a.​ E.g.

business owners, board of directors, managerial

personnel
CHAPTER 1: INTRODUCTION TO ACCOUNTING
b.​ An example of information needs is income for the period
Definition of Accounting - a process of identifying, recording, and communicating
financial information of an organization useful for making economic decisions 2.​ External users - not directly involved in managing the business. These
are individuals who want financial information about the company,
●​ Identifying - analyzing accountable events that are relevant for business including the Securities and Exchange Commission (SEC), Bureau of
transactions (known as economic events or those that affect the assets, Internal Revenue (BIR), Department of Labor and Employment (DOLE),
liabilities, equity, income, and expenses) Social Security System (SSS), and Local Government Units (LGUs).

●​ Recording - assigning numbers and initial recording of business a.​ E.g. investors, lenders, government agencies, non-managerial
transactions (journalizing) and classifying the effects of the events on employees, customers, public
the accounts (posting)
b.​ An example of information needs is the performance of the
●​ Communicating - summarizing the information processed from company
economic data into accounting information such as financial statements
and then reporting it to interested users Types of Accounting Information Classified as to Users’ Needs

Types of Information provided by Accounting 1.​ General Purpose - to meet the common needs of most statement users,
primarily external users, through financial accounting
1.​ Quantitative information - numbers, quantities, or units not expressed
monetarily 2.​ Special Purpose - to meet the specific needs of particular statement
users, primarily internal users, through management accounting
a.​ E.g. 5kg, 15 pcs
Brief History of Accounting - 10,000 years ago when accounting was invented. They
2.​ Qualitative information - basic information expressed in words or were used to keep records of clay tokens and wet clay tablets. Advancement began
descriptive form in the Middle Ages. The concept of equality for entries paves the way to double-entry
records. Luca Pacioli made the first systematic record-keeping of the double-entry
a.​ E.g. Dates, Name of the Company recording system.

3.​ Financial information - numbers expressed in monetary units Common Branches of Accounting

a.​ E.g. ₱5,000 1.​ Financial Accounting

Nature of Accounting - a systematic recording of financial transactions and the ➔​ systematic records of financial transactions (journals and ledgers)
presentation of related information to the appropriate person to be used in making ➔​ focuses on general-purpose financial statements at least annually
economic decisions
➔​ provides the history of the company’s performance to help external users

●​ Service activity - assists decision-makers through financial reports in decision-making

➔​ governed by the Philippine Financial Reporting Standards (PFRSs)
●​ Art and discipline - involves certain creativity and techniques that help
accountants attain particular objectives. It also follows certain standards
and professional ethics, making it a discipline Financial Reporting - entire process of preparing, reviewing, and presenting financial
information. It promotes principles that are also useful to other financial reporting
●​ Information system - collects processes and communicates financial
information: input, process, output ●​ Primary objective: To provide information about an entity’s economic
resources (assets), claims to those resources (liabilities and equity), and
changes in those resources (income, expenses, etc.)
○​ Inputs - identified accountable events

●​ Secondary objective: To provide information useful in assessing the

○​ Processes - recording, classifying, and summarizing
entity’s management stewardship
○​ Output - accounting report
Financial Statements - structured representation of an entity's financial position and
results of its operations. They are the end product of the accounting process
Bookkeeping and Accounting
covering the following:

●​ Bookkeeping - a process of recording the accounts or transactions of an

1.​ Statement of profit or loss and other comprehensive income (income
entity. It normally ends with the preparation of the trial balance. It doesn’t
statement) - performance of the business in a specific period
require the interpretation of the information processed.

Format:
●​ Accounting - covers the whole process of identifying, recording, and
communicating information to interested users.
ABC Company
Income Statement
Function in Business - accounting is the language of the business as it provides For the Year 2023
information to determine the efficiency of the business operations
➔​ Contains temporary/nominal accounts such as Income and Expenses
●​ To provide external users with information in making investment and
credit decisions 2.​ Statement of changes in equity - shows how the equity of the company
has changed over a period
●​ To provide internal users with information on managing the business
a.​ Income salary/retained earnings
Users of Accounting Information b.​ Withdrawals
c.​ Investment/capital
1.​ Internal users - directly involved in managing and operating the business.
d.​ Net income/loss
 accounting principles (GAAP). The audit does not cover 100% of the
3.​ Statement of cash flows - detailed analysis of the company's cash accounting records but the CPA reviews a selected sample of these
inflows and outflows over a period records and issues an audit report.
➔​ It requires 600,000 amount to provide an audit
a.​ Operating - transactions daily

➔​ Businessess with gross annual sales exceeding 3M are required to have

b.​ Investing - purchases of equipment
their FS audited by a CPA.

c.​ Financing - interest and notes

5.​ Tax Accounting

4.​ Statement of financial position (balance sheet) - current status of the

➔​ preparation of tax returns
business
➔​ provides tax advice
Format:

6.​ Cost Accounting

ABC Company
Balance Sheet
As of Dec. 2023 ➔​ refers to the recording, presentation, and analysis of manufacturing
costs and their effects on earnings and pricing
➔​ analyses of costs of products or services
Notes:

-​ Late submission of FS results to a charge of 37% 7.​ Accounting Education

-​ 25% = charges
-​ 17% = interest ➔​ teaching accounting-related subjects

➔​ Contains real accounts such as Assets, Liabilities, and Equity

8.​ Accounting Research
5.​ Notes - provide additional detail and context to the financial statements
➔​ range of topics related to accounting through research papers, articles,
and other publications
6.​ Additional statement of financial position

Forms of Business Organizations

Financial Report/Other Financial Reporting - an output that includes financial
statements and other information outside the financial statements that assists in
Business - an activity where goods and services are exchanged for money
the interpretation of a complete set of FS to make efficient economic decisions. All
FS are FR, but not all FR are FS as they include other types of information such as
quarterly report Entrepreneur or businessman - a person who is engaged in business

2.​ Management Accounting 1.​ Sole/Single Proprietorship

➔​ preparation of timely and relevant information and specific management ➔​ owned by only one individual

reports for those internal users of accounting information, such as the ➔​ the business and the owner are inseparable

managers and employees in their decision-making needs ➔​ the business owner is called a sole/single proprietor

➔​ these are sensitive information and are not distributed to those outside ➔​ registered with the Department of Trade and Industry (DTI)

the business, such as prices, plans to open up branches, customer lists, ➔​ transferring of ownership: sell the business (it’s a new entity under a new

etc. owner)

➔​ involves many phases of business conduct and operations

➔​ helps business operations project its revenue and others Advantages Disadvantages
➔​ controls the future events

●​ The owner keeps all the ●​ The life of the business is

3.​ Government Accounting profits limited to the owner

➔​ view of the financial activities and position of the government ●​ The owner makes all the ●​ Limited amount of capital
➔​ deals with how the funds of the government are recorded and reported to decisions
ensure that resources are allocated properly ●​ Reliable for all the risk of
●​ Easy to form and operate loss and obligations of the
➔​ the government uses the new government accounting system policy
for there are fewer formal business
business requirements
4.​ Auditing
●​ Lower extent of
➔​ verifies financial statements through factual opinions to ensure that they government regulation and
taxes
adhere to the established criteria and requirement
➔​ internal auditing deals with determining the operational efficiency of the
company regarding the protection of the company’s assets, accuracy
and reliability of the accounting data, and adherence to certain 2.​ Partnership
management policies. It focuses on evaluating the adequacy of a
company's internal control structure ➔​ owned by two or more persons (maximum of 5)

➔​ external auditing refers to the examination of financial statements by a ➔​ formed by a contract

CPA to express an opinion as to compliance with the generally accepted ➔​ the business owners are called a partner
➔​ profits are divided among partners based on their agreed sharing 4.​ Cooperatives
➔​ partners transact on behalf of the partnership
➔​ owned by an association of persons with a common bond of interest,
➔​ transfer of ownership: sell the business or interest of a partner (consent
voluntarily joining together to achieve their social, economic, and cultural
of other partners is necessary)
needs.
➔​ registered with the Securities and Exchange Commission (SEC)
➔​ formed in accordance with the provisions of The Philippine Cooperative
Code of 2008
Advantages Disadvantages ➔​ owners are called members, who are expected to patronize their
products and services
➔​ the founding members shall not be less than 15 individuals, while it can
●​ Greater capital compared ●​ Conflict among partners
to a sole proprietorship due to different business have as many members
decisions ➔​ transfer of ownership: Cannot transfer nor sell his membership
●​ Better business decisions
➔​ regulated by the Cooperative Development Authority (CDA)
made by two or more ●​ The profits are divided
parties
●​ A partner can be held liable
Advantages Disadvantages
●​ Easy to operate like a sole for the acts of the other
proprietorship partners

●​ Unlimited liability. The ●​ Tax exemption privilege ●​ Prone to poor

partners can be held liable management for members
for partnership debts ●​ Easy to form and operate of cooperatives are mostly
for there are fewer formal not professional managers
●​ Limited life. The business requirements
partnership can be ●​ Prone to corruption
dissolved by the ●​ Limited liability. Members
withdrawal, retirement, or are liable for cooperative ●​ When a cooperative is
death of one debs only up to the amount dissolved, the amount
they have invested accumulated in the fund
will be donated to other
●​ Unlimited life. The cooperatives and will not
withdrawal, retirement or be returned to the
3.​ Corporation death of one cannot members, called reserve
dissolve the cooperative fund
➔​ founders are called incorporator (at least 5 and maximum of 15)
➔​ formed by operation of law ●​ Termination of the
business: As stated in the
➔​ ownership is represented by shares of stocks
Articles of Incorporation,
➔​ owners are called stockholders or shareholders (can have as many as it not to exceed 50 years.
can)
➔​ separate from its owners
➔​ transfer of ownership: sell stocks
➔​ registered with the Securities and Exchange Commission (SEC) Types of Business According to Activities

1.​ Service Business - offers professional skills, advice, and consultations

rather than physical goods
Advantages Disadvantages

Example: Schools, Professionals, Hospitals, etc.

●​ Can easily raise additional ●​ Complicated to set up as it

funds by selling shares of is costly and requires more Advantages Disadvantages
stocks to the public formal business
requirements
●​ Shareholders are not ●​ Minimal supplies ●​ Limited personal time
personally liable for the ●​ Subject to greater
debts of the corporation government regulation and ●​ Small capital ●​ Suffer from decline in
taxes demand
●​ Unlimited life. The ●​ Perceived as an expert
withdrawal, retirement or ●​ Those who own more ●​ Costly to commit an error
death of one cannot shares enjoy a larger share
dissolve the corporation of the company’s profit

●​ Can easily transfer the ●​ Termination of the

shares to other investors business: As stated in the 2.​ Merchandising Business - buys at wholesale and later sells the products
by selling them in the stock Articles of Incorporation, at retail. Profit is made by selling the products at prices that are higher
market, called stock not to exceed 50 years. than their purchase costs. This type of business is also known as "buy
trading and sell."

Example: Grocery stores, pharmacies

 3.​ Going concern
Advantages Disadvantages
➔​ business is expected to continue indefinitely to see how viable it is
➔​ the opposite of going concern is liquidation, where business intends to
●​ Lower start-up capital ●​ You need to have a retail
compared to store and it must be in a end its operations. The assets of a liquidating concern are measured at
manufacturing strategic location net selling price rather than historical cost

●​ Can take advantage of ●​ Less flexibility in managing

price fluctuations costs 4.​ Matching

●​ Lower cost of quality ●​ Keeping track of inventory ➔​ recognizes expenses when there is revenue
is tedious ➔​ costs are recognized as assets and charged as expenses when revenue
●​ Expertise is not required is recognized

●​ You can sell other goods

when running out of a 5.​ Accrual basis
specific good
➔​ economic events are recorded in the period in which they occur rather
than it affect cash
➔​ revenue/income should be recognized when earned regardless of
3.​ Manufacturing Business - buys raw materials and uses them in making collection and are reported in the accounting period when services or
a new product
goods have been delivered

Example: Factories, technology companies ➔​ expenses should be recognized when incurred regardless of payment
and are reported in the accounting period when the expense matches the
revenues or is used up
Advantages Disadvantages
➔​ cash basis is when revenue is recorded when collected and expenses is
recorded when paid
●​ High growth potential ●​ High start-up capital

6.​ Prudence
●​ You have the opportunity ●​ You have to be competitive
to establish abrand and innovative to be viable
➔​ accountants observes unfavorable outcomes (future losses) to avoid
●​ Can directly sell to ●​ Warehousing and logistics high expectations
wholesalers costs can be high ➔​ assets and income should not be overstated while liabilities and
expenses should not be understated
●​ Greater flexibility in ●​ Shortage in raw material
managing costs
7.​ Time period
●​ Better pricing policy
➔​ financial statements are to be divided into specific time intervals
➔​ series of equal short periods is called reporting periods (accounting
periods), which is usually 12 months
4.​ Hybrid - engages in more than one type of activity ◆​ calendar - starts on January 1 and ends on Dec. 31 of the
same year
Example: Restaurant
◆​ fiscal - other dates than January 1 + 12 months
➔​ interim period - shorter than 12 months (e.g. a month, quarter (3
CHAPTER 2: ACCOUNTING CONCEPTS AND PRINCIPLES
months), semiannual (6 months))

Accounting Concepts and Principles - a set of logical ideas and procedures that
guide the accountant in recording and communicating economic information to 8.​ Stable Monetary Unit
users in a proper way
➔​ transactions/financial information are expressed in one currency
Basic Accounting Concepts sourced from the Standards (PFRSs), the Conceptual ➔​ changes in the purchasing power of the peso due to inflation are ignored
Framework for Financial Reporting, or general acceptance in the profession due to
long-time use:
9.​ Materiality
1.​ Separate Entity
➔​ an item is considered material when it has an effect on the business or
➔​ the business is separate from its owner could influence economic decisions
➔​ only records the transactions of the business and the personal ➔​ matter of professional judgement
transactions of the business owners are not recorded ➔​ in case of assets that are immaterial, the company should record it as an
expense
2.​ Historical Cost

10.​ Cost-benefit
➔​ assets are initially recorded at their acquisition cost
➔​ records transactions on how much was it when it happened ➔​ the cost should be lowered than its benefit
 11.​ Full disclosure 1.​ Fundamental Qualitative Characteristics - characteristics that make
information useful to users:
➔​ all relevant and material information should be reported
➔​ it comes with objectivity where financial statements must be presented A.​ Relevance - information is relevant if it can affect the decisions of users

with supporting evidence

I.​ Predictive Value - help users to make predictions about future
outcomes
12.​ Consistency
II.​ Confirmatory Value - help users confirm their past projections
➔​ accounting policies applied should be consistent from one period to
III.​ Materiality - information is material if misstating it could
another unless required by a standard to change
influence the decisions of users
➔​ any change in accounting policy must be disclosed
B.​ Faithful Representation - provides factual information and effects of
Accounting Standards events that have taken place

➔​ Explicit concepts and principles are those that are specifically mentioned I.​ Completeness - financial information should include all
in the Conceptual Framework for Financial Reporting and the Philippine necessary data and explanations
Financial Reporting Standards (PFRSs)
II.​ Neutrality - information is presented without bias
➔​ Implicit concepts and principles are customarily used due to their general
and longtime acceptance within the accountancy profession III.​ Free from error - information is not materially misstated and
no errors in the description and in the process
➔​ The term standard refers to the Philippine Financial Reporting Standards
(PFRSs), traditionally referred to as the Generally Accepted Accounting 2.​ Enhancing Qualitative Characteristics - characteristics that enhance the
Principles (GAAP), adopted/issued by the Financial Reporting Standards usefulness of information:
Council (FRSC). They consist of the following:
A.​ Comparability - help users identify similarities and differences between
◆​ Philippine Financial Reporting Standards (PFRSs) different sets of information in a business

◆​ Philippine Accounting Standards (PAS) B.​ Verifiability - authenticating financial information through supporting
evidence or documents to maintain integrity
◆​ Interpretations
C.​ Timeliness - information should be timely and available on time
➔​ The Financial Reporting Standards Council (FRSC) is the official
accounting standard-setting body in the Philippines D.​ Understandability - information should be presented in a clear and
precise manner, and users are expected to know about business
➔​ PFRS is patterned from the International Financial Reporting Standards activities to be understood
(IFRS), issued by the International Accounting Standard Board (IASB)

➔​ a detailed guide, rules, and application of concepts when recording and CHAPTERS 3 AND 4: THE ACCOUNTING EQUATION AND TYPES OF MAJOR
communicating accounting information from economic transactions ACCOUNTS

➔​ specifies certain information that should be included in financial reports The Basic Accounting Equation:

➔​ it ensures transparency and reliability of accounting information in Assets = Liabilities + Owner’s Equity
financial statements to be generally acceptable Assets - Liabilities = Owner’s Equity
Assets - Owner’s Equity = Liabilities
Relevant Regulatory Bodies
The Expanded Accounting Equation/Five Major Accounts:
1.​ Securities and Exchange Commision (SEC) - regulates partnerships and
corporations, requiring them to file audited financial statements Assets = Liabilities + OE + Income - Expenses

2.​ Bureau of Internal Revenue (BIR) - tasked in collecting national taxes Assets - the economic resources that the business owner controls that have resulted
from past events and can provide you with economic benefits
3.​ Bangko Sentral ng Pilipinas (BSP) - regulates banks and other entities
performing bank functions ●​ Current assets - assets that can be used up one year after the reporting
period
4.​ Cooperative Development Authority (CDA) - regulates cooperatives
●​ Non-current assets - assets that can’t be used up one year after the
reporting period
Conceptual Framework for Financial Reporting

●​ Tangible assets - physical assets

➔​ provides broad principles and concepts rather than detailed rules that
are relevant to the preparation of financial statements
●​ Intangible assets - non-physical assets
➔​ serves as a general frame of reference and it is used as a guide in
developing new standards Liabilities - present obligations that have resulted from past events and require you
to give up economic resources when settling them. It is an obligation:
➔​ ensure that standards are based on coherent principles, and serves as a
reference point for resolving accounting issues not addressed by a.​ Legal obligation - results from a contract, legislation, or law
existing standards
b.​ Constructive obligation - results from past actions that have created
valid expectations of others that you will accept certain responsibilities
Qualitative Characteristics of Useful Financial Information - traits that determine
whether an item of information is useful to users
●​ Current liability - payable within 1 year
 ●​ Non-current liability - not payable within 1 year Ending balance of an account - the difference between the monetary totals of debuts
and credits to an account, with a minimum ending balance of zero. This occurs when
Equity - residual interest in the assets of the entity after deducting all its liabilities the total debits equal total credits to an account.

Income - increase in economic benefits/resources, increasing assets and equity, Notes:

decreasing liabilities. It includes both revenue and gains:
●​ “Debit and debit” and “credit and credit” result to addition
a.​ Revenue - a source of income that results from ordinary/main activities ●​ “Debit and credit” results to subtraction
of a business
Chart of Accounts - a list of all the accounts used by a business
b.​ Gains - other sources of income that may not arise in the ordinary/main
activities of an entity
Balance Sheet Accounts Income Statement Accounts

Expenses - decrease in economic benefits/resources, decreasing assets and equity,

increasing liabilities. It includes both expenses and losses:
ASSETS INCOME
a.​ Expenses - results from the ordinary/main activities of a business
110 Cash - cash on hand or in banks 410 Service fees - revenues earned
b.​ Losses - other expenses that may not arise in the ordinary/main from rendering services
activities of an entity 120 Accounts receivable - informal
promises to pay 420 Sales - revenues earned from the
sales of goods
Profit or loss - the difference between income and expenses
125 Allowance for bad debts - losses
from uncollectible AR 430 Interest Income - revenues earned
●​ If income is greater than expenses, it is profit
from the issuance income
●​ If expenses are greater than income, it is a loss 130 Notes receivable - formal
●​ If income and expenses are equal, it is breakeven promises to pay through promissory 440 Gains - income earned from the
notes sale of assets that are not classified
as revenue
Solution: 140 Inventory - stocks/goods held for
sale EXPENSES
●​ Income = expenses - revenue (higher expenses mean loss, higher
revenue means profit) 150 Prepaid supplies - cost of unused 510 Cost of sales - value of inventories
●​ Expenses = income - loss / income + profit office supplies sold

155 Prepaid rent - rent paid in advance 515 Freight-out - costs of delivering
Account - the basic storage of information in accounting. It is the record of the goods
increases and decreases in a specific item of major accounts 160 Prepared insurance - cost of
insurance paid in advance 520 Salaries expense - salaries earned
T-account has three parts: by employees for the service they have
170 Land - plant site rendered
1.​ Account title - describes the specific type/item of accounts
2.​ Debit 180 Building - structure for use in 525 Rent expense - cost of rentals that
operations have been used up
-​ the left side of the account
-​ referred to as the value received 185 Accumulated depreciation 530 Utilities expense - cost of utilities
3.​ Credit building - the total amount of
-​ the right side of the account depreciation expenses recognized 535 Supplies expense - cost of used
since the building was acquired and supplies
-​ referred to as the value parted with made available for use
540 Bad debt expense - losses from
Balance - the difference between the total debits and credits in the account 190 Equipment - items used for the uncollectible AR
business
➔​ If total debits exceed total credits, the account has a debit balance 545 Depriciation expense - cost of a
➔​ If total credits exceed total debits, the account has a credit balance 195 Accumulated depreciation depriciable asset
equipment - the total amount of
depreciation expenses recognized 550 Advertising expense - cost of
Normal balance of account - increase in that account since the equipment was acquired and marketing activities
made available for use
555 Insurance expense - cost of
Debit (+) Credit (-)
LIABILITIES insurance

210 Accounts payable - informal 560 Taxes and licenses expense - cost
Assets Liabilities
promises to pay by the debtor of business and local taxes required by
Expenses Equity/Capital
Withdrawals Revenue/Income the government
220 Notes payable - formal promises
to pay by the debtor through 565 Transportation and travel
promissory notes expense
Rules of Debits and Credits
230 Interest payable - interest incurred 570 Interest expense - cost of
●​ To debit an account with a normal debit balance means to increase it. To but not yet paid borrowing money
credit it means to decrease it.
240 Salaries payable - earned by 575 Miscellaneous expense - cost of
●​ To credit an account with a normal credit balance means to increase it.
immaterial products/small
To debit it means to decrease it.
 ●​ General Journal - involves all transactions in the business that cannot be
employees but not yet paid expenditures
recorded in the special journals

250 Utilities payable - utilities already 580 Losses

Simple and Compound Journal Entries
used but not yet paid
a.​ Simple journal entry - single debit and credit element
260 Unearned income - income
collected in advance before they are b.​ Compound journal entry - two or more debits and credits
earned
2. Ledger
EQUITY
➔​ book of secondary entries or final entries
310 Owner’s capital - residual amount
➔​ systematic compilation of a group of accounts
of liabilities from assets
➔​ classify the effects of business transactions on the accounts, a process
320 Owner’s drawings - withdrawals of called posting
the owner

Types of Ledgers:

●​ General Ledger - contains all accounts appearing in the trial balance

Notes:
●​ Subsidiary Ledger - provides a breakdown of sets of accounts under the
●​ Prepaid/Deferral/Unearned - there is cash involve/payment is made and general ledger and the balances of controlling accounts
products or services are yet to be made in the future
Formats of the Books of Accounts
●​ Accrual/Accrued - no cash involve
○​ Accrued income - goods are sold and services are performed General Journal:
but not yet paid
○​ Accrued expense - service is already incurred but not yet paid ●​ Date column - recording chronological dates of the transactions
●​ Account titles column - accounts affected by a business transaction
●​ Account numbers column - corresponding numberings of the accounts
Major Types of Accounts Assigned Number affected by the transaction
●​ Short description of the transaction - provided for future reference
Assets 1
●​ Debit and credit columns - the monetary effects of the transaction on the
Liabilities 2 accounts
●​ Posting reference (P.Ref.) - used to cross-reference journal entries to the
Equity 3
ledger
Income 4 ●​ Journal entry number (GJ No.) - used to number journal entries

Expenses 5
Double Entry System - each transaction is recorded in two parts, which are debit and
credit
Example: 110 - the first digit signifies the type of account; the second digit refer to
specific account title; the third digit, if not zero, signifies that the account is a contra Concepts of Duality and Equilibrium
account or an adjunct account
a.​ The concept of duality - each transaction is recorded using at least two
CHAPTER 5: BOOKS OF ACCOUNTS AND DOUBLE-ENTRY SYSTEM accounts
b.​ The concept of equilibrium - each transaction is recorded in terms of
A business maintain two books of accounts, which are Journal and Ledger.
equal debits and credits
1. Journal
Contra and Adjunct Accounts - an account related to another account
➔​ book of original entries
➔​ business transactions are first recorded through journal entries, a ●​ Contra Accounts
process called journalizing
-​ deduction to their related accounts
-​ has a normal credit balance
Types of Journal: ●​ Adjunct Accounts

●​ Special Journal - records transactions of a similar nature. It includes only -​ addition to their related accounts
specific types of transactions: -​ has a normal debit balance

○​ Sales Journal - used to record sales on account

○​ Purchases journal - used to record purchases of inventory on Net carrying amount - the sum of the balances of an account and its related contra
or adjunct account
account
○​ Cash receipts journal - used to record all transactions Examples:
involving receipts of cash (debited to the Cash account)
○​ Cash disbursements journal - used to record all transactions ●​ Accounts Receivable - Allowance for Doubtful Accounts = Net Realizable
involving payment of cash (credited to the Cash account) Value
●​ Cost of Equipment - Accumulated Depreciation = Net Book Value
CHAPTER 6: BUSINESS TRANSACTIONS AND THEIR ANALYSIS Types of Events

The Accounting Cycle - represents the steps used to record transactions and 1.​ External events - transactions that involve the business and another
prepare financial statements. It implements the accounting processes of identifying, external party (e.g., sale, purchase, borrowing of money, payment of
recording, and communicating economic information.
liabilities, etc.)
Steps: 2.​ Internal events - events that do not involve an external party (e.g.,
production, losses, salaries, dividend, etc.)
1.​ Identifying and analyzing business documents or transactions
-​ Information is gathered from source documents and
determines the effect of the transactions on the accounts
2.​ Journalizing
-​ The identified accountable events are recorded in the
journals
3.​ Posting (summary of journal entries)
-​ Information from the journal is transferred to the ledger
4.​ Preparing the unadjusted trial balance
-​ The balances of general ledger accounts are proved as to the
equality of debits and credits
-​ Serves as basis for adjusting entries
5.​ Preparing the adjusting entries
-​ Accounts are updated by recording accruals, deferrals,
prepayments, and depreciations
6.​ Preparing the adjusted trial balance (worksheet preparation)
-​ Equality of debits and credits are rechecked after
adjustments
-​ Basis for the preparation of the financial statements
7.​ Preparing the financial statements
-​ The information processed is communicated to users
8.​ Closing the books
-​ Temporary or nominal accounts (income and expenses) are
closed for accuracy and comparability
-​ The resulting profit or loss is transferred to an equity account
9.​ Preparing the post-closing trial balance
-​ The equality of debits and credits is again rechecked after
the closing process
10.​ Recording of reversing entries
-​ Made at the beginning of the next accounting period to
simplify the recording of certain transactions in that period
-​ Entry from the adjusting entry accounts is reversed

Source Documents - written evidence containing information about transactions

a.​ Sales invoices - used for the sale of goods

b.​ Official receipts/service invoice - used for the rendering/sales of
services
c.​ Purchase orders - a document issued by a buyer to a seller indicating the
types, quantities, and agreed prices for products or services to be
purchased
d.​ Delivery receipts - a document signed by the receiver of a shipment
acknowledging the receipt of the goods
e.​ Bank deposit slips - proof of deposit to a bank
f.​ Bank statements - a report issued by a bank that shows the deposits,
withdrawals, and balances of a depositor’s bank account
g.​ Checks - orders a bank (drawee) to pay the person named on the check
(payee) a definite amount of money from the drawer’s bank account
h.​ Statement of accounts - a report a business sends to its customers to
view payments made by the customer and the remaining balance, which
also serves as a notice of billing