Accounting

- is the art of recording, classifying, summarizing in

a significant manner and in terms of money,
transactions and events which are, in part at least,
of a financial character and interpreting the results
thereof. (AICPA)

- 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 decisions.
 Functions of Accounting
accounting process of recognition or non-
recognition of business activities as
IDENTIFICATION “accountable events” or whether they have
accounting relevance

accounting process of assigning of peso amounts

MEASUREMENT
or numbers to the economic transactions and
events. The unit of measure of accounting is
money, expressed in prices.

accounting process of preparing and distributing

COMMUNICATION
accounting reports to potential users of
accounting information and interpreting the
significance of this processed information.
 Types of Business
TYPE ACTIVITITY STRUCTURE EXAMPLES

Selling people’s Hiring skilled staff

Accounting
SERVICE time
and selling their Legal
time
Buying a range of
raw materials and
manufactured
Buying and selling goods, making Wholesaler
MERCHANDISING products them available for Retailer
sale to their
customers or
online for delivery

Designing Taking raw

products, materials using Vehicle Assembly
Construction
MANUFACTURING aggregating
components and
equipment and
staff to convert Engineering
Chemicals
assembling them into finished
finished products goods
 FORMS OF BUSINESS ORGANIZATIONS

SOLE this business organization has a single owner

called the proprietor who is also a manager.
PROPRIETORSHIP (ex. Physicians, lawyers, and accountants)

is a business owned and operated by two or

more persons who bind themselves to
PARTNERSHIP contribute money, property, or industry to a
common fund, with the intention of dividing
the profits among themselves.

is a business owned by its stockholders. It is

an artificial being created by operation of
CORPORATION law, having the rights of succession and the
powers, attributes and properties expressly
authorized by law or incident to its existence.
 BRANCHES OF ACCOUNTING
1. AUDITING – is the accountancy profession’s most
significant service to the public.
2. BOOKKEEPING – mechanical task involving the
collection of basic financial data.
3. COST ACCOUNTING – is the process that involves
the recording of cost data in books of accounts
4. FINANCIAL ACCOUNTING – is focused on the
recording of business transactions and the
periodic preparation of reports on financial
position and results of operations.
 BRANCHES OF ACCOUNTING
5. MANAGEMENT ACCOUNTING – incorporates cost
accounting data and all types of financial and non-
financial information adapts them for specific
decisions made by the management.
6. TAXATION – preparation of tax returns and the
consideration of the tax consequences of proposed
business transactions or alternative course of action.
7. GOVERNMENT ACCOUNTING – it is concerned with
the identification of the sources and uses of
resources consistent with the provisions of city,
municipal, provincial or national laws.
 USERS OF ACCOUNTING INFORMATION

- are individuals and others that have current or

potential financial interest in the reporting entity but
are not involved in the daily operations of the entity.
a. Owners f. Customers
b. Stockholders g. Labor unions
EXTERNAL USERS c. Creditors h. Government agencies
d. Potential investors i. Trade associations
e. Suppliers j. The public

- include the following:

a. Board of Directors e. Bus. unit Managers

b. Chief executive officers f. Plant Managers
INTERNAL USERS c. Chief financial officers g. Supervisors
d. Vice presidents
 ACCOUNTING CONCEPTS AND
PRINCIPLES
GAAP or Generally Accepted Accounting Principles
 encompass the conventions, rules and procedures
necessary to define accepted accounting practice at a
particular time.

UNDERLYING ASSUMPTIONS
Going Concern - financial statements are normally
prepared on the assumption that an enterprise is a
going concern and will continue in operation for the
foreseeable future.
 FUNDAMENTAL CONCEPTS
OF ACCOUNTING PROCESS
 Entity Concept – transactions of different entities
should not be accounted for together. Each entity
should be evaluated separately.
 Periodicity Concept – an entity’s life can be
meaningfully subdivided into equal time periods
for reporting purposes.
 Stable Monetary unit Concept – the Philippine
peso is a reasonable unit of measure and that its
purchasing power is relatively stable.
GAAP usually depends on how well
it meets THREE CRITERIA
 to the extent that it results in information
that is meaningful and useful to those who
RELEVANCE need to know something about a certain
organization.

 to the extent that the resulting

information is not influenced by the
personal bias or judgment of those who
furnish it.
OBJECTIVITY  it connotes reliability and trustworthiness
 it connotes verifiability, which means that
there is some way of finding out whether the
information is correct.

 to the extent that it can be implemented

FEASIBILITY without undue complexity or cost.
 BASIC PRINCIPLES ON
FINANCIAL STATEMENTS

 OBJECTIVITY – accounting records and

statements are based on the most reliable
data.

 HISTORICAL COST – this principle states that

acquired assets should be recorded at their
actual cost and not at what management
thinks they are worth as at reporting date.
 BASIC PRINCIPLES ON
FINANCIAL STATEMENTS

 Revenue Recognition – revenue is to be

recognized in the accounting period when
goods are delivered or services are rendered or
performed.

 Expense Recognition – expenses should be

recognized in the accounting period in which
goods and services are used up to product
revenue and not when the entity pays for those
goods and services.
 BASIC PRINCIPLES ON
FINANCIAL STATEMENTS
 Adequate Disclosure – require that all relevant
information that would affect the user’s
understanding and assessment of the accounting
entity be disclosed in the financial statements.
Materiality – financial reporting is only concerned
with information that is significant enough to affect
evaluations and decisions.
 Consistency – the firms should use the same
accounting method from period to period to
achieve comparability over time within a single
enterprise.
ACCOUNTING CYCLE
 ACCOUNTING EQUATION

The most basic tool in accounting

The equation below presents the resources
controlled by the enterprise, the present
obligation of the enterprise and residual interest
in the assets
It states that assets must always equal liabilities
and owner’s equity

ASSETS = LIABILITES + OWNER’S EQUITY

Or
ASSETS = EQUITIES
Assets include anything owned or possessed by the
business which is capable of being expressed in terms
of money or possessing monetary values, and which,
consequently is available for the payment of the debts
of the business.

Equity include all the vested rights of person in the assets

of the business. It is classified into the following:
1. Equity of outsiders or amounts owing to persons
other that the owners of the business, technically
known as “liabilities”
2. Equity of owner, known in the accountant’s
language as “capital”
 ACCOUNTING EQUATION

ASSETS = LIABILITES + CAPITAL

Or
LIABILITIES
ASSETS = EQUITIES
CAPITAL
 RULES ON DEBITS AND CREDITS
THE DOUBLE-ENTRY SYSTEM

 Accounting is based on a double-entry system

which means that the dual effects of a business
transactions is recorded.
 A debit side entry must have a corresponding
credit side entry.
 Each transactions affects at least two
accounts.
 RULES ON DEBITS AND CREDITS
THE DOUBLE-ENTRY SYSTEM
• Debit means an entry to the left hand side of an
account. Entry on the left side of a double –
entry bookkeeping system that represents the
addition of an asset or expense or the reduction
to a liability or revenue account.
• Credit means an entry to the right hand side of
an account. Entry on the right side of a double –
entry bookkeeping system that represents the
reduction of an asset or expense or the addition
to a liability or revenue.
RULES ON DEBITS AND CREDITS
RULES ON DEBITS AND CREDITS
 T-ACCOUNT
is a graphic representation of a general
ledger account.
is a fundamental training tool in double
entry accounting, showing how one side of
an accounting transaction is reflected in
another account.
 NORMAL BALANCE OF AN ACCOUNT

refers to the side of an account – debit

or credit – where increases are recorded.
Assets, owner’s withdrawal and expense
account normally have debit balances.
 Liability, owner’s equity and income
accounts normally have credit balances.
 INCREASES RECORDED BY NORMAL
BALANCE

ACCOUNT DEBIT CREDIT DEBIT CREDIT

CATEGORY

Assets
. .
Liabilities
. .
Owner’s Equity:

Owner’s Capital
. .
Withdrawals
. .
Income
. .
Expenses
. .
RULES ON DEBITS AND CREDITS
 TYPES AND EFFECTS OF TRANSACTIONS
An asset account increases and
a corresponding claims Purchase of supplies on
1. SOURCE OF (liabilities or owner’s equity) 
ASSETS (SA) account.
account increases  Sold goods on cash

One asset account increases

2. EXCHANGE and another asset account
OF ASSETS Acquired equipment for
decreases. cash
(EA)

An asset account decreases and Payment of accounts

3. USE OF a corresponding claims payable
ASSETS (UA) (liabilities or equity) account Paid salaries to
decreases. employees
One claims (liabilities or
4. EXCHANGE owner’s equity) account
OF CLAIMS increases and another claims Received utilities bill but
(EC) (liabilities or owner’s equity) did not pay.
account decreases.