CHAPTER 1: Accounting & It’s Environment

TYPES OF BUSINESS, ITS ACTVITY, STRUCTURE AND EXAMPLES

 Accounting and it’s Environment

Accounting allocation of scarce resources under their

- it is the system that measures business control.
activities, processes that information
into reports and communicates the
results to decision-makers. It quantifies What happens if the decision makers are able to
business communication. make well-informed decision?
-Resources are allocated in a way that
- it is called the language of business better meets the needs and goals of those
within the market.
- it is a service activity. Its function is to
provide quantitative information,
primarily financial in nature, Forms of Business Organizations
about economic entities that is
intended to be useful in making 1. Sole Proprietorship
economic decisions. -This business organization has a single
- (Accounting Standards Council) owner called the proprietor who generally
is also the manager. It tends to be small
- it is an information system that service-type (e.g. physicians,
measures, processes and communicates lawyers and accountants) businesses
financial information about an economic and retail establishments. The
entity. owners receives all profits, absorbs
- (Financial Accounting Standards Board) all losses and is solely responsible for
all debts of the business. When the
- it is the process of identifying, owner dies, so does the business - just
measuring and communicating as when they start a new company or
economic information to permit take over a family business.
informed judgement and decisions by
users of the information. - The most popular/common.
- (American Accounting Association)
-It has unlimited liability.
- it is the art of recording, classifying and
summarizing in a significant manner and Advantages:
in terms of money, transactions and  All profits are subject to the owner
events which are, in part at least, of a  There is very little regulation for
financial character, and interpreting the proprietorships
results thereof. - (American Institute of  Owners have total flexibility and control
Certified Public Accountant) when running the business
 Very few requirements for starting—often
Accountants only a business license
- they are called the scorekeepers of  No public disclosure required
business.  Low start-up costs
 Easy tax reporting
Without accounting Disadvanatges:
- a business couldn't function optimally;  Owner is 100% liable for the business
it wouldn't know its financial situation. debts
 Equity is limited to the owner’s personal
Accounting in market economy resources
- the information helps decision-makers  Ownership of proprietorship is difficult to
make informed choices regarding the transfer
  No distinction between personal and attributes and properties expressly
business income authorized by law or incident to its
 Difficulty in raising funds existence. The stockholders are not
 Lack of structure, there is a risk of personally liable.
becoming too relaxed when managing
the money - are regarded as legal persons and are
considered separate entities for tax
2. Partnership purposes. This implies, among other
- It is a business owned and operated by things, that a corporation’s profits are
two or more partners who bind subject to taxation as its “personal
themselves to contribute money, income”. Any money paid out to
property, or industry to a common fund, shareholders in form of any dividends or
with the intention of dividing the profits profits is the taxed once again as the
among themselves. Each partner is owners’ personal income.
personally liable for any debt incurred
by the partnership. -Limited liability

-Unlimited liability of all partners. Advantages:

 Limits liability of the owner to debts or
- General partnerships can exist verbally losses
or even subtly between the two  Profits and losses belong to the
proprietors of the firm. Limited corporation
partnerships let participants set a ceiling  Can be transferred to new owners fairly
on how much of the company’s debts easily
they are personally responsible for  Personal assets cannot be seized to pay
paying. for business debts
 Tax exemptions: Corporations can
Advantages: deduct expenses related to company
 Shared resources provides more benefits, including health insurance
capital premiums, wages, taxes, travel,
 Each partner shares the total profits equipment and more to lessen tax.
 Similar flexibility and simple design of  Quick capital through stocks: To raise
a proprietorship additional funds for the business,
 Inexpensive and easy to establish, shareholders may sell shares in the
formal or informal, requires minimal corporation.
paperwork Disadvantages:
 Distributed workload  Operations are costly
 Parners can combine expertise  Establishing the entity is costly
Disadvantages:  Requires complex paperwork upon
 Each partner is 100% responsible for starting
debts and losses  Income are taxed twice (C-corporations)
 Selling the business is difficult—  Owners are less involved than managers
requires new partner, difficult to  Annual record-keeping requirements
transfer ownership (except s-corp)
 Partnership ends when any partner
decides to end it
 Possibility of disagreements 4. Limited Liability Company
- In essence, an LLC is a hybrid that
combines the benefits of a corporations
3.Corporation and partnerships while minimizing their
- It is a business owned by its drawbacks.
stockholders. It is an artificial being
created by operation of law, having the
rights of succession and the powers,
 - Limited liability similar to a limited business without disrupting its structure
partnership while also offering some of or dissolving it.
the financial benefits of partnership. Disadvantages:
 Raising capital: Larger investors may
- The most common form of business choose to invest in other business
structure for small businesses. Defined structures that allow them to earn a
as a separate legal entity and may have larger share, as the cooperative
an unlimited amount of owners structure treats all investors the same,
both large and small.
Adavanatges:  Lack of accountability: Cooperatives are
 Limits liability to the company owners more relaxed in terms of structure, so
for debts or losses members who don't fully participate or
 The profits are shared by the owner contribute to the business leave others
without double-taxation as owners can at a disadvantage and risk turning other
pay taxes as personal members away.
Disadvantages:
 Ownership is limited by a certain state Take aways:
laws Limited Liability is a legal structure whereby
 Agreements must be comprehensive shareholders or directors are legally responsible
and complex for their company's debts only up to the value of
 Start up has high costs due to legal and their shares.
filing fees
 Separate records of personal and An example of a partnership is a business set up
business expenses between two or more family members, friends or
colleagues in an industry that supports their skill
sets.
5. Cooperative
- Cooperatives are business owned by Corporations offer the strongest protection to its
“member-owners”. owners from personal liability, but the cost to form
a corporation is higher than other structures.
- A cooperative, or a co-op, is a private
business, organization or farm that a There are three main forms of corporations: a C
group of individuals owns and runs to corporation, an S corporation and an LLC, or
meet a common goal. These owners limited liability corporation.
work together to operate the business,
and they share the profits and other The main difference between an S Corp and C Corp
benefits. Most of the time, the members lies in federal income tax liability and ownership. S
or part-owners of the cooperative also corps are pass-through entities, where profits and
work for the business and use its losses pass through to shareholders' personal tax
services. returns. C corps are separate taxable entities,
subject to double taxation.
Advantages:
 Greater funding options: Cooperatives Family-owned businesses and companies with a
have access to government-sponsored small number of members may operate as an LLC
grant programs, depending on the type (Limited Liability Company) because it is a flexible
of cooperative. business model that allows members to be active
 Democratic structure: Members of a or passive in their roles. e.g. start-ups and other
cooperative follow the "one member, small businesses
one vote" philosophy, meaning that
everyone has a say, regardless of their Many cooperatives exist in the retail, service,
investment in the co-op. production and housing industries. e.g. credit
 Less disruption: Cooperatives allow unions, utility cooperatives, housing cooperatives
members to join and leave the and retail stores that sell food and agricultural
products
 Types Of Businesses

Type of Business Activity Structure Examples

1. Services  Software
Selling people’s time Hiring skilled staff and Development
selling their time  Accounting Firm
 Law Firm/Legal Firm
2. Trader Buying a range of raw
Buying and selling materials and  Wholesale
products manufactured goods and  Retailer
consolidating them,
making them available for
sale in locations near to
their customers or online
delivery.
3. Manufacture  Vehicle assembly
Designing products; Taking raw materials and  Construction
Aggregating components using equipment and staff  Engineering
to convert them into  Electricity
finished products.  Water
 Food and Drink
4. Raw Materials Growing and extracting Buying blocks of land and  Farming
materials suing them to provide raw  Mining
materials.  Oil
5. Infrastructure  Transport(airport
Selling the utilization of Buying and operating operator, airlines,
infrastructure assets; selling occupancy trains, ferries, buses)
often in combination with  Hotels
services  Telecoms
 Sports facilities
 Property
management
6. Financial Accepting cash from
Receiving deposits, depositors and paying  Bank
lending and investing them interest; using the  Investment house
money money to provide loans to
borrowers, charging them
fees and a higher rate of
interest than the
depositors receive
7. Insurance Collecting cash from many
Pooling premiums of customers; investing the  Life Insurance
many claims of a few money to pay the losses  car Insurance
experienced by a few  health Insurance
customers. By
understanding the risk
accepted and the
likelihood of a claim, more
premium income can be
earned than claims paid
 HISTORY AF ACCOUNTING  Any profits after tax can continue to be
reinvested in the cycle or paid out to the
Luca Pacioli owners as ROI.
- is regarded as the father of double-entry
accounting. Avtivities In Business Organization

-He is a Franciscan friar and a celebrated Financing Investing Operating

mathematician. Activities Activities Activities
methods an Managers uses Involve the use
-He stated that the purpose of organization capital from of resources to
uses to obtain financing design, produce,
bookkeeping was “to give the trader
financial activities to distribute, and
without delay of information as to his resources acquire other market goods
assets and liabilities.” from financial resources used and services
markets and in the
- He did not invent bookkeeping but how it transformation
rather described what were prevalent manages these process. (to
accounting practices of the day. resources transfer
resources from
- He said that it is always good to close the from to another
form)
book each year, especially if you are in a
Primary sources Selection and It includes
partnership with others. Frequent
of financing for management research and
accounting makes long friendship. most businesses including development,
are owners and disposal and design and
Fundamental Business Model creditors (e.g. replacement of engineering,
The business model is built on five activities: banks and long-term purchasing,
suppliers) resources that human
1 the investors provide the required capital for the will be used to resources,
business. develop, production,
produce, and distribution,
The cash investment will then be held in a bank
sell goods and marketing and
account. services. selling and
servicing.
2 The cash in the business can be:
- converted into another type of asset that
Repaying the Ex. Busying land, Organizations
will be used in the business or sold; or creditors equipment, compete in
- spent on operating costs such as salaries, (interest) and building, and supplier and
rentals and utilities. paying a return other resources labor market for
to the owners that are needed resources used
3 The combination of business resources provides (dividends) in the operation in these
the basis for producing the product or services. of the business activities
and selling these
4 The sale of a product or service generates an resources when Also, in product
they are no markets to sell
asset called receivable.
longer needed. the goods and
This asset once collected will provide a cash inflow services created
fro the business. by operating
activities.
5 The cash inflow from collections will be used to
pay the debt.
The rest of the cash can be sent back to the cycle Purpose and Phases of Accounting
by being converted into other assets or spent on
operating cost. Accounting handles the financial operations of the
business but also provides information and advice
 In the normal course of business, this whole to other departments.
process will earn profits on which tax will
have to be paid.
Accounts are produces to aid management in (2) Periodicity Concept
planning, control ad decision-making and to – this concept allows the users to obtain timely
comply with regulations. information to serve as a basis on making decisions
about future activities.
An accounting information will be useful; it must
be expressed in terms of common financial – equal time periods (reporting purposes)
denominator-money.
– allows the users to obtain timely information (for
Business transactions are the economic activities decision-making)
of a business.
– one year is the usual accounting period fro
Before the effects of transaction can be recorded, external reporting (calendar/fiscal year)
they must be measured.
(3) Stable Monetary Unit Concept
An accounting information will be useful; it must – it allows accountants to add and subtract peso
be expressed in terms of common financial amounts as though each peso has the same
denominator-money. purchasing power as any other peso at any time.

– PHP is a reasonable unit of measure and that its

Money serves as both a medium of exchange and purchasing power is relatively stable
measure of value.
(4) Going Concern
To measure a business transaction, account must – Financial statements are normally prepared on
decide: the assumption that the reporting entity is a
- when the transaction occurred going concern and will continue in operation for
(recognition issue) the foreseeable future
- what value to place on the transaction
(valuation issue) – the entity has nether the intention nor the need
- how the components of the transaction to enter liquidation or to cease trading.
should be classified (classification issue)
Takeaways:
To be useful in making decisions, the recorded data Double-entry Accounting is an accounting term
must be classified and summarized. stating that every financial transaction has equal
and opposite effects in at least two
Classification reduces the effects of numerous different accounts
transactions into useful groups or categories.
Summarization of financial data is achieved The Franciscan friar are one of the four large
through the preparation of financial statements. mendicant orders of the Catholic Church.
These summarize the effects of all business Mendicant means to live as a beggar and these
transactions that occurred during the same period. orders are known as the mendicant orders because
their members all take vows of poverty.
The result of the summarization phase is to be
interpreted or analyzed to evaluate the liquidity, A calendar year always begins on New Year's Day
profitability and solvency of the business and ends on the last day of the month (Jan. 1 to
organization. Dec. 31 for those using the Gregorian calendar). A
fiscal year can start on any day and end precisely
365 days later.
Fundamental Concepts in the Accounting Process

(1) 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.
 Accountancy in the Philippines Historical Cost
- the acquired assets should be recorded
Philippine accountancy as a recognized profession to their actual cost and not at what
was on March 17, 1928. management thinks they are worth as at
reporting date
Act No. 3105 was approved by the Sixth Legislature:
Revenue Recognition Principle
“An Act Regulating the Practice of Public - revenue is to be recognized in the
Accounting; creating the Board of Accountancy; accounting period when goods are
Providing for Examination, for the Granting of delivered or services are rendered or
Certificates, and the Registration of Certified Public performed
Accountants; for the Suspension or Revocation of
Certificates; and for other purposes” Expense Recognition Principle
- expenses should be recognized in the
Republic Act No. 9501 accounting period in which goods and
- signed into law by President Gloria services are used up to produce revenue
Macapagal-Aroyo and not when the entity pays for those
goods and services
- banks and lending institutions are now
required to allocate atleast 10% of their Adequate Disclosure
total loan portfolio to MSMEs, broken - require all relevant information that
down as follows: would affect the user’s understanding and
assessment o the accounting entity be
- 8% to micro and small enterprises, 2% disclosed in the financial statements
medium enterprises
Materiality
- the old law provided only a total of 8% - materiality depends on the size and
nature of the item judged in the particular
- updated the definitions of MSMEs by circumstances of its omission
increasing net assets threshold
Consistency Principle
Category - firms should use the same accounting
Enterprises By Asset Size By number of method from period to period to achieve
Employees comparability over time within a single
Micro Up to P 3M 1-9 employees enterprise
(from P 1.5M)
Small P 3 M - P 15M 10-99 - changes are permitted if justifiable and
(from P 1.5M) employees disclosed in the financial statements
Medium P 15M - P 100M 100-199
employees Big Five (now Big Four) Accounting Firms in the
World

Basic Principles - the nickname used to refer to the four

largest accounting firms in the United States (or
Objectivity Principle around the world), as measured by revenue
- Accounting records and statements are
based on the most reliable data available PwC
so that they will be as accurate and as Deloitte
useful as possible. EY
- Without this principle, accounting KPMG
records would be based on whims an Arthur Andersen (defunct, used to be no. 1)
opinions and is therefore subject to Biggest local firm
disputes. - SGV or SyCip Gorres Velayo & Co. (SGV &
Co.)
Philippines Accountancy Act of 2004 Section 13. The CPA Examination
- R.A. 9298; signed into law by President - all applicants are required to undergo a licensure
Gloria Macapagal-Aroyo on May 13, 2004 examination subject o compliance with the
requirements of the Commission in accordance
- repealed Presidential Decree No. 692 in with R.A. 8981 (PRC Modernizaton Act of 2000)
1975 (revised accountancy law)
Section 14. Qualifications of Appicants for
Section 4. Scope of Practice: Examination
(1) Practice of Public Accountancy  Filipino Citizen
(2) Practice in Commerce & Industry  Good Moral Character
(3) Practice in Education/Academe  Holder of the degree of BSA
(4) Practice in Government  Not convicted of crimes involving moral
turpitude

Section 5. The Professional Regulatory Board of Section 15. Scope of Examination

Accountancy and its Composition  CPALE coverage (7):
(1) Theory of Accounts,
- composed of a chairman and six (6) members (2) Business Law and Taxation,
appointed by the President of the Philippines from (3) Management Services,
a list of three (3) recommendees for each position (4) Auditing Theory,
and ranked by the commission, from a list of five (5) (5) Auditing Problems,
nominees for each position submitted by the (6) Practical Accounting Problems I, and
accredited national professional organization of (7) Practical Accounting Problems II
certified public accountants.
 Subjects Tested:
- the board shall select a vice-chairman from (1) Financial Accounting and Reporting,
among its members for a term of one year (2) Taxation,
(3) Regulatory Framework for Business
Transactions
Section 6. Qualifications of Members of the (4) Advanced Financial Accounting and
Professional Regulatory Board Reporting, and
(5) Auditing
 natural born citizen and PH resident
 Duly registered CPA with 10 years of Section 16. Rating in the Licensure Examination
experience - A candidate must obtain a general average of
 Good moral character; not convicted of 75% with no grades lower than 65% in nay given
crimes involving moral turpitude subject
 No pecuniary interest with any institution - conditional credit
conferring an academic degree in
accountancy, conducting review classes for Section 17. Report of Ratings
CPALE; shall not be a member of - the Board shall submit the rating obtains by each
faculty/administration thereof candidate to the Commission within ten (10)
 Shall not be a director/officer of Accredited calendar days after the examination
National Professional Organization of CPAs
Section 18. Failing the Candidates o Take a
Refresher Course
- any candidate who fails 2 complete CPALE shall
be disqualified to take again, unless he/she
completed at least 24 units of subject in the exam
Section 13. The
- examination in which the candidate was
conditioned together with the removal
examination on the failed subject is counted as one
complete examination
Philippines’ Board of Accountancy - Luca said that to be successful every
merchant needs three essential things:
Under the stewardship of PRC (Professional (1) sufficient cash or credit, (2) a good
Regulation Commission), it discharges its mandate bookkeeper, (3) and an accounting system
of supervising, controlling, and regulating the to view the business affairs at a glance
practice of accountancy with authority and
distinction; raise standards of the profession to a - he dicussed three (3) books in Summa:
very high level of excellence as seen in the (1) the memorandum, (2)the journal,
following (3)and the ledger
developments: Memorandum
1) Full computerization of CPA licensure exams - where all transaction are recorded, in
2) Upgrading the quality of accounting education the currency in which they are conducted,
3) Regulation of CPA firms and partnerships at the time they are conducted
4) Requirement of CPAs the civil service
- prepared in chronological order

- a narrative description of the business’s

economic events

- is necessary to support transactions as

documents

Journal
- merchant’s private book

- entries are in one currency

-chronological order

- in narrative form
Philippines Institute of Certified Public Accounts
(PICPA) Ledger
- accredited by PRC in 0975 as the - alphabetical listing along with the
bonafide professional organization representing running balance of each particular
CPAs in the country to further strengthen the account
profession
- where T-Accounts can be found

Accountancy is the first among the PH professions Why has a recording system devised from the
to be included under the World Trade medieval time lasted so long?
Organization’s policy of liberation of services; Answer:
freely compete globally. Because of two main reasons: (1)it
provides an accurate record of what has happened
to a business over a specified period of time; (2)
Pacioli’s Double-entry Bookkeeping and its and information extracted from the system can
evolution help the manager or the owner operate the
business much more effectively.
Summa de arithmetica, geometria, proportioni et
proportionalita
- is a book on mathematics written
by Luca Pacioli and first published in 1494.

- there are 36 short chapters of

bookkeeping
 Philippine Accounting Standards Core Competencies Frameworks for
Accountants
Accounting Standards Council (ASC) • Bridge the gap between requirements of the
- created by PICPA on November 18, 1981 workplace and the academic preparation of
to establish and improve accounting professionals
standards that will be generally accepted
• Competency-based approach to education
- in the Philippines; substantial
authoritative support from interested • Strategic goal: Produce technically competent
parties and ethical professional accountants ready to
compete internationally
- supported by: Securities an Exchange
Commission (SEC), Central Bank of the 1. Knowledge
Philippines (CB), Professional Regulation ❑ General Knowledge
Commission (PRC), Financial Executives ❑ Organization and Business Knowledge
Institute of the Philippines (FINEX) ❑ Information Technology Knowledge
❑ Accounting Knowledge
- Composed of 8 members (4 from PICPA
an done each: SEC, PB, PRC, FINEX) 2. Skills
❑ Intellectual
- standards based from: existing practices ❑ Interpersonal
in the PH; research/studies of the Council; ❑ Communication
international literature; statements,
recommendations, studies, or standards 3. Values
from IASB and FASB ❑ Professional Ethics
❑ Moral Values

Financial Reporting Standards Council (FRSC) Code of Ethics for Professional Accountants in the
- as per Section 9 (A) of the Rules and PH
Regulations Implementing R.A. 9298, this Approved by the Board of Directors of PICPA and
shall be the new accounting standard PRC as part of the rules and regulations of the BOA
setting body for the practice of the accountancy profession

- composed of 15 members with a Adopted from the revised Codeof Ethics of IFAC
chairman, who had been or presently a effective June 30, 2008
senior accounting practitioner in any of
the scope of accounting practice and 14 International Federation of Accountants (IFAC) -
representatives from the following: international body representing all the major
(a) BOA – 1 accountancy bodies across the world
(b) SEC – 1
(c) BSP – 1 Distinguishing mark of the profession: Acceptance
(d) BIR – 1 of the responsibility to act in the public interest
(e) A major organization composed of
preparers and users of financial Professional accountant
statements - 1 - an individual who holds a valid
(f) COA - 1 certificate issued by the BOA, whether
(g)Accredited National Professional he/she be in public practice, industry,
Organization of CPAs: commerce, the public sector or education;
Public Practice – 2; should observe and comply with the
Commerce and Industry – 2; ethical requirements of the Code
Academe/Education – 2;
Government - 2
3 Parts of the Code: b) Commerce and Industry – Financial Accounting
A. Fundamental Principles of Professional and Reporting Staff; Management
Ethics and Conceptual Framework Accounting Staff; Tax Accounting Staff;
Internal Audit Staff; Financial Analyst;
B. Professional Accountants in Public Budget Analyst; Credit Analyst; Cost
Practice Accountant; Comptroller; Senior
Information Systems Auditor; Senior
C. Professional Accountants in Business Fraud Examiner; Senior Forensic Auditor;
Chief Financial Officer; Chief Information
Fundamental Principles Officer
Integrity
- straightforward and honest; c) Government Service – State Accounting
Examiner; State Accountant; LGU
Objectivity Accountant; Revenue Officer; Audit
- should not allow bias or conflict of Examiner; Budget Analyst;
interest Financial Services Specialist; State
Accountant V; Director III and Director IV;
Professional Competence and Due Care Government Accountancy and Audit;
- continuing duty to maintain professional Financial Services Manager; Audit Services
knowledge and skill; exercise of sound Manager; Senior Auditor; National
judgment; phases: attainment and Treasurer; Vice
maintenance; diligence; make customers President for Finance/CFO; Commissioner;
aware of limitations inherent in the Associate Commissioner; Assistant
services Commissioner (COA, BIR, BOC)

Confidentiality d) Education/Academe – Junior Accounting

- should not disclose information to third Instructor; Senior Faculty; Accounting
parties without proper and specific Department Chair; Vice President for
authority unless there is legal right or duty Academic Affairs; Dean
to do so.

Professional Behavior Branches of Accounting

- comply with relevant laws and AUDITING
regulations; should not bring the External audit –independent examination
profession into disrepute that ensures the fairness and reliability of
reports that management submits to
external users; result embodied in the
The Accountancy Profession independent auditor's report (External vs.
Internal)
Characteristics
• All members earned a degree and passed a BOOKKEEPING
licensure exam • Mechanical task of collecting financial
• Own body of language data; routinary
• Adhere to a Code of Ethics • Procedures end when the basic data
• Member of a national organization, PICPA, for have been entered to the books of
the profession’s continued improvement Career accounts and checked for accuracy, which
Opportunities is taken over by acctg.

a) Public Practice - Audit Staff; Tax Staff; COST ACCTG

Management Services/Consulting Staff; • Cost bookkeeping
Audit Manager; Tax Manager; Consulting • Costing
Manager; Partner; Senior Partner; Senior • Cost Accounting
Consultant/Financial Advisor
FINANCIAL ACCTG
• Focused on recording of business
transactions and the periodic preparation
of reports on financial position and results
of operations

FINANCIAL
MANAGEMENT
• Setting financial objectives, making
plans based on those objectives, obtaining
the finance needed to achieve the plans,
and generally safeguarding all the
financial resources of the entity

MANAGEMENT ACCTG
• Incorporates cost accounting data and
adapts them for specific decisions of
management
• Utilizes both financial and non-financial
information

TAXATION
• Preparation of tax returns and
consideration of tax consequences of
proposed business transactions or
alternative courses of action
• Comply with tax statutes

GOVT ACCTG
• Concerned with proper custody and
disposition of public funds
• Identification of sources and uses of
resources consistent with provisions of
the law

Takeaways:
An efficient business is on that provides gppds and
services at low cost relative to their selling prices.
An effective business is one that successful in
providing goods and services demanded by the
customers.
 CHAPTER 2:
Accounting Equation & Double Entry System 5. Expenses
-decreases in economic benefits during
the accounting period in the form of
The Accounting Equation outflows or depletions of assels or
incurrences of liabilities that result in
Assets = Liabilities + Owner’s Equity decreases in equity, other than those
relating to distributions to equity
participants
Assets = Liabilities + Owner’s Equity + Revenue -
Expenses
The Account or “T” Account
or - the basic summary device of accounting
Assets = Liabilities + Initial Investment is the account.
+ Addt’l Investment - Withdrawals + Income – - A separate account is maintained for
Expenses each element that appears in the balance
sheet (assets, liabilities, and equity) and in
The Accounting Equation the income statement (income and
- most basic tool of accounting expenses).
- it states that assets must always equal - The simplest form of the account is
liabilities and owner’s equity. known as the “T” account

DEBITS AND CREDITS THE DOUBLE ENTRY SYSTEM

Elements of Financial Statements
• Accounting is based on a double-entry system
Conceptual Framework for Financial Reporting which means that the dual effects of a business
2018 transaction are recorded.

1. Assets (Owned) • Each transaction affects at least two accounts.

- resource controlled by the entity as a
result of past events and from which • The total debits for a transaction must always
future economic benefits are expected to equal the total credits.
flow to the entity
• abbreviation for debit are Dr (from Latin
2. Liabilities (Owed) debere) and credit Cr (from Latin credere)
- present obligation of the entity arising
from past events, the settlement of which
is expected to result in an outflow from Normal Balance
the entity of resources embodying - refers to the side of the account debit or
economic benefits credit where increases are recorded

3. Owner's Equity
- residual interest in the assets of the
entity after deducting all its liabilities.

4. Income
- increases in economic benefits during
the accounting period in the form of
inflows or enhancements of assets or
decreases of liabilities that result in
increases in equity, other than those
relating to contributions from equity
participants
 Types and Effects of Transactions

Source of Assets
❑ increase in assets, increases in
liabilities or owner’s equity
❑ Example: Purchase on account

Exchange of Assets
❑ increases in assets, decrease in assets.
❑ Example: Acquired equipment for cash.

Use of Assets
❑ decrease in asset, decrease in liabilities
❑ Example: Paid salaries of employees.

Exchange of Claims
❑ liabilities or owner’s equity increases,
liabilities or owner’s equity decreases.
❑ Example: Received utilities bill but did
not pay.

Typical Account Title Used

(Statement of Financial Position)

(Statement of Financial Performance)

Accounting event
- is an economic occurrence that causes Inventories. Per PAS No. 2, these are (a) held for
changes in an enterprise’s assets, sale in the ordinary course of business; (b) in the
liabilities, and/or equity. process of production for such sale; or (c) in the
form of materials or supplies to be consumes in
Transaction the production process or in the rendering of
- is a particular kind of event that involves services.
the transfer of something of value e.g. merchandise, supplies, raw materials
between two entities.
Prepaid Expenses. Expenses paid in advance
Operating Cycle e.g. prepaid rent, prepaid insurance
- the time between the acquisition of
assets for processing and their realization Non-cureent Assets
in cash or cash equivalents. Property, Plant and Equipment. Per PAS No. 16,
these are tangible assets that are held by
enterprises for use in the production or supply of
Typical Account Title Used goods or services, or for rental to others, or for
Statement of Financial Position administrative purposes and which are expected to
Current Asset be used more than one period.
A. It expects to realize the asset, or e.g. computers, machines, land property, building
intends to sell or consume it, in its normal
operating cycle Accumulated Depreciation. A contra account that
B. Holds the asset for trading contains the sum of the periodic depreciation
C. Realized within 12 months after charges. The balance of this account is deducted
reporting period from the cost of the related asset to obtain book
D. The asset is cash or cash equivalent, value.
unless is restricted from being exchanged
or used to settle a liability for at least 12 Intangible Assets. PER pas nO. 38, these are
months after reporting period identifiable, non-monetary assets without physical
substance held for use in the production or supply
Current Assets of goods or services, for rental of others, or for
Cash. Cash is any medium of exchange that a bank administrative purposes.
will accept for deposit at face value. e.g. goodwill, patents, copyrights, licenses,
e.g. coins, currency, checks, money orders, bank franchises, trademarks, brand names, secret
deposits, drafts processes, subscription lists, non-competition
agreements
Cash Equivalents. Per PAS No. 7, these are short-
term, highly liquid investments that are readily
convertible to known amounts of cash and which Current Liability
are subject to an insignificant risk of changes in A. Expects to settle liability in its normal
value. operating cycle
e.g bank certificates of deposit, banker's B. Holds liability primarily for trading
acceptances, Treasury bills, commercial paper, and C. Dues to be settled within 12 months
other money market instruments after reporting period; or
D. The entity does not have an
Notes Receivable. Is a written pledge that the unconditional right to defer settlement of
customer will pay the business a significant the ;ability for at least 12 months after the
amount of money on a certain date. reporting period
e.g. promissory note
Current Liabilities
Accounts Receivable. Claims against customers Accounts Payable. Represents the reverse
arising from sale of services or goods on credit. relationship of the accounts receivable. The buyer
This offers less security than a promissory note. agrees to pay after acquiring on credit.
e.g. purchases on credit with no contract
Notes Payable. Note receivable in reverse. The Income Statement
business entity is the maker of the note; promising Income
to pay the other party with a specified money on a Service Income. Revenues earned by performing
specific date. services for a customers or client; for example
accounting services offered by accounting firms, or
Accrued Liabilities. Amounts owed to others for services offered laundry shop
unpaid expenses.
e.g. salaries payable, utilities payable, interest Sales. Revenues earned as a result of sale of
payable, taxes payable merchandise; for ex. Sale of building materials bya
construction supplies firm
Unearned Revenues. When the business entity
receives payment before providing its customers Expenses
good or services. Cost of Sales. The cost incurred to purchase or to
produce the products sold to customers during the
Current Portion of Long-Term Debt. Portions of period, also known as cost of goods sold.
mortgages notes, bonds and other long-term
indebtedness which are to be paid within one year Salaries or Wages Expenses. Includes all payments
from the balance sheet date. as a result of an employer-employee relationship
such as salaries or wages, 13th month pay, cost of
living allowances and other related benefits.
Non-current Liabilities
Mortgage Payable. Records long-term debt of the Telecommunication, Electricity, fuel and Water
business entity for which the business entity has Expenses. Expenses related to use of
pledged certain assets as security to the creditor. telecommunication facilities, consumption of
In the event that the debt is not paid the creditor electricity, fuel and water.
can foreclose the or cause the mortgaged asset t
be sold to enable the entity to settle the claim. Rent Expense. Expense for space, equipment or
other asset rentals.
Bonds Payable. Business often obtain substantial
sums of money from lenders to finance the Supplies Expense. Expense of using supplies (e.g.
acquisition of equipment and other needed assets, office supplies) in the conduct of daily business.
they obtain these by issuing bonds. The bond is a
contract between the issuer and the lender Insurance Expense. Portion of premiums paid on
specifying the terms of repayment and the interest insurance coverage (e.g. on motor equipment,
to be charged. health, life, fire, typhoon, or flood) which has
expired

Owner’s Equity Depreciation Expense. The portion of the cost cost

Capital (from the Latin capitalis, menaing of a tangible asset (e.g. building and equipment)
“property”). Used to record the original and allocated or charged as expenses during an
additional investments of the owner of the accounting period.
business entity. Increased by profit or decreased
by loss and withdrawal. Bears the name of the Uncollectible Account Expenses. The amount of
owner. receivables estimated to be doubtful of collection
and charged as expenses during and accounting
Withdrawals. When the owner withdraws cash or period.
other assets from the business are recorded in the
drawing account rather than directly to the equity. Interest Expense. An expense related to use pf
borrowed funds.
Income Summary. It is a temporary account used A business transaction is the occurrence of an
at the end of the accounting period before closing event or a condition that affects financial position
to the capital account. and can be reliably recorded.
 CHAPTER 3: Journal
Basic Financial Accounting & Reporting - a chronological record of the entity’s
transactions
Transactions and events are the starting points in
the accounting cycle. - book of original entry

Source Documents - general journal is the simplest journal

- these original written evidences contain
information about the nature and the Standards contents of general journal:
amounts of the transactions. 1. Date. The year and month are nor rewritten for
- these are the basis for the journal every entry unless the year or the month changes
entries or a new page is needed.

Accounting Cycle 2. Account Titles and Explanation. The account to

Step 1 Identification and Analyzing of Events be debited is entered n the extreme left of the first
Step 2 Journalizing Transactions line while the account to be credited is entered
Step 3 Posting Journal Entries to the Ledger slightly indented on the next line. A brief
Step 4 Preparation of Trial Balance description of the transaction is usually made on
Step 5 Preparation of Worksheet and Adjusting the line below the credit. Generally, skip a line
Entries after each entry.
Step 6 Preparation of the Financial Statement
Step 7 Adjusted Journal Entries 3. P. R. (posting reference). used when the entry
Step 8 Closing Journal Entries are posted, that is until the amounts are
Step 9 Preparation of Post-Closing Trial Balance transferred to the ledger accounts. The posting
Step 10 Reversing Journal Entries process will be described later.

Posting 4. Debit. The debit amount each account is

- transferring the amounts from the entered in the column.
general journal to appropriate accounts in
the ledger 5. Credit. The credit amount for each account is
entered in this column.
The Ledger
- a grouping of accounts Simple Entry
- only two accounts are affected—debit
- used to classify and summarize and credit.
transactions and o prepare data for basic
financial statements Compound Entry
- three or more accounts are required in a
-organizes information by account journal entry

- every account in the ledger maintains

the basin format of the T-Account but Accounts in the ledger are classified into two
offers more information (e.g. the account general groups:
number in the upper right corner and the 1. Balance sheet or permanent accounts (assets,
journal reference column) liabilities, and owners equity)

- general ledger is the “reference book” 2. Income statement or temporary accounts

(income and expenses). Temporary or nominal
Trial Balance accounts are used to gather information for a
- listing of all ledger accounts, in order, particular accounting period. At the end of the
with their respective debit or credit period, the balances of these accounts are
balance transferred to a permanent owner’s equity account.
 Ledger Accounts After Posting Locating Errors

At the end of accounting period, the debit and Inequality in the total of debit and credit signal
credit balance of each account must be errors. The errors could include:
determined to enable us to come up with a trial 1. Error in posting a transaction to the ledger:
balance.  An erroneous amount was posted to the
- Each account balance is determined by account.
footing (adding) all debits and credits.  A debit entry was posted as a credit or
- Which ever sum is grater whether vice versa.
debit or credit will be the balance of the  A debit or credit posting was omitted.
account.
2. Error in determining the account balances:
 A balance was incorrectly computed.
 A balance was entered in the wrong
balance column.
3. Error in preparing the trial balance:

 one of the columns of the trial balance

was incorrectly added.
 the amount of an account balance was
incorrectly recorded on the trial balance
 A debit balance was recorded on the
trial balance as a credit or vice versa, or
a balance was omitted entirely.
Trial Balance
- listing of all ledger accounts, in order, What is the most efficient approach in locating an
with their respective debit or credit error? The following procedures when done in
balances sequence may save considerable time and effort in
locating errors:
- prepared to verify the equality of debit
and credit 1. Prove the addition of the trial balance columns
by adding these columns in the opposite direction.
- is a control device that helps minimize
errors. 2. If the error does not lie in addition, determine
the exact amount by which the trial balance is out
This equality provides an interim proof of the of balance. The amount of the discrepancy is often
accuracy of the records but it does not signify the a clue to the source of the error. If the discrepancy
absence of errors. For instance, if the bookkeeper is divisible by 9, this suggests either a transposition
failed to record payment of rent, the trial balance (reversing the order of numbers) error or a slide
columns are equal but in reality, the accounts are (moving of the decimal point). For example,
incorrect since rent expense is understated and assume that the cash account balance is P21,750,
cash is overstated. but in copying the balance into the trial balance
the figures are transposed and written as P21,570.
The resulting error amounted to P180 and is
divisible by 9. Another common error is the slide,
or incorrect placement of the decimal point, as
when P21,750.00 is copied as P2,175.00. The
resulting discrepancy in the trial balance will also
be an amount divisible by 9.

Assume that the office equipment account has a

debit balance of P42,000 but it is erroneously listed
in the credit column of the trial balance. This will
cause a discrepancy of two times P42,000 or
P84,000 in the trial balance totals. Since such
errors as recording a debit in a credit column are
common, it is advisable, after determining the
discrepancy in the trial balance totals, to scan the
columns for an amount equal to exactly one-half of
the discrepancy.

It is also advisable to look over the transactions for

an item of the exact amount of the discrepancy. An
error may have been made by recording the debit
side of the transaction and forgetting to enter the
credit side.

3. Compare the accounts and amounts in the trial

balance with that in the ledger. Be certain that no
account is omitted.

4. Recompute the balance of each ledger account.

4. Trace all postings from the journal to the ledger

accounts. As this is done, place a check mark in the
journal and in the ledger after each figure is
verified. When the operation is completed, look
through the journal and the ledger for unchecked
amounts. In tracing postings, be alert not only for
errors in amount but also for debits entered as
credits, or vice versa.

Note that even when a trial balance is in balance,

the accounting records may still contain errors. A
balanced trial balance simply proves that, as
recorded, debits equal credits. The following errors
are not detected by a trial balance:

1. Failure to record or post a transaction.

2. Recording the same transaction more than once.

3. Recording an entry but with the same erroneous

debit and credit amounts.

4. Posting a part of a transaction correctly as a

debit or credit but to the wrong account.