SELF-PACED LEARNING MODULE

COLLEGE DEPARTMENT

MODULE 1
Subject:

FUNDAMENTALS OF ACCOUNTING 2

AISAT COLLEGE – DASMARIÑAS, INC.

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INFORMATION SHEET PR-1.1.1

 Unit Accounting
Module REVIEW OF ACCOUNTING PROCESS
AE-ACTG2 Fundamentals of Accounting 2 Units: 6 Page |2

“REVIEW OF BASIC ACCOUNTING”

Accounting is a service activity which function is to provide quantitative information, primarily financial
in nature, about economic entities that is intended to be useful in making economic decisions. It identifies,
records, and processes business activities to come up with financial reports that are measured in
monetary terms to show the financial condition of the business.

ACTIVITIES IN BUSINESS ORGANIZATIONS

Financing Activities. Are activities that result in changes in the size and composition of the contributed
equity and borrowings of the enterprise.

Operating Activities. Are the principal activities of the enterprise. They are the transactions and events
that enter into the determination of profit or loss.

Investing Activities. Are the acquisition and disposal of long-term assets and other investments.

FORMS OF BUSINESS ORGANIZATION

• Sole Proprietorship
• Partnership
• Corporation

PURPOSE OF BUSINESS ORGANIZATION

• Service. Companies that performs services for a fee. (e.g. law firms, accounting and the like)
• Merchandising. Companies that purchase goods that are ready for sale and then sell these to
customers.
• Manufacturing. Companies buy raw materials, convert them into products and then sell the
products to other companies.

The Accounting Equation

All accounting entries in the books of account for an organization have a relationship based on the
‘accounting equation’:
Assets = Liabilities + Owner’s equity

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 1st – 2nd
PRELIM
1 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module REVIEW OF ACCOUNTING PROCESS
AE-ACTG2 Fundamentals of Accounting 2 Units: 6 Page |3

Assets. Assets are tangible and intangible items of value which the business owns.
Examples of assets are:
• Cash • Furniture
• Cars • Debtors (money owed from
• Buildings customers)
• Machinery • Stock / Inventory

Liabilities. Liabilities are those items which are owed by the business to bodies outside of the business.
Examples of liabilities are:
▪ Loans to banks
▪ Creditors (money owed to suppliers)
▪ Bank overdrafts

Owner’s Equity. The simplest way to understand the accounting equation is to understand what makes
up ‘owner’s equity’.

Revenues. It corresponds to the increases in fund balance from the sale of goods or delivery of services
(when the accrual principle of accounting is used, this is recorded when the revenue is earned which is
not necessarily the same as when it is collected)

Expenses. Costs incurred by a business to provide goods or services that reduce fund balance (under the
accrual principle of accounting, this is recorded when the assets are used to provide the good or service,
not necessarily when they are paid for)

Net income: the difference between revenue and expense

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:
MODULE 1st – 2nd
PRELIM
1 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module REVIEW OF ACCOUNTING PROCESS
AE-ACTG2 Fundamentals of Accounting 2 Units: 6 Page |4

BASIC FINANCIAL STATEMENTS OF BUSINESS ORGANIZATION

1. Statement of Financial Performance/Income Statement/Statement of Profit

or Loss/ Statement of Receipts and Disbursements- report which describes how business operated or
produced wealth over a given period of time.

2. Statement of Changes in Owner’s Equity- prepared by the accountant which explain the activities for
a period of time that caused the owner’s equity to change.

3. Statement of Financial Position/Balance Sheet- show how healthy or robust the enterprise when it
shows a listing of accumulated resources (cash and properties) After deducting the liabilities (debts or
obligations to pay). After deducting the liabilities from the assets, the net assets show the new value or
net worth of the firm which belong to the owner.

4. Statement of Cash Flows- financial statement which explains why the amount of cash changed over a
period of time. The report makes a listing of the cash inflow activities (cash receipts) and the cash outflow
(cash payments) of the business.

Debits and Credits

These are the backbone of any accounting system. Every accounting entry in the general ledger contains
both a debit and a credit. Further, all debits must equal all credits.
Depending on what type of account you are dealing with, a debit (+) or credit (-) will either increase or
decrease the account balance. (This can be the most confusing part of accounting for most non-
accountants.) Figure 1 illustrates the entries that increase or decrease each type of account.

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 1st – 2nd
PRELIM
1 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module REVIEW OF ACCOUNTING PROCESS
AE-ACTG2 Fundamentals of Accounting 2 Units: 6 Page |5

The Account
The basic summary device of accounting is the account. A separate account is maintained for each
element that appears in the balance sheet and in the income statement.

ACCOUNTING CYCLE

Step 1. Identification of Events to be recorded

Step 2. Transactions are recorded in the journal

Step 3. Journal entries are posted to the ledger

Step 4. Preparation of a Trial Balance

Step 5. Preparation of the worksheet including adjusting entries

Step 6. Preparation of Financial Statement

Step 7. Adjusting journal entries are journalized and posted

Step 8. Closing journal entries are journalized and posted

Step 9. Preparation of post-closing trial balance

Step 10. Reversing journal entries are journalized and posted

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 1st – 2nd
PRELIM
1 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director