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ACTBAS 1 INTRODUCTION TO ACCOUNTING Accounting - art of recording, classifying, summarizing and interpreting data.

- system that measures business activities, processes given information into reports and communicates those findings to decision-makers. - science ~ systematized knowledge Accounting as LANGUAGE OF BUSINESS - medium of communication between a business firm and the various parties interested in its financial activities - accounting is often utilized whenever there are business transactions, and business transactions normally involve people. *Bookkeeping deals primarily with the systematic method of recording and classifying financial transaction of business. 3 kinds of information needed by different parties: 1. Financial Position 2. Results of Operations 3. Financing and Investing Activities BRIEF HISTORY Italy 1400s

published Summa de Arithmetica, Geometria, Proportioni et Proportionalite (Everything about Arithmetic, Geometry, and Proportion) in Venice in November 1494 double entry bookkeeping pace of accounting increased during the Industrial Period 19th century corporations growth of

Accounting systems to report the owners how well their businesses were doing Concept of income Globalization USERS OF FINANCIAL STATEMENTS

Internal Users 1. Owners 2. Management 3. Employees External Users 1. Potential Investors 2. Creditors 3. Customers 4. Taxing Authorities 5. Government Regulation Agencies 6. Non-profit Organizations FORMS OF BUSINESS ORGANIZATION Based on Ownership 1. Sole or Single Proprietorship one person makes the investment 2. Partnership two or more persons agree to operate the business.

Luca Pacioli - mathematician - friend of Leonardo da Vinci

Persons owning this form of business are called partners

3. Corporation a body formed and authorized by law to act as a single person although constituted by one or more persons. - most popular form of business today - persons who put in capital in a corporation are called stockholders. Based on Operations 1. Service Concern rendering services 2. Merchandising or trading Concern buying and selling of goods or commodities 3. Manufacturing Concern processing of products or the conversion of raw materials into finished goods that are sold ACCOUNTING CONCEPTS Entity Concept - The business is regarded as having a separate and distinct personality from that of the owner/s. Monetary Concept - Money is a common unit of measure that we can use to record economic transactions and prepare financial statements. Time Period Concept - It divides the life of the business into regular intervals (usually one year) at the end of which financial statements are prepared. - Calendar year or fiscal year

Revenue Realization Concept - Income is recognized when earned regardless whether cash is received. Accrual Concept - Income be recorded when earned regardless whether cash is received - Expense be recognized when incurred regardless whether payment is made Matching Concept - all expenses incurred to generate revenues must be recorded in the same period that the income are recorded to properly determine net income or net loss of the period. Objectivity Concept - all transactions must be evidenced by business documents free from personal biases and independent experts can verify reports Cost Concept - assets acquired by the business must be recorded at acquisition price and no adjustment are to be made on this valuation in later periods. Going Concern Concept - the business is to continue its operations indefinitely Conservatism Concept - when uncertainty exists, the users of financial statements are better served by understatement than overstatement of net income and assets. Consistency Concept - once a method is adopted, it must not be changed from year

to year to allow comparability of financial statements between years and between businesses. Materiality Concept - relative importance of an item or event - an item or event is considered material if knowledge of it would influence the decision of prudent users of financial statements. Disclosure Concept - all relevant and material events affecting the financial position of a business and the results of its operations must be communicated to users of financial statements. ACCOUNTING PROFESSION 1. Public Accountants 2. Private Accountants Certified Public Accountant - earns his title through acceptance score in the written national examination given by the Board of Accountancy. - Board of Accountancy prepares, grades and gives the results of the exam to the Professional Regulation Commission. - Professional Regulation Commission issues licenses to those who passed the exam. Organizations 1. PICPA or Philippine Institute of Certified Public Accountants national professional organization of CPAs in the country 2. FRSC or Financial Reporting Standards Council establish and improve accounting

standards that will be generally accepted in the Philippines. formulates the International Financial Reporting Standards

STATEMENT OF FINANCIAL POSITION Forms 1. Account Form 2. Report Form ACCOUNTING EQUATION: Assets = Liabilities + Owners Equity CLASSIFICATIONS Current Assets 1. Cash 2. Investments in Trading Securities 3. Trade and Other Receivables a. Notes Receivable b. Interest Receivable c. Accounts Receivable d. Advances to Employees e. Accrued Income f. (Allowance for bad debts) 4. Prepaid Expenses a. Supplies b. Prepaid Insurance c. Prepaid Rent Non-Current Assets 1. Property, Plant and Equipment a. Land b. Building c. Equipment d. Furniture and Fixtures e. (Accumulated Depreciation) Current Liabilities 1. Trade and Other Payables a. Accounts Payable b. Notes Payable c. Interest Payable

d. Deferred Income or Unearned Service Income e. Taxes Payable Non-Current Liabilities 1. Notes Payable (Long Term) 2. Installment Contracts Payable 3. Mortgage Payable INCOME STATEMENT Forms: 1. Natural Form 2. Functional Form Income Accounts 1. Service Income 2. Other Income a. Interest Income b. Dividend Income Expense Accounts 1. Salaries Expense 2. Rent Expense 3. Supplies Expense 4. Utilities Expense 5. Transportation Expense 6. Gas and Oil Expense 7. Representation Expense 8. Depreciation Expense 9. Bad Debts Expense 10. Donations & Contributions Expense 11. Miscellaneous Expense Types of Withdrawals 1. Temporary Owner, Drawing Cash or Asset 2. Permanent Owner, Capital Cash or Asset xxx xxx xxx xxx

STATEMENT OF CHANGES IN OWNERS EQUITY JOSEPH LABRADOR, CPA Statement of Changes in Owners Equity For the Year Ended December 31, 2010 Joseph, Capital Jan 1 Add: Net Income Sub-total Less: Joseph, Drawing Joseph, Capital Dec 31 P 620,500 34,500 P 655,000 10,000 P 645,000

STATEMENT OF CASH FLOWS Forms: 1. Direct Method 2. Indirect Method Operating Activities income statement items 1. Receipts a. Sales, customers b. Interest and dividends 2. Payments a. To suppliers for inventory b. To employees for services c. To government for taxes d. To lenders for interest e. To others for expenses Investing Activities Changes in investments and Non-current assets 1. Receipts a. Sale of PPE b. Sale of debt or equity securities of other entities c. Collection of principal on loans to other entities 2. Payments a. To purchase PPE b. To purchase debt or equity securities of other entities c. To make loans to other entities

Financing Activities Changes in Noncurrent Liabilities and owners equity 1. Receipts a. Owners investments b. Issuance of debt (bonds and notes) 2. Payments a. Withdrawal of cash by the owner b. To redeem long-term debt ACCOUNTING CYCLE 1. 2. 3. 4. 5. 6. 7. 8. 9. Journalizing Posting to the General Ledger Trial Balance Preparation Worksheet Preparation Adjusting Entries Financial Statements Preparation Closing the books Post-closing trial Balance Reversing Entries GENERAL LEDGER Forms 1. Standard Form 2. Running Balance Form Balancing total debit total credit TRIAL BALANCE
OWNER Trial Balance September 10, 2010 Cash Accounts Receivable Office Supplies Office Equipment Office Furniture & Fixture Accounts Payable Owner, Capital Owner, Drawing Service Income Taxes & Licenses Expense Repair & Maintenance Expense Salaries & Wages Expense Utilities Expense Total 269,500 10,000 7,000 40,000 50,000 30,000 350,000 8,000 15,000 5,000 500 3,500 1,500 395,000

ACCOUNTING FOR PROMISSORY NOTE Components: 1. Maker 2. Payee 3. Principal amount 4. Interest Rate 5. Maturity value 6. Maturity Date 7. Place of Issue 8. Issuing Date Transactions: 1. for services rendered

Notes Receivable xxx Service Income or Sales xxx 2. to extend payment of an account xxx xxx

Notes Receivable Account Receivable 3. for a loan granted xxx

Notes Receivable Cash


Interest = Principal x Rate x Term Maturity Value = Principal + Interest DISCOUNTING A NOTE RECEIVABLE Discount Period = # of days from discounting date until maturity date Discount = maturity value x discount rate x discount period Net proceeds = maturity value discount Example: Cash 10,065.13 Interest Expense 134.87 Interest Income 200 Liability on Discounted Note 10,000 Discounted note at 14% to BPI

________ 395,000

DISCOUNTING OWN NOTE Cash xxx Discount on Notes Payable xxx Notes Payable xxx Settlement: Notes Payable xxx Interest Expense xxx Discount on Notes Payable xxx Cash xxx