What is Accounting?
obtained in the system to
“Accounting is simply the means by
which we measure and describe the
results of any economic activity.”
 Accounting is everywhere you
need to calculate for any
mater.
 It’s often called “Language of
Business”.
 It’s widely used in all types of
business activities.
 It’s necessary to have a valid
understanding of accounting
to understand the business
matters and communicate
fluently in the business
community.
 The basic purpose of
Accounting is to provide
useful information to
managers who make useful
decisions for the business.
 Accounting gives us a closer
look to nature of economic
activities.
Basic functions of Accounting
System:
1- Interpreting and recording
effect of business
transactions.
2- Classifying the similar
transactions.
3- Summarize and
communicating the data
decision makers.
Types of Accounting:
1- Financial Accounting:
It refers to the information
describing the financial
resources, obligations and
activities of an economic
entity.
 It assists the investors
and creditors to decide
where to place their
scarce investment
resources.
2- Management/Managerial
Accounting:
The development and
interpretation of
economic/accounting
information intended
specifically to add
management in running the
business.
It is used widely in,
 Setting organizational
goals.
 Evaluating
performance of
departments and
individuals.
 Decision making.
Management accounting is
actually financial in
nature but has been
organized in a manner
 relating directly to the
decision at hand.
3- Tax Accounting:
Tax Accounting is base on the
financial accounting
information. It is a specialized
field within accounting. The
information available is
arranged in such a way to
adjust with income tax
reporting requirements.
Financial Reporting:
The process of supplying general -
purpose financial information to the
people outside the organization is
called financial reporting.
The accounting information should
be accurate and reliable.
Financial Position:
The term financial position refers to
describing a firm’s financial
resources and obligations at one
point in time.
Result of Operations:
Accountants often use the term
result of operation to describe the
financial activities of a firm during
the year.
Financial Statements:
These are the principal means of
reporting general-purpose financial
information to people outside the
organization.
 People who use this
information are called
“Users”.
 The basic purpose of financial
statements is to assist users in
evaluating the financial
position, profitability and
future prospects of a business.
A set of financial reports consist of
four related accounting reports that
summarizes the financial obligation,
resources, profitability and cash
transaction of a business firm in few
pages. A complete set of financial
statements includes:
Balance Sheet: showing the
financial position of a firm in
specific time by indicating the
resource that it owns, the debt it
owes and the amount of owner’s
equity.
Income Statement: indicating the
profitability of business over the
preceding year.
Statement of Owner’s Equity:
explaining certain change in the
amount of owner’s equity in the
business.
Statements of Cash Flows:
summarizes the cash receipts and
cash deposits of the business over
the same time period covered by
the income statement.
Accounting System:
An accounting system consists of
personals, procedures, devices and
reports used by an entity in
developing accounting information
and communicating this
information to decision makers.
Accounting information is first
recorded, then classified into
different categories to obtain sub
totals and summarized to assist the
managers in decision making.
Transaction Approach of
recording Economic Activity:
Accounting reports summarizes
information which has been
recorded in the accounting system.
In recording economic activities,
accountants focus on transactions- 1-
events causes an immediate change
in the financial resources or
obligations of business. 2- Which can
be measured objectively in
monetary terms.
CPAs: (Certified Public Accounts)
The independent organization whose
specialized auditors make assurance
of the validity and accuracy of
financial statements of a business
firm by auditing them.
CPA expresses the professional
opinion as to the fairness of the
financial statements. They are
licensed by the state.
FASB: (Financial Accounting
Standard Board)
The most authoritative source of
GAAP and highly independent rule
making body. It consist seven
members form accounting
profession, accounting education,
industry and government. It has
designed a conceptual framework
for financial reporting which
stresses on,
Objectives of financial reporting
 Relevancy, reliability and
understandability
characteristics
 Elements of financial
statements
 Criteria on deciding the
information to be included
 Valuation concepts relating to
financial statement amount
SEC: (Security & Exchange
Commission)
It’s a governmental agency with
legal power to establish accounting
principles and financial reporting
requirements for publically own
corporations. It bears the force of
law to implement its accepted rules.
AICPA: (American Institute of
Certified Public Accountants)
It is the professional association of
certified public accountants. It
participates in developing code of
professional ethics and auditing
standards.
AAA: (American Accounting
Association)
Comprised of accounting educators.
It sponsors research studies and
monographs for improvement of
business.
Annual Reports:
A document issued annually by the
organization having audited
financial information for several
years as well as nonfinancial
information about the company and
its operations.
These comparative financial
statements enable us to identify
trends in company’s performance
and financial position.
GAAP: (Generally Accepted
Accounting Principal)
The ground rule for financial
reporting. It is the accounting
concept, measurement technique
and standards provide the general
framework determining what
information is to be presented in
financial statements.
Basically there are seven rules
grounded in GAAP
1- Comparability and Reliability
The information shared should
be able to comparable
vertically or horizontally and
should be reliable.
2- The business entity concept
Set of financial statements are
required to describe the
affairs of specific business
entity.
3- The cost principal
The assets which are used in
making profit should be
recorded at their cost in
financial statements. They
may be amortized or
depreciated.
4- The stable-dollar assumption
The dollar is a stable unit of
measurement and works well
with stable prices.
5- The concept of adequate
disclosure
The user of financial
statement should be informed
of any facts necessary for the
proper interpretation of
financial statements.
 6- The going concern assumption
The principal show that the
business is a continuing
process, a going concern and
the assets such as land and
building are not for resale
purpose. So their valuation
with time is not considered in
financial statements.
7- The objectivity principal
Should show the valuation of
assets which should be factual
and can be verified by
experts.
Nature of Accounting Principles:
Accounting principles are general
rules made by man to better manage
a business. They should have
authoritative support. Accounting
principals
 Originates from a
combination of tradition,
experience and official decree.
 Requires authoritative
support and some means of
enforcements.
 Are sometimes arbitrary.
 Must be clearly understood
and observed by all
participants in process.
Business Entity:
It is an economic unit that engages
in identifiable business activities. In
business terms the business entity is
regarded as separate from the
personal affairs of its owner.
Assets:
Economic resource owned by an
entity. Such as land, building,
vehicles, machinery, office
equipment and many more.
Liability:
The economic resources owed by a
firm or individual for any purpose
and have to pay back in a specific
period either with a profit or not.
Capital Stock:
Transferable unit of ownership in a
corporation.
Cost Principal:
The widely used principal for
accounting for assets at their
original price to the current owner.
Ethical Conduct:
Doing the right thing with honor
and integrity even sacrificing
personal advantage.
Income Statement:
A statement showing the profit and
loss of a business over a specific time
period.
Internal Control:
All measures used by a firm to
assure management that the
organization is operating in
accordance to the management’s
rules and policies.
Profitability:
An increase in owner’s equity
through successful business
operations.
Public Information:
The information available by law to
the general public regarding any
organization.
Publically Owned Corporations:
The corporations in which the
members of general public may buy
or sell the shares of capital stock.
Statement of Retained Earnings:
The financial statement explaining
certain changes in the amount of the
owner’s investment in the business
organized as corporation.
Stockholder:
Owner of capital stock in a
corporation. Also the owners of
corporation.
Transaction:
Event causing an immediate change
in the financial position of an entity
that can be measured objectively in
monetary terms.
Window Dressing:
Legitimate measures taken by
management to make a business look
as strong as possible at the balance
sheet date.
Account:
The record used to summarize the
increase and decrease in particular
asset.
Accountability:
The state/condition of being
responsible for one’s actions by
existence of independent record of
those actions.
Accounting cycle:
The complete set of accounting
procedures applied in recording,
classifying, summarizing accounting
information. The cycle begins with a
transaction and ends with the
preparation of financial statements.
Chart of Accounts:
The chart lists the ledger account
titles and account numbers that are
used by particular businesses.
Credit:
The amount entered on the right-
hand side of ledger account. Showing
decrease in assets and increase in
liabilities and owners equity.
Debit:
The amount entered on the left-hand
side of ledger account. It is used to
record in increase in assets or
decrease in liabilities.
General journal:
The simplest type of journal having
only two columns. It is the first
place in accounting where a
transaction is recorded.
Journal:
The chronological record of
transactions showing for each
transaction occurred.
Ledger:
A close-leaf book, file or other record
containing all the separate records
of a business.
Posting:
The process of transferring the
information form journal to
individual ledger accounts.
Trial Balance:
A two column schedule listing the
names, debit and credit balance of
account in ledgers. It is mostly used
to check the balance of accounting
equation.
Accounting Period:
The span of time covered by an
income statement. Ideally one year,
and may be a month, Quarter or a
half year.
Accumulated Depreciation:
A separate account showing the
decrease in the worth of depreciable
assets used in the accounting period.
Adjusting entries:
The entries required to update the
accounting information to be used
in financial reporting at the end of
accounting period.
Adjusted Trial Balance:
After handling adjusting entries an
adjusted trail balance is prepared
just like trail balance to check where
there is balance in accounting
equation or not.
Closing Entries:
Journal entries made for the
purpose of closing temporary
accounts (revenue, expenses and
owner with drawl) and transferring
it into owner’s capital account.
Depreciation:
The systematic allocation of the cost
of an asset to expense during the
period of its useful life.
Expenses:
The amount spent on products or
services to earn revenue.
Fiscal Year:
Any 12 months accounting period
adopted by a business.
Matching Principal:
The GAAP rule, focusing on how
revenue earned during an
accounting period is matched with
the expenses incurred in generating
it.
Revenue:
The price of goods and services
charged/rendered by a business.
Accrues Means to Grow or
Accumulate over time.
Materiality is the relative
importance of an item
Notes provide extra information
regarding any transaction recorded
in journal.
Book Value:
The net amount at which an asset
appears in balance sheet at specific
time.
Interim Financial Statements:
The FS prepared for less than Fiscal
year. Such as quarterly or 6 months.
Prepaid Expenses:
Assets representing advance
payment of expenses for future
financial year.
Unearned Revenue:
An obligation to deliver goods or
render services in future accounting
period.
Bar Code:
The label attached with goods in
vertical bars with the information
only identifiable by computers.
Gross Profit:
Net Sales Revenue-Cost of Goods Sold
While the gross profit expressed in
terms of %age of net sales.
While net sales is the pure earning
after deduction all of the obligations.
Periodic Inventory System:
the system in which inventories are
determined only periodically. And
don’t need to keep it up to date.
Perpetual Inventory System:
Merchandising transactions are
recorded as they occur and needs to
keep up to date.
Point of Sale Terminals:
The computerized system to record
the transaction form cod bars.
Board of Directors:

Persons elected by the stock holders

of a corporation to set corporate
polices who hire managers and
officers to run the operations.

Capital Stock is transferable unit of

ownership in corporation.

Dividends are the assets distributed

among the stock-holders of any
corporation.

Retained earnings are the portion of

owner’s equity resulting from the
retaining profit from the business.

Tax planning is the structuring

transactions in a manner that
legally minimize the impact of
income tax.