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Prepared by: Socorro Gemma B.

Agranum
Instructor 1,
College of Business Management and Accountancy
Overview of Business
 Business – an undertaking of an individual or group of
individuals to engage and perform activities which will
produce income. Activities which use the organizations
resources whose primary objective is to gain profit.
Business organizations may also be termed as
economic unit or economic entity.

 Forms of Business Organization as to ownership:


Sole Proprietorship – owned by a proprietor
Partnership – owned by two or more persons
Corporation – owned by shareholders/stockholders
Note: Cooperatives may also be considered wherein these are owned
by the members.
Types of Business:

 Service business – selling people’s time


 Merchandising/Trader – buying and selling products
 Manufacturing – taking raw materials, use equipment
and staff to convert it into finished products
 Raw Materials – growing or extracting raw materials
 Infrastructure – selling and utilization of large assets
 Financial – receiving deposits, lending and investing
money
 Insurance - pooling premiums of many to meet claims of
a few
(note: provide examples for each type)
 Activities in Business Organization
 Financing Activities – Business organizations require
financial resources to obtain other resources used to produce
goods and services.
 Investing Activities – Business is involve in the selection
and management including the disposal and replacement of
long-term resources that will be used to develop, produce and
sell goods and services.
 Operating Activities – Organization is involve in the use of
resources to design, produce, distribute, and market goods
and services. These activities include research and
development, design and engineering, purchasing, human
resources, production, distribution, marketing and selling,
and servicing.
Note :( provide transactions which are related to the above
classification which will be used in the preparation of Cash Flow
Statement)
Definition of Accounting:
Accounting is a service activity. Its function is to provide
quantitative information, primarily financial in nature, about
economic entities that is intended to be useful in making
economic decisions. (Accounting Standards Council, 1983)

Accounting is an information system that measures, processes


and communicates financial information about an economic
entity. (Financial Accounting Standards Board, 1978)

Accounting is the process of identifying, measuring and


communicating economic information to permit informed
judgements and decisions by users of information. (American
Accounting Association, 1966)
Definition of Accounting:
Accounting is the 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.
(American Institute of Certified Public Accountant, 1953)
Recording transactions in the book called journal,
classifying transactions through ledger and summarizing is
preparation of trial balance and may involve the use of
worksheet which then results to financial statements.
Interpreting is communicating the information to the users
for decision making purposes.
Significant manner refers to the use of accounting
cycle, the scientific way of recording events, translating
transactions in to business language.
A Certified Public Accountant may engaged with:
-Public Practice -Government Practice
-Education/Academe -Commerce and Industry

To be a CPA and practice accountancy, one shall be required to undergo a


licensure examination to be given by the Board in such places and dates as
compliance with the requirements prescribed by the Commission.
Requirements are, he/she must be a Filipino citizen, of good moral character, a
degree holder of Bachelor of Science in Accountancy and has not been
convicted of any criminal offense involving moral turpitude.

Documents that are needed to support the requirements are: certificate


of live birth from NSO/PSA, marriage contract, collage diploma, baccalaureate
transcript of records, NBI clearance and other documents that the board of
Accountancy may require.

Branches of accounting includes Auditing, Bookkeeping, Cost


Bookkeeping, Costing, and Cost Accounting, Financial Accounting, Financial
Management, Management Accounting, Taxation and Government
Accounting.
 Users of financial information: (note: identify as to internal or external)

- owners, investors - customers


- employees/managers -public
- suppliers - creditors/lenders
-government and their agencies -potential investors
In recording business transactions, accountants should consider
the following fundamental concepts and assumptions:
Entity Concept – each entity should be evaluated separately.
Periodicity Concept – An entity’s life can be meaningfully
subdivided into equal time periods for reporting purposes.
Stable Monetary Unit – Philippine peso is a reasonable unit of
measure and that its purchasing power is relatively stable.
Going Concern Assumption – means that the accounting entity
is viewed as continuing in operation indefinitely.
 Accounting practices follow certain guidelines which is
GAAP, generally accepted accounting principles, encompass
the conventions, rules and procedures, necessary to define
accounting practice at a particular time.

 Basic Principles: Characteristics of useful financial info:


 Objectivity Principle - Comparability
 Historical Cost - Relevance
 Revenue Recognition - Faithful Representation
 Expense Recognition - Completeness
 Adequate Disclosure -Neutrality
 Materiality - Verifiability
 Consistency Principle - Understandability
-Freedom from error
- Timeliness
-
Financial Statements
 The final output of the accounting cycle:
-Income Statement – shows the performance of the entity
in an accounting period. Revenue and Expenses are the elements
of FS presented, thus profit or loss arise.

- Statement of Financial Position – shows the stewardship


of the management in the use of the entities resources. Informs
also the resources owned (assets), obligations (liabilities) and
equity (capital) of the business in a specific date.

-Statement of Cash Flow- shows the inflow and outflow of


entities cash, the cash resources and its uses .

- Statement of Changes in Owners Equity – indicates the


increases or decreases in the capital/investment made by the
owners
Elements of Financial Statements
 Assets are resources owned and controlled by an entity as a
result of past events and from which future economic benefits
are expected to flow to the enterprise.
 Liabilities are obligations of the entity to outside parties ,
arising from past events, the settlement of which is expected to
result in an outflow of resources embodying economic benefits.
 Equity is the residual interest in the assets of the enterprise after
deducting all its liabilities.
 Revenue arises in the course of ordinary activities of an
enterprise and is referred to by to a variety of different names
including sales, fees, interest, dividend, royalties and rent.
 Expenses are decreases in economic benefits during the
accounting period in the form of outflows or depletion of assets
or incurrence of liabilities that result in decreases in equity.
Typical account titles used in Financial Statements
Assets Liabilities Equity

Cash Accounts Payable Capital


Cash Equivalents Notes Payable Withdrawals
Notes Receivable Accrued Liabilities/ Income Summary
Accounts Receivable Accrued Expenses
Inventories Unearned Revenues Partner’s Capital

Prepaid Expenses Loans Payable Partner’s Drawing


Property , Plant and Current Portion of Long- Shareholders’ Equity:
Equipment Term Debt Ordinary share
Preference share
Accumulated Mortgage Payable Retained Earnings:
Depreciation
Intangible Assets Bonds Payable
Note: 1)determine how the 2) know the meaning of above 3)provide transaction for the use
above accounts come into of above account title
existence in the entity.
Typical account titles used in Financial Statements
Revenue Expenses
Service Income/Revenue Cost of Sales
Sales Salaries or Wages Expense
Rent Income Telecommunications, Electricity
Professional Fees Fuel, Water
Consultation Fees Interest Expense
Referral Fee Transportation Expenses
Rent Expense
Supplies Expense
Insurance Expense
Depreciation Expense
Uncollectible Accounts Expense

Note: 1)determine how the 2) know the meaning of above 3)provide transaction for the
above accounts come into use of above account titles
existence in the entity.
Accounting tools
 Account – the basic summary device of accounting. A detailed
record of the increases, decreases and balance of each element
that appears in an entity’s financial statements.
 T-account – this has three parts, account title, left side (Debit
side) and right side (Credit side)
 Accounting Equation – the basic tool of accounting. Assets
must always equal liabilities and owner’s equity.
Assets = Liabilities + Owners’ Equity
Above equation also means that creditor and owner have
claims over the assets of the entity
 Double-Entry System – Debit and Credit – Accounting is
based on a double entry system which means that the dual
effects of a business transaction is recorded.
 Normal balance of an account – refers to the side of the
account- debit or credit where increases are recorded . Asset,
owner’s withdrawal and expense accounts normally have debit
balances; liability, owner’s equity and income accounts normally
have credit balances.
Rules of Debit and Credit
Accounting events and transactions
 An accounting event is an economic occurrence that causes changes
in an enterprise’s assets, liabilities, and/or equity. Events may be
internal or external actions.
 A transaction is a particular kind of event that involves the transfer
of something of value between two entities.
Types and effects of transactions:
1. Source of Assets (SA)- an asset account increases and a
corresponding claims or equity account increases.
2. Exchange of Assets (EA) – One asset account increases and
another asset account decreases.
3. Use of Assets (UA) – An asset account decreases and
corresponding claims account decreases.
4. Exchange of Claims (EC) – One claims account increases and
another claims account decreases.

Every accountable events has a dual but self-balancing effect


on the accounting equation.
Accounting for business transactions
 Every transactions can be analyzed or expressed in terms of its effects on the accounting equation. But the use
of a financial transaction worksheet is not that efficient approach once the number of accounts involved
increases. The double-entry system provides a formal system of classification and recording business
transaction. The use of T-accounts is where in the rules of debit and credit applies:

Example: 1. Mr. A invested P500,000 to form a computer shop business.


Analysis: The entity received P500,000 which means asset cash increased and another account which the owners
capital increased by the same amount. (SA)

2. The entity acquired three sets of computers each amounting to P55,000 , gave P55,000 down
payment and the balance payable next year.
Analysis: Asset Computer equipment increased by P165,000, cash decreased by P55,000 and the liability account
increased by P110,000. (EA) and (UA)

3. Acquired land for P100,000 and building for P200,000 in cash.


Analysis: Increase in asset Land for P100,000, increase in asset Building for P200,000 and decrease in asset Cash
P300,000. (EA)

4. Acquired furniture and fixture for P150,000 on account from SM Appliance .


Analysis: Asset furniture and fixture increased and Liability accounts payable increased by P150,000. (SA)

5. Paid Mayors permit and other requirements to establish the business for P10,000 and took a one
year fire insurance from Insular for 12,000.
Analysis: Asset Prepaid Expenses increased by P22,000 and another asset Cash decreased. (UA)

(note: require students to provide more transactions, then eventually determine when to debit and
credit accounts.)
Accounting cycle

accounting cycle
Activities
performed in an
accounting period
that help the
business keep its
records in an
orderly fashion.

By: Glencoe / Accounting Real-World Applications & Connections


Basic Accounting –made easy by Win Lu Ballada
Step 1 Step 2

Collect and Journalize


verify source Analyze each
transaction. each
documents. transaction.

Commonly Used Source Documents

Invoice Receipt
Memorandum Check stub

source document
A paper prepared as the evidence that a transaction occurred.
Source documents

sales invoice, cash register tapes, official receipt, bank deposit slips, bank
statements, checks, purchase orders, time cards and statement of accounts
 Here is an example showing the analysis of a business transaction
and its general journal entry:

Business Transaction

Zip issued a P3,000 check to purchase a computer system.

journal
A chronological record of the transactions of a business.
journalizing
The process of recording business transactions.
Need for adjustments (step 5)
 Financial statements are prepared on the accrual basis of accounting,
except the for the cash flow statements.
 Each adjusting entry affects a balance sheet account and an income
statement account. There are two types of adjusting entries, deferrals
and accruals.
 These entries are needed to measure properly the profit for the period,
and to bring related asset and liability accounts to correct balances for
the financial statements.
 Deferral is the postponement of the recognition of “an expense
already paid but not yet incurred”
example of deferrals that need adjustments: prepayments, depreciation
of property and equipments, allocation of revenues received in advance
to revenues.
 Accrual is the recognition of “an expense already incurred but unpaid”.
example of accrual that needs adjustments: unpaid expenses already
incurred for the period, accrued revenues, accrual fro uncollectible
accounts.
The worksheet (still at step 5)
Preparing the worksheet:
1. Enter the account balances in the unadjusted trial balance columns
and total the amounts.
2. Enter the adjusting entries in the adjustment columns and total the
amounts
3. Compute each accounts adjusted balance by combining the
unadjusted trial balance and the adjustment figures. Enter the
adjusted amounts in the adjusted trial balance columns.
4. Extend the asset, liability and owner’s equity amounts from the
adjusted trail balance columns to the balance sheet columns. Extend
the income and expense amounts to the income statement columns.
5. Compute profit or loss as the difference between total revenues and
total expenses in the income statement. Enter profit or loss as a
balancing amount in the income statement and in the balance sheet,
and compute the final column totals.
Step 6. Preparing Financial Statements Once worksheet is completed, it is easy to prepare
the financial statements. Most of the information needed to prepare income statements,
statement of changes in equity and balance sheet are available from the worksheet.
 Step 7 – Adjustments are journalized and posted. This step in the
accounting cycle brings the ledger into agreement with the data
reported inn the financial statements.
 Step 8 – Closing entries are journalized and posted. Temporary
accounts are closed to Income Summary accounts at the end of
the accounting period. The closing procedure: 1. Close income
accounts 2. Close the expense accounts. 3. close the income
summary account, and 4. close the withdrawal account.
 Step 9- Preparation of Post-Closing Trial Balance. To test the
equality of all the remaining open accounts, preparation of trial
balance after closing all temporary accounts has to be done. This
contains only balance sheet items.
 Step 10 – Reversing entries. An optional step, in the accounting
cycle. A reversing entry is the opposite of a related adjusting
entry made at the end of the period. Reversing entry should be
made for adjusting entries that increased an asset or a liability
account.
Application of the above learning is through the use of
practice set, thus students will be required to comply with.
Suggest that students have to take down notes during
discussion.

end of review

note: that most of the discussion and illustration were from the
book of Win Lu and Susan Ballada.
May the Lord God be by your side in your quest for knowledge.