Fundamentals of Accounting
1st Semester – A.Y. 2015-2016
Business- is an organization engaged in the trade of goods,
services, or both to consumers.
 Main goal is to earn profit.
Two kinds:
 Profit-oriented
 Non-profit business- uses surplus revenues to achieve
its goals rather than to distribute them as dividends to
owners
Forms of Business Enterprises:
 Service Business- offers services and generates a profit
by charging fees
 Merchandising Business- trading business; buys goods
and sells them in their original form
 Manufacturing Business- buys raw materials and
converts these into finished products
Types of Business Ownership:
 Sole Proprietorship
- has one owner called proprietor
- most basic legal form of business
- less complex business transactions
- easiest to form
- minimal regulatory requirements
- decision can be made and implemented
faster
- proprietor enjoys all the profits earned
- limited ability to raise capital
- can only expand in proportion
- proprietor doesn’t receive the benefit of
second opinion
- one bears the risks and losses
- unlimited personal liability
 Partnership
- association of two or more persons
- governed by the Civil Code of the Philippines
- easier to organize than corporation
- burden of managing the operations is shared
- more ideas are exchanged and brainstormed
- can raise more capital than sole proprietorship
- may result to disagreements
- may be dissolved by agreement, withdrawal,
death, incapacity of partner
- unlimited personal liability
 Corporation
- most complex form
- Corporation Coded defines this as an artificial
being created by law
- Greatest capacity to raise capital
- May exist for a period not longer than 50 years,
subject to renewal
- Limited liability
- Cost forming and managing a corporation is
high
- Subject to greater scrutiny, regulation, control
and supervision by the gov’t
- Management is more complex
- Higher income tax rate
- Corporation Code of the Philippines and
Articles of Incorporation
 Stockholder/shareholder- owner of corporation
 Incorporators- originally formed the business
- needs to have 5-15 owners
 Corporators- after the establishment
 Dividends- income that will be divided among
owners
 Board of Directors- decision making committee
- elected from stockholders
- 1 vote = 1 share
Financial Information- summary of all the transactions of the
business over a period of time
Accounting- processes raw data and converts them into
meaningful information that will be useful for decision-making
- it is where the most important financial
statement comes from
* Basic purpose of accounting is to supply financial information
to users to help them make informed judgments and better
decisions; to provide quantitative financial information.
Accounting provides the ff. information:
 resources and obligations of business
 interest being paid
 cash inflows and outflows
 Management sees if the company has other resources that
has no value
 Management analyzes the existing debts of the business to
check if it could handle additional debt
 Cash inflows and outflows are analyzed to see other possible
sources of financing
Accounting- is the language used to communicate financial
information to interested parties
- includes interpretation of information recorder
under bookkeeping
- can only be done by certified public
accountants
Bookkeeping- is the procedural or mechanical aspect of
accounting
- it involves the set-up, update and
maintenance of accounting records
- may done by properly trained non-
accountants
Philippine Accountancy Act of 2004 or Republic Act No. 9298
 R.A. 9298 created the Professional Regulatory
Board of Accountancy to enforce the
provisions of the Phil. Accountancy Act.
 The board is composed of 7 members which
are appointed by the Phil. President
Sectors of Accounting Practice:
 Public Practice
- includes individual practitioners, small
accounting firms, medium sized and
multinational accounting firms
Services provided:
 Auditing- most common service
- independent examination of financial
statements
 Tax Services- preparation of tax returns to
various clients
 Management Consulting Services- providing
advisory/consulting services to clients on matters
of accounting
 Commerce and Industry- accountants are
employed in positions like vp for finance, chief
accountant
 Controller or comptroller is the highest accounting
officer in a business org
 Education- accountants are employed as
professors, reviewer or researchers
 Government- hired as staff, auditor, budget
officer, or consultants in government units
Friar Luca Pacioli- Father of Double-Entry Bookkeeping
- wrote a book containing double-entry bookkeeping
system
Summa de Arithmetica, Geometria, Proportioni et
Proportionalita (Everything about Arithmetic, Geometry,
Proportions and Proportionality)- summary of existing
mathematical knowledge during that time
Fields of Accounting:
 Financial Accounting- presentation and
presentation of general-purpose financial
statements with the aim of meeting most of the
needs of external users
 Management Accounting- financial reporting
for internal users
 Cost Accounting- measure’s a business’s costs
to help management in controlling expenses
 Tax Accounting- compliance with the tax laws
and minimizing the company’s tax bill through
legal means
 Government Accounting- proper custody,
disposition and accounting for public funds
Generally Accepted Accounting Principles
GAAP- comprises the conventions, rules, processes, principles,
standards, and underlying assumptions that are used in
preparing financial statements.
* Accounting principles continue to evolve as a response to the
changes in the financial information needs of business
stakeholders.
Financial Reporting Standards Council (FRSC)- official
accounting standard setting body in the Philippines
- has a Chairman and 14 representatives; 15
members
Philippine Financial Reporting Standards (PFRS) is based on
International Financial Reporting Standards (IFRS) issued by
International Accounting Standards (IASB) Board.
Basic Accounting Concepts:
 Business entity principle
- business is considered distinct and separate
from the owners of the business
- Accounting entity is an organization that is
accounted for as a separate economic unit.
 Dual-Effect of Business Transactions
- for every value received, there must be a
value given up
- Every transaction os recorded by entries to two
or more accounts and the total amount of the
left side of the accounting equation is always
equal to the total amount of the right side of
the equation.
 Matching Principle
- Transactions affecting both revenues and
expenses should be recognized in the same
accounting period
 Accrual Basis
- Revenue and expenses are recorded when
they occur and not when the cash is received
or paid out
- Cash Basis- income is recognized when the
cash is received, and expenses are recognized
when cash is paid
 Stable Monetary Unit
- it must be expressed in terms of a uniform
means of measurement
 Periodicity
- operating life of an enterprise may be
conveniently divided into time periods of equal
length called accounting periods
- Accounting Period- time interval by which the
company summarizes results of operation and
makes the financial statements
- Calendar Period- form Jan to Dec
- Fiscal Period- any moth to one year thereafter
- Interim Financial Statements- less than one
year
 Going Concern
- Enterprise is a going concern and will continue
in operation for the foreseeable future
 General Purpose
- For the purpose of common interests of all users
Conceptual Framework- is a statement generally accepted
theoretical principles which form the frame of reference for a
particular field of study
- emphasizes existing and potential investors,
lenders, and other creditors as the primary
users
Primary Users:
 Investors- providers of risk capital
 Lenders
 Creditors
Secondary Users:
 Public
 Employees
 Gov’t and their agencies
 Customers
Economic resources- entity’s assets
Economic claims- entity’s liabilities
Financial Statements- are the means by which the information
accumulated in and processed by the financial accounting is
communicated to users on a periodic basis
 - aim to provide information about the financial
position, financial performance and cash flows
of an entity
- are the end-product of the financial
accounting process
Five Basic Financial Statements:
 Statement of Comprehensive Income
 Statement of Financial Position
 Statement of Cash Flows
 Statement of Equity or Capital
 Notes to the Financial Statements
Liquidity- is the availability of cash in the near future to cover
currently maturing liabilities
Solvency- is the availability of cash over the long term to meet
obligations when they fall due
Capacity for Adaptation- is the ability of the enterprise to use its
available cash for unexpected requirements and investment
opportunities
Performance or profitability- whether a company is able to
generate profit or incur a loss
 Statement of Comprehensive Income/ Income Statement
- measures a company’s financial performance
over a specific accounting period
- revenues minus expense
- may contain ‘extraordinary’ items
 Statement of Financial Position/ Balance Sheet
 Statement of Cash Flows
- inflows and outflows in business
- changes in cash balance
 Statement of Equity
- Changes in capital
 Notes to the Financial Statement
- narrative form
- contains information that cannot be presented
in other fin. Statements
- explanation of other items
- breakdown of aggregated amounts
Qualitative Characteristics of Financial Information:
 Relevance- influences the economic decisions
of users
 Predictive Value- if it can be used as an input to
processes employed by users to predict future
outcomes
 Confirmatory- if it confirms or changes previous
evaluations or earlier expectations of a financial
statement user
Materiality- if omitting or misstating it could influence the
decisions of users of financial information about specific
entity
 Faithful Representation- the actual effects of
transactions should be properly accounted for
and reflected in the financial statements
 Complete- all information is being depicted
 Neutral- without bias
 Free form error
 Comparability- enables users to identify and
understand similarities and differences of items
 Verifiability- means that different and
knowledgeable and independent observers
could reach a consensus that the depiction of
a particular event is faithfully represented
 Timeliness- information is available to decision-
makers in time to be capable of influencing
their decisions
 Understandability- made understandable by
classifying, characterizing and presenting it
clearly and concisely
 Cost Constraint- the cost of producing
information must be justified by the benefits
that it provides
 Underlying Assumption- assumption that the
reporting entity Is a going concern and will
continue in operation for the foreseeable
future
Elements of Financial Statements:
 Assets- resources controlled by the enterprise
 Cash
 Accounts Receivable
 Supplies on hand
 Merchandise inventory
 Property, Plant, and Equipment
 Liabilities- present obligations of the entity
 Accounts Payable
 Salaries Payable
 Utilities Payable
 Advances form Customers
 Loans Payable
 Equity- claims of the business
 Income- increases in the economic benefits during
the accounting period in the form of inflows
 Revenue- arises in the course of the ordinary
activities of an enterprise
 Gain- other items that do not meet the
definition of income
 Expenses- decreases in economic benefits in the form
of outflows
 Losses- other items that do not meet the
definition of expenses
Measurement- is the process of determining the monetary
amounts
 Historical Cost- amount paid at the time purchased
 Current Cost- amount you will pay if you are going to
purchase now
 Realizable Value- amount recoverable
 Present Value- amount of discounted value; future to present
Business Transaction- an economic activity that causes changes
in the elements of the financial statements
Internal Transactions- manufacture of goods for sale and
incurrence of casualty losses
External Transactions- sale of goods to customers
Business/ Source Documents- original record of business
transactions
 Sales Invoice- to evidence a sale for cash
 Charge/Sales Invoice- to evidence a sale
where goods are sold on credit
 Delivery Receipt- to evidence
acceptance/receipt of goods delivered to
customer
 Official Receipt- to evidence receipt of cash
 Vendor’s invoice- a bill for goods purchased
 Purchase Requisition Forms- employee’s
request for the purchase of needed
goods/supplies
 IOUs- note acknowledging indebtedness in an
enterprise
 Promissory Notes- unconditional promise in
writing
 Bank Statements- a summary of all financial
transactions occurring over a certain period on
a bank account
 Minutes of Meetings- written record of meeting
 Business Letters- business correspondence
 Job time tickets- time spent working at a
certain job
 Certificate of Stocks- evidencing ownership of
shares
 Time records/ timesheets- detailed record
showing time in and out of employees
 Check voucher- to facilitate the authorization
of cash disbursement transactions
 Journal voucher- transactions and journal
entries for which there is no other source
document
Accounting equation- mathematical expression showing the
relationship between and among the elements of the financial
statements.
- it emphasizes the double-entry bookkeeping
system in accounting
Basic accounting equation: Simple Journal Entry- 1 debit and 1 credit
ASSETS = LIABILITIES + EQUITY or Compound Journal Entry- otherwise
ASSETS = LIABILITIES + [EQUITY + REVENUE – EXPENSE]
Chart of Accounts- list of all accounts of the business and their
Accounts- basic summary device of accounting respective account numbers
T-Account- a simple representation of the account that
resembles like letter T Posting- process of transferring date from journal to ledger
Ledger- book of final entry
Rules of Debit and Credit: General Ledger- basic form
 For every debit there is corresponding credit
 Each transaction affects at least 2 accounts Contra asset account- deducted; “a”
 Total debits should equal total credits
 Debit is left: Credit is right Trial balance- list of all accounts and their balances
- commonly taken every month-end for
Account Balance- difference between the total debits and checking purpose
total credits Trial balance- open account
Normal Balance- balance on which side increases are recorded Close account- zero balance

ACCOUNTING CYCLE: Trial balance errors- makes the trial balance not equal
1. Analyzing business transactions through source Accounting errors- not detected in trial balance
documents.
2. Journalizing or the recording of transactions in a journal. Types of Errors:
3. Posting or transferring of the entries from the journal to  Transposition- figures are interchanged
the ledger.  Transplacement- error in placing the decimal point or
4. Preparing the trial balance. zero
5. Preparing a 10-column worksheet and making the  Error of omission- transaction is not recorded
necessary adjusting journal entries. (Optional Step)
6. Preparing financial statements based on adjusted Adjusting Journal Entries
account balances.
7. Recording adjusting entries to the journal and posting the Accrued Expenses- already incurred but not yet paid
same to the ledger. -unrecorded expenses
8. Recording and posting of closing entries. ??? Expense xxx
9. Ruling and balancing real and nominal accounts. ??? Payable xxx
10. Preparing a post-closing trial balance.
11. Preparing reversing entries. (Optional Step) Accrued Income- income already earned but not yet received
- unrecorded income
Journalizing- process of systematically and chronologically ??? receivable xxx
recording transactions in the journal ??? income xxx
Journal- book of original entry
General Journal- most basic form of journal
Unearned/Deferred Income- income received but not yet Allowance Method- updated yearly
earned Bad Debts Expense xxx
- a liability Allowance for bad debts xxx
Liability Method:
Unearned Income xxx Accrued Interest- for interest-bearing notes
??? Income xxx
Accrued interest= principal X rate X time/days or months
Income Method:
??? Income xxx Accrued Income (creditor)- notes receivable
Unearned Income xxx Interest Receivable xxx
Interest Income xxx
Prepaid expense- already paid but not yet earned
Asset Method: Accrued Expense (debtor)- notes payable
??? Expense xxx Interest Expense xxx
Prepaid ??? xxx Interest Payable xxx

Expense Method:
Prepaid ??? xxx Worksheet- columnar device to facilitate the preparation of the
??? Expense xxx financial statements by making it easier to transfer date from
the trial balance to the financial statements
Depreciation- value of asset is considered used up (expense) for
the year Cross-footing- adding figures for the same account balance
- unrecorded expense and subtracting figures for the different account balance
Straight-line method:
𝐶𝑜𝑠𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 Nominal Account- expenses and revenues
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒 - temporary account because zero balance in
or the end of the period
- includes Drawing
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = (𝐶𝑜𝑠𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒) × 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 Real Account- Assets, liabilities, and capital

Depreciation Expense xxx Income Statement:

Accumulated Dep xxx Dr > Cr Net loss
Dr < Cr Net Income
Bad Debts/Uncollectible/Doubtful
- accounts receivable that is uncollectible Balance Sheet:
- expense Dr > Cr Net Income
Direct write-off method- if the company is sure that customer Cr < Cr Net Loss
will not pay
Bad Debts Expense xxx
Accounts Receivable xxx