INTRODUCTION

WHAT IS ACCOUNTING?
Accounting is art of recording, classifying and summarizing in a significant manner and in
terms of money, transactions, and events which are in part at least, of a financial character, and
interpreting the results thereof.

LUCA PACIOLI
 Father of accounting
 Published in 1494 the first book on double entry accounting.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

Uniform set of accounting rules, procedures, practices and standards that are followed in
preparing the financial statements.
1. Historical cost or Cost principle
This principle states that acquired assets should be recorded at their actual cost and not
what management thinks they are worth as at reporting date.
2. Matching concept
This is the combined concept of Revenue Recognition and Expense Recognition
principle.
2.a. Revenue Recognition
Revenue should be recognized in the accounting period when goods are delivered or
services are rendered or performed.
2.b. Expense recognition
Expense should be recognized in the accounting period in which goods and services are
used up to produce revenue and not when the entity pays for those goods and services.

BASIC ACCOUNTING ASSUMPTION

1. Separate-entity Assumption/ Proprietor and Business Separate Personality
An accounting entity is an organization or a section of an organization that stands apart
from other organization and individuals as a separate economic unit.
2. Going concern
Business will continue on an indefinite period.
3. Periodicity/Time Period Assumption
The life of business is then divided into equal period for reporting purposes. It will be
aimless to wait for the actual last day operation to perfectly measure the entity’s profit.
Annual Accounting period

 Calendar Year
The accounting period will begin on January 1 and will end on December 31 on the
same year
 Fiscal Year
Also covers 12 months but starts on a date other than January 1.

4. Accrual Basis of Accounting

Economic events are recorded in the period in which they occur rather than at the point
in time when they affect cash.
NATURE OF A BUSINESS
1. Manufacturing
Is one that buys raw materials and process them into final products.
2. Trading/Merchandising
Is one that buys and sells goods without changing their physical form.
3. Services
Is one that offers services as its main product rather than physical goods.

FORMS OF BUSINESS
1. Sole/Single Proprietorship
Business owned by only one individual
2. Partnership
Is a business that is owned by two or more individuals who entered into a contract to
carry on the business and divide among themselves the earnings therefrom.
3. Corporation
Is a business that is formed by 5 but not more than 15 natural persons created by
operation of law. (Old Corporation Code)

ACCOUNTING EQUATION

ASSETS = LIABILITIES + EQUITY

ASSET
Resource controlled by the enterprise as a result of past events and from which future
economic benefits are expected to flow to the enterprise.
Layman’s term: Owned and used by the enterprise in its operation.

CLASSIFICATION OF ASSET
1. Current Asset
a. It expects to realize the asset, or intends to sell or consume it, in its normal operating
cycle.
b. It holds the asset primarily for the purpose of trading
c. It expects to realize the asset within 12 months after the reporting period
d. The asset is cash or cash equivalent unless it is restricted.
Examples:
a. Cash
Any medium of exchange that a bank will accept for deposits at face value. It includes
coins, currency, checks, money orders, bank deposits and drafts.
b. Notes Receivable
Written pledge that the customer will pay the business a fixed amount of money on
certain date
c. Accounts Receivable
These are claims against customers arising from sale of services or goods on credit.
 d. Inventories
Assets which are (1) held for sale in the ordinary course of business; (2) in the process
of production (3) in the form materials or supplies to be consumed in the production
process or in the rendering of services.
e. Prepaid expenses
Account title for expenses that are paid in advance but are not yet incurred or have not
yet paid in advance but are not yet incurred or have yet expired such as Prepaid Rental,
Prepaid Insurance, Prepaid Interest, Prepaid Advertising, Prepaid Supplies, etc.

2. Non-current Assets
Examples
a. Property Plant Equipment
These are tangible assets that are held by an enterprise for use in the production
or supply of goods or services or for rental t others, or for administrative
purposes and which are expected to be used during more than one period.
b. Accumulated Depreciation
It is a contra account that contains the sum of the periodic depreciation charges.
The balance in this account is deduction from the cost of the related asset to
obtain book value.

LIABILITIES
Present obligations that have resulted from past events and can require you to give up resources
when settling them.
Layman’s term: Financial obligations of the business to its creditors.

CLASSIFICATION OF LIABILITIES
1. Current Liabilities
a. It expects to settle the liability in its normal operating cycle
b. It holds the liability primarily for the purpose of trading.
c. The liability is due to be settled within 12months after the reporting period.
d. The entity does not have an unconditional right to defer settlement of the liability for at
least 12months after the reporting period.
Examples
a. Accounts Payable
Financial obligation of enterprise that constitute an oral promise to pay.
b. Notes Payable
Same as Accounts Payable in nature but obligation is evidence by a promissory note.
c. Accrued liabilities
Amount owed to others for unpaid expenses.
d. Unearned Revenues
Advanced Payment of the customers before providing the goods and services.
 2. Non-current Liabilities
Examples
a. Mortgage Payable
This account records long-term debt of the business entity for which the business entity
has pledged certain assets as security to the creditor
b. Bonds Payable
Business organization often obtains substantial sums of money from lenders to finance
the acquisition of equipment and other needed assets.

EQUITY/ NET WORTH/NET ASSET

The residual interest in the asset of the enterprise after deducting all its liabilities
CAPITAL – This account is used to record the original and additional investments of the
owner of the business entity.
WITHDRAWALS – When the owner withdraws cash or other assets, such are recorded in the
drawing or withdrawal account rather than directly reducing the owner’s equity account.
INCOME SUMMARY – It is temporary account used at the end of the accounting period to
close income and expenses.

THE EXPANDED ACCOUTING EQUATION

ASSETS = LIABILITIES + EQUITY (+ INCOME/REVENUE – EXPENSES)

INCOME/REVENUE – represents the inflow of asset (or decrease in liabilities) due operating
activities. This may include sales of products, merchandise and services and earnings from interest,
dividends, and rents.
EXPENSES – represent the outflow of assets (or increase in liabilities) due to a company’s operating
activities.

FORMULA
REVENUE XXX
Less: EXPENSES XXX
PROFIT/LOSS XXX