FINANCIAL ACCOUNTING and REPORTING ability to raise capital once volume of

business increases
Business- a legally-recognized organizational 2. Proprietor does not receive the benefit
entity existing within an economically free of second opinion on decisions made
country designed to sell goods and/or provide 3. Proprietor bears the risks and losses
services to consumers which may be incurred in the business
4. Proprietor has unlimited personal
Profit-oriented enterprise- aims to earn liability for the debts incurred by the
income or profit through the provision of goods business
and/or services to consumers  Partnership- an association of two or
more persons who bind themselves to
Non-profit-oriented enterprise- aims to contribute money, property, or industry to
achieve socio-civic or charitable aims a common fund with the intention of
dividing the profits among themselves
Forms of Business Enterprises (according to
- Partnerships are governed by
nature of operations)
the Civil Code of the Philippines
Advantages:
1.S ervice business or service concern-
1. It is easier to organize compared to a
simplest form of business and provides
corporation
services to clients or customers in 2. Burden of management is shared
exchange for fees, rent, interest or among partners
royalties 3. More ideas are exchanged and
2.M erchandising business or trading brainstormed which results in better
concern- purchase goods from suppliers decision-making
and, without altering the state of the 4. Can raise more capital than sole
goods bought, sell the same at a higher proprietorship
price than cost
3.M anufacturing business or Disadvantages:
manufacturing concern- involves the 1. Depends on the capability of each
most complex activities and actually partner to invest resources into the
produces the goods that it sells to business
customers 2. Plurality of owners may result to
disagreements regarding ideas and
LEGAL FORMS of Business/ Business management style, hampering
Ownership business operations
3. Life of partnership may be fragile –it
 Sole Proprietorship- most basic legal may be dissolved by agreement, by
form of business and has only one owner withdrawal of one or more partners, or
Advantages: by the death of or incapacity of partner
1.E asier to form compared to 4. Partners have unlimited personal
partnerships and corporations liability for partnership debts
2.G enerally has uncomplicated  Corporation- the most complex form of
transactions and minimal regulatory business organizations
requirements - Shareholder- a person who invests in
3.D ecisions can be arrives at in less time a corporation
and implemented faster - Certificate of stock- evidence of the
4.P roprietor enjoys all the profits earned number of shares purchased
by the business - Governed by the Corporation Code of
the Philippines
Disadvantages: - Management of operations of the
corporation is centralized in the
1.P roprietor faces financing problems
corporation’s board of directors
because of the enterprise’s limited

Page | 1
 Advantages: time. Most important financial information comes
from accounting
1. Has the greatest capacity to raise
capital Accounting- the art of recording, classifying and
2. Can raise capital by selling shares of summarizing, in a significant manner, and in
stock to the public as a whole terms of money, transactions and events which
3. Shareholders may transfer their shares are in part at least of a financial character, and
without the need to obtain the consent interpreting the results thereof
of other shareholders
4. Corporations may exist for period no - Is a service activity. Its function is to
longer than 50 years, subject to provide quantitative information,
renewal primarily financial in nature, about
5. Limited liability of owners economic entities, that is intended to
(shareholders are liable to third parties be useful in making economic
for the losses of the corporation only to decisions
the limit of their fully-paid - Service function to management. It
investments) basically processes raw data and
6. If corporation goes bankrupt, lenders converts them to meaningful
cannot take personal assets of the information that will be useful for
stockholders decision-making
- Is the process of identifying, measuring
Disadvantages:
and communicating economic
1. The cost of forming and managing a information to permit informed
corporation is relatively high compared judgement and decision by users of
to sole proprietorships and the information
partnerships
Basic purpose of accounting: to supply
2. Subject to greater scrutiny, regulation,
financial information to users of the information
control and supervision by the
to help them make informed judgements and
government
3. Management is more complex better decisions
4. Has limited powers, as expressly
Accounting is language of the business: used to
stated in the Corporation Code of the
communicate financial information to interested
Philippines and its own Articles of
parties. Through this, different users of
Incorporation
5. Subject to higher income tax rate information understand what is happening in the
 Cooperatives- defined by International business enterprise
Cooperative Alliance’s Statement on
Bookkeeping- procedural or mechanical aspect
Cooperative Identity as “autonomous
of accounting and involves set-up, update and
associations of persons united voluntarily
maintenance of accounting records. It can be
to meet their common economic, social,
done by properly trained non-accountants
and cultural needs and aspirations through
jointly owned and democratically Accounting- interpretation of information
controlled enterprises” recorded under bookkeeping. Practice of
accountancy can be done only by certified public
Economic Decisions
accountants
Economic decisions- decisions which affect the
The Accountancy Profession
resources it controls and the obligations of the
business to other enterprises Accounting is a profession because it has the
attributes required of a profession.
Financial Information- a summary of all the
transactions of the business over a period of

Page | 2
 1. Mastery of particular intellectual Any person applying for examination shall
skill, acquired by training and establish the following requisites to the
education. Accounting requires students satisfaction of the Board that he/she:
to finish degree in Bachelor of Science in
Accountancy and pass government  Is a Filipino citizen
examination administered by Professional  Is of good moral character
Regulatory Board of Accountancy  Is a holder of degree of Bachelor of
2. Adherence by its members to a Science in Accountancy conferred by a
common code of values and conduct school, college, academy or institute duly
established by its administrating recognized and/or accredited by the CHED
body, including maintaining an or other authorized government offices
outlook which is essentially  Has not been convicted of any criminal
objective. The Code of Ethics is offense involving moral turpitude
mandatory for all CPAs
3. Acceptance of duty to society as a Licensure examination for CPAs shall cover , but
whole (usually in return for are not limited to, the following subjects:
restrictions in use of a title or in the
 Management Services
granting of qualification). Majority rely
 Business Law and Taxation
on CPAs for sound financial accounting
 Theory of Accounts
and reporting, effective financial
 Auditing Theory
management and competent advice on a
 Auditing Problems
variety of business and taxation matters
 Practical Accounting Problems 1
The Accountancy Act of 2004  Practical Accounting Problems 2
 Economics
Republic Act No. 9298, the Philippine
Accountancy Act of 2004 To be qualified as having passed the licensure
exam, candidate must obtain a general average
Objectives: of 75% with no grades lower than 65% in any
given subject. If candidate obtains required rating
 Standardization and regulation of or above in at least a majority of subjects
accounting education provided for in this Act, they will receive a
 Examination for registration of certified conditional credit for the subjects passed Such
public accountants candidate will take an examination in the
 Supervision, control, and regulation of the remaining subjects within 2 years from preceding
practice of accountancy in the Philippines examination and fails to obtain 75% and a rating
of at least 65% for the subjects re-examined, they
Article II creates Professional Regulatory
will be considered as having failed the entire
Board of Accountancy which enforces the
examination
provisions of the Philippine Accountancy Act. It is
also granted the right to issue, suspend, revoke Candidates who fail 2 complete examinations
or reinstate CPA certificates for the practice of the shall be disqualified from taking another exam
profession unless they submit evidence to the satisfaction of
the Board that they enrolled an completed at
 The Board is composed if a chairman and
least 24 units of subject given in the licensure
6 members, all of whom are appointed by examination
the President of the Republic of the
Philippines Sectors of Accounting Practice

The CPA Board Exams 1. Public practice- This sector includes

individual practitioners, small accounting
firms, medium sized and multinational

Page | 3
 accounting firms that render independent Accounting –Then and Now
professional accounting services to the
public. CPAs charge professional fees for  Comes from Middle East Region, where as
these services. Example of service are: early as 8500 BC, tradesmen use clay
 Auditing- most common service objects to represent commodities
provided by CPAs and involves  Ancient civilizations of Babylon, Greece
independent examination of financial and Egypt also used clay tablets and later
statements for the purpose of papyri to record document wage
expressing an opinion on the fairness payments, material requisitions and costs
of these statements of labor
 Tax services- includes the preparation  In 13th to 15th centuries, more systematic
of tax returns for various clients, record-keeping methods were developed
provision advice on tax matters and with the growth of trade and commerce
representation of clients in tax cases  Florentine, Venetian and Genoan
 Management and consulting merchants used these methods to keep
services- involves providing track of their business
advisory/consulting services on  Double-entry records first appeared in
matters of accounting, finance, Genoa in 1340 AD
business policies, organization
Luca Pacioli and the Summa
procedures, budgeting, product costing
and the conduct of operations
 1494, Friar Luca Pacioli wrote a book
2. Commerce and Industry
Accountants are employed in various containing discussions on the double-
positions such as: vice-president for entry bookkeeping system entitled Summa
finance, chief accountant, cost de Arithmetica, Geometria, Proportioni et
accountant, internal auditor or budget Proportionalita (Everything about
officer. The highest accounting officer of a Arithmetic, Geometry, Proportions and
business organization is known as the Proportionality), summary of the existing
controller. Accountants in commerce and mathematical knowledge at the time
 Considered as Father of Double-Entry
industry assist management in planning
and controlling a company’s operations Bookkeeping
3. Education
This area employs accountants as The Industrial Revolution
professors, reviewers or researchers. They
 Cost accounting- specialized field of
take steps to clarify and address emerging
accounting which deal with the allocation
accounting issues encountered by
of costs to products was developed during
accountants in other sectors. They share
this period
results of discussion and research with
colleagues in other sectors. Educators also Fields of Accounting
prepare aspiring CPAs for the Licensure
Examinations 1. Financial accounting-focuses on
4. Government preparation of general-purpose financial
statements with the aim of meeting most
Accountants may be hired as staff,
of the needs of the external users
auditor, budget officer or consultant in 2. Management accounting- concerned
government units like the Commission on with financial reporting for internal users
Audit, Bureau of Internal Revenue, (management) and users have control
Department of Finance, Department of over the accounting system and can
Budget and Management, and the specify precisely the type of reports
Securities and Exchange Commission needed for use in decision-making

Page | 4
 3.C ost accounting- measures a business’ is equal to the value given up (for every
costs to help management in controlling value received, there is an equal value
expenses given up) Debit-Credit
4.T ax accounting- has two aims: 3. Matching principle: profit or loss is
compliance with tax laws and minimizing computed by deducting the expenses
the company’s tax bill through legal incurred from the income earned during
means an accounting period. Income recorded
5.G overnment accounting- encompasses and reported in one accounting period
the process of analyzing, classifying, should be matched against the expenses
summarizing and communicating all that directly or indirectly contributed to
transactions involving receipt and the generation of the income
disposition of government funds and 4. Accrual basis: income is recognized
property and interpreting the results when it is earned, regardless of when cash
thereof. Focus is the proper custody, is received. Expenses are recognized when
disposition and accounting for public funds incurred, regardless of when cash is paid
 If services have already been rendered
to a customer, income is recognized
even if cash has not been received
Generally Accepted Accounting Principles
from the customer
GAAP- comprises the accounting principles and  If cash is received from customer
processes, standards and underlying assumptions before a service is rendered or goods
that are used in preparing financial statements are delivered, income is not yet earned
because there is no service or delivery
Financial Reporting Standards Council of goods yet. The cash received would
(FRSC)- official accounting standard setting body be earned only upon rendering of
in the Philippines. The primary task of FRSC is to service or delivery of the goods
improve and establish accounting standards that  If services have already been received
will be generally accepted in the Philippines by the business from its suppliers,
expenses are recognized even if these
Philippine Financial Reporting Standards services have not yet been paid for by
(PFRS)- The FRSC issued this and this the businessz
constitutes the generally accepted accounting  If cash has already been paid by the
standards observed in the Philippines business to its suppliers, an expense is
not recorded until it is incurred
-PFRS includes: 5. Cash basis of Accounting: income is
recognized when cash is received, and
 Philippine Accounting Standards
expenses are recognized when cash is
 PFRS
paid (extra concept sometimes used by
 Philippine Interpretations developed by
other businesses)
Philippine Interpretations Committee 6. Stable monetary unit: it is concerned
with information which can be quantified
Basic Accounting Concepts
and expressed in terms of money. For
1.B usiness entity principle: business is business transactions to be included in the
considered distinct and separate from the accounting records and financial
owner(s) of the business statements of the enterprise, it must be
 Accounting entity- an organization expressed in terms of a uniform means of
accounted for as a separate economic measurement
unit 7. Periodicity (Time Period Concept):
2.D ual-effect of business transactions: operating life of an enterprise may be
whenever a business transaction takes conveniently divided into time periods of
place, it is assumed that the value receive equal length called accounting periods.

Page | 5
 Normal accounting period is equal to 12 c. Qualitative characteristics that determine
months or 1 year the usefulness of information in financial
8. Going Concern (Continuity statements
Assumption): enterprise is a going d. Definition, recognition and measurement
concern and will continue operation for the of the elements of the financial
foreseeable future. It is assumed that the statements
enterprise has neither the intention nor e. Concepts of capital and capital
the need to liquidate or curtail materially maintenance
the scale of its operations
Financial Statements
Accounting Framework
Financial statement- the means by which the
 The Framework for the Preparation and information accumulated in and processed by
Presentation of Financial Statements sets financial accounting is communicated to users on
out the concepts that underlie the a periodic basis and is the end-product of the
preparation and presentation of financial financial accounting process
statements for external users
Parts:
 The Framework is not part of the PFRS and
in case of conflict, the requirements of the 1. Statement of financial position or
PFRS shall prevail over those of the balance sheet
Framework 2. Statement of comprehensive income
(income statement)
Purposes of the Framework 3. Statement of changes in equity
4. Statement of cash flows
a) Assist the FRSC in developing accounting 5. Notes to the financial statements
standards that represent the GAAP in the
Philippines Users of Financial Statements
b) Assist the FRSC in its review and adoption
of existing International Financial 1. Investors- providers of risk capital and
Reporting Standards are concerned with the risk inherent in
c) Assist prepares of financial statements in and return provided by their investments.
applying FRSC Philippine Financial They need information to help them
Reporting Standards and in dealing with determine whether to buy, sell or hold
topics that have yet to from the subject of their investments. Info enables them to
an FRSC statement assess enterprise’s ability to pay dividends
d) Assist the auditors in forming an opinion 2. Employees- interested in information
as to whether financial statements about the stability and profitability of their
conform with the Philippine GAAP employers. Info enables them to assess
e) Assist users of financial statements in the enterprise’s ability to provide
interpreting the information contained in remuneration, retirement benefits and
financial statements prepared in employment opportunities
conformity with Philippine GAAP 3. Lenders- determine whether their loans
f) Provide those who are interested in the and the interest attaching to them will be
work of the FRSC with information about paid when due
its approach to the formulation of 4. Suppliers and other trade creditors-
Philippine Financial Reporting Standards determine whether the amounts owing to
them will be paid when due
Scope of the Framework 5. Customers- information about the
continuance of an enterprise
a. Objective of financial statements 6. Government and their agencies-
b. Underlying assumptions in the preparation
interested in the allocation of resources
of financial statements
and, therefore, the activities of the
enterprise. They also require information
Page | 6
 to regulate the activities of enterprise, 3. Changes in financial position
determine taxation policies and as the - Information concerning changes about
basis for national income and similar a company’s financial position is useful
statistics in order to assess its investing,
7. The public- enterprises affect the financing and operating activities
members of the public in a variety of ways during the reporting period. This
 Financial statements are primarily used for information provides users with a basis
the use of investors and creditors to assess the enterprise’s ability to
generate cash and cash equivalents
Information Provided by Financial and the needs of the enterprise to
Statements utilize those cash flows

 Information about the financial position, Statement of changes in equity- shows

financial performance and cash flows of an balance of the owner’s investment in the
entity business at the beginning of the accounting
1. Financial Position period, additional investments made by the
- Condition of a business, in monetary
owner, withdrawals by the owner for personal
terms, as of a given date or point in
use, the profit or loss for the period, and the
time and is primarily provided in a
balance of the owner’s investment at the end of
statement of financial position or
the accounting period
balance sheet. Financial position is
affected by the economic resources Statement of cash flows- summarizes cash
controlled, financial structure,, activity for the period, classified according to the
liquidity, solvency, and capacity to nature of activity
adapt to changes in the environment
in which an enterprise operates 4. Other supplementary information
- Additional information that is relevant
Liquidity- availability of cash in the near future to the need of financial statement
to cover currently maturing liabilities or users. May include:
obligations  disclosures about the risk and
uncertainties concerning the
Solvency- availability of cash over the long term enterprise and any resources and
to meet obligations when they fall due obligations not recognized in the
statement of financial position
Capacity for adaptation- ability of the
 information about geographical and
enterprise to use its available cash for
industry segments
unexpected requirements and investment
 effects on the enterprise of changing
opportunities or simply called as emergency
prices
money
General-Purpose Financial Statements
2. Performance or profitability
- Refers to whether a company is able to - financial statements that meet most of
generate profit or incur a loss during a the needs of other users
particular accounting period and is  Special-purpose financial statements-
used for statement of comprehensive covered by management accounting and
income. 2 parts: profit/loss portion and auditing courses
other comprehensive income portion

Income statement- useful tool for evaluating Frequency of Preparation of Financial

management’s stewardship of the resources of Statements
the enterprise and for assessing the inflow and
outflow of cash - Usually prepared annually

Page | 7
  Interim financial statements- shorter suppliers for resale to customers at
period financial statements (monthly, a higher price than cost
quarterly or semi-annually)  Property , plant and
equipment- long-lived assets
Responsibility for Financial Statements which have been acquired for use
in operation
Management is responsible for: 2. Liabilities- present obligation of the
enterprise arising from past events,
 Preparation and presentation of the
which are to be settled in the future. It
financial statements of the enterprises
is required to be settled in the future
 Selecting and applying the accounting
 Accounts payable- amounts due
policies and principles which are
to suppliers for goods purchased or
appropriate for the company
services received on account
 Salaries payable- due to
Underlying Assumptions in the Preparation
employees which are unpaid as of
of Financial Statements
the reporting date
Underlying assumptions-concepts which are  Utilities payable- due to utility
assumed to have been applied in preparing companies for electricity, heat,
financial statements light and water charges
 Advances from customers-
 Accrual basis amounts received from customers
 Going concern in advance for delivery of goods or
provision of services
Elements of Financial Statements  Loans payable- obligations of an
enterprise to lenders
A. Elements pertaining to financial 3. Equity- claim; residual interest in the
position assets of the enterprise after
1. Assets- resource owned and/or
deducting all its liabilities and arise
controlled by the enterprise and
from the original investment by an
expected to provide future economic
owner into the business and increased
benefits to the enterprise. It is
by additional investments by the
acquired by an enterprise as a result of
owners and by profit earned during a
a past transaction or event. The
period
enterprise should have the capacity to B. Elements pertaining to performance
restrict or prevent other entities from or profitability
enjoying the economic benefits arising 1. Income- increase in economic benefits
from the use of the resource or item during the accounting period in the
 Cash- items considered as medium form of inflows or enhancements of
of exchange in business assets or decreases of liabilities that
transactions result in the increase of equity other
 Accounts receivable- valid claims than those a relating to contributions
from customers or clients arising from equity participants
from the provision of services or  Revenue- course of the ordinary
delivery of goods in the ordinary activities of an enterprise (sales,
course of business where the price fees, dividends, royalties and rent)
for these services or goods have  Gain- other items that meet the
not yet been paid definition of income and may or
 Supplies on hand- supplies may not arise in the course of the
purchased by an enterprise which ordinary activities of an enterprise
are unused as of the reporting date 2. Expenses- decrease in economic
 Merchandise inventory- goods benefits during the accounting period
which have been bought from in the form of outflows or depletions of
Page | 8
 assets or incidences of liabilities that financial statements are to be
result in decreases in equity other than recognized and carried in the financial
those relating to distributions to equit statements
participants
 Losses- other items that meet the Measurement Bases
definition of expenses and may or
 Historical cost: assets are recorded at
may not arise in the course of the
the amount of cash or cash equivalents
ordinary activities of the enterprise
paid or the fair value of the consideration
Recognition of the Elements of the Financial given to acquire them at the time of their
Statements acquisition
 Current cost: assets are carried at the
Recognition- process of incorporating in the amount of cash or cash equivalent they
statement of financial position or statement of would have to be paid if the same or an
comprehensive income an item that meets the equivalent asset was acquired currently
definition of an element and satisfies the criteria  Realizable (settlement) value: assets
for recognition are carried at the amount of cash or cash
equivalent that could currently be
Criteria: obtained by selling the asset in an orderly
disposal
1. It is probable that any future economic
 Present value: assets are carried at the
benefit associated with the item will flow
present discounted value of the future net
to or from the enterprise
2. The item has cost or value that can be cash inflows that the item is expected to
measured with reliability generate in the normal course of business

Examples: Qualitative Characteristics of Financial

Statements (Accounting concepts)
 Asset is recognized when it is probable
Qualitative characteristics- attributes that make
that the future economic benefits will and
the information provided in financial statements
asset has a cost or value that can be
useful to users
measured reliably
 Liability recognized when it is probable
that an outflow of resources embodying
economic benefits will result from
settlement of a present obligation and it
can be measured reliably 4 principal qualitative characteristics
 Income is recognized when increase in
1. Relevance- when it influences the
future economic benefits related to an
economic decisions of users by helping
increase in an asset or a decrease of a
them evaluate past, present or future
liability has arisen that can be measures
events or confirming or correcting past
reliably
 Expenses is recognized when a decrease evaluations
a) Predictive role- if it is used to make
in future economic benefits related to a
predictions of future cash inflows or
decrease in asset or an increase of a
income in future periods
liability has arisen that can be measure
b) Confirmatory role- if it is used o
reliably
confirm or correct the earlier
Measurement of the Elements of the expectations of a financial statement
Financial Statements user
c) Materiality- if its omission or
- Process of determining the monetary misstatement could influence the
amounts at which the elements of the
Page | 9
 economic decisions of users taken on 1.T imeliness- if there is undue delay in the
the basis of financial statements reporting of information it may lose its
2. Reliability- info should be free from relevance
material error and bias and can be 2.C ost-benefit- cost of providing financial
depended upon by users to respect information should not exceed the benefits
faithfully that which it either purports to of having these information available for
represent or could reasonably be expected decision-makers
to represent 3.B alance between Qualitative
a) Faithful representation- information characteristics- relevance and reliability
must represent faithfully the are not present simultaneously as desired
transactions and other events it either
purports to represent or could
reasonably be expected to represent.
Business transaction- exchange of values
The actual effects of transactions
involving two parties or within the enterprise
should be properly accounted for and
reflected in the financial statements External transactions- sale of goods to
b) Substance over form- transactions customers or the provision of services to clients
and other accountable events are
accounted for and presented in Internal transactions- manufacture of goods
accordance with their substance and for sale and incurrence of losses by the company
economic reality and not merely their resulting from fire and flood
legal form
c) Neutrality- financial statements must Source Documents
be free from bias
d) Prudence (Conservatism)- inclusion - Original record of a business
of a degree of caution in the exercise transaction (date and nature of
of judgement needed in making the transaction amount and parties
estimates required under conditions of involves)
uncertainty, such that asset or income
Examples:
are not overstated and liabilities and
expenses are not understated 1.S ales invoice- issued to evidence a sale
e) Completeness- info must be
for cash
complete within the bounds of 2.D elivery receipt- evidence the
materiality and cost acceptance/receipt of the goods delivered
3. Understandability- words and other
to the customer
accounting terminology being used are 3.O fficial receipt- issued to evidence the
those expected to be known and receipt of cash from customers
understood by users of the financial 4.V endor’s invoice- issued to the
statements enterprise by the enterprise’s suppliers
4. Comparability 5.P urchase requisition forms- evidences
a) Intra-comparability- users must be
an employee’s request for the purchase of
able to compare the financial needed goods or suppliers
statements of an enterprise across 6.I OUs- note acknowledging indebtedness
accounting periods to the enterprise
b) Inter-comparability- users must be 7.P romissory notes- unconditional
able to compare financial statements promise in writing made by one person to
of different enterprises in order to another
evaluate their relative financial 8.B ank statements- summary of all
position financial transactions occurring over a
certain period on a bank account
Constraints on Relevant and Reliable 9.M inutes of meetings- record of a
Information meeting
Page | 10
 10. Business letters- business 1. Asset Accounts
correspondences  Cash- medium of exchange for
11. Job time tickets- time spent working at a business transactions
particular customer order  Held for trading securities-
12. Certificates of stock-ownership of temporary investments of excess cash
shares in a corporation which are primarily held for short-term
13. Time records/timesheets- time-in and gain
time-out of employees  Loans and receivables- trade
14. Check voucher- authorization of cash
receivables and non-trade receivables
disbursement transactions
and are claim against others which
15. Journal voucher- documents used for
arise in the ordinary course of doing
transactions and journal entries for which
business
there is no other source document
 Trade notes receivable- written
Basic Accounting Equation promise from the customer to pay a
fixed amount of money on a certain
Assets= Liabilities + Equity future date
 Non-trade receivables- all other
Net Assets-focuses on equity or the claim of claims which are not trade
owners to the assets of the business  Inventories- assets which are held for
sale/ in the process of production/ in
Equity= Assets – Liabilities
the form of materials and supplies
Possible effects of business transactions:  Prepaid expenses-expenses paid for
by the business in advance. (e.g.
a) Increase in assets= increase in liabilities prepaid insurance and prepaid rent)
b) Increase in assets = increase in equity  Long-term investments- asset held
c) Increase in one asset= decrease in by an enterprise for the accretion of
another asset wealth through capital distribution for
d) Decrease in assets= decrease in liabilities capital appreciation or for other
e) Decrease in assets= decrease in equity
benefits to the investing enterprise
f) Increase in liabilities= decrease in equity
g) Increase in equity = decrease in liabilities  Property, plant and equipment-
h) Increase in one liability= decrease in tangible assets used in the production
another liability or supply of goods or services
i) Increase in one equity= decrease in one  Intangible assets- identifiable, non-
equity monetary assets without physical
substance
Expanded Accounting Equation 2. Liability Accounts
 Accounts payable- opposite of
Assets= Liabilities + Equity + Income – Expenses accounts receivable
 Notes payable- enterprise is the one
Parts of:
who promises to pay
 Financial Position: assets, liabilities and  Accrued liabilities- amounts owed to
equity others for unpaid expenses
 Comprehensive Income: Income and  Unearned revenues- enterprise
expenses receives payments before providing
 Changes in Equity: capital, additional its customers with goods or services
 Mortgage payable- used for
investments and withdrawals
 Cash flows: any activity that results in recording long-term debts of an
inflow or outflow of money or resources enterprise
 Bonds payable- large sums of money
Common Examples of Account Titles Used are often required by a business for
working capital and expansion

Page | 11
 purposes and is often obtained by 1.F or every debit entry, there must be a
floating bonds corresponding credit entry and accounting
3. Equity Accounts equation must always be maintained
 Equity- used to record the original and 2.E ach transaction affects at least two
additional investments of the owner of accounts
the business entity 3.T otal debit for a transaction must equal
 Withdrawals- when proprietor total credits
withdraws cash or other assets for 4.A n account is debited when an amount is
non-business use entered on the left side of the account and
 Income summary- temporary credited when amount is entered on the
account used to summarize all income right side
and expenses for a given period 5.T he account type determines how
4. Income Accounts increases or decreases in it are recorded
 Service income or fees income-
Account Balances
revenues earned by performing
services for customers - Difference between the total debits
 Sales- revenues earned as a result of
and the total credits of each account
sale of merchandise
5. Expense Accounts Debit balance- if total debits are greater than
 Cost of sales- cost incurred to the total credits
purchase or to produce the products
sold to customers during the period Credit balance- if the total credits are greater
 Salaries and wage expense- than the total debits
payments as a result of an employer-
employee relationship Normal balance- usual balance of an account
 Utilities expense- expenses related assuming proper accounting has been made
to use of communication facilities, the
consumption of water and electricity
 Rent expense- expense for leased Steps in Accounting Cycle:
office space, equipment or other
assets rented from others 1.A nalyzing business transactions through
 Supplies expense- account used for source documents
recording the usage of supplies in the 2.J ournalizing, or the recording of
normal course of business transactions in a journal
 Insurance expense- portion of 3.P osting or transferring of the entries from
premiums paid on insurance coverage the journal to the ledger
which has expired 4.P reparing the trial balance
 Depreciation expense- the portion 5.P reparing the 10-column worksheet and
of the cost of a tangible asset making the necessary adjusting journal
entries
allocated or charged as expense
6.P reparing the financial statements based
during as accounting period
on adjusted account balances
 Bad debts expense- amount of
7.R ecording adjusting entries to the journal
receivables estimated to be
and posting the same to the ledger
uncollectible and charged as expense 8.R ecording and posting of closing entries
during an accounting period 9.R uling and balancing real and nominal
 Interest expense- expense related to accounts
borrowed funds 10.Pr eparing post-closing trial balance
11.Pr eparing reversing entries
Double-Entry Accounting System
Journal- book where transactions are initially
recorded in a systematic and chronological order;
also called the book of original entry
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Simple journal entry- one account debited and Open account- when in trial balance, there is a
one account credited balance either on the debit or credit side

Compound journal entry- more than one Closed account- if the debit equals credit
account is involved in a single entry
Reasons Why Trial Balance may not be
Memorandum entry- an entry which has no Balance:
debit or credit, which shows only the date and a
brief explanation or reminder 1. Error in footing the debit and credit
columns
Chart of accounts- list of all accounts of the 2. Error in transferring from the ledger to the
business and their respective account numbers. trial balance
Use of this would reduce confusion as to the 3. Error in posting (e.g. posting debit to
choice of account titles and permits uniformity in credit side of account)
4. Error in journalizing
recording routine transactions
5. Error of omission
Ledger- group of accounts and known as the
Working-Back Method
book of final entry
1. Check if amount is doubled on debit or
Trial balance- list of all accounts and their
credit side
balances and indicated whether total debit equals 2. Transplacement error- e.g. 1M -> 100,000
total credit. It does not guarantee that all 3. Transposition error- when position of
transactions have been recorded. It is commonly numbers are mixed (e.g. 535,700 ->
taken every month-end 553,700)
Footing- adding all the debits and credits

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