I- HISTORICAL BACKGROUND OF ACCOUNTING

It was in the 15th century when a Franciscan friar by the name of Luca Pacioli published a book,
Summa de Arithmetica that gave way to the modern way of recording business transaction. As
years went by, more mathematical wizards started to develop a better way of recording things.

The Accounting Profession

In the past, it used to be a part of the curriculum of Business Administration major in

Accounting. But today, we call Accountancy. The Accountancy Profession has already attained
its status as in other professions like Law and Medicine. It has a separate curriculum for those
who would like to take the Certified Public Accountant (CPA) examinations.

Board Accountancy is the body authorized by law to make rules and regulations involving the
practice of the profession in the Philippines.

ACCOUNTING AND BUSINESS

Accounting is often called the language of business because it is used in describing all types of
business activities. Business is a field of endeavor. A person engages in business for the purpose
of attaining an objective which is profit. It is through Accounting that we can measure the
profitability of the business. Accounting, however, is not limited to business because nearly
everyone practices Accounting in one form or another on almost our daily activities. It provides
individuals with information useful in making decisions.

FLOW OF ACCOUNTING INFORMATION

Economic Activities

Business documents

Accounting Process

Accounting Reports

Decision makers

1 .Economic activities refer to the field of endeavor (business).

2. Business documents are produced by business transactions like cash voucher, official receipt, checks,
sales invoices, journal vouchers, and other.

3. Accounting process refers to the steps from journalization, posting up, to the preparation of
accounting reports.

4. Accounting reports refers to the financial statements, the Balance Sheet, and The Income
Statement.

5. Decision-makers are the people in need of accounting reports to help them in their decision.

At this point in time, the student should know the different areas of Accounting.
Areas of Accounting

1. Public Accounting

People engaged in public accounting render independent and expert financial services to
the public for a fee. They may be individuals, small accounting firm, or even large multinational
association. They are like doctors and lawyers who give expert services for a fee. Since they are
independent accountants, they can offer other services like auditing, management advisory
services, and taxation.

Auditing is the examination of financial statements by an independent certified public

accountant for the fairness of the financial statements.

Management Advisory Services

Individuals engaged in this area provide professional advisory services for the purpose of
improving the clients uses of its capabilities and resources to achieve the objectives of the
organization.

Taxation Refers to the preparation of annual income tax return and other income
services related to taxation.

2. Private Accounting

These are CPAs employed in a business enterprise. They may occupy the position of a
chief accountant, accounting staff, or internal auditor.

They assist the management in the operation of business. They maintain the records;
prepare the budgets and the various taxes of business.

3. Government Accounting has been defined as the process of analyzing, summarizing and
communicating all transaction involving the receipts and deposits of government funds and
property and interpreting the result thereof.

CPAs are employed in many branches of the government, like the BIR, COA,
Department of Budget and Management and other agencies related to the custody of public
funds.

4. Research and Education

Accountants enter the teaching profession. Some are engaged in research work for some
companies. Some are lecturers, or reviewers in some review school to prepare accounting
students for the CPA examinations.

Accounting versus Bookkeeping

Accounting is a broader field which includes Bookkeeping. Bookkeeping deals with the
procedures of keeping records while Accounting is conceptual. It covers almost everything about
the profession of Accountancy.

Accounting versus Accountancy

Generally speaking, the two terms are synonymous because both refer to the field of
accounting. They refer to the principles, theories, and the practice of accounting. However,
strictly speaking, Accountancy embraces the profession while accounting particularly covers the
field where one wants to go as private accounting, public accounting, and even government
accounting
Financial Accounting versus Management Accounting

Both deal with accounting records. In the Financial Accounting, the focus is on the
preparation of financial reports, the Income Statement, and the Balance Sheet for internal and
external use.

Management accounting on the other hand, refers to the function of providing

professional advisory services for the purpose of improving clients use of its capabilities and
resources to achieve the objectives of the organization.

Users of Accounting Reports

1. Internal users include management and the business its self.

2. External users are the people outside the business like the reading public government
agencies, creditors, investors, employees.

Why are the external users interested in accounting?

The Business prepares reports about the position or the status of the business. Through
financial statement, they can get the information they need about the business.

1. Investors the information they from the financial reports of the business will help them
determine whether or not they will not put their money in that business. They can
estimate the rate of return in their investment.
2. Customer will get the information on whether or not they can get the services of the
business on a particular product or commodity.
3. Employees need information to know whether or not the company can provide the
salaries and other benefits they need.
4. Creditors are interested to determine whether or not the loans extended to the business
can be paid at maturity.
5. Government can regulate the activities of the business for the purposes of taxation and
other government needed information. For example, the BIR will use computation of
income tax of the business.
6. Public the information will help the people of public to know how the business
contributes to the national economy of the country. They will also know whether or not
employment is available to help solve unemployment.

Who are the internal users?

Owners/Management would like to know the progress of their business. They would like to
know how their money is being used.

Accounting and Bookkeeping Defined

The Statement of Financial Accounting Standards (SFAS) Bulletin No.1 define s

Accounting as a service activity, which provides quantitative information, primarily financial in
nature, about business organization, which need information in making decisions

The American Institute of Certified Public Accountants (AICPA) defined Accounting as

the process of recording, classifying, summarizing in a significant manner character, and
interpreting the result thereof.

The AICPA definition gives us the function of accounting before the financial statements
can be completed.

Functions of Accounting

1. Recording is the writing down of the business transactions in a record book called
journal. This is termed as bookkeeping.
 Bookkeeping is technically defined as the process of recording business
transaction in a chronologically order. In other words, it records the day-to-day activities
of a business unit.
2. Classifying means arranging or organizing transactions in classes of categories.
Examples are baby dresses ladies wear, and mens wear, and others.
3. Summarizing is the summing ups of the event to find the total so that financial
statements can be prepared.
4. Interpreting Is defined by the Webster dictionary as to set forth the meaning of; to
understand in a particular way. After the third function, financial reports can be prepared.
At this point, the business will understand what happened to the business whether it
realizes an income or suffers a loss.

How to Start a Business

1. A business is started by investing the personal money or fund of the owner. This money
in the meantime becomes the money of the business. In Accounting, this is what we
called business entity concept. Under this concept, the personality of the business is
treated distinct and separate from the personality of the owner. There is now a dividing
line between the money of the owner and that of the business.
2. After deciding to start a business, the next question will be the type of business activity
we shall engage in.

Types of Business Activity

a) Service business income is derived from services rendered.

b) Merchandising typed of business engaged in buying and selling goods or merchandise.
c) Manufacturing a business engaged in transforming raw materials into finished products.

3. After deciding the type of business, the next query will be the form of business organization.
Will I manage it alone? Shall I take a partner or will I form a corporation?

Forms of Business Organization

a) Single or sole proprietorship an organization owned by only one person.

b) Partnership An organization whereby two or more persons contribute money, property,
or industry into a common fund and then divide the profits among themselves.
c) Corporation an organization composed or five or more persons not exceeding fifteen
registered with the Securities and Exchange Commission having the rights, powers, and
attributes of a person.

4. After considering the type of business activities and the forms of business organization, the
next step is to register the business name with the Bureau of Domestic Trade and pay the
necessary taxes and licenses before starting its operation.

5. The necessary thing needed in the business for sale or for its use will be bought.

6. Service for income (service business) or sells goods above cost (for merchandising business)
business

Business) will be rendered.

7. At a certain time, the business will close its books of accounts to determine the result of a
period operation.

Accounting Period

An accounting period is the length of time that covers the business transaction being
reported upon. Accounting period varies depending on the policy of the owner or management. It
may cover a month, a quarter, six month, or one year. Usually a period of one year is used. An
accounting period may be:
 a) Calendar year or period a period of twelve months starting January 1 and ending
December 31.
b) Fiscal year any succession of twelve months starting with any month except January
and ending in any month except December,

II FINANCIAL STATEMENT

Chapter Learning Objectives;

Chapter II will help the students to:
1. Know the statements produced by accounting
2. Learn the forms in preparing the statements
3. Learn the accounting terminologies
4. Prepare the financial statements

Financial reports Produced by Accounting

The most important financial statements are:

1. Income statement is a statement showing the result of the business operation for a
certain period. It shows the income received by the business and the cost and expenses
incurred in realizing that income.
2. Balance Sheet- is a statement that gives the financial condition of a business as a given
date. It shows the assets or the things owned by the business, the liabilities or the debts
owned by the business to persons other than the owner and the investment or the equity
of the owner of the business.

What are the Forms of Income Statement?

a) Single-step when all expenses are deducted from the total income. This form is used by
service business.
b) Multi-step is one which shows the different sections of the statement like the total
sales, cost of sales, the operating expenses, other income and other expenses. This form is
used by merchandising business.

What are the forms of the Balance Sheet?

a) Account Form when the assets are placed at the left side and the liabilities and the
owners equity at the right side of the statement.
b) Report Form the arrangement will be from top to bottom. The assets are listed first,
followed by the liabilities and then the owner equity.
c) Financial Position F shows the working capital position of the business. The current
assets less the current liabilities equal the net working capital. To this you add the other
assets and then deduct the long-term liabilities to arrive at the owners equity.

ACCOUNTING TERMNILOGIES

ASSETS
Assets are property or rights on property owned by the business. In other words,
anything of value owned by the business.

Current Asstes refer to cash and other assets that are easily convereted into cash
or consumed during the accounting period usually one year.

Property and Equipment refers to assets that have the following characteristics.
1. More or less permanent in nature
 2. They possess physical existence
3. They are not for sale and
4. They are intended for use in the operation.

Cash on Hand refers to cash and other cah items which are not yet deposited in the bank.
Cash in bank money deposited in the bank.
Marketable Securities is a term refers to company securities, usually stocks that are sold
for cash.
Notes Receivable are claims of the business from anyone evidence by a note.
Interest receivable is interest earned on an interest bearing note not yet collected.
Accrued Interest Income is a term synonymous with interest receivable
Accounts Receivable refers to claims of the business from anyone for sales made or
services rendered an account.
Estimated uncollectible account is sometimes called allowance for bad debts. It refers to
a provision for accounts that may not be collected in the future.
Advances to officers and employees refers to amounts given to officers and employees
usually deductible from their salaries
Merchandise Inventory refers to goods unsold at the end of the accounting period or on
hand at the beginning of the year
Prepaid expenses are expenses paid in advance or itmes that are bought which will used
during the accounting period.
Tool refers to small items of equipment like pliers, hammer.
Land refers land owned space owned by the business
Building refers to the building or edifice constructed, owned and intended for use by the
business.
Furniture and fixtures is a term used to include tabelas and chairs, cabinets, counters.
Delivery equipment is a term that includes car, jeeps, trucks and other transportation
vehicles owned by the business.
Accumulated depreciation is a contra account. It is deduction from a particular fixed
assets account.
Intangible assets are assets that do not have physical existence owned by the business.

LIABILITIES

Current liabilities are obligations or debts of the business which will be paid during the
accounting period.

Accounts payable is a current liability which refers to the debts or obligations that
arise from the purchase of goods or services on account.
Notes payable
Interest payable
Salaries payable

Log-term liabilities
Mortgage payable

CAPITAL OR OWNERs EQUITY

Owners Equity Refers to the vested interest of the owner in the business. The
difference between the assets and liabilities.
Owners Drawing term that shows withdrawal of cash or items from the business by the
owner. This is a deduction from the income earned by the business.
INCOME
Interest Income
Service Income
Legal Fees
Sales
Commission Income
Other Income

COST and EXPENSES

Taxes and licenses
Salaries Expense
Supplies Expense
Delivery Expense
Depreciation Expense
Bad Debts Expense
Rent Expense
Interest Expense
Advertising Expense
Repairs and Maintenance Expense
Cost of Sales

PRO FORMA:

Income Statement (SINGLE STEP)

XYZ Repair Shop

Income Statement
For the year ended December 31, 2008

Income from Repairs 8,500.00

Less: Operating Expenses
Salaries and Wages 1,600.00
Rent Expense 1,000.00
Supplies Expense 1,500.00 4,100.00
NET INCOME 4,400.00

Balance Sheet(REPORT FORM)

XYZ Repair Shop

Balance Sheet
December 31, 2008

ASSETS
Current Assets:
Cash 3.500.00
Account Receivable 2,400.00
Notes Receivable 600.00
Total Current Assets 6,500.00

Property and Equipment

Furniture and Fixtures 2,500.00
 Office Equipment 9,500.00
Less: Accumulated depreciation 800.00 8,700.00
Total Property and Equipment 11,200.00
TOTAL ASSETS 17,700.00

LIABILITES AND OWNERS EQUITY

Current Liabilities
Accounts Payable 3,300.00
Notes Payable 1,400.00
Total Current liabilities 4,700.00

Long-term liabilities
Mortgage Payable 3,000.00
Total liabilities 7,700.00

Owners Equity
XYZ Capital 6,000.00
Add: Net increase in Capital
Net Income 4,400.00
Less: Drawing 400.00 4,000.00 10,000.00

TOTAL LIABILITES AND OWNERS EQUITY 17,7000.00

III ELEMENTS OF ACCOUNTING

1. ASSETS - are property or rights on property owned by the business. In other words,
anything of value owned by the business.

2. LIABILITES- are obligations or debts of the business

3. OWNERS EQUITY- refers to the vested interest of the owner in the business.

An equation may be formed to show the relations between three elements:

ASSETS = LIABILITIES + OWNERS EQUITY

OWNERRS EQUITY = ASSETS - LIABILITIES

LIABILITES = ASSETS - OWNERS EQUITY

THEORY OF DEBIT and CREDIT

Transactions are exchanges of values. For every value received, there is an equal value
parted with. Transaction has a double effect, receiving of value and parting of value. This called
double-entry bookkeeping.

Application:
 ASSETS: Debit to Increase
Credit to Decrease

LIABILITIES: Debit to Decrease

Credit to Increase

OWNERS EQUITY: Debit to Decrease

Credit to Increase

RULES OF DEBIT AND CREDIT:

When you DEBIT When you CREDIT:

1. Received an assets 1. Given away an assets
2. Liabilities paid 2. Liabilities incurred
3. Loss 3. Received income
4. Pay expenses 4. Investment or capital
5. Drawings or withdrawals