POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Department of Accountancy
LOPEZ, QUEZON BRANCH

INSTRUCTIONAL MATERIAL
For ACCO 20BC/ACCO 20273/ACCO 05BC
Fundamentals of Accounting and Business/Accounting 1/
Fundamentals of Accounting 1

(MODULE 1 – Introduction to Accounting)

BSHM 1-1/DOMT 2-1/DOMT 2-2/BSBA 2-1
1st Semester, SY 2020-2021

Compiled by:
Joanne Michelle D. Lee, CPA
Instructor 1

Maribel D. Chan, CPA

Assistant Professor 4
Subject Overview
 No business could operate very long without knowing how
much it was earning and how much it was spending.
 Accounting provides the business with these information,
that’s why accountants are called the scorekeepers of
business.
 Without accounting, a business couldn’t function optimally; it
wouldn’t know where it stands financially, whether it’s making
a profit or not, and it wouldn’t know its financial situation.
 Also, a sound understanding of this language will bring about
a better management of the financial aspects of living.
 Personal financial planning, education expenses, car
amortization, business loans, income taxes and investments
are based on the information system that we call
Accounting.
Objectives
 After this module, the students should be able to:
 Define Accounting
 Understand the nature, functions, and objectives of
accounting
 Determine the scope and branches of accounting
 Recognize the users of accounting information and their
information needs
 Identify the forms of business organizations and their
activities
 Describe the basic financial statements of business
organizations
 Determine the elements of financial statements
 Explain basic accounting concepts and principles.
DEFINITIONS OF
ACCOUNTING
 The Accounting Standards Council (ASC) defines
accounting as follows:
 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, in
making reasoned choices among alternative courses of
action.
 Accounting is also defined as 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.
DEFINITIONS OF
ACCOUNTING
 The first definition states the purpose of accounting, that is,
to provide quantitative information about a business for the
basis of economic decisions and resolutions.
 The second definition states the phases performed in the
accounting process. These are the following:
 Recording or Bookkeeping – the process of systematically
maintaining a record of all business transactions.
 Classifying – the sorting or grouping of similar and interrelated
transactions in their respective class.
 Summarizing – is the preparation of financial statements which
include the Statement of Financial Position (Balance Sheet),
Statement of Profit or Loss (Income Statement), Statement of
Cash Flows, and Statement of Changes in Owner’s Equity.
DEFINITIONS OF
ACCOUNTING
 Accounting is actually an information system that
measures business activities, processes information
into reports and communicates the reports to decision
makers.
 Accounting is called the “Language of business”,
because it serves as a communication link between
the business entity and the users of financial
information.
 An accountant’s primary task therefore is to supply
financial information to statement users so that they
could make informed judgment and better decisions.
THE DEVELOPMENT OF
ACCOUNTING
 Accounting traces its roots to the Middle East region,
where as early as 8500 BC, tradesmen use clay
objects to represent commodities such as flocks of
sheep, jars of spices and oil, bolts of clothing and
other goods.
 The Ancient Civilizations of Babylon, Greece and
Egypt also used clay tablets.
 These records show wage payments, materials
requisitions and costs of labor, which only shows that
Accounting has already been used even during
Biblical times.
THE DEVELOPMENT OF
ACCOUNTING

 In 1494, Friar Luca Pacioli wrote a book which

contains discussions on the double-entry bookkeeping
system.
 The book was entitled, “Summa de Arithmetica,
Geometria, Proportioni et Proportionalita”,
(Everything about Arithmetic, Geometry, Proportions
and Proportionality).
 Friar Pacioli was considered the father of double-
entry bookkeeping.
THE DEVELOPMENT OF
ACCOUNTING

 In the mid-18th to the mid-19th centuries, the Industrial

Revolution altered the ay goods are produces from
artisan/craftsman method to the assembly-line
method.
 Also, during this period, the corporate form of business
organization was created to accommodate the need
for the increasing large amounts of funds which was
required to finance the expansion of business.
THE ROLE OF ACCOUNTING
FOR BUSINESS
A business is an organization in which basic resources
are assembled and processed to provide goods or
services to customers or clients.

 The role of accounting in business are as follows:

 Provides the necessary information essential in the

formulation and execution of business and non-business
policies.
 Business establishments and the government
acknowledge accounting as an essential tool of
management.
FORMS OF BUSINESS
ORGANIZATIONS
 The three forms of business organizations are as follows:

 Single or Sole Proprietorship – a business owned by only an

individual called proprietor. Easiest to form and less
complicated to operate and decisions are made faster.
 Partnership – an association of two or more persons who bind
themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves.
 Corporation – is an artificial being created by operation of law
having the rights of succession and the powers and attributes
expressly authorized by law or incident to its existence. It is the
most complex form of business organization because there are
several legal requirements that must be complied first before it
can commence its business operation.
TYPES OF BUSINESS
 Business entities may engage in any of the following
types of business:

 Service Business – renders services to customers or

clients for a fee.
Examples are as follows:
public transport companies medical or health clinics
beauty parlors event coordinators
security agencies law offices
repair shops accounting firms
laundry shops advertising firms
schools
TYPES OF BUSINESS
 Merchandising Business or Trading – buys goods or
commodities and sells them at a profit.
Examples are as follows:
grocery stores hardware stores
supermarkets drugstores
car dealers appliance stores
 Manufacturing Business – makes finished goods from
raw materials or unassembled parts. It produces the
goods it sells.
Examples are as follows:
shoe factories car assembler
food processing plants
SPECIALIZED ACCOUNTING
FIELDS
 Certified Public Accountants (CPA) are those who
have met the required education, experience and have
passed the CPA Licensure examination
A. Public Accounting – accountants and their staff render
services for a fee. The services rendered by CPAs in public
practice include:
 Auditing – involves the independent examination of financial
statements for the purpose of expressing an opinion on the
fairness of the said statements prepared by the company under
audit.
 Tax Services – CPAs who specialized in tax accounting
prepare income tax returns and advise clients on tax matters.
 Management Advisory Services – involve providing services
to clients on matters relating to the design and maintenance of
a company’s accounting system, budgeting, cost accounting,
production, organizational planning and other business matters.
THE GENERALLY ACCEPTED
ACCOUNTING PRINCIPLE
 GAAP defines what is accepted accounting practice and
they are like laws that must be followed in financial
reporting.
 GAAP encompasses the conventions, rules, procedures,
practice and standards followed in the accumulation,
preparation and presentation of accounting data in the
financial statements.
 The Financial Reporting Standards (FRSC) is the
accounting standard setting body created by the
Professional Regulation Commission (PRC) upon
recommendation of the Board of Accountancy (BOA).
 The FRSC aims to develop a single set of high quality,
understandable and enforceable accounting standards
that require high quality, transparent and comparable
information in financial statements.
THE GENERALLY ACCEPTED
ACCOUNTING PRINCIPLE
Some Generally Accepted Accounting Principles are:
 Business Entity Concept – the business entity is
treated as separate and distinct from its owner/s and
from other business units.
 Going Concern or continuity assumption – this
assumes that unless there is evidence to the contrary,
the business entity will continue to operate for an
indefinite period.
 Time Period Assumption – this requires that the
indefinite life of the business be divided into time periods
or accounting periods for the purpose of preparing
financial reports on the performance and financial
position of the business.
 Unit of measurement assumption – this specifies that
accounting should measure and report the results of a business’
economic activities in terms of a monetary unit such as the
Philippine Peso.
 Matching Principle – relates to the expense recognition
principle which requires that costs and expenses incurred in
generating the revenue should be properly matched against the
related revenue in determining the net income or net loss for the
period.
 Accrual Basis – requires that revenue or income should
be recognized when earned regardless of when
collection is received; and expense should be
recognized when incurred regardless of when payment
is made.
THE BASIC FINANCIAL
STATEMENTS
 Financial Statements are the end product of the accounting process.
 The five basic financial statements consist of the following:
1) Statement of Profit and Loss – shows the summary of the company’s
revenue and expenses for the given period. It is also known as Income
Statement.
2) Statement of Financial Position – shows the list of a company’s asset,
liabilities and owner’s equity as of a specific date, usually at the close of
the last day of a month or a year. It is also known as Balance Sheet.
3) Statement of Changes in Owner’s Equity – the summary of changes
in the owner’s equity that have occurred during a specific period of time,
such as a month or a year.
4) Statement of Cash Flows – provides information about the cash
receipts and cash payments of an entity for a given period of time.
5) Notes to the Financial Statements – to make the financial statements
more useful and meaningful to those who might have an interest in the
business, these notes are added as required to be prepared by
companies.
QUALITATIVE CHARACTERISTICS OF
FINANCIAL STATEMENTS

The fundamental qualitative characteristics of financial statements

consists of the attributes or qualities that make information provided in the
financial statements useful to users. These are:
 Relevance – Information has the quality of relevance when it would
influence a decision by helping users form predictions about the outcome
of past, present and future events, or confirm and correct prior
expectations.
 Faithful Representation – to be useful, financial information must not
only be relevant, it must also represent faithfully the phenomena it
purports to represent. This fundamental characteristic seeks to maximize
the underlying characteristics of the following:
 Completeness – a complete depiction includes all information necessary for a
user to understand what is being depicted, including all necessary descriptions
and explanations.

 Neutrality – financial information should be free from bias and is not slanted,
weighted, emphasized, de-emphasized or otherwise manipulated.

 Freedom from error – No errors or omissions in the description of the

phenomenon, and the process used to produce the reported information has
been selected and applied with no errors in the process.
QUALITATIVE CHARACTERISTICS OF
FINANCIAL STATEMENTS

The enhancing qualitative characteristics of financial statements

enhance the usefulness of information that is relevant and faithfully
represented. These are:
 Comparability – means the ability to bring together for the purpose of
noting points of likeness and differences. Information about a reporting
entity is more useful if it can be compared with similar information about
other entities and with similar information about the same entity for
another period or another date.
 Verifiability – means that different knowledgeable and independent
observers could reach consensus, although not necessarily complete
agreement, that a particular depiction is a faithful representation.
 Timeliness – information is available to decision-makers in time to be
capable of influencing their decisions.
 Understandability – information provided in the financial statements
must be presented in a form and expressed in terminology that a user
understands. Financial reports are prepared for users who have
reasonable knowledge of business and economic activities and who
review and analyze the information with diligence.
THE USERS OF FINANCIAL
INFORMATION
 Management – for planning and controlling the operation of the
business.
 Creditors and suppliers – in order to evaluate a borrower’s ability to pay
and in deciding whether to extend credit to a debtor.
 Owner/s of the firm – need to know if the business is operating at a
profit or loss.
 Investors – to determine if their investment is profitable and safe and in
deciding whether to invest in the business or not. Also, whether they
should buy, hold or sell their shares of stocks.
 Government and their agencies – require financial information to
regulate the activities of the enterprise, determine taxation policies and
as basis for national income statistics.
 Customers – use financial statements as basis for evaluating the
possibility of price changes and identifying other sources of cheaper
services and commodities.
 Employees – interested in information about the stability and profitability
of their employers.
 Public – financial statements may assist the public by providing
information about the trends and recent developments in the prosperity of
the enterprise and the range of its activities.
THE ELEMENTS OF FINANCIAL
STATEMENTS
The elements of financial statements also known as the five (5) basic
classifications of accounts are as follows:
1. ASSETS – resources controlled by the enterprise as a result of past
transactions and events and from which future economic benefits are
expected to flow to the enterprise.
2. LIABILITIES – defined as present obligations of an enterprise arising
from past transactions or events, the settlement of which is expected to
result in an outflow from the enterprise of resources embodying
economic benefits.
3. CAPITAL or OWNER’S EQUITY – represents the equity or claim of the
owner on the assets of the business.
4. REVENUE or INCOME – the gross inflow of economic benefits during
the period in the form of inflows or enhancements on assets or decrease
in liabilities that result in increase in equity, other than those relating to
contributions from the owner or owners.
5. EXPENSES – the gross outflow of economic benefits during the period
in the course of ordinary activities when these outflows result in
decrease in equity other than those relating to distribution to owners.
ASSETS
 Cash is any medium of exchange that a bank will accept at face value. It includes
coins and currencies, checks, money orders and bank drafts.

 Accounts Receivable are claims against debtors or customers arising from services
rendered on account and sale of merchandise on account.

 Notes Receivable are claims supported by promissory note.

 Merchandise Inventory are goods on hand and are available for sale.

 Office supplies/Store Supplies are supplies being used by the business.

 Prepaid Expenses are expenses paid by the business in advance.

 Office/Store Equipment includes computers, air-conditioning units, electric fans,

freezers, refrigerators, display cabinets, etc.

 Furniture and Fixtures includes office tables, chairs, filing cabinets, etc.

 Intangible Asset is an identifiable non-monetary asset without physical substance.

 Franchise is a right granted by one party (called franchisor) to another party (called
franchisee) for a specified period.

 Copyright is an exclusive right or protection granted to an author for literary, musical

or artistic work.

 Patent is an exclusive legal right granted by the government for an invention to

enable its holder to manufacture, sell and control an item or process.

 Trademarks are words, names, symbols, or other devices used in trade to indicate
the source of a product and to distinguish it from the products of others.

 Computer Software or just software is a general term primarily used for digitally
stored data such as computer programs and other kinds of information read and
written by computers.
LIABILITIES
 Accounts Payable are amounts due to creditors for assets acquired on
accounts.
 Notes Payable are amounts due to creditors evidenced by written
promise to pay.
 Mortgage Payable are long term debts secured by a collateral.
 Salaries Payable are unpaid salaries of employees at the end of an
accounting period.
 Interest Payable are interest due on borrowed funds.
 Utilities Payable examples are unpaid electric and water bills.
 Unearned Revenue is revenue collected by the business in advance

CAPITAL/OWNER’S EQUITY
 Owner’s Capital is used to record the original and additional
investments of the owner in the business entity. It is increased by the
amount of profit earned during the year or is decreased by a loss.
 Owner’s Drawing/Withdrawal are cash or other asset withdrawn or
taken by the owner from the business for personal use.
 Income Summary is a temporary account used at the end of the
accounting period to close income and expenses.
REVENUE OR INCOME
 Service Income are revenues earned by performing services for a
customer or client; for example, accounting services by a CPA firm,
laundry services by a laundry shop.
 Commonly used revenue accounts are:
Sales Interest Income Service Revenue
Fees Earned Professional Fees Subscription Revenue
Rent Income Commissions Earned

EXPENSES
 Salaries or Wages Expense includes all payments as a result of an
employer-employee relationship such as salaries or wages, 13th moth
pay, cost of living allowances and other related benefits.
 Utilities Expense is related to use of telecommunications facilities,
consumption of electricity, fuel and water.
 Supplies Expense includes used supplies in the conduct of daily
business.
 Insurance Expense are portion of premiums paid on insurance coverage
which has expired.
 Depreciation Expense is the portion of the cost of a tangible asset
allocated or charged as expense during an accounting period.
 Interest Expense is related to use of borrowed funds.
Video Links
 Watch: Benefits in Learning Accounting
https://youtu.be/sRuWd5TL5_I?list=PL5zKSeS09l339nB6ujJ
PQ9Rsv99_b-aTb
 Watch for Accrual Basis of Accounting
https://youtu.be/C8UuX75ZarU?list=PL5zKSeS09l339nB6ujJ
PQ9Rsv99_b-aTb
 Watch: What are Assets?
https://youtu.be/rOsuqG_J0t4?list=PL5zKSeS09l339nB6ujJP
Q9Rsv99_b-aTb
 Watch: What are Liabilities?
https://youtu.be/fKRwT10Sszc?list=PL5zKSeS09l339nB6ujJP
Q9Rsv99_b-aTb
 Watch: What is Equity?
https://youtu.be/Fr5oHEYrT2A?list=PL5zKSeS09l339nB6ujJP
Q9Rsv99_b-aTb
ASSIGNMENTS/QUIZZES/EXAM:
GENERAL INSTRUCTIONS:
 Answers on assigned exercises in this module should be
submitted in Google Classroom.
 Click the posted assignment in Google Classroom then attach
your answers.
 It can be a picture of the answers written on a sheet of paper or
you may type your answers on the spreadsheet provided.
 Once your answers are attached, do not forget to click the
TURN IN button.
 Once turned in, your work will be graded and you may view
your grade in the Google Classroom.
 You may submit your work on or before the due date and time
as stated in our schedule and in the posted assignment in the
Classroom.
 Quizzes will be posted in Google Classroom, to be conducted
through Google Forms, with time limit. Follow the further
instructions and schedules posted in Google Classroom.
M1 – Exercise 1
M1 – Exercise 2
M1 – Exercise 2
M1 – Exercise 3
M1 – Exercise 4
REFERENCES:

 A. Baguio, M. Balbarino, E. Dela Cruz, M. Doquenia, L. Espino, J. Fonte,

M. Hernane, M. Orfiano, L. Pilapil, & C. Vedasto. Principles of
Accounting. 2014 Edition
 W. Ballada & S. Ballada. Basic Accounting Made Easy. 17th Edition
 Pictures were taken or copied from Google Images.
 Video links were taken/copied from Youtube channel Accounting Stuff.