INTRODUCTORY

ACOUNTING

CHAPTER 1 & 2 review

ACCOUNTING
-The Language of Business

Objectives
Define accounting
Understand the functions of financial
statements
Identify common account titles
Be familiar with reports of CPA and
management
identify the accounting process and cycle,
Understand the double entry system,
understand the effects of transactions on the
accounting equation,
Be familiar with the rules of debit and credit

Accounting
An information system that

measures,
processes,
communicates information

For the purpose of

making economic
decisions

C1

Accounting Activities

Identifying
Business
Activities

Recording
Business
Activities

Communicatin
g Business
Activities

1-4

C1

Importance of
Accounting
is a
Accounting
Accounting

system that

Identifies
Identifies

Records
Records
information
Relevant
Relevant

that is

Communicates
Communicates

Reliable
Reliable

Comparable
Comparable

about
aboutan
anorganizations
organizations
business
businessactivities.
activities.
1-5

Operating
Operating Cycles
Cycles
The operating
cycle of a
merchandising
company
ordinarily is
longer than that
of a service
company.

LO 1 Identify the differences between service and merchandising companies.

Steps in Accounting
Cycle
Transaction

Financial
Statements

Journalize & Post

Closing Entries

Journalize

Journalize &
Post Adjusting
Entries

Post

Worksheet

Post-Closing Trial
Balance

2007 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 10e by Slater

Reversing
entry

An Overview
General
Journal

Special
Journals

Ledger Accounts

Trial Balance
Adjustments
Prepare Simple Financial Statements

FINANCIAL
STATEMENTS

BALANCE SHEET
INCOME STATEMENT
OWNERS EQUITY STATEMENT
CASH FLOW STATEMENT

Purpose of financial
statements
Provide information about
Financial position
Results of operation
Movement of cash in the enterprise

Elements of Financial
Statements
Balance Sheet- assets,

liabilities

Owners equity
Income Statement- income,

expenses
Cash Flow Statement-all elements of

Balance sheet and

Income Statement

Balance Sheet-A quantitative

summary of a companys financial
condition at a specific point in time,
including assets, liabilities and owners
equity for a given time.

Balance Sheet

A1

Assets
Assets

Liabilities
Liabilities

Assets

Equity
Equity

Liabilities
+ Equity

1-13

A. Income
Statement
Provides a financial summary of the
firms operating results during a
specified period.
Measures all your revenue source vs.
business expenses for a given time
period.
An accounting of revenue, expenses
and new profit for a given period.

INCOME STATEMENT
Income
/Sales
- Expenses
Profit

CASH FLOW
STATEMENT

Measures changes in financial

position. Summarizes the cash
receipts and cash
disbursements for the
accounting period.
Cash inflows (receipts) less
cash outflows (payments)

Cash
Cash Receipts
Receipts less
less
Cash
Cash Disbursements
Disbursements =
=
Net
Net Cash
Cash inflow
inflow (Outflow)
(Outflow)

Test I
Directions: Shade the letter of the best answer.
Which Financial Statements contain information to
answer the following questions? Shade letter
A-if found in the Income Statement and
B- if found in the Balance Sheet
1. Did the company make money for the period?
2. Did it incur a loss for the period?
3. How much does the company own?
4. To buy all its properties, did it borrow money or
did the money come from the stock holders?
5. How much cash does the company have at the
end of the period?
6. How much did it spend on salaries for the period?

7. How much did it sell for the period?

8. How much tax did it pay for the period?
9. Are its debts greater than the investments of the
owners?
10. Is the company heavily indebted?
11. How big are the investments of the owners?
12. How much interest on bank borrowings did the
company pay for the period?
13. What properties does it own?
14. Is the company big in terms of sales?
15. Is the company big in terms of what it owns?
17. Can the company pay its maturing debts?
18. As of the end of the period, how much does the
company owe?
19. How much is the total investments of the owner?

Assets

A1

Cash
Cash
Accounts
Accounts
Receivable
Receivable

prepayments
prepayments

Store
Store
Supplies
Supplies

Resources
Resources
owned
owned or
or
controlled
controlled
by
by aa
company
company

Notes
Notes
Receivable
Receivable

Land
Land

Buildings
Buildings
Equipment
Equipment
1-20

Current Assets
These are the assets in a business that
can be converted in cash in one year

or less.
Example: Cash, stocks and other liquid
investments, accounts receivable,
inventory and prepaid expenses.

CURRENT ASSETS
Cash includes money
and any other negotiable
instrument
that
are
payable in money and
acceptable by the bank
for
deposit
and
immediate credit.

Marketable
Also called Temporary
Securities
Investments.
Must be marketable (i.e., able to
readily sell).
E.g., commercial paper, treasury
bills, publicly traded stocks and
bonds issued by companies.

5-23

Trade and Other

Accounts
receivables.
Receivables
Called trade receivables for
nonfinancial institutions.
Amount collectible from
customers
Notes Receivable-promissory
note issued by customer
Interest Receivable-interest
collectible on promissory note
5-24
issued by the client.

Accounts Receivable
Amounts owed to the
company.

Arise from credit sales to

customers.

Not all customers will pay in

full.

Trade and Other

Receivables

Trade and
Other
Other receivables.
Receivables

E.g., advances or loans to

employees for various
reasons (Shown separately
e.g. Due from Employees).
Accrued Income-income
already earned but not yet
received.

CURRENT ASSETS

Inventories-unsold goods at the end

of the period.
Prepaid Expenses-supplies or
services bought the benefits of
which shall be received in the future.

Uncollectible Accounts
Until now, we have also assumed that all accounts
receivable will be collected.
However, because of various circumstances,
some customers will not be able to keep their
promises to pay.
Contra-Asset AccountAllowance for Bad Debts

CONTRA-ASSET ACCOUNTS

Allowance for bad debtslosses due

to uncollectible accounts. This is
deducted from accounts receivable .
Accumulated Depreciation- the expired
cost of the property, plant and
equipment as a result of usage and
passage of time. This is deducted from
the cost of the related account.

Non-current Assets
These are the tangible assets of a
business that wont be converted to
cash within a year during the normal
course of operation.
Example: Land, buildings, leasehold
improvements, equipment, machinery
and vehicles.

NON-CURRENT ASSETS
Long-term investments-intended to be held
for a long period of time.

Property, Plant and Equipment-for use in

the production of goods and services expected
to be used for more than one period.
Examples: Land, Building, furniture and fixtures
Intangible assets-non-physical assets
Examples: franchises, patents, copyrights,
trademarks, goodwill

Liabilities

A1

Accounts
Accounts
Payable
Payable

Salaries
payable

Mortgage
Mortgage
Payable
Payable

Notes
Notes
Payable
Payable

Creditors
Creditors
claims
claims on
on
assets
assets

Unearned
Unearned
Income
Income
Wages
Wages
Payable
Payable
1-33

LIABILITIE
S
Liabilities are classified and presented
based on their maturity. Obligations
presently due for payment are listed
first.
Classified into:
Current Liabilities
Non-current Liabilities

Current Liabilities
These are the obligations of the business
that are due within one year.
Example: Notes payable on lines of credit
or other short-term loans, current
maturities of long-term debt, accounts
payable to trade creditors, accrued
expenses and taxes, and amounts due to
stockholders.

LIABILITIES-Current

Accounts payable-debts arising from

purchase of asset or service on
account.
Notes Payable-debts evidenced by a
promissory note
Loans Payable- borrowed from
financial institutions payable within
twelve months
Utilities payable-services from PLDT,
Meralco, Maynilad etc.

LIABILITIES-Current

Unearned Revenuesadvance payments

received before goods or services are
delivered to the customer.
Accrued Liabilities- expenses already
incurred but not yet paid.
Examples: salaries payable, utilities
payable, interest payable

NON-CURRENT
LIABILITIES

Mortgage Payable-debts secured

by a collateral
Bonds Payable-certificates of
indebtedness with specific terms
of payment and interest rate.

Equity
A1

Contributed
Contributed
Capital
Capital

Earnings
Earnings

Owners
Owners
claim
claim on
on
assets
assets
withdrawals
withdrawals
1-39

Owners Equity
Capital - represents the total amount
invested by the owners plus the
accumulated profit of the business.

Drawing-withdrawals made by the

owner.

Income Summary-temporary account

that shows the income or loss for the
period.

Income Statement
Provides a financial summary of
the firms operating results during
a specified period.
Measures all your revenue source
vs. business expenses for a given
time period.
An accounting of revenue,
expenses and new profit for a
given period.

Service Companies
Service organizations sell time to earn revenue.
Examples:
Examples: Accounting
Accounting firms,
firms, law
law firms
firms and
and plumbing
plumbing services
services

Revenues

Minus

Expenses

Equals

Net
income

What is revenue?
Revenue (in business) is
the
incomethat
acompany
receives
from
its
normal
business
activities,
usually from the sale
ofgoods
and
servicesto
customers .
5-43

Service
Income
Revenues earned by the business in
performing services for a customer.

Examples:
Medical services by a doctor
Dental services by a dentist
Services by a lawyer
Services by an accountant

 Cost of Sales or cost of Services

The direct cost of the products sold
or the services rendered

Expense
s

Salaries
Utilities
Supplies
Insurance
Transportation
Depreciation
Bad debts
interest

Independent Auditors
Report
It states the division of responsibility
between the external auditor and the
company.
Auditor-expresses an opinion on the fair
presentation of financial statements
Company-responsible for the preparation
of the financial statements

Statement of
Managements
Responsibilities

Acknowledges responsibility
1. F/S in conformance with GAAP
2. amounts are based on best estimates
3. a system of internal controls
4. material disclosures were made
a. deficiencies in the design of internal
control
b. weaknesses in internal controls
c. fraud

 Philippine regulatory bodies

Philippine Regulation Commission
(PRC) Board of Accountancy (BOA), the
Securities and Exchange
Commission (SEC)
Bureau of Internal Revenue (BIR)
--Philippine Financial Reporting
Standard (PFRS) is now in use.

STEPS IN THE
ACCOUNTING PROCESS: 1.
ANALYZING
DETERMINING EFFECTS OF TRANSACTIONS ON THE

BUSINESS

Source Documents
Invoice from
supplier

Employee
earnings
records

Billings to
customers

Step 2 : RECORDING

Inputting of information in
books/journals

STEP 3: CLASSIFYING

Sorting like transactions

into account titles

STEP 4: SUMMARIZING
Grouping the accounts

STEP 5: REPORTING
Preparation of Financial Statements

STEP 6: INTERPRETING
Computation of relationship of
figures.

What is an Account ?
An account is a brief and
systematic record of
transactions which are
similar in nature.

LEDGER BOOK
Account

Account

T Account
Dr

NAME OF ACCOUNT Cr

DEBIT
Left
side

CREDIT
Right
side

T format
Dr

ASSETS ACCOUNT

DEBIT

CREDIT

Cr

T format
Dr

LIABILITY ACCOUNT

DEBIT

CREDIT

Cr

T format
Dr OWNERS EQUITY ACCOUNT
Cr

DEBIT

CREDIT

D OUBLE - E NTRY

ACCOUNTING SYSTEM
Every business
transaction will involve two
parties

Each party must give up

something (out) in order
to receive something
in return. (in)

Example:

When the business sells its

goods for cash, it will give up its

goods to its customer and will
receive cash in return.
Cash

IN

Goods
OUT
Firms goods

Firm

Example:

When

a business buys goods

with cash, it will give up its cash
to its suppliers and will receive
goods in return.
Goods

Cash
OUT
Suppliers goods

IN

Firm

Example:

When

a business purchases a
motor vehicle, it will give up its
cash to the seller and will
receive motor vehicle in return.
Motor
Vehicle

Motor Vehicle

IN
Cash
OUT

Firm

Example:

When a debtor pays to the firm, the

firms cash will increase and the
firms debtors will decrease.

Debtors
decreases

Cash
Debtor

increases

Firm

Example:

When the firm pays to the creditors,

the firms cash will decrease and the
firms creditors will decrease.

Creditors
decreases

Cash
Creditors

decreases

Firm

Hence,

For every business transaction,

two accounts will be involved.
One account will have a debit
entry and another account will
have a credit entry.

Examples : A

= L + OE
a) John began business with cash in
hand Php500,000.
Cash

P500,000

Capital

P500,000

b) The firm took a bank loan of

P800,000.
Cash

P800,000

Bank Loan

c)P800,000
Purchase d a motor vehicle from
ABC Trading for P700,000.
Motor Vehicle P700,000
Cash

Examples : A

= L + OE

d) Paid P50,000 to Creditor, Peter.

Cash P50,000

Creditors P50,000

e) Received P35,000 in check from a

debtor.
Debtors P35,000

P35,000

Cash at Bank

Examples : A

L + OE

f) Paid part of bank loan for P150,00.

Cash P150,000

Bank Loan

P150,000

g) Purchased office equipment from

Lee Trading on credit for P7,000.
Office Equipment

Creditors P7,000

P7,000
(Lee Trading)

Seatwork/Homework
Do exercise

 Thank you for your patience

and your admirable desire to
learn!