ₱30,000, equity is ₱70,000.

3. Accounting Elements
 Assets, Liabilities, Equity, Revenue, Expenses – the building blocks of accounting.
 Example: Cash (asset), Loans Payable (liability), Owner’s Capital (equity).

4. The Account
 A record that shows all changes to a specific item in the accounting equation.
 Example: The Cash account tracks all cash receipts and payments.

5. Assets
 Resources owned by the business that have value and provide future benefits.
 Example: Cash, equipment, inventory.

6. Liabilities
 Debts or obligations of the business.
 Example: Accounts Payable to suppliers, bank loans.

7. Equity
 The owner’s claim on the assets after liabilities are paid.
 Example: If assets are ₱500,000 and liabilities ₱200,000, equity is ₱300,000.

8. Drawing
 Withdrawal of assets by the owner for personal use.
 Example: Owner takes ₱5,000 cash from the business.

9. Business Transaction Defined

 Any event that changes the financial position of the business and can be measured in
money.
 Example: Selling goods for ₱10,000 cash.

10. Recording Transactions Using the Basic Accounting Equation

 Transactions are recorded by increasing/decreasing assets, liabilities, or equity while
keeping the equation balanced.
 Example:
Owner invests ₱50,000 → Assets +₱50,000, Equity +₱50,000.

11. Expanded Accounting Equation

 Assets = Liabilities + (Capital + Revenue – Expenses – Drawing)
 Example:
Cash + Equipment = Loans Payable + (Owner’s Capital + Sales – Rent Expense –
Drawings).

12. Revenue
 Income earned from the main business operations.
 Example: Sales of products, service fees.

13. Expenses
 Costs incurred to earn revenue.
 Example: Salaries, utilities, rent.

14. Net Income / Net Loss

 Net Income: Revenue > Expenses.
 Net Loss: Expenses > Revenue.
 Example: Sales ₱80,000 – Expenses ₱50,000 = ₱30,000 Net Income.