Basic Accounting

Chapter 2
Learning Outcomes

🠶 Define accounting and double-entry

bookkeeping.
🠶 Describe income statement, statement of cash
flows, statement of changes in equity, and
statement of financial position.
🠶 Prepare a correct journal entry.
🠶 Prepare the four basic financial statements.
 Outline
🠶 Accounting
🠶 Debit and Credit
🠶 Journal Entry
🠶 Posting to Accounts
🠶 Extracting Balances
🠶 Trial Balance
🠶 Income Statement
🠶 Statement of Cash Flows
🠶 Statement of Changes in Equity
🠶 Statement of Financial Position
Accounting

🠶 The lifeblood of a business

🠶 The process of recording, analyzing, and
interpreting the economic activities of a
business
🠶 Bookkeeping is a method of recording all
transactions for a business in a specific format
Why is Accounting Important?
🠶 Accountability – people who handle cash in the
company are responsible for it
🠶 Budgeting – this allows businesses to estimate its
future sales and expenses
🠶 Taxation – records must be kept in order to pay
taxes
🠶 Financial Statements – reports that summarize the
financial performance of a business
🠶 Annual Reports – FS are presented to shareholders
and potential investors in the form of annual reports
What financial questions might you
have about your business?
🠶 Is the business earning profit?
🠶 Are selling prices too high/low?
🠶 How much does ABC company owe me?
🠶 What is the value of my inventory?
🠶 How much did John Smith earn last year?
🠶 Do we have enough money to pay our bills?
Who else may want financial
information about the business?
🠶 Government
🠶 Bankers
🠶 Lenders
🠶 Potential investor
🠶 A lawyer
If you decide to be an entrepreneur, you
will find yourself facing such accounting
tasks such as:
🠶 Banking
🠶 Payroll
🠶 Keeping track of amounts owed by and owed
to customers
🠶 Keeping track of amounts owed to the
government
🠶 Producing an income statement for income tax
purpose
 Categories of Accounting Work

Routine Daily Activities Periodic Accounting

o Processing Bills Activities (at regular
intervals)
o Preparing Cheques
o Paycheques (bi-weekly)
o Daily Banking
o Bank accounts (balanced
o Recording Transactions monthly)
o Preparing Business o Financial reports (monthly,
Papers quarterly, yearly)
o Income tax returns
(yearly)
 Categories of Accounting Work

Miscellaneous Activities
o Employee resignation
o An advertisement is prepared
o New capital equipment is purchased
o A new loan
o A new employee is hired
Types of Financial Statements
1. Statement of Comprehensive Income or Income
Statement – shows the result of operations for a
given period. It consists of revenue, cost, and
expenses.
2. Statement of Cash Flows – summarizes the cash
receipts and cash disbursements for the
accounting period. It summarizes the cash
activities of the business by classifying cash
inflows (receipts) and cash outflows (payments)
into operating, investing, and financing
activities.
Types of Financial Statements
3. Statement of Changes in Owner’s Equity or
Statement of Owner’s Equity – shows the
changes in the Capital or Owner’s Equity as a
result of additional investment or withdrawals
by the owner, plus or minus the net income or
net loss for the year.
4. Statement of Financial Position or Balance
Sheet – shows the financial condition/position
of a business as of a given period. It consists of
the Assets, Liabilities, and Owner’s Equity.
The Fundamental Accounting Equation

ASSETS = LIABILITIES + OWNER’S EQUITY

OR

ASSETS – LIABILITIES = OWNER’S EQUITY

Example

Assets = Liabilities + Owner’s Equity

₱? = ₱ 40, 000 + ₱ 60,000
Answer: ₱ 100,000 = ₱ 40, 000 + ₱ 60,000
₱ 150,000 = ₱ ? + ₱ 70,000
Answer: ₱ 150,000 = ₱ 80, 000 + ₱ 70,000
₱ 200,000 = ₱ 110, 000 + ₱ ?
Answer: ₱ 200,000 = ₱ 110, 000 + ₱ 90,000
 Exercise 1

Find the missing amounts.

ASSETS LIABILITIES OWNER’S

EQUITY
1. ₱ 4,902,400 ₱ ₱ 2,153,800
2. 9,656,000 987,200
3. 1,141,000 646,000
4. 8,200,000 3,250,000
5. 25,000,000 14,600,000
 Exercise 1

Find the missing amounts.

ASSETS LIABILITIES OWNER’S

EQUITY
1. ₱ 4,902,400 ₱2,748,600 ₱ 2,153,800
2. 10,643,200 9,656,000 987,200
3. 1,141,000 646,000 495,000
4. 8,200,000 4,950,000 3,250,000
5. 25,000,000 14,600,000 10,400,000
Income
Statement
Income Statement
🠶 Service income – includes revenues earned or
generated by the business in performing services for a
customer or client
🠶 Salaries or Wages expense – payments made to
employees for rendering services to the company
🠶 Utilities expense – related to the use of electricity, fuel,
water, and telecommunications facilities
🠶 Supplies expense – covers office supplies used by the
business in the conduct of daily operations
Income Statement
🠶 Insurance expense – the expired portion of premiums
paid on insurance coverage
🠶 Depreciation expense – the annual portion of the cost of
a tangible asset such as buildings, machineries, and
equipment charged as expense for the year.
🠶 Uncollectible Accounts Expense/Doubtful Accounts
Expense/Bad Debts Expense – the amount of
receivables charged as expense for the period because
they are estimated to be doubtful of collection
Statement of
Cash Flows
Statement of Cash Flows
a)Operating activities – the cash inflows (receipts) and
the cash outflows (payments) arising from the normal
operations of the business
Receipts of Cash: Payments of Cash:
o Collections from o To suppliers for services
customers for the and goods acquired
performance of services o Employees’ salaries
or sale of goods
o Government licenses and
o Royalties, fees, taxes
commissions received
o Interest expense
o Interest, dividends, and
other income received o Other operating expense
Statement of Cash Flows

b) Investing activities – the cash inflows (receipts) and

cash outflows (payments) from the purchase of sale
of property and equipment, investment in debt or
trading securities
Statement of Cash Flows
c) Financing activities – the cash inflows (receipts) and
cash outflows (payments) from the owners and
creditors of the business
Receipts of Cash: Payments of Cash:
o Original and additional o Cash withdrawal of
investments by owner owner
o Proceeds of loan o Payment for the principal
balance of loan
Statement of Changes in Owner’s
Equity
Statement
of Financial
Position or
Balance
Sheet
Statement of Financial Position or
Balance Sheet
a) Assets (Current & Non-Current)
🠶 An asset is anything that the business owns that has
value
🠶 Cash – includes coins, currencies, checks, bank deposits,
and other cash items readily available for use in the
operations of the business
🠶 Cash equivalents – short-term investments that are
readily convertible to known amounts of cash subject to
an insignificant risk to changes in value
Statement of Financial Position or
Balance Sheet
🠶 Marketable securities – are stocks and bonds purchased
by the enterprise and are to be held for only a short
span of time
🠶 Accounts receivables – the amount collectible from the
customer to whom sales have been made or services
have been rendered on account or credit
🠶 Notes receivable – is a promissory note issued by the
client or the customer in exchange for services or goods
received as evidence of his obligation to pay
Statement of Financial Position or
Balance Sheet
b) Liabilities (Current & Non-current)
🠶 A liability is anything that the business owes; any
debts of the business
🠶 Examples:
🠶 Credit line
🠶 Mortgage
🠶 Owed to parents
🠶 Credit cards
Statement of Financial Position or
Balance Sheet
c) Owner’s Equity
🠶 Owner’s equity is also referred to as a capital or
net worth
🠶 It is the difference between the total assets and
total liabilities of a business