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ACCTBA1 (Fundamentals of Accounting)

FORMS OF BUSINESS ORGANIZATIONS

ACCORDING TO ACTIVITIES
FORM OF BUSINESS NORMAL OPERATING SYSTEM
SERVICE
Provide services

Collect money Bill the customers

TRADING / MERCHANDISING
Buy merchandise

Collect money Sell merchandise

Bill the customers

MANUFACTURING
Buy raw materials Process into finished goods

Collect money Sell finished goods

Bill the customers

*** Similarities of the 3 Normal Operating Cycles: their aim is to gain profit in the end.

ACCORDING TO OWNERSHIP
FORM OF BUSINESS NO. OF OWNER/S NAME OF OWNER/S
SOLE PROPRIETORSHIP 1 Owner
PARTNERSHIP 2 or more Partners
CORPORATION 5 15 members Stockholders (stock corporation)
Shareholders (non-stock corporation)

ACCOUNTING

Definition:
1. It is the language of business
- It has its own terminologies
- Information are useful for decision-making
2. It is a service activity
3. It is an art of recording, classifying, and summarizing in significant manner and in terms of money transactions or events and interpreting
the results thereof.

4 Phases of Accounting

RECORDING journalizing

BOOKKEEPING
CLASSIFYING Posting ledgers

ACCOUNTING
SUMMARIZING Financial statements, trial balance

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INTERPRETING
Bookkeeping vs. Accounting

BOOKKEPING ACCOUNTING
- Involves only the recording of - involves the entire process of
economic events identifying, recording &
- just a part of the accounting communicating economic
process events

Brief History of Accounting

ANCIENT CIVILIZATIONS China, Babylonia, Greece and Egypt


Rules used accounting to keep track of the cost of labor and materials in building
structures (ex: Great Pyramid)
RENAISSANCE PERIOD Luca Pacioli
Italian Renaissance mathematician
close friend of Leonardo da Vinci
contemporary of Christopher Columbus
wrote Summa de Arithmetica, Geometria, Proportioni et Proportionalite
(Everything About Arithmetic, Geometry, and Proportion)
published in Venice, Italy on November 1494
- contained the principles of mathematics and incidentally a set of
accounting procedures
described a system to ensure that financial information was recorded efficiently &
accurately
INDUSTRIAL AGE (19th Century) emergence of large entities
separation of owners from the managers of business took place
need to report the financial status of the entity became more important to ensure
that managers acted in accord with owners wishes
transactions between entities became more complex
POST-INDUSTRIAL AGE (Information Age) many products are information services
Computers have been the driver of computer age

How to Determine Financial Position?

LIQUIDITY Ability to pay short term obligations using short term resources
/ assets (easily converted to cash)
many assets in terms of cash
SOLVENCY many assets in terms of equipments / buildings
BANKRUPCY process of doing insolvency

Generally Accepted Accounting Principles (GAAP)

PRINCIPLE DESCRIPTION
ENTITY Views the business as separate and distinct from the owner
You cant utilize the money of the business for personal use
Entity anything that has an existence
most basic principle
Record transactions related to the business only

PERSONAL FUND BUSINESS FUND


PERSONAL PURPOSE not recorded recorded
(OWNER WITHDRAWAL
liability of owner to the
business)
BUSINESS PURPOSE recorded recorded
(OWNER INVESTMENT
liability of business to owner)

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MONETARY Recorded in terms of a unit measure (money)
Money is stable and is not affected by inflations & fluctuations
COST Assets are initially recorded at their cost (acquisition, historical, purchase)
Record the amount you have paid for
Ex: Delivery charge (incidental cost) is added, everything that you have paid for acquiring
the product)
OBJECTIVITY / Based on objective evidence (unbiased)
RELIABILITY There should be a proof of data
Ex: Official Receipts, Invoices
GOING Assumption that the business is going to operate indefinitely (as long as it can), unless there
CONCERN is evidence to the contrary
It is important because potential investors will invest on your business if they see that they
can get benefits for a long time
So you will know when to enter transactions with customers & suppliers
MATERIALITY An item is considered to be material if it can significantly affect decisions of users
Ex: A waste basket that costs Php 50 is not significant for big entities but it is to smaller ones.
DISCLOSURE Report all relevant and material information notes on a financial statement
Ex: impending lawsuit (case in court)
TIME PERIOD Indefinite life of business is divided into short time intervals known as ACCOUNTING
PERIOD.

4 Types of Accounting Period


1. Calendar Year 12-month period that ends on Dec 31
2. Fiscal Year 12-month period starting from the date of incorporation and ends on a date,
not on Dec 31
3. Natural Business Year 12-month period ending when the business is at its lowest (slack/off-
peak season)
4. Interim shorter than a year (3 months / 6 months)
ACCRUAL Recognizes revenue when earned regardless of when the cash is received and recognizes
expenses when incurred regardless of when cash is paid
Ex: Tuition Fee (instalment basis)
REVENUE Recognizes revenue when the earning process is complete
REALIZATION
MATCHING Expenses incurred should be recognized in the same period as the related revenue
Ex: Service rendered by professionals
- Needs equipments, workers, supplies
- Recognize salaries, depreciation costs
CONSERVATISM Expect the least profit
When given options, select the one which will have the least impact on profits
Ex: Option A (Php 100k) > Option B (Php 2M)
CONSISTENCY You apply the same accounting methods / principles, procedures over the years
You can change as long as you can justify, so it can be compared from period to period.

Financial Statements (Basic)

FINANCIAL STATEMENT DESCRIPTION


Income Statement Presents the financial performance of the company for a given period of
time (max: 1 year

3 Elements of Income Statement:


1. Revenues
2. Expenses
3. Net Income / Loss
Statement of Changes in Equity Highlights the changes that happened in Owners Equity

3 Elements of Statement of Changes in Equity:


1. Owner Investment
2. Owner Withdrawal
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3. Net Income / Loss
Statement of Financial Position Presents the financial status of the company as of a specified date
(Balance Sheet) Balances Assets, Liabilities & Owners Equity to maintain equality
Includes Basic Accounting Equation: A = L + OE

3 Elements of Statement of Financial Position:


1. Assets
2. Liabilities
3. Owners Equity
Statement of Cash Flows Summarizes the cash inflows and outflows of the company for a given
period of time
Notes of Financial Statement Explains how you arrived at those answers

Statement of Financial Position (Balance Sheet)

2 Forms (Format) of Statement of Financial Position

REPORT FORM Assets, Liabilities and Owners Equity are presented on a downward sequence.
More formal way of presenting data

ASSETS
_____________
_____________
_____________
LIABILITIES & OWNERS EQUITY
Liabilities
_____________
_____________
_____________
Owners Equity
_____________
_____________
_____________

ACCOUNT FORM Presents Assets on the left side and Liabilities & Owners Equity on the right side
(T-accounts : Debit / Credit)

A = L + OE
DEBIT CREDIT

Accounts record that summarizes, shows increases or decreases in Assets,


Liabilities & Owners Equity

3 Elements of Statement of Financial Position

ASSETS Current Assets Cash and cash equivalents -most liquid asset
-money in the form of bills or coins
-Resources/Properties -Assets that can be Ex: cash equivalent money invested in banks but gets it within
owned and controlled converted into cash 30-60 days
by the business within one year Investments in Trading -short-term investments in stocks or bonds of other business
Securities Ex: treasury bills investments that matures beyond 90 days
-Economic resources -According to the -placed in govt so that inflation/fluctuation wont be felt that
(used for production & order of liquidity much
consumption) of the -you can sell it at a higher price in the future
business that have Trade and other receivable Ex: Accounts Receivable allows customer to pay next time
Notes Receivable supported by a promissory note
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probable future Interest Receivable (Accrued Interest Receivable) comes with
benefits Notes Receivable
Advances to Employees vale
Inventory -stocks not sold
Prepaid Expenses -expenses already paid but not yet incurred
Ex: Supplies
Prepaid Insurance
Prepaid Rent
Non-Current Assets Property, plant, and -is tangible
equipment -has an estimated useful life beyond one year
- Assets that can be -subject to depreciation, except land (usually appreciates in
converted into cash value)
beyond one year -used in regular business operations (not for sale)
Ex: land
Building
Machinery
Office equipment
Furniture & Fixtures
Transportation Equipments transports people
Delivery Equipments transports goods

CONTRA-ASSET AMOUNTS:
*Accumulated Depreciation deducted from asset to get net
value
*Allowance for Doubtful Accounts deducted from Accounts
Receivable; estimated amount that is not going to be paid by
client
LIABILITIES Current Liabilities Trade and other payables Ex: Accounts Payable
Notes Payable
-External claims Interest Payable
against assets Salaries Payable
Utilities Payable
-Economic obligations Rent Payable
of the company Taxes & Licenses Payable
Accrued____Expense
Unearned____Expense
Current position of non- -installment basis
current liabilities
Non-Current Ex: Mortgage Payable collateral real-estate/shuttle
Liabilities mortgage
Notes Payable (due in 2 or more years)
Bonds Payable issued to the lender of business
Loans Payable
Profs Extra Notes:
REVENUE EARNED REVENUE NOT EARNED
CASH COLLECTED Revenue Unearned Revenue
(LIABILITY)
CASH NOT Accrued Income X
COLLECTED (Receivable)
(ASSET)

EXPENSES INCURRED EXPENSES NOT


INCURRED
CASH PAID Expenses Prepaid Expense
(ASSET)
CASH NOT PAID Accrued Expense X
(Payable)
(LIABILITY)
OWNERS EQUITY Investments -may be initial (beginning capital Owner, Capital) or additional investment by owner

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Withdrawals -may be temporary (Owner, Drawing compensated by net loss / income) or permanent (You
-Owners claims on the dont intend to give it back)
asset Net Loss / Income -presented in Income Statement
-results of operation

Revenues Expenses = Net Income / Loss

Net Income = Revenues > Expenses


Net Loss = Revenues < Expenses
Breakeven = Revenue = Expenses
Profs Extra Notes:

DECREASE in OE INCREASE in OE
Expenses Capital
Drawing Revenue

TRANSACTIONS ANALYSIS

ASSETS LIABILITIES + OWNERS EQUITY


+/- 0 0
+ + 0
+ 0 +
- - 0
- 0 -
0 +/- 0
0 + -
0 - +

Income Statement

2 Forms (Format) of Income Statement

NATURAL FORM Costs and expenses are classified according to their nature
Normally used by service business
Combine account titles with the same nature
Ex: Combine light, water, and electricity expenses in Utilities Expense
FUNCTIONAL FORM Costs and expenses are classified according to their function
Normally used by merchandising & manufacturing business
Expenses / Income of the same nature are separated

Elements of an Income Statement:

REVENUES Gross increases in assets or gross decreases in liabilities as a result of


undertaking the normal operations of the business

A = L + OE
(+) (+)
It should affect the OE positively
(+) Asset; (-) Asset is not included it is called GAIN

Distinguish:
Revenue gross / total; includes day to day operations only
Income net; Revenue Expenses = (+)
Profit Net Income (final income)
Gain Non-operating income
Ex: Gained cash because you sold your office equipment
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EXPENSES Gross decreases in asset or gross increases in liabilities as a result of
undertaking the normal operations of the business

Distinguish:
Expense gross / total; includes day to day operation
Loss net; Revenue Expenses = (-)
Cost amount of money you paid for
Expenditure can be an expense or asset
NET INCOME / LOSS Revenue > Expenses = Net Income
Expenses < Revenue = Net Loss

Foot totaling of column


Cross-foot totaling of rows

NORMAL BALANCE OF ACCOUNT

DEBIT (Dr) CREDIT (Cr)


A L + OE
Current Assets Current Liability
Non-current Assets Non-current Liability
Expenses Owner Capital
Owner, Drawing Revenues
Contra-Assets

Debit left side of an account


Credit right side of an account

Rules of Debit & Credit


1. For every value received, there should be a value parted with. (For every debit, there should be a corresponding credit)
2. Debits are presented first before credits

ACCOUNTING CYCLE
1. Analyzing business transactions from source documents (receipts & Invoices)
2. Journalyzing
- recording in a journal (book of original entries)
2 Kinds of Journal
a. General Journal all transactions
b. Special Journal 1 book for each
3. Posting to the Ledger
- transferring of accounts from journal to ledger (book of final entries)
2 Kinds of Ledger
a. General Ledger
b. Subsidiary Ledger
4. Preparing Trial Balance
- Report which tells you that you are balanced
- Report that shows that total debit is equal to total credit
- Prepared monthly
5. Journalyzing & Posting Adjusting Entries
6. Preparing Financial Statements
- Prepared annually
7. Journalyzing & Posting Closing Entries
8. Preparing a Post-closing Trial Balance
- Other accounts are already zero
9. Journalyzing & Posting Reversing Entries
- Dont accumulate income & expenses for the next year
- Non-current assets (ex: Office equipments) are cumulative

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Journal Entries (Format)

GENERAL JOURNAL Page #


DATE PARTICULARS F Dr Cr
20xx
Month # Debit xxx xxxxx
Credit xxxxx
Explanation

Financial Statements Order (For Posting Ledgers)

1. ASSETS
Current Assets
Non-Current Assets
2. LIABILITIES
Current Liabilities
Non-Current Liabilities
3. CAPITAL
4. DRAWING
5. REVENUE
6. EXPENSES

Chart of Accounts listing of all account titles and account numbers used by the business

Trial Balance (Format)

COMPANY NAME
Trial Balance
Month x, 20xx
Dr Cr
Assets Php xxx
Liabilities Php xxx
Capital xxx
Drawing xxx
Revenue xxx
Expenses xxx
Total Php xxx Php xxx

Statement of Changes in Equity


- Shows the changes that happened in the investment of the owner

Statement of Cash Flows


- Summarizes cash inflows (receipts) & outflows (cash disbursements) of a business for a specific period of time.

2 Methods in Preparing Statements of Cash Flows

DIRECT METHOD - Simpler version


Classifies cash flow activities into:
1. Operating Activities : Revenues; Expenses;
Current Assets & Liabilities
2. Investing Activities : Non-Current Assets
3. Financing Activities : Non-Current Liabilities;
Capital, Drawing

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INDIRECT METHOD - Starts with net income and add
back all non-cash expenses to get
net income cash basis

INTRODUCTION TO MERCHANDISING BUSINESS

Service vs. Merchandising


SERVICE Net income is the difference between its revenues and the expenses incurred in
providing the services
MERCHANDISING Earns net income by buying and selling merchandise
Merchandise inventories - represent goods intended for sale

Activities of a Merchandising Business:


Purchasing
Handling
Returning of Goods Purchased
Selling
Returning of Goods Sold
Maintaining Adequate Stocks on Hand (Merchandise Inventory)

Wholesale vs. Retail


WHOLESALER An intermediary that buys products from manufacturers or other wholesalers
and sells them to retailers or other wholesalers
RETAILER Buys products from the manufacturers or wholesalers and sells them to
consumers

Manufacturer Wholesaler Retailer