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The Introduction of Basic Accounting Property, Plant and Equipment


 Accumulated Depreciation
 Intangible Assets
Concepts and Functions
 Long-Term Investments
What is Accounting?
What are Liabilities?
• Is a SERVICE ACTIVITY.
• Present obligation of the entity:
• Is the PROCESS of identifying, measuring and
1. Arising from past events.
communicating economic information.
2. The settlement of which is
• Is the art of recording, classifying and
expected to result an outflow of
summarizing in a significant manner and in terms
resources.
of money, transactions and events.
Classification: Current and Non-current Liabilities
Function of Accounting
Examples of Liabilities
To provide QUANTITATIVE information, primarily
financial in nature, about economic entities that is Current Liabilities
intended to be useful in making economic decisions.
• Accounts Payable
The Basic Accounting Equation
• Notes Payable
• Financial accounting is based upon the
accounting equation. • Accrued Liabilities

Assets = Liabilities + Owners' Equity • Unearned Revenues

– This is a mathematical equation which • Current Portion of Long-Term Debt


must BALANCE.
Non-current Liabilities
– If assets total P300 and liabilities total
P200, then owners' equity must be P100. • Mortgage Payable

What are Assets? • Bonds Payable

Valuable Resources owned by the entity. What is Equity?

Controlled by the entity as a result of past events and from • Residual interest in the assets of the entity after
which future economic benefits are expected to flow to the deducting all liabilities.
enterprise.
• Simply stated, equity means
Classification: Current and Non-current Assets
“NET ASSETS” or total assets minus liabilities.
Examples of Assets
Owner’s Equity = Assets - Liabilities
Current Assets
Liabilities and Equity
• Cash and Cash Equivalents
• Both liabilities and owners' equity represent
• Accounts Receivable CLAIMS on the assets of a business.

• Notes Receivable – Liabilities are claims by people external


to the business.
• Inventories
– Owners' equity is a claim by the owners.
• Prepaid Expenses
Financial Statements
Non-current Assets
• Structured financial representation of the Report Form
financial position and financial performance of an
entity. Account Form

• Show the results of the management’s


stewardship of the resources entrusted to it.

• Useful to a wide range of users in making


economic decisions.

Statement of Financial Position


or Balance Sheet

• The balance sheet is an expanded expression of


the accounting equation.

• Is a formal statement showing the three elements


comprising financial position, namely assets,
liabilities and equity.

• Reform and Account Form

Balance Sheet

Assets Liabilities and Owners’ Equity


Cash 5,000 Liabilities
Accounts receivable 7,000 Accounts payable 8,000
Inventory 10,000 Notes payable 2,000 Income Statement
Equipment 7,000 Total liabilities 10,000
Owners’ equity 19,000 • Is a formal statement showing the financial
Total assets 29,000 Total liabilities and performance of an entity for a given period of
owners’ equity 29,000 time.

• Presents the income, expenses, gains, losses


and net income or loss recognized during the
period.

• “Results of Operations”

Classification of Income

 Service Income
– Revenues earned by performing services.
 Sales
– Revenues earned as a result of sale of
merchandise.

Classification of Expenses

 Cost of Sales/Cost of Goods Sold


 Salaries or Wages Expense
 Utilities Expenses
 Rent Expense
 Supplies Expense
 Insurance Expense
 Depreciation Expense – Basic summary device of accounting.
 Uncollectible Accounts Expense
• An account is debited when an amount is entered
 Interest Expense
on the LEFT side.

• An account is credited when an amount is


Income Statement entered on the
(Service Business) RIGHT side.

Normal Balance of an Account

Income Statement
(Merchandising Business)

DEBITS and CREDITS


The Double-Entry System

• ACCOUNT
• The analysis of transactions should follow these
four (4) basic steps:

Four (4) Basic Steps:

1. Identify the transaction from source documents.

2. Indicate the accounts – either assets, liabilities,


equity, income or expenses – affected by the
transaction.

3. Ascertain whether each account in increased or


decreased by the transaction.

4. Using the rules of debit and credit, determine


whether to debit or credit the account to record its
increase and decrease.

Source Documents

• Are original written evidences contain information


about the nature and the amounts of the
transactions.

Rules of Debits and Credits


• Examples:
NOTE:
1. sales invoices
The total debits for a transaction MUST ALWAYS
EQUAL the total credits. 2. official receipts

Analyzing Transactions 3. bank deposit slips

4. bank statements
What is a TRANSACTION?
5. checks
– a particular kind of event that involves the
transfer of something of value between 6. purchase orders, etc.
two entities.
A transaction may do one of several things:
Example:
• It may increase both the asset side and the
• Acquiring assets from owner(s)
liabilities and owners' equity side.
• Borrowing funds from creditors

• Purchasing or Selling goods and services. (+)Assets = (+)Liabilities + (+)Owners' Equity

Transaction Analysis • It may decrease both the asset side and the
liabilities and owners' equity side.
• Is the central component of the financial
accounting process. (-)Assets = (-)Liabilities + (-)Owners' Equity

– Remember that every transaction must A transaction may do one of several things:
keep the accounting equation in balance.
• It may cause both an increase and a decrease on
the asset side.
(+ & -)Assets = Liabilities + Owners' Equity Journal Entry

• It may cause both an increase and a decrease on


the liabilities and owners' equity side.

Assets = (+ & -)Liabilities + (+ & -)Owners' Equity

Note:

• Regardless of what transaction occurs, the


accounting equation must be in BALANCE after Transaction Analysis
the transaction is analyzed.
• Rented office space and paid two months’ rent in
Sample Problem advance, $12,000.
Paid Rent in Advance

Merchandising Business & Service Business ASSETS = LIABILITIES + OWNERS’ EQUITY


Cash
-$12,000
Transaction Analysis Prepaid
Rent
+$12,000
• H. Jacobs established his business with an initial
investment of $50,000 on Jan. 1, 2018.

Owners’ Original Investment


ASSETS = LIABILITIES + OWNERS’ EQUITY
Cash H.Jacobs, capital
+$50,000 +$50,000

Journal Entry

Transaction Analysis

 H. Jacobs issued a promissory note for a $20,000


loan from Metrobank on Feb. 20, 2018.
Bank Loan
ASSETS = LIABILITIES + OWNERS’ EQUITY
Cash Notes
+$20,000 Payable
+$20,000

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