Chapter 1: Introduction To Accounting (FAR By: Millan)

Chapter 1: Introduction to Accounting
(FAR by: Millan)

Definition of accounting
• Accounting is a process of identifying,
recording and communicating economic
information that is useful in making
economic decisions.
Essential elements of the definition of
accounting
1. Identifying – The accountant analyzes each business transaction and
identifies whether the transaction is an “accountable event” or “non-
accountable event.” This is because only “accountable events” are
recorded in the accounting books. “Non-accountable events” are not
recorded in the accounting books.
2. Recording – The accountant recognizes (i.e., records) the “accountable
events” he has identified. This process is called “journalizing.” After
journalizing, the accountant then classifies the effects of the event on
the “accounts.” This process is called “posting.”
3. Communicating – At the end of each accounting period, the
accountant summarizes the information processed in the accounting
system in order to produce meaningful reports. Accounting
information is communicated to interested users through accounting
reports, the most common form of which is the financial statements.
Nature of accounting
• Accounting is a process with the basic
purpose of providing information about
economic activities intended to be useful in
making economic decisions.
Types of information provided by accounting
1. Quantitative information
2. Qualitative information
3. Financial information
Functions of Accounting in Business
1. To provide external users with information

that is useful in making investment and
credit decisions; and
2. To provide internal users with information
that is useful in managing the business.
Accounting as a managerial tool
Accounting provides information that helps a
business manager perform the following
management functions:
1. Planning
2. Organizing
3. Staffing
4. Directing
5. Controlling
Brief history of accounting
• Accounting can be traced as far back as the prehistoric times, perhaps more
than 10,000 years ago.
• Archaeologists have found clay tokens as old as 8500 B.C. in Mesopotamia
which were usually cones, disks, spheres and pellets. These tokens correspond
to commodities like sheep, clothing or bread. They were used in the Middle
West in keeping records. After some time, the tokens were replaced by wet clay
tablets. During such time, experts concluded this to be the start of the art of
writing. (Source: http://EzineArticles.com/456988)
• Double entry records first came out during 1340 A.D. in Genoa.
• In 1494, the first systematic record keeping dealing with the “double entry
recording system” was formulated by Fra Luca Pacioli, a Franciscan monk and
mathematician. The “double entry recording system” was included in Pacioli’s
book titled “Summa di Arithmetica Geometria Proportioni and Proportionista,”
published on November 10, 1494 in Venice.
• The concept of “double entry recording” is being used to this day. Thus, Fra Luca
Pacioli is considered as the father of modern accounting.
Common Branches of Accounting
)
Users of Accounting Information
1. Internal users – those who are directly involved in managing the
business. Examples:
• Business owners who are directly involved in managing the business
• Board of directors
• Managerial personnel

2. External users – those who are not directly involved in managing the
business. Examples:
• Existing and potential investors (e.g., stockholders who are not directly
involved in managing the business)
• Lenders (e.g., banks) and Creditors (e.g., suppliers)
• Non-managerial employees
• Public
)
Forms of Business Organizations
Advantages and Disadvantages
Chapter 1: Introduction to Accounting (FAR by: Millan)




Types of Business According to Activities
1. Service business
2. Merchandising (Trading)
3. Manufacturing


Basic Accounting Concepts
1. Separate entity concept 7. Time Period
2. Historical cost concept 8. Stable monetary unit
3. Going concern assumption 9. Materiality concept
4. Matching 10. Cost-benefit
5. Accrual Basis 11. Full disclosure principle
6. Prudence (or Conservatism) 12. Consistency concept
Philippine Financial Reporting Standards (PFRSs)
The PFRSs are Standards and Interpretations

adopted by the FRSC. They consist of the
following:
1. Philippine Financial Reporting Standards
(PFRSs);
2. Philippine Accounting Standards (PASs);
and
3. Interpretations
Qualitative Characteristics
I. Fundamental Qualitative Characteristics
i. Relevance (Predictive Value, Confirmatory Value, Materiality)
ii. Faithful Representation (Completeness, Neutrality,
Free from error)
II. Enhancing Qualitative Characteristics

i. Comparability
ii. Verifiability
iii. Timeliness
iv. Understandability
)
The Accounting Equation
Assets= Liabilities + Equity
Chapter 3: The Accounting Equation (FAR by: Millan)

Essential elements of an Asset
a. Control
b. Past events
c. Future economic benefits

Essential elements of a Liability
a. Present obligation
b. Outflow of economic benefits

The Expanded Accounting Equation
Assets = Liabilities + Equity + Income - Expenses

The Account
• An account is the basic storage of

information in accounting. It is a record of
the increases and decreases in a specific
item of asset, liability, equity, income or
expense.
Chapter 4: Types of Major Accounts (FAR by: Millan)

The T-Account

The Five Major Accounts
1. ASSETS – are the resources you control that have resulted from
past events and can provide you with future economic benefits.
2. LIABILITIES – are your present obligations that have resulted

from past events and can require you to give up resources
when settling them.
3. EQUITY – is assets minus liabilities.
4. INCOME – are increases in economic benefits during the period
in the form of inflows or enhancements of assets or decreases
of liabilities that result in increases in equity, other than those
relating to investments by the business owners.
5. EXPENSES – are decreases in economic benefits during the
period in the form of outflows or depletions of assets or
increases of liabilities that result in decreases in equity, other
than those relating to distributions
Chapter to the
4: Types of Major Accounts (FARbusiness
by: Millan) owners.
Classification of the Five Major Accounts

Chart of Accounts
A chart of accounts is a list of all the accounts
used by a business.

Common Account Titles
• BALANCE SHEET ACCOUNTS
ASSETS
a. Cash
b. Accounts receivable
c. Allowance for bad debts
d. Notes receivable
e. Prepaid supplies
f. Prepaid rent
g. Prepaid insurance
h. Land
i. Building
j. Accumulated depreciation - Building
k. Equipment
l. Accumulated depreciation - equipment
Chapter 4: Types of Major Accounts (FAR
by: Millan)
Common Account Titles - Continuation
LIABILITIES
a. Accounts payable
b. Notes payable
c. Interest payable
d. Salaries payable
e. Utilities payable
f. Unearned

by: Millan)
EQUITY
a. Owner’s capital (or Owner’s equity)
b. Owner’s drawings

by: Millan)
• INCOME STATEMENT ACCOUNTS
INCOME
a. Service fees
b. Sales
c. Interest income
d. Gains

by: Millan)
• INCOME STATEMENT ACCOUNTS
EXPENSES
a. Cost of sales (or Cost of goods sold)
b. Freight-out
c. Salaries expense
d. Rent expense
e. Utilities expense
f. Supplies expense
g. Bad debt expense
h. Depreciation expense
i. Advertising expense
j. Insurance expense
k. Taxes and licenses
l. Transportation and travel expense
m. Interest expense
n. Miscellaneous expense
o. Losses
by: Millan)
The Books of Accounts
1. Journal (General and Special)

2. Ledger (General and Subsidiary)
Chapter 5: Books of Accounts & Double-entry System (FAR by: Millan)

Journal
The journal, also called the “book of original

entries,” is the accounting record where business
transactions are first recorded.
1. Special Journal – is used to record transactions
with similar nature (e.g., Sales journal,
Purchases journal, Cash receipts journal, and
Cash disbursements journal)
2. General Journal – All other transactions that
cannot be recorded in the special journals are
recorded in the general journal.
Ledger
• The ledger is used to classify the effects of

business transactions on the accounts. It is
also called the “book of final entries.”
1. General ledger – contains all the accounts
appearing in the trial balance.
2. Subsidiary ledger – provides a breakdown
of the balances of controlling accounts.

Format of the General Journal

Formats of the Ledgers

Double-entry System
• Concept of duality – each transaction is
recorded in two parts – debit and credit
• Concept of equilibrium – each transaction is
recorded in terms of equal debits and
credits.

Normal balances of accounts

Rules of Debits and Credits

Contra and Adjunct accounts
• Contra accounts are presented in the
financial statements as deduction to their
related accounts.
• Adjunct accounts are presented in the
financial statements as addition to their
related accounts.

Steps in the Accounting cycle
1. Identifying and analyzing

2. Journalizing
3. Posting
4. Unadjusted trial balance
5. Adjusting entries
6. Adjusted trial balance (and/or Worksheet)
7. Financial statements
8. Closing entries
9. Post-closing trial balance
10. Reversing entries
Chapter 6: Business Transcations & Their Analysis (FAR by: Millan)
Identifying and analyzing transactions and events
• Only accountable events are recorded.

Accountable events are those that affect the
assets, liabilities, equity, income or expenses
of the business.
• Accountable events are normally identified
from source documents, such as sales
invoice, official receipts, delivery receipts,
and the like.
Types of Events
1. External events – are transactions that
involve the business and another external
party.
2. Internal events – are events that do not
involve an external party.

Journalizing
Journalizing refers to recording an identified
accountable event in the journal by means of a
journal entry.

Simple and Compound journal entries
• Simple journal entry – contains a single debit
and a single credit element.
• Compound journal entry – contains two or
more debits or credits.

Posting
Posting, the third step in the accounting cycle,

is the process of transferring data from the
journal to the appropriate accounts in the
ledger.
Chapter 7: Posting to the Ledger (FAR by: Millan)

Example of posting:
Transaction: Jan. 8 - Services worth ₱30,000
were rendered for cash.
Journalizing:

Example of posting (continuation)
Posting

Trial balance
• A trial balance is a list of general ledger
accounts and their balances. It is prepared
to check the equality of total debits and
total credits in the ledger.

Types of Trial balance
a. Unadjusted trial balance – this is prepared

before adjusting entries are made.
b. Adjusted trial balance – this is prepared
after adjusting entries but before the
financial statements are prepared.
c. Post-closing trial balance – this is prepared
after the closing process.

Errors revealed by a trial balance
1. Journalizing or posting one-half of an entry,
i.e., a debit without a credit, or vice versa.
2. Recording one part of an entry for a
different amount than the other part.
3. Errors of Transplacement (Slide error) on
one side of an entry.
4. Error of Transposition on one side of an
entry.
Errors not revealed by a trial balance
1. Omitting entirely the entry for a transaction

2. Journalizing or posting an entry twice
3. Using wrong account with the same normal
balance as the correct account
4. Wrong computation with the same
erroneous amounts posted to debit and
credit sides

Adjusting entries
• Adjusting entries are entries made prior to

the preparation of financial statements to
update certain accounts so that they reflect
correct balances as of the designated time.
Chapter 8: Adjusting Entries (FAR by: Millan)

Purpose of adjusting entries
a. To take up unrecorded income and expense

of the period.
b. To split mixed accounts into their real and
nominal elements.

Real, Nominal and Mixed Accounts
a. Real Accounts (Permanent accounts) – accounts that are
not closed at the end of the accounting period. These
accounts include all balance sheet accounts, except the
“Owner’s drawings” account.
b. Nominal Accounts (Temporary accounts) – accounts that
are closed at the end of the accounting period. These
accounts include all income statement accounts, drawings
account, clearing accounts and suspense accounts.
c. Mixed accounts – accounts that have both real and
nominal account components. These accounts are subject
to adjustment.

Methods of Initial Recording of Income
1. Liability method – under this method, cash

receipts from items of income are initially credited
to a liability account. At the end of the period, the
earned portion is recognized as income while the
unearned portion remains as liability.
2. Income method – under this method cash receipts
from items of income are initially credited to an
income account. At the end of the period, the
unearned portion is recognized as liability while
the earned portion remains as income.
Methods of Initial Recording of Expenses
1. Asset method – under this method cash disbursements

for items of expenses are initially debited to an asset
account. At the end of the period, the incurred portion
(‘used up’ or ‘expired’) is recognized as expense while
the unused portion remains as asset.
2. Expense method – under this method, cash
disbursements for items of expenses are initially
debited to an expense account. At the end of the
period, the unused portion (‘not yet incurred’ or
‘unexpired’) is recognized as asset while the incurred
portion remains as expense.
Worksheet
A worksheet is an analytical device used to
facilitate the gathering of data for
adjustments, the preparation of financial
statements, and closing entries.
Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan)

Financial statements
• The financial statements are the end
product of the accounting process.
Information from the journal and the ledger
are meaningless to most users unless they
are summarized and communicated through
the financial statements.

The major processes in accounting are
summarized below:

Financial Statements
• Statement of financial position (or Balance
sheet) – shows information on assets,
liabilities and equity.
• Statement of profit or loss (or Income
statement) – shows information on income
and expenses, and consequently, the profit
or loss for the period.

Closing entries
• Closing entries are entries prepared at the
end of the accounting period to “zero out”
all nominal accounts in the ledger. This is
done so that the transactions during the
period will not commingle with the
transactions in the next period.

Closing entries
• Closing entries are prepared as follows:
a. All income accounts are debited and all
expense accounts are credited. The resulting
balance is recorded in a clearing account called
the “Income summary.”
b. The balance of “Income summary” is closed to
the “Owner’s capital” account.
c. Any balance in the “Owner’s drawings” account
is closed to the “Owner’s capital” account.

Reversing Entries
• Reversing entries are entries usually made
on the first day of the next accounting
period to reverse certain adjusting entries
made in the immediately preceding period.

Adjusting entries that may be reversed
1. Accruals for income or expense

2. Prepayments initially recorded using the
expense method
3. Advanced collections initially recorded
using the income method

Worksheet
A worksheet is an analytical device used to
facilitate the gathering of data for
adjustments, the preparation of financial
statements, and closing entries.

Financial statements
• The financial statements are the end
product of the accounting process.
Information from the journal and the ledger
are meaningless to most users unless they
are summarized and communicated through
the financial statements.

The major processes in accounting are
summarized below:

Financial Statements
• Statement of financial position (or Balance
sheet) – shows information on assets,
liabilities and equity.
• Statement of profit or loss (or Income
statement) – shows information on income
and expenses, and consequently, the profit
or loss for the period.

Closing entries
• Closing entries are entries prepared at the
end of the accounting period to “zero out”
all nominal accounts in the ledger. This is
done so that the transactions during the
period will not commingle with the
transactions in the next period.

Closing entries
• Closing entries are prepared as follows:
a. All income accounts are debited and all
expense accounts are credited. The resulting
balance is recorded in a clearing account called
the “Income summary.”
b. The balance of “Income summary” is closed to
the “Owner’s capital” account.
c. Any balance in the “Owner’s drawings” account
is closed to the “Owner’s capital” account.

Reversing Entries
• Reversing entries are entries usually made
on the first day of the next accounting
period to reverse certain adjusting entries
made in the immediately preceding period.

Adjusting entries that may be reversed
1. Accruals for income or expense

2. Prepayments initially recorded using the
expense method
3. Advanced collections initially recorded
using the income method

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Chapter 1: Introduction to Accounting

(FAR by: Millan)

1. To provide external users with information

Chapter 1: Introduction to Accounting (FAR by: Millan)

Chapter 1: Introduction to Accounting (FAR by: Millan)

Chapter 1: Introduction to Accounting (FAR by: Millan)

Chapter 1: Introduction to Accounting (FAR by: Millan)

Chapter 1: Introduction to Accounting (FAR by: Millan)

Chapter 1: Introduction to Accounting (FAR by: Millan)

The PFRSs are Standards and Interpretations

II. Enhancing Qualitative Characteristics

Assets= Liabilities + Equity

Chapter 3: The Accounting Equation (FAR by: Millan)

Chapter 3: The Accounting Equation (FAR by: Millan)

Chapter 3: The Accounting Equation (FAR by: Millan)

Assets = Liabilities + Equity + Income - Expenses

Chapter 3: The Accounting Equation (FAR by: Millan)

• An account is the basic storage of

Chapter 4: Types of Major Accounts (FAR by: Millan)

Chapter 4: Types of Major Accounts (FAR by: Millan)

2. LIABILITIES – are your present obligations that have resulted

Chapter 4: Types of Major Accounts (FAR by: Millan)

Chapter 4: Types of Major Accounts (FAR by: Millan)

Chapter 4: Types of Major Accounts (FAR

Chapter 4: Types of Major Accounts (FAR

Chapter 4: Types of Major Accounts (FAR

1. Journal (General and Special)

Chapter 5: Books of Accounts & Double-entry System (FAR by: Millan)

The journal, also called the “book of original

• The ledger is used to classify the effects of

Chapter 5: Books of Accounts & Double-entry System (FAR by: Millan)

Chapter 5: Books of Accounts & Double-entry System (FAR by: Millan)

Chapter 5: Books of Accounts & Double-entry System (FAR by: Millan)

Chapter 5: Books of Accounts & Double-entry System (FAR by: Millan)

Chapter 5: Books of Accounts & Double-entry System (FAR by: Millan)

Chapter 5: Books of Accounts & Double-entry System (FAR by: Millan)

Chapter 5: Books of Accounts & Double-entry System (FAR by: Millan)

1. Identifying and analyzing

• Only accountable events are recorded.

Chapter 6: Business Transcations & Their Analysis (FAR by: Millan)

Chapter 6: Business Transcations & Their Analysis (FAR by: Millan)

Chapter 6: Business Transcations & Their Analysis (FAR by: Millan)

Posting, the third step in the accounting cycle,

Chapter 7: Posting to the Ledger (FAR by: Millan)

Chapter 7: Posting to the Ledger (FAR by: Millan)

Chapter 7: Posting to the Ledger (FAR by: Millan)

Chapter 7: Posting to the Ledger (FAR by: Millan)

a. Unadjusted trial balance – this is prepared

Chapter 7: Posting to the Ledger (FAR by: Millan)

1. Omitting entirely the entry for a transaction

Chapter 7: Posting to the Ledger (FAR by: Millan)

• Adjusting entries are entries made prior to

Chapter 8: Adjusting Entries (FAR by: Millan)

a. To take up unrecorded income and expense

Chapter 8: Adjusting Entries (FAR by: Millan)

Chapter 8: Adjusting Entries (FAR by: Millan)

1. Liability method – under this method, cash

1. Asset method – under this method cash disbursements