Basic

Accounting for
NonAccountants

Learning Objective
1. Describe the nature of a business and the
role and purpose of accounting in business
2. Describe the accounting concepts and
principles and constraints
3. State the accounting equation and define
each element of the equation.
4. Introduction to debit and credits
5. Introduction to the accounting process

What is a Business?
A business is an organization in which
basic resources (inputs), such as materials
and labor, are assembled and processed to
provide goods or services (outputs) to
customers.
The objective of most businesses is to
earn a profit.
Profit is the difference between the
amounts received from customers for
goods or services and the amounts
paid for the inputs used to provide
the goods or services.

The Role of Accounting in

Business
Accounting can be defined as an
information system that provides
reports to users about the economic
activities and condition of a business.

What is ACCOUNTING?
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 decision.
Accounting Standards Council

 Accounting is the
process of
Measuring
Interpreting
Communicating financial
information to support
internal and external
business decision making.

Purpose of Accounting
It gives you an excellent gauge of how well
your business is doing
Accounting also provides financial
information throughout the year so you
can test the success of your business
strategies and make course corrections to
ensure that you reach your year-end profit
goals.
Acccounting can become your best system
for managing your financial assets and
testing your business strategies

The Need for

Accounting

Managers, investors, and other internal groups

want the answers to two important questions:

How well did

the organization
perform?

Where does
the organization
stand?

Accountants answer these questions

with three major financial statements:

Income
statement

Balance
sheet

Statement of
cash flows

Users of Financial
Information

Accounting
Concepts and
Terminologies

Accounting Concepts: Underlying

Assumptions
ACCRUA
L

Income is recognized when earned

regardless of when received
Expense is recognized when incurred
regardless of when paid
The effects of transactions are recognized
when they occur
The business will continue in operational
existence for the foreseeable future
Financial statements should be prepared on
a going concern basis unless management
either intends to liquidate the enterprise or
to cease trading,
The business and its owner(s) are two
separate entities

GOING
CONCER
N
CONCEP
BUSINES
T
S ENTITY
CONCEP Any private and personal incomes and
expenses of the owner(s) should not be
T
treated as the incomes and expenses of
the business

Accounting Concepts: Underlying

Assumptions
TIME
PERIOD

The life of an entity is subdivided into

time periods which are of equal length
for the purpose of making financial
reports

Usually twelve months

MONETARYAssets, liabilities, capital, income and
expenses should be stated in terms of a
UNIT
unit of measure (Philippine Peso)
The purchasing power of the Peso is
stable/constant

Accounting Concepts: Business

Entities
Sole
Proprietorship A proprietorship is owned by one
individual.

They are easy and cheap to

organize and resources are limited
those of the
owner. to a
Partnership Ato
partnership
is similar
proprietorship except that it is owned
by two or more individuals.
Combines the skills and resources of
more than one person.
Corporation

A corporation is organized under

state statutes as a separate legal
taxable entity.

Accounting Concepts: Qualitative

Characteristics
Relevance The capacity of information to
influence a decision

Reliability The degree of confidence users place

upon the truthfulness of the

representations in the financial
statements
The quality of information that assures
users that the information is free from
error
and faithfully
Faithful
bias
Theand
actual
effects
of the represents
it purports
to represent
transaction
should
be properly
Representat what
accounted for and reported in the
ion
financial statements
Substance Transactions should be accounted
in accordance with their
over Form
substance in reality and not

Accounting Concepts: Qualitative

Characteristics
Neutrality Information in the Financial

Statements must be free from

bias
fairness
Conservatis Care and caution must be
exercised when dealing with
m or
uncertainties in the measurement
Prudence
process
The Revenues and profits are not
anticipated. Only realized profits
with reasonable certainty are
in the profit
andbe
loss
Completene recognized
Relevant information
must
account
presented in a way that facilitates
ss
understanding and avoids
erroneous implication

Accounting Concepts: Qualitative

Characteristics
Understandab Financial information must be
comprehensible or intelligible if it
ility
is to be useful

Comparabil
ity

Information must be comparable

with similar information of
previous periods or with
information of another entity

Accounting Concepts: Accounting

Constraints
TIMELINES
S

Information must be available or

communicated early enough when a
decision is to be made

COSTBENEFIT

The benefit derived from the information

should exceed the cost incurred in
obtaining the information

MATERIALI
TY

An item is material if knowledge of it

would affect or influence the decision of
the informed users of the financial
statements

RELEVANCE
vs
RELIABILITY

There is a tradeoff between relevance

(reporting information in a relevant
manner) and reliability (ensuring that the
information is reliable)

THE ACCOUNTING EQUATION

Assets

= Liabilities

The resources
owned by a
business

The rights of
creditors are the
debts of the
business

+ Equity

The rights of the

owners

Accounting Terminologies

TRANSACTI
ON

ACCOUN
T

a business event having a monetary

impact on the financial statements of a
business
It is recorded in the accounting records
of the business

A record in the general ledger

that is used to collect and store
similar information

Types of
Accounts
are valuable resources that
ASSET
ACCOUN are owned by a firm.
T
LIABILIT present obligations of the
Y firm.
ACCOUN
T EQUITY
ACCOU
NT

represents the owners'

residual interest in the assets
of the business.
Residual interest is another
name for owners' equity.

INCOME
ACCOUN
T

the payment you receive for your

time, services you provide, or the
use of your money
Examples include commissions, tips,
dividend income from stocks, and
interest income from bank accounts.

EXPENSE money you spend to

goods or
ACCOUNT purchase
services provided by

someone else
Examples include rent,
electricity, and light
expenses

CHART
OF
ACCOUN
TS

TACCOUNTS

a listing of the names of the

accounts that a company has
identified and made available for
recording transactions in its general
ledger

An informal term for a set of financial records that

use double-entry bookkeeping.
If a large letter T were drawn on the page, the
account title would appear just above the T, debits
would be listed under the top line of the T on the left
side and the credits would be listed under the top
line of the T on the right side

NORMA
L
BALANC
E
DEBI
T
CREDI
T

The sum of the increases in an

account is usually equal to or
greater than the sum of the
decreases in the account. Thus,
the normal balance of an account
is either a debit or a credit
depending on whether increases
in the account are recorded as
debits or credits.

An accounting entry that

results in either an increase in
assets or a decrease in equity
or liabilities on a company's
balance sheet or in your bank
account.
An accounting entry that either
decreases assets or increases
liabilities and equity on the
company's balance sheet.

Debits and Credits

You just need to understand that debit and credit are
two actions that are opposite in nature.
An element (account) that is effected by an accounting
transaction is either debited or credited (with an
amount that is reflected in the transaction) depending
on the nature of the account and the rule applicable to
it.
Entries to the left side of the an account are debits
(DR), and accounts with left sided balances (asset
accounts and expense accounts) are debit accounts.
Entries to the right side of the an account are credits
(CR), and accounts with right sided balances (liability
accounts, owners' equity accounts, and revenue and
profit accounts) are credit accounts. Understanding
debit and credit is essential for bookkeeping and
analysis of balance sheets.

Debit and Credit Rules

DEBIT

CREDIT

An accounting
entry that:

An accounting
entry that:

Increases an asset
account
Increases an
expense account
Decreases a
liability account
Decreases a
revenue account

Decreases an
asset account
Decreases an
expense account
Increases a
liability account
Increases a
revenue account

Summary of Debits and

Credits

The Accounting
Process

The Accounting Process

Systematic recording of the
financial operations of a
business or of an individual
Before an accounting system
can be started, the owner of a
business must find:
What the business owns (assets)
What the business owes (liabilities)
What the business is worth (equity)

Single-entry vs Double-entry
Single One account entry for each
transaction
Double Two account entries for
each transaction
One debit and one credit

Hybrid systems
May not match income with expenses
May not distinguish cash, check, or credit

Double-entry Accounting
A process by which accounting transactions are
entered
each individual transaction always has an offsetting
transaction.
double-entry bookkeeping gets its name because
you enter all transactions twice
One account will receive a "debit" entry, meaning
the amount will be entered on the left side of that
account. Another account will receive a "credit"
entry, meaning the amount will be entered on the
right side of that account. The initial challenge with
double-entry is to know which account should be
debited and which account should be credited.

Rules of Debit and Credit Normal Balances of

Accounts

Accounting Methods
Accounting methods dictate how the
company'stransactions are recorded in the
company's financial books
Cash-basis accounting companies record
expenses in financial accounts when the cash is
actually laid out, and they bookrevenuewhen they
actually hold the cash
Accrual accounting companies record revenue
when the actual transaction is completed (such as
the completion of work specified in a contract
agreement between the company and its customer),
not when they receive the cash. Companies record
any expenses when they're incurred, even if they
have not paid for the supplies yet

Accounting Process