Professional Documents
Culture Documents
ACCORDING TO ACTIVITIES
FORM OF BUSINESS NORMAL OPERATING SYSTEM
SERVICE
Provide services
TRADING / MERCHANDISING
Buy merchandise
MANUFACTURING
Buy raw materials Process into finished goods
*** Similarities of the 3 Normal Operating Cycles: their aim is to gain profit in the end.
ACCORDING TO OWNERSHIP
FORM OF BUSINESS NO. OF OWNER/S NAME OF OWNER/S
SOLE PROPRIETORSHIP 1 Owner
PARTNERSHIP 2 or more Partners
CORPORATION 5 15 members Stockholders (stock corporation)
Shareholders (non-stock corporation)
ACCOUNTING
Definition:
1. It is the language of business
- It has its own terminologies
- Information are useful for decision-making
2. It is a service activity
3. It is an art of recording, classifying, and summarizing in significant manner and in terms of money transactions or events and interpreting
the results thereof.
4 Phases of Accounting
RECORDING journalizing
BOOKKEEPING
CLASSIFYING Posting ledgers
ACCOUNTING
SUMMARIZING Financial statements, trial balance
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INTERPRETING
Bookkeeping vs. Accounting
BOOKKEPING ACCOUNTING
- Involves only the recording of - involves the entire process of
economic events identifying, recording &
- just a part of the accounting communicating economic
process events
LIQUIDITY Ability to pay short term obligations using short term resources
/ assets (easily converted to cash)
many assets in terms of cash
SOLVENCY many assets in terms of equipments / buildings
BANKRUPCY process of doing insolvency
PRINCIPLE DESCRIPTION
ENTITY Views the business as separate and distinct from the owner
You cant utilize the money of the business for personal use
Entity anything that has an existence
most basic principle
Record transactions related to the business only
2
MONETARY Recorded in terms of a unit measure (money)
Money is stable and is not affected by inflations & fluctuations
COST Assets are initially recorded at their cost (acquisition, historical, purchase)
Record the amount you have paid for
Ex: Delivery charge (incidental cost) is added, everything that you have paid for acquiring
the product)
OBJECTIVITY / Based on objective evidence (unbiased)
RELIABILITY There should be a proof of data
Ex: Official Receipts, Invoices
GOING Assumption that the business is going to operate indefinitely (as long as it can), unless there
CONCERN is evidence to the contrary
It is important because potential investors will invest on your business if they see that they
can get benefits for a long time
So you will know when to enter transactions with customers & suppliers
MATERIALITY An item is considered to be material if it can significantly affect decisions of users
Ex: A waste basket that costs Php 50 is not significant for big entities but it is to smaller ones.
DISCLOSURE Report all relevant and material information notes on a financial statement
Ex: impending lawsuit (case in court)
TIME PERIOD Indefinite life of business is divided into short time intervals known as ACCOUNTING
PERIOD.
REPORT FORM Assets, Liabilities and Owners Equity are presented on a downward sequence.
More formal way of presenting data
ASSETS
_____________
_____________
_____________
LIABILITIES & OWNERS EQUITY
Liabilities
_____________
_____________
_____________
Owners Equity
_____________
_____________
_____________
ACCOUNT FORM Presents Assets on the left side and Liabilities & Owners Equity on the right side
(T-accounts : Debit / Credit)
A = L + OE
DEBIT CREDIT
ASSETS Current Assets Cash and cash equivalents -most liquid asset
-money in the form of bills or coins
-Resources/Properties -Assets that can be Ex: cash equivalent money invested in banks but gets it within
owned and controlled converted into cash 30-60 days
by the business within one year Investments in Trading -short-term investments in stocks or bonds of other business
Securities Ex: treasury bills investments that matures beyond 90 days
-Economic resources -According to the -placed in govt so that inflation/fluctuation wont be felt that
(used for production & order of liquidity much
consumption) of the -you can sell it at a higher price in the future
business that have Trade and other receivable Ex: Accounts Receivable allows customer to pay next time
Notes Receivable supported by a promissory note
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probable future Interest Receivable (Accrued Interest Receivable) comes with
benefits Notes Receivable
Advances to Employees vale
Inventory -stocks not sold
Prepaid Expenses -expenses already paid but not yet incurred
Ex: Supplies
Prepaid Insurance
Prepaid Rent
Non-Current Assets Property, plant, and -is tangible
equipment -has an estimated useful life beyond one year
- Assets that can be -subject to depreciation, except land (usually appreciates in
converted into cash value)
beyond one year -used in regular business operations (not for sale)
Ex: land
Building
Machinery
Office equipment
Furniture & Fixtures
Transportation Equipments transports people
Delivery Equipments transports goods
CONTRA-ASSET AMOUNTS:
*Accumulated Depreciation deducted from asset to get net
value
*Allowance for Doubtful Accounts deducted from Accounts
Receivable; estimated amount that is not going to be paid by
client
LIABILITIES Current Liabilities Trade and other payables Ex: Accounts Payable
Notes Payable
-External claims Interest Payable
against assets Salaries Payable
Utilities Payable
-Economic obligations Rent Payable
of the company Taxes & Licenses Payable
Accrued____Expense
Unearned____Expense
Current position of non- -installment basis
current liabilities
Non-Current Ex: Mortgage Payable collateral real-estate/shuttle
Liabilities mortgage
Notes Payable (due in 2 or more years)
Bonds Payable issued to the lender of business
Loans Payable
Profs Extra Notes:
REVENUE EARNED REVENUE NOT EARNED
CASH COLLECTED Revenue Unearned Revenue
(LIABILITY)
CASH NOT Accrued Income X
COLLECTED (Receivable)
(ASSET)
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Withdrawals -may be temporary (Owner, Drawing compensated by net loss / income) or permanent (You
-Owners claims on the dont intend to give it back)
asset Net Loss / Income -presented in Income Statement
-results of operation
DECREASE in OE INCREASE in OE
Expenses Capital
Drawing Revenue
TRANSACTIONS ANALYSIS
Income Statement
NATURAL FORM Costs and expenses are classified according to their nature
Normally used by service business
Combine account titles with the same nature
Ex: Combine light, water, and electricity expenses in Utilities Expense
FUNCTIONAL FORM Costs and expenses are classified according to their function
Normally used by merchandising & manufacturing business
Expenses / Income of the same nature are separated
A = L + OE
(+) (+)
It should affect the OE positively
(+) Asset; (-) Asset is not included it is called GAIN
Distinguish:
Revenue gross / total; includes day to day operations only
Income net; Revenue Expenses = (+)
Profit Net Income (final income)
Gain Non-operating income
Ex: Gained cash because you sold your office equipment
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EXPENSES Gross decreases in asset or gross increases in liabilities as a result of
undertaking the normal operations of the business
Distinguish:
Expense gross / total; includes day to day operation
Loss net; Revenue Expenses = (-)
Cost amount of money you paid for
Expenditure can be an expense or asset
NET INCOME / LOSS Revenue > Expenses = Net Income
Expenses < Revenue = Net Loss
ACCOUNTING CYCLE
1. Analyzing business transactions from source documents (receipts & Invoices)
2. Journalyzing
- recording in a journal (book of original entries)
2 Kinds of Journal
a. General Journal all transactions
b. Special Journal 1 book for each
3. Posting to the Ledger
- transferring of accounts from journal to ledger (book of final entries)
2 Kinds of Ledger
a. General Ledger
b. Subsidiary Ledger
4. Preparing Trial Balance
- Report which tells you that you are balanced
- Report that shows that total debit is equal to total credit
- Prepared monthly
5. Journalyzing & Posting Adjusting Entries
6. Preparing Financial Statements
- Prepared annually
7. Journalyzing & Posting Closing Entries
8. Preparing a Post-closing Trial Balance
- Other accounts are already zero
9. Journalyzing & Posting Reversing Entries
- Dont accumulate income & expenses for the next year
- Non-current assets (ex: Office equipments) are cumulative
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Journal Entries (Format)
1. ASSETS
Current Assets
Non-Current Assets
2. LIABILITIES
Current Liabilities
Non-Current Liabilities
3. CAPITAL
4. DRAWING
5. REVENUE
6. EXPENSES
Chart of Accounts listing of all account titles and account numbers used by the business
COMPANY NAME
Trial Balance
Month x, 20xx
Dr Cr
Assets Php xxx
Liabilities Php xxx
Capital xxx
Drawing xxx
Revenue xxx
Expenses xxx
Total Php xxx Php xxx
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INDIRECT METHOD - Starts with net income and add
back all non-cash expenses to get
net income cash basis