Lecture in FABM Income or Revenue

 Income is the revenue a business earns from

selling its goods and services or the money an
Examples of Current Assets
individual receives in compensation for his or
 Cash her labor, services, or investments. Businesses
 Accounts Receivable report this figure on the income statement
 Notes Receivable whereas individuals report theirs on the form
 Marketable Securities 1040.
 Inventory
 Prepaid Insurance
 Prepaid Rent Expenses
 O-Office Supplies  An expense is the cost of operations that a
company incurs to generate revenue. As the
popular saying goes, “it costs money to make
What is Accounts Receivable? money.” Common expenses include payments
to suppliers, employee wages, factory leases,
 Accounts Receivable is the amount you expect and equipment depreciation.
to receive on some future time.

T – Accounts Definition of Accounting

 Kapag nag increase ang asset, debit.  Accounting ia an art of recording, classifying,
 Kapag nag decrease ang asset, credit. summarizing, and interpreting the results
thereof in terms of money and other business
transactions.
Liability
NATURE OF ACCOUNTING
 A liability is something a person or company
owes, usually a sum of money. ... Recorded on Accounting is a Process – A process is compose of
the right side of the balance sheet, liabilities multiple steps that lead to a common and goal.
include loans, accounts payable, mortgages,
deferred revenues, bonds, warranties, and Accounting is an Art – Art refers to a way of
accrued expenses. performing something: it and entails creativity and skills
to help us attain some objectives.
 Kapag nag increase ang liability, credit. Accounting deals with Financial Information and
 Kapag nag decrease ang liability, debit. Transaction – Accounting deals only with quantifiable
financial transactions. These are the only events
 Kapag nag increase ang EXPENSES, debit. identified by accountants, recorded in the books and
 Kapag nag increase ang INCOME, credit. communicated to different parties.
Accounting is a Means and not an End – As I
Assets mentioned earlier, accounting is a tool to achieve
specific objectives.
 An asset is something containing economic
value and/or future benefit. An asset can often Accounting is an Information System – Accounting is
generate cash flows in the future, such as a recognized and characterized as a storehouse of
piece of machinery, a financial security, or a information. As a service function, it collects processes
patent. Personal assets may include a house, and communicates financial information of any entity.
car, investments, artwork, or home goods.
3 MAIN FUNCTION OF ACCOUNTING
1. Keeping systematic record of business
transactions.
Equity  Steps in accounting
 Equity represents the value that would be 2. Protecting properties of the business.
returned to a company's shareholders if all of  Cash ( First Property)
the assets were liquidated and all of the  Buildings / Properties
company's debts were paid off. ... The  Capital
calculation of equity is a company's total assets 3. Communicating results to various parties in or
minus its total liabilities, and is used in several connected with a business.
key financial ratios such as ROE.  Internal Parties / Internal Users
 External users of financial information
4. Meeting legal requirements.
  Accounting Entity
 Going - Concern
Ceasar – Nagsimula raw sakanya ang accounting.
 Time – Period
Luca Pacioli – Suma de Aritmica  Unit of Measure
 Accrual Basis of Accounting
 Luca Pacioli (c. 1447 – 1517) was the first
person to publish detailed material on the
double-entry system of accounting. He was an
Italian mathematician and Franciscan friar who Accounting Entity Concept
also collaborated with his friend Leonardo da (Separate Entity Concept or Business Entity
Vinci (who also took maths lessons from Concept)
Pacioli).
 Luca Pacioli was a monk, magician and lover  Seperation of the Business in the owner or
of numbers. He discovered this special management.
bookkeeping in Venice and was intrigued by it. - Distinct and seperate from the transactions
In 1494, he wrote a huge math encyclopedia of the business.
and included an instructional section on  Transactions need to separate properly.
double-entry bookkeeping. - Only business transactions are recorded in
the book business.
 BUSINESS IS BUSINESS
HISTORY OF ACCOUNTING  PERSONAL IS PERSONAL

The history of accounting or accountancy can be traced EXAMPLE:

to ancient civilizations.
Mr. Oyong the owner of OK SUITE HOTEL,
The early development of accounting dates back to He invested in land, building, and a lot of money. All of
ancient Mesopotamia, and is closely related to the investment of Mr. Oyong is no longer his but in his
developments in writing, counting and money and early business.
auditing systems by the ancient Egyptians and
Babylonians. By the time of the Roman Empire, the
government had access to detailed financial information. Theres the business Owner
In India Chanakya wrote a manuscript similar to a
financial management book, during the period of the
Mauryan Empire. His book "Arthashasthra" contains few Personal Expenses of the Owner should be separated
detailed aspects of maintaining books of accounts for a from the expenses of the business.
Sovereign State.

Personal and Family Expenses Business

The Italian Luca Pacioli, recognized as The Father of Expenses
accounting and bookkeeping was the first person to
publish a work on double-entry bookkeeping, and Going - Concern Concept
introduced the field in Italy. ( Continuity Concept)
The modern profession of the chartered accountant
 Business will continue to operate over an
originated in Scotland in the nineteenth century.
indefinite period of time.
Accountants often belonged to the same associations as
- If there is a concrete evidence, the business
solicitors, who often offered accounting services to their
can no longer continue…
clients. Early modern accounting had similarities to
- The Continuity Concept should be
today's forensic accounting. Accounting began to
abandoned.
transition into an organized profession in the nineteenth
century, with local professional bodies in England EXAMPLE:
merging to form the Institute of Chartered Accountants
in England and Wales in 1880. Mr. Oyong purchase of 10 Million should not
be recorded as an outright expense, rather – 10 years of
it cost to the life of a car.
ACCOUNTING CONCEPT AND PRINCIPLES

- Business will continue to operate for an

indefinite period of time.
Accounting Assumptions
- Allocate the cost over the period of its
 Guides in the preparation of Financial useful life.
Statements
 something or received a service even if
they haven’t paid for it yet.
Accrual Basis is the opposite of Cash Basis
Time – Period Concept
Cash Basis
 Life of the business is divided into equal
periods. Income Expense
- Financial Statements are prepared at the
Money is Received Money is Paid
end of each period.
Periods can be:
6 Million cannot be recorded as income even though
- Monthly
they haven’t collected anything yet.
- Quarterly
- Semi – Annually
- Annually
Generally Accepted Accounting Principles (GAAP)

 Uniform set of accounting rules, procedures,

Annually practices, and standards that are followed in
preparing the financial statements.
- Financial Statements should be prepared,
meaning at least once a year.
 GAAP – Ground Rules

- Recording, Measuring, and Reporting

Calendar Year
financial information of the business
- Accounting period that starts January 1 and entity.
ends in December 31.
(GAAP)
Fiscal Year
Principles needs to follow this criteria:
- Is a reporting period that starts with any
- Principles needs to be relevant – useful in
month other than January 1. It may start at
making decisions.
February 1, March 1, April 1, May 1, June
- Objective – it is not influence by personal
1, July 1, so on and so forth. If it didn’t
biased.
start at January 1 it means it will not end at
- Feasible – it can be implemented without
December 31.
caused.

Stable Monetary Concept GAAP PRINCIPLES

(Unit of Measure)

 Purchasing power of peso is steady regardless of Cost Principle

inflation rates.
- Assets should be recorded at original /
acquisition cost.

EXAMPLE:
Mr. Oyong purchase a land worth 5 million 9 TODAY 3 YEARS AFTER
years ago, even if the value of the land is already 8
5 Million 10 Million
million it will be still recorded in the statement of
financial position as 5 million. It will not be affected by It will be still recorded at the cost 5 Million.
inflation.
Accrual Basis Concept
Objectivity Principle
 Income is recognized when earned not when
- Accounting records should be based on
received.
reliable and verifiable data as evidence of
- Meaning a company can already record an
transactions.
income once its delivered your product,
perform the services even if it hasn’t PURCHASE – RECEIPT = EVIDENCE
received any cash yet.
 Expenses on the other hand is recognized when
incurred not when paid. Materiality Principle
- Meaning the company has to record an
expense once they are able to use of
 - Determining the valuation of an item Stuff the Business Owns
should be practicable.
EXAMPLE:
Land, Building, Equipment will cost million.
Assets
- On the other side of the accounting
Matching Principle equation we actually have two different
words to describe what the business owes
- Revenue and expense should be recognized
and that depends on who the lender is.
in the same period.
- If you recognized expense revenue you
should also recognized the corresponding
expense as a shaded. Equity
- So when you recognized sales revenue you
should also recognized the corresponding
cost of sales. Stuff the Business Owes

Consistency Principle Liabilities

- Accounting methods and procedures - We use liabilities to describe what the

should be applied on a uniform basis from business owes to third parties, and we use
period to period. equity to describe what the business owes
to its owner.
ASSETS = LIABILITIES + EQUITY – The full
Adequate Disclosure Principle account equation.
- Financial Statements should be free from
material misstatement. Should be
complete. So that five dollars that my popcorn business now has is
called an Asset and that five dollars that my business
owes back to me is called Equity.
ACCOUNTING EQUATION FIVE DOLLARS IN ASSET = FIVE DOLLARS IN
EQUITY

Why Accounting Equation?

- This equation lies at the heart of Assets can include things like:
accounting and is the foundation of the - Cash
double – entry accounting system. - Accounts Receivable
- Inventory
- Plant Property and Equipment
The key principle behind the accounting equation is that - Land and Buildings
stuff the business owns is eaqual to the stuff that the - Investments
business owes, and it is vitally important that you - Goodwill
remember that this equation balance is always, always,
always.
Where as liabilities can be made up of:

The stuff the = The stuff the - Accounts Payable

- Loans Payable
Business owns Business owes - Wages Payable
- Taxes Payable
The most common forms of equity are:
Now let’s say I come up with this amazing idea for a
business. - Stockholders
- Owner’s Equity
I want to make popcorn and sell it I’ve got five dollars in
- Retained Earnings
my pocket, and I decide to lend it to the business. Now
 Profit Held for Future Use.
there is a word to describe the stuff that the business
owns and that is called assets.
 I then go and spend this ten dollars on a pot.
Let’s say I go and sell this first batch of popcorn at a
TOTAL ASSETS = $5 TOTAL LIABILITIES + EQUITY = $5
sixty percent markup on cost. So I’ve made sales of eight
Now let’s add some totals to the above and see if this dollars.
thing still balances.
All my inventory has now gone, however I now have
Of course it does, the accounting equation always eight dollars in cash, and have made a small profit of
balances! And a balance sheet is basically a snapshot of three dollars. My profit is three dollars because my sales
our different assets, liabilities, and equity at a single were eight dollars and my corn cost me five dollars to
point in time. buy.

Assets = Liabilities + Equity $8 - $5 = $3

- Remember I said that we can think of
Retained Earnings as profit held for future
A balance sheet is one of the most important financial us? So my retained earnings are going to
statements. increase by three dollars.
There is a lot you can tell about a business by looking at - Because my business has made a profit of
its balance sheet. three dollars, my total assets have now
increased.

EXAMPLE:
If I head down to the shop and spend five dollars on corn
then I no longer have five dollars in cash but I now have
five dollars of inventory.

TOTAL ASSETS = $18 TOTAL LIABILITIES + EQUITY = $18

From $15 to $18

RECAP
TOTAL ASSETS = $5 TOTAL LIABILITIES + EQUITY = $5
1. Stuff the business has is equal to stuff the
business owes.
The categories have now changed but my total assets - This can be re – worded from the
stay the same. accounting equation.
2. The accounting equation is ASSETS =
My balance sheet is in balance. LIABILITIES + EQUITY.
- Now I need to pop this corn. But I don’t 3. It always balances.
have enough money to go and buy a pot. 4. The expanded accounting equation forms the
- So I got to one of my friends, and I ask balance sheet.
them if I can borrow ten dollars. 5. The balance sheet is a snapshot of a business’s
- The business cash increased by ten dollars, assets, liabilities, and equity at a single point in
and loans payable go up by ten dollars as time.
well.
Total assets are now $15 and my liabilities + equity are
now also.

TOTAL ASSETS = $15 TOTAL LIABILITIES + EQUITY = $15

We’re still in balance.