Learning Objectives

• Define accounting and state its basic

purpose.
• Differentiate the three types of business.
• Explain the basic concepts and principles
applied in accounting.
• Define the elements of financial statements.
• Enumerate and describe the components of a
complete set of financial statements.
What is Business?
• It is any economic activity conducted
primarily for profit.
• To engage in business is to supply
goods and services to earn profit or
income.
What is Business?
• It is any economic activity conducted
primarily for profit.
• To engage in business is to supply
goods and services to earn profit or
income.
Types of Business
1. Service
– This business renders services to clients in
exchange for a fee. Therefore, the primary
product of this business is “service”.
2. Merchandising
– This business engages in the “buying” and “selling”
of goods. Its earnings are primarily derived from
the markup(profit) it adds to the cost of goods it
sells to the customers.
3. Manufacturing
– This business converts raw materials into finished
goods that are to be sold at selling price.
Service Business
Merchandising
Manufacturing
 Forms of Business Organizations
1. Sole Proprietorship
– This business organization has a single owner called the
proprietor who generally is also the manager.
2. Partnership
– It is a business owned and operated by two or more
persons who bind themselves to contribute money,
property, or industry to a common fund, with the intention of
dividing the profits among themselves. The owners are
called partners.
3. Corporation
– It is an artificial being created by operation of law, having
the rights of succession and the powers, attributes and
properties expressly authorized by law or incident to its
existence. It is a business owned by its stockholders.
Activities in Business Organizations
1. Financing Activities
– Activities that obtain financial resources from
financial markets.
2. Investing Activities
– It includes buying land, equipment, buildings
and other resources that are needed in the
operation of the business, and selling these
resources when they are no longer needed.
3. Operating Activities
– It involves the use of resources to design,
produce, distribute, and market goods ad
services.
Definition of Accounting
– It is the process of identifying, measuring
and communicating economic information to
permit informed judgments and decisions by
users of the information.
– It is the information system that measures
business activities, processes that information
into reports, and communicates the results to
decision makers.
 THE ACCOUNTING PROCESS
Communication
Identification Recording Accounti
ng
Reports

Prepare
accounting reports
SOFTBYTE
Select economic events Record, classify, Annual Report

(transactions) and summarize

Analyse and interpret

for users
Purpose of Accounting
– To provide decision makers with
information useful in making
economic decisions.
– To help the end-users of the
information to see the true picture
of the business in financial terms.
Users of Accounting Information
• Internal Users
– They are decision-making individuals inside the
business who are responsible for the performance of
the business. They need accounting information for
planning and controlling the firm’s operations.
• External Users
– They are decision-making individuals outside the
business who are affected in some way by the
performance of the business.
External Users
1. Owners and prospective
owners(investors)
2. Creditors(lenders)
3. Governments and their agencies
4. Employees
5. Customers
6. General public
 ILLUSTRATION 1-2
QUESTIONS ASKED BY INTERNAL USERS

What is the cost of manufacturing

each unit of product?
Is cash sufficient to pay bills?

Which product line is the most

Can we afford to give employees profitable?
pay raises this year?
QUESTIONS ASKED BY EXTERNAL USERS

How does the company

compare in size and profitability
Is the company earning with its competitors?
satisfactory income?
What do we
do if they
catch us?

Will the company be able to pay its debts as they come due?
 BOOKKEEPING DISTINGUISHED
FROM ACCOUNTING
Accounting
1. Includes bookkeeping
2. Also includes much more
Bookkeeping
1. Involves only the recording of economic
events
2. Is just one part of accounting
Fundamental Accounting Concepts
• Entity Concept
– An accounting entity is an organization or a
section of an organization that stands apart
from other organizations and individuals as
a separate economic unit.
• Periodicity Concept
– An entity’s life can be meaningfully
subdivided into equal time periods for
reporting purposes.
Fundamental Accounting Concepts
• Stable Monetary Unit Concept
– It allows accountants to add and subtract
peso amounts as though each peso has the
same purchasing power as any other peso
at any time.
• Going Concern
– assumes organization will continue into
foreseeable future.
Basic Accounting Principles
1. Objectivity Principle
2. Historical Cost
3. Revenue Recognition Principle
4. Expense Recognition Principle
5. Adequate Disclosure
6. Materiality
7. Consistency Principle
Objectivity Principle
– Accounting records and statements
are based on the most reliable data
available so that they will be as
accurate and as useful as possible.
They are documented by objective
evidence.
Historical Cost Principle
– This principle states that acquired
assets should be recorded at
their actual cost and not at what
management thinks they are
worth as at reporting date.
Revenue Recognition Principle

– Revenue is to be recognized in
the accounting period when
goods are delivered or services
are rendered or performed.
Expense Recognition Principle

– Expenses should be recognized

in the accounting period in
which goods and services are
used up to produce revenue and
not when the entity pays for
those goods and services.
Adequate Disclosure Principle

– Requires that all relevant

information that would affect the
user’s understanding and
assessment of the accounting
entity be disclosed in the
financial statements.
Materiality Principle
– Financial reporting is only
concerned with information that
is significant enough to affect
evaluations and decisions.
Consistency Principle
– The business should use the
same accounting method from
period to period to achieve
comparability over time within a
single enterprise.
BASIC ACCOUNTING EQUATION

Assets = Liabilities + Owner’s Equity

ELEMENTS OF FINANCIAL
STATEMENTS
 ASSETS
⚫ Assets are resources owned by a
business.
⚫ They are things of value used in
carrying out such activities as
production and exchange.
 EXAMPLE OF ASSETS

CASH
 EXAMPLE OF ASSETS

Accounts
Receivable
 EXAMPLE OF ASSETS

Office
Supplies
 EXAMPLE OF ASSETS

Store
Supplies
 EXAMPLE OF ASSETS

Merchandise
Inventory
 EXAMPLE OF ASSETS

Equipment
 EXAMPLE OF ASSETS

Furniture
 EXAMPLE OF ASSETS

Building
 EXAMPLE OF ASSETS

Land
 LIABILITIES
⚫ Liabilities are claims against
assets.
⚫ They are existing debts and
obligations.
 EXAMPLE OF LIABILITIES

Accounts
Payable
 EXAMPLE OF LIABILITIES

Notes
Payable
 EXAMPLE OF LIABILITIES

Utilities
Payable
 OWNER’S EQUITY
⚫ Owner’s Equity is equal to total assets minus
total liabilities.
⚫ Owner’s Equity represents the ownership
claim on total assets.
⚫ Subdivisions of Owner’s Equity:
1. Capital
2. Drawings
3. Revenues
4. Expenses
 EXAMPLE OF CAPITAL

Capital
 INVESTMENTS BY OWNERS

⚫ Investments by owner are the assets

put into the business by the owner.
⚫ These investments in the business
increase owner’s equity.
 DRAWINGS

⚫ Drawings are withdrawals of cash or

other assets by the owner for
personal use.
⚫ Drawings decrease total owner’s
equity.
 REVENUES
⚫ Revenues are the gross increases in owner’s
equity resulting from business activities entered
into for the purpose of earning income.
⚫ Revenues may result from sale of merchandise,
performance of services, rental of property, or
lending of money.
⚫ Revenues usually result in an increase in an
asset.
 EXPENSES
⚫ Expenses are the decreases in owner’s
equity that result from operating the
business.
⚫ Expenses are the cost of assets consumed
or services used in the process of earning
revenue.
⚫ Examples of expenses include utility
expense, rent expense, and supplies
expense.
 ILLUSTRATION 1-6
INCREASES AND DECREASES IN
OWNER’S EQUITY
INCREASES DECREASES
Investments Withdrawals
by Owner by Owner
Owner’s
Equity
Revenues Expenses
 FINANCIAL STATEMENTS

– are the formal – show how the

reports of an entity’s business is performing
financial information. and where it stands.
 FINANCIAL STATEMENTS
After transactions are identified, recorded, and
summarized, four financial statements are
prepared from the summarized accounting data:
1. An statement of comprehensive income
presents the revenues and expenses and
resulting net income or net loss of a
company for a specific period of time.
2. A statement of owner’s equity summarizes
the changes in owner’s equity for a specific
period of time.
 FINANCIAL STATEMENTS
In addition to the income statement and statement
of owner’s equity, two additional statements are
prepared:
3. A statement of financial position reports the
assets, liabilities, and owner’s equity of a
business enterprise at a specific date.
4. A statement of cash flow summarizes
information concerning the cash inflows
(receipts) and outflows (payments) for a
specific period of time.