ACCOUNTING 1 MATERIALS (OVERVIEW)

ROLE AND PURPOSE OF ACCOUNTING IN BUSINESS

The role and purpose of accounting is to provide useful and timely information
about the financial activities of an individual, business or other organization.
In addition, accounting provides information to other stakeholders to use in
assessing the economic performance and condition of the business.
WHY STUDY ACCOUNTING?
In order to appreciate and understand the financial reports of the business,
one should have an understanding of how data are gathered and recorded. All
these understandings are gained in the study of accounting. Accounting can
also be ones profession a work which is interesting and highly rewarding.
WHAT IS ACCOUNTING?
ACCOUNTING is a service activity whose function is to provide quantitative
information, primarily financial in nature, about economic entities, that is
intended to be useful in making economic decision.
In general sense,
Accounting is an information system that provides reports to stakeholders
about economic activities and condition of a business.
The Committee on Terminology, American Institute of Accountants defined
ACCOUNTING as 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 financial character and interpreting the result thereof.
ACCOUNTING is an art.
It is the language of business.
Through the
accounting data prepared the business communicates to the different
interested parties the results of its operation and its financial condition. Aside
from this, the accountants opinion and estimation are needed in preparing
accounting data and reports. Accounting, however, is not only an art but also
a science in a way there are accounting principles that serve as guide in
accomplishing data and preparing reports.
USERS OF ACCOUNTING INFORMATION
USERS
OWNERS-Present
and
prospective
investors
MANAGEMENT or MANAGERS May or
may own the business
CREDITORS-

Present

and

INFORMATION
Firms
profitability
and
current
financial condition.
Detailed
up-to-date
information
about the business to measure
performance.
potential Firms ability to pay bills/obligations
1

creditors

on time so they can decide whether

or not to extend credit.
GOVERNMENT - National and Local To determine taxes that must be paid
Government Units
and for purposes of regulation.
OTHERS Employees, customers, Accounting information that affects
Financial Analyst, Stock Exchanges, their particular interest relative to
Trade Association etc.
the financial condition and operating
performance.
FIELDS OF ACCOUNTING
Accounting has the following fields in which an accountant finds himself
employed:
PUBLIC ACCOUNTING
-it is a professional service rendered
by a CPA and his employees to the
public for a fee.
Auditing
Management Advisory Services
Taxation or Tax Services

PRIVATE ACCOUNTING
-it is an accounting job done in
private business enterprises.
General Accounting
Cost Accounting
Budgeting
Internal Auditing
Government Accounting
Accounting Education
International Accounting
Social Accounting

MAJOR AREAS OF ACCOUNTING

1. FINANCIAL
ACCOUNTING

focuses
on
the
development
and
communication of financial information for external users.
2. MANAGEMENT ACCOUNTING is concerned primarily with financial
reporting for internal users. Internal users, especially management, have
control over the accounting system and can specify precisely what
information is needed and how the information is to be reported.
3. GOVERNMENT ACCOUNTING focuses on the accounting development and
communication of financial affairs of governmental agencies.
BUSINESS ORGANIZATIONS can be classified into two (1) according to
ownership and (2) according to the nature of business.
TYPE OF OWNERSHIP STRUCTURES:
1. SINGLE OR SOLE PROPRIETORSHIP is a business that is owned by a
single individual.
2

2. PARTNERSHIP is a business that is owned by two or more individuals.

3. CORPORATION is a business that is owned by its shareholders and is
organized under operation of law that has a separate and legal entity.
ADVANTAGES AND DISADVANTAGES:
SINGLE
PROPRIETORSHIP
One owner

Owner assumes all

risks
Owner makes all
decisions

PARTNERSHIP

Two or more
partner
Partners
share
risks
Partners
may
disagree on how to
run business

CORPORATION
Shareholders
Shareholders have
limited risks
Shareholders may
have
a
little
influence
on
business decision.

TYPE OF BUSINESSES:
1. SERVICE BUSINESS this provides services to customers like professional
services,
transportation,
entertainment,
financial
and
telecommunications.
2. MERCHANDISING BUSINESS this purchase products from other
businesses and sell them to customers.
3. MANUFACTURING BUSINESS this converts materials, labor and overhead
into finished products that are sold to customers.
BASIC ELEMENTS OF ACCOUNTING:
BALANCE SHEET (Financial Condition):
1. ASSETS economic resources of value that is owned by the business.
Examples of asset accounts that are reported on a company's balance
sheet include:
Cash
Petty Cash
Temporary Investments
Accounts Receivable
Inventory
Supplies
Prepaid Insurance
Land
Machinery
Buildings
Equipment
Goodwill
Furniture
3

Usually asset accounts will have debit balances.

Contra assets are asset accounts with credit balances. (A credit balance in an
asset account is contraryor contrato an asset account's usual debit
balance.) Examples of contra asset accounts include:
Allowance for Doubtful Accounts or Bad Debts
Accumulated Depreciation-Machinery
Accumulated Depreciation-Buildings
Accumulated Depreciation-Equipment
2. LIABILITIES economic or legal obligations that a business owes to other
businesses or individuals.
Examples of liability accounts reported on a company's balance sheet
include:
Notes Payable
Accounts Payable
Salaries Payable
Wages Payable
Interest Payable
Unpaid (Accrued) Expenses Payable
Income Taxes Payable
Notes Payable
Warranty Liability
Lawsuits Payable
Unearned Revenues
Bonds Payable
3. OWNERS EQUITY is the owners interest in, claim to the assets of a
business. It is the difference between the amount of assets and amount
of liabilities.
"Owner's Equity" is the words used on the balance sheet when the company is

a sole proprietorship. If the company is a corporation, the words Stockholders'

Equity is used instead of Owner's Equity. An example of an owner's equity
account is Mary Smith, Capital (where Mary Smith is the owner of the sole
proprietorship). Examples of stockholders' equity accounts include:

Common Stock

Preferred Stock

Paid-in Capital in Excess of Par Value

Paid-in Capital from Treasury Stock

Retained Earnings
4

Both owner's equity and stockholders' equity accounts will normally have
credit balances.
Contra owner's equity accounts are a category of owner equity accounts with
debit balances. (A debit balance in an owner's equity account is contraryor
contrato an owner's equity account's usual credit balance.) An example of a
contra owner's equity account is Mary Smith, Drawing (where Mary Smith is
the owner of the sole proprietorship). An example of a contra stockholders'
equity account is Treasury Stock.
INCOME STATEMENT (RESULTS OF OPERATIONS):
1. REVENUES inflows of assets resulting from the sale of goods or
services. Revenues increase owners equity.
2. EXPENSES outflows of assets resulting from cash spent or liability
incurred in order to produce revenue. Expenses decrease owners
equity.
3. NET INCOME (LOSS) the excess (deficit) of revenue over expenses for
an accounting period. Net income increases owners equity while net
loss decreases owners equity.
THE ACCOUNTING PROCESS
Accounting is a measurement and communication process designed to provide
useful and timely financial information.
FOUR PHASES OF ACCOUNTING
Based on the definition, accounting has 4 phases:
1. RECORDING this is technically called bookkeeping.
In this phase,
business transactions are recorded systematically and chronologically in
the proper accounting books. The data that we are record in the
accounting books are called transactions.
Transactions are the
economics activities of the firm.
2. CLASSIFYING in this phase, items are sorted and grouped. Similar items
are classified under the same name. They may be classified as asset
accounts, liability accounts, capital accounts, revenue accounts and
expense accounts.
This classification is useful to the needs of
management.
3. SUMMARIZING after each accounting period, data recorded are
summarized through financial statements. These reports are submitted
to the management at the end of accounting period or as the need arises.
4. INTERPRETING usually, due to the technicality of accounting reports,
the accountant interpretation on the financial statement is needed. In
this case, analysis reports are submitted together with the financial
statements.
BASIC ACCOUNTING EQUATION
5

The accounting equation (or basic accounting equation) offers us a simple way
to understand how these three amounts relate to each other. The accounting
equation for a sole proprietorship is:

The accounting equation for a corporation is:

The accounting equation must always balance. The amount on the left side of
the equation should always equals on the right side of the equation.
FINANCIAL STATEMENTS are accounting reports that provide the financial
information of the transactions that have been recorded and summarized. The
principal financial statements of a single proprietorship are:
INCOME STATEMENT is a summary of the revenue and expenses for a specific
period of time such as a month or a year.
STATEMENT OF OWNERS EQUITY - is a summary of the changes in owners
equity that have occurred during a specific period of time, such as a month or
a year.
BALANCE SHEET is a list of assets, liabilities and owners equity as of specific
date at the end of the month or year.
STATEMENT OF CASH FLOWS is a summary of cash inflows and cash outflows
for a specific period of time, such as a month or a year.
DOUBLE-ENTRY ACCOUNTING is a record keeping system in which each
business transactions affects at least two accounts.
AN ACCOUNT is the record used to classify and store information about
increases and decreases in an item.
THE T ACCOUNT so called because of its T shape, is used to show the increase
or decrease in an account to analyse the parts of transactions.
Accountants and bookkeepers often use T-accounts as a visual aid for seeing
the effect of the debit and credit on the two (or more) accounts.
We will begin with two T-accounts: Cash and Notes Payable.

The T account has a top, a left side, and a right side. On the top of the T is
the title of the account. The left side of the T account is always used for debit
amounts. The right side of the T account is always used for credit amounts.
TRIAL BALANCE
After all transactions have been entered in the appropriate T accounts, each
account must be totalled to determine the balance. The account balances are
ruled (double lined) to make a distinction and would make an easy reference
when you prepare a trial balance.
RULES OF DEBIT AND CREDIT:
Debits and credits are used to record the increases and decreases en each
account affected by a business transaction. The rules of debit and credit vary
according to whether an account is classified as an asset, liability or an
owners equity.
RULES FOR ASSET ACCOUNTS:
1. An asset account is increased (+) on the debit side.
2. An asset account is decreased (-) on the credit side.
3. The normal balance for an asset account is a debit balance.
RULES FOR LIABILITY AND OWNERS EQUITY ACCOUNTS:
1. The liability and capital accounts are increased (+) on the credit side.
2. The liability and capital accounts are decreased (-) on the debit side.
3. The normal balance for the liability and capital accounts is a credit
balance.
7

RECORDING OF BUSINESS TRANSACTIONS:

ACCOUNTING CYCLE is the complete series of steps used to account for a
businesss financial transactions during a fiscal period.
BUSINESS TRANSACTION FLOW
Source
Journal
Financial
Documents
to
Entries
to
Statements

Ledger
to

Trial
Accounts

to

Balance

SOURCE DOCUMENT is a paper prepared s evidence to support a business

transaction. (ex. Invoices, receipts, memorandums, deposit slips, check stubs,
cash register tapes and payroll time cards).
JOURNAL is called a book of original entry. It is a place where all transactions
initially recorded in chronological order of the day to day transactions. A twocolumn journal (general journal) is an all purpose journal which can be used
by a business having simple operations and limited transaction. The process
of recording a business transaction in a journal is called journalizing.
CHART OF ACCOUNTS is a list of all accounts and their account (code)
numbers used for journalizing business transaction.
LEDGER is a book of final entry. It is a book or file with the business entire
collection of account records also referred to as general ledger.
TRIAL BALANCE is a listing of all accounts in the general ledger and the sum
of debit and credit amounts of their balances.