INTRODUCTION TO ACCOUNTING INTERNAL USERS

Shareholders
Define Accounting - Refer to the corporate investors who
- Accounting is a service activity designed hold a certificate of stock. (evidence of
to provide quantitative information about ownership)
economic entities. - Use accounting information for
- Accounting is the art of recording, assurance of the safety and continued
classifying, and summarizing in terms of profitability of their investment.
money, transactions, and events that Partners
are, in part, at least, financial in - Are owners or investors in a business
character; and interpreting the results organization who contributed money or
thereof. industry. (can also contribute their
Nature of Accounting talents)
- The accumulation of the financial history - Use accounting information to ascertain
of a business entity based on the that profits have been correctly
analysis of transactions. computed and shared according to their
- The objective is to provide users with agreement.
reliable financial statements containing Owners
the appropriate financial information to - The decision maker in a sole
aid them in making sound economic proprietorship.
decision - Use accounting information to make
FUNCTIONS OF ACCOUNTING appropriate economic decisions and
a. It provides relevant and timely assures the owner that his profit
information to decision-makers objective has been achieved.
b. It directs management’s attention to Management
problems of the organization and assist in their - Consists of the members of the board of
solutions by offering alternatives. directors, corporate officers, committee
c. It provides the owners with reliable chairmen, and department heads, who
information on the financial condition and results collectively work for the achievement of
of business operations. the entity’s goal.
USERS OF FINANCIAL STATEMENT - Use accounting information in planning
operations and in controlling or
External Users allocating company resources.
- are users and decision-makers who do Employees
not belong to the management, personnel or - Are the personnel and staff employed by
staff of the business entity. the company.
Internal Users - Use accounting information to help them
- they belong to the business organization itself assess whether their employer can
and whose decision directly affects its operation. provide them with retirement benefits
 conceptual framework of accounting is
EXTERNAL USERS the composite of:
Potential Investors, Creditors , and Suppliers 1. Accounting concepts
- Use accounting information to decide 2.Accounting principles
whether to extend or allow credit to the Generally Accepted Accounting
entity or if they will receive the interest Principles
→ Kakayanan ng owner/company makapagbayad ng utang or
when due. - refers to the conventions, rules
interest in time
- Use accounting information to make and procedures necessary to
decisions on possible financial define accepted accounting
commitments to the company practices that have gained
Tax Authorities general acceptability in the
- Determine taxation policies. accounting profession.
- Use accounting information as basis of - Generally accepted
evaluation, investigation and accounting principles
assessment of tax returns and penalty (GAAP) comprise a set of
dues accounting rules and
Government procedures used in
- Use accounting information to ascertain standardized financial reporting
that operations are within the authority practices. By following GAAP
specifically allowed in their business guidelines, compliant
permits organizations ensure the
Labor Unions accuracy, consistency, and
- Use accounting information to assess transparency of their financial
the company’s strengths, and evaluate disclosures.
its prospects in the industry. Accounting Concepts
- Based on this evaluation, labor unions - are a collection of ideas representing the
may prepare essential wage and theoretical foundation of the accounting
contract demands in their negotiations discipline.
with the company. Accounting Principles
General Public - are a collective and coherent set of rules
- Mainly includes the customers, or doctrines that have been developed
applicants, financial analysts, lawyers by the customs, usage, experience, logic
etc. and practical necessity.
- These principles provide guidelines for
ACCOUNTING CONCEPTS AND PRINCIPLES recording and reporting, as well as, in
the interpretation and evaluation of
Conceptual Framework for Accounting financial information.
- The conceptual framework (considered
the rules of accounting), is the Underlying Assumptions
foundation for developing consistent and - ACCRUAL BASIS
logical accounting standards. The • transactions and events are
recognized and recorded when they occur.
 - GOING CONCERN ASSUMPTION Accounting Concepts Relevant to General
• a business entity is assumed to continue Objectives
operations and has no intention to neither - Accounting concepts provide a
liquidate nor curtail its operation. (no stop) standardized framework for financial
Underlying Assumptions reporting, ensuring consistency,
- are the basic and fundamental ideas that transparency, and accuracy in recording
serve as the premise on which the business transactions, fostering trust
accounting process is based. and clarity in financial statements across
- also known as postulates, serve as the entities.
foundation of accounting in order to
enhance the usefulness and avoid Qualitative Objectives of FS RELEVANCE
misunderstanding of the contents of • Information is considered relevant if it affects
financial statement. the user’s decision, either changing it or
confirming it.
• relevant information enables the user to better
Implicit Assumptions in Understanding
Accounting Information evaluate past and present events and to better
prepare for the future.

SEPARATE ACCOUNTING ENTITY RELIABILITY

• transactions are analyzed from the • Reliability implies freedom from material errors.
viewpoint of the business and not from the • Reliable financial information is fair and
owner. unbiased.

ACCOUNTING PERIOD • FS must not present favorable results of

• the life of the business is divided into operations to a prospective creditor while

time periods not exceeding one year. presenting poor results for income tax purposes.

MEASUREMENT IN TERMS OF MONEY UNDERSTANDABILITY

- transactions are financial in character • Understandable financial accounting

and are expressed or measured in terms information presents data that users can

of money. understand and is expressed in a form with

technology adapted to the user’s range of
- in the Philippines, the monetary unit is
understanding.
the Philippine Peso
COMPARABILITY
The quantitative objectives of financial
statements are to provide reliable
• is the quality of being brought together
to note likeness or differences.
information on:
• the business entity’s • to ensure comparability, accounting
information must also be verifiable
assets and obligations
• the entity’s profitability
(income statement and changes in Other Related Qualitative Characteristics
(Reliability)
equity)
TIMELINESS: The FS must be prepared
• the entity’s financing
regularly and submitted on time.
and investing activities (cash flow)
• other significant matters (notes to
financial statements)
NEUTRALITY: The preparer of FS should not The Accounting Equation and Major
try to increase the helpfulness of the information Accounts
to a few users to the detriment of other users
who may have opposing interests. Definition of Account
FAITHFUL REPRESENTATION: The
An "account" refers to values or accounting
information in the FS should be valid. It means
elements by which the items affected by
that the actual effects of the transactions shall
transactions and events are identified or
be properly accounted for and reported in the
classified.
FS.
COMPLETENESS: It signifies that all relevant
Account title - is the name designated to the
financial information needed by users is properly
account which describes its nature.
reported.
SUBSTANCE OVER FORM: Financial
information should be based on the records of
transactions as to their substance or economic
Types of Major Accounts
reality, not on their legal form.
CONSERVATISM or prudence is the degree of 1. Real Accounts
caution that must be exercised when preparing
FS. It recognizes the least income and the most Accounts relevant to the measurement of
cost or loss; . Assets should not be overstated financial position (assets, liabilities, equity).
and liabilities and expenses should not be
understated. 2. Nominal Accounts

Accounts with usefulness limited to the year they

occurred or were incurred (income and
expenses).
Other Related Qualitative Characteristics
(Comparability)
CONSISTENCY: signifies the use of the same
accounting methods that were applied during
Classification of Accounts
previous years. (uniformity).
MATERIALITY: is a quality of information that
1. Assets 2. Liabilities 3. Capital
would influence the judgment of users. or Equity 4. Revenue 5.
Materiality depends on the size and the nature Expenses
of the item and on good judgment, expertise
and common sense.
COST-BENEFIT: indicate the judgmental
process of evaluating accounting information, Accounting Elements: Assets
wherein cost should not exceed benefits.
Assets

Accounting Terms and Definitions ● Economic resources owned by the

business entity.
● May be tangible or intangible.
 Non-Current Assets

● Long-term resources held for use in

operations, investment, or
Types of Assets Current Assets administration.

● Realizable or consumable within the Examples of Non-Current Assets:

normal operating cycle.
● Includes cash or cash equivalents without 1. Property, Plant, and Equipment
(PPE): Tangible assets held for use in
restrictions, held primarily for trading.
production or supply of goods and
Examples of Current Assets: services, rentals, or administrative
purposes.
1. Cash: Bills, paper or coins, and money
○ Examples: Land, Buildings,
substitutes such as checks and postal
Furniture & Fixtures, Office
money orders (cash on hand or cash in
Equipment, Delivery Equipment,
bank).
Machinery.
2. Petty Cash Fund: Cash set aside for
2. Intangible Assets: Non-physical assets
small disbursements or expenses.
providing long-term benefits.
3. Notes Receivable: Amounts collectible,
○ Examples: Franchise,
evidenced by a promissory note.
Trademark, Tradename,
4. Accounts Receivable: Amounts
Goodwill, Leasehold, Deferred
collectible for goods sold or services
Charges.
rendered on credit.
5. Financial Assets: Readily marketable
debt and equity securities held for short-
term income generation.
Accounting Elements: Liabilities
6. Advances on Salaries: Amounts
advanced chargeable against salaries. Liabilities
7. Merchandise Inventory: Goods on
hand and for sale. ● Values owed, representing economic
8. Office Supplies: Items such as tapes, obligations of the entity to creditors.
bond paper, and staple wire.
9. Materials and Supplies: General-use Types of Liabilities Current Liabilities
materials for office or store.
● Payable within one year or within the
10. Prepaid Assets: Expenses paid in
normal operating cycle.
advance but not yet incurred or expired.
○ Examples: Prepaid Rent, Prepaid Examples of Current Liabilities:
Insurance, Prepaid Advertising.
1. Accounts Payable: Amounts due to
suppliers for purchases of goods or
services on credit.
 2. Notes Payable: Obligations evidenced 2. Withdrawals (Drawing): Temporary
by a promissory note. withdrawal of capital by the owner for
3. Interest Payable: Unpaid interest on personal use.
borrowed amounts. 3. Net Income/Net Loss: Profit or loss
4. Salaries Payable: Unpaid salaries for during the accounting period.
services rendered by employees. ○ Net income is added to the
5. Advances from Customers (Unearned capital.
Revenue): Amounts paid by customers ○ Net loss is deducted from the
in advance for future sales or services. capital.
6. Bank/Loan Payable: Amounts due to
creditor banks for loans.

Non-Current Liabilities Income Accounts

● Obligations payable beyond one year. Types of Income

Examples of Non-Current Liabilities: 1. Service Income: Income from services

rendered.
1. Mortgage Payable: Obligation secured 2. Professional Income: Earnings by
by a collateral. professionals from practicing their
2. SSS Premium Payable: Amount profession.
withheld from employees and 3. Rental Income: Revenue from rented or
employer’s share contribution for leased properties.
retirement.
4. Interest Income: Earnings from lending
3. PhilHealth Premium Payable: operations.
Contributions for hospitalization benefits. 5. Miscellaneous Income: Income that
4. Pag-IBIG Premium Payable: does not fit other classifications (not
Contributions for employee housing significant).
benefits.
6. Gains from Sale of Assets: Income from
selling assets not intended for regular
business operations.

Owner’s Equity

● Represents the residual interest of the

Expense Accounts
owner in the assets after deducting all
liabilities.
Types of Expenses

Components of Owner’s Equity

1. Salaries and Wages: Payments for
services rendered by employees
1. Capital: Owner’s investment in the
(includes 13th
business.
month pay, COLA, bonuses, overtime
pay).
 2. Rent Expense: Cost of using office,
store, or factory space.
3. Office Supplies Expense: Materials
used in offices.
4. Store Supplies Expense: Materials
used in daily store operations.
5. Insurance Expense: Expired portion of
premiums paid for insurance coverage.
6. Interest Expense: Interest paid on
borrowings during the period.
7. Taxes and Licenses: Payments for
taxes, licenses, and government fees.
8. Bad Debts Expense: Estimated
uncollectible receivables.
9. Utilities Expense: Costs for light, water,
and gas usage.
10. Depreciation Expense: Expired portion
of the cost of assets like machinery and
buildings (except land).
11. SSS Contribution: Employer’s share in
SSS contributions.
12. PhilHealth Contribution: Employer’s
share in Medicare contributions.
13. Pag-IBIG Contribution: Employer’s
share for employees’ housing benefits.
14. Miscellaneous Expense: Immaterial,
uncommon, or infrequent costs.

Chart of Accounts

Definition

A properly classified list of all accounts used by

an entity in bookkeeping and reporting. Parts of

the Chart of Accounts

1. Name of the company.

2. Account classification and account titles.
3. Assigned account number.
4. Page location in the ledger