Identifying

- Involves the process of determining quantifiable transactions or events based on available

supporting documents and identifies whether the transaction is accountable event or non -
accountable event.
(accountable events: those that affect the assets, liabilities, equity, income or expenses of a
business.)

What to identify?

- Business transactions or events

Why do we need to identify?

- To gather information about transactions or event generally through source documents which
will be recorded in the journal. Because only accountable events are recorded in the book of
accounts.

How do we identify?

- Accountant analyzes each business transaction and identifies whether the transaction is
accountable event or non-accountable events.

Recording
- This process is called journalizing or bookkeeping.
- The routine and mechanical process of writing down business transactions. Only business
transactions and events that are quantifiable or measurable are recorded in the books of
accounts in chronological manner.
- Business transactions are recorded daily and chronologically.

What to record?

- Identified accountable events

Why do we need to record?

- To record the economic impact of transactions on the in a journal, which is a form that
facilitates transfer to the accounts.

How do we record?

- A business entity may use a general journal or special journal to record the various transactions
for the first time.
Classifying
• The process of sorting or grouping similar business transactions and events into their respective
kinds or classes. In other words, similar transactions and events should be grouped together. In
accounting, this is technically known as posting.

Why do we need to classify?

• Classifying provides a proper record/list of accounts according to their nature and type. Properly
recorded accounts make it easier to report on the balance sheet and is a key part of converting
ledgers into financial statements.

What do we need to classify?

• Assets
- Assets are resources controlled by the enterprise as a result of past events and from
which future economic benefits are expected to flow to the enterprise (per IFRS
Framework). In simple terms, assets are valuable resources owned by the entity. Assets
should be classified only into two: current assets and noncurrent assets.

- What are current assets and its examples?

Current assets are all assets which are expected to be realized within the ordinary
course of business, or a span of 12 months, whichever is longer. Realization here only
means that these assets are expected to be converted into cash, sold, or disposed after
a certain time, or through the passage of time.

a. Cash • Cash is any medium of exchange that a bank will accept for deposit at face
value, perhaps the most basic, liquid, and familiar of all assets.
• This includes bills, coins, checks, bank accounts.

Examples:
1. Petty Cash Fund – cash used to pay petty or small amounts.
2. Cash on Hand – cash in the possession and custody of the business.
3. Cash in Bank – cash that are deposited in the banks.
b. Accounts • These are claims against customers arising from sale of services or goods on
Receivable credit.
• This type of receivable offers less security than a promissory note.
c. Notes A written pledge that the customer will pay the business a fixed amount of
Receivable money on a certain date.
Represented by a promissory note which ensures that in the case of default by
the borrower, the company can seek additional legal remedies to recover what
has been lent.
d. Inventories These are assets which are:
1. held for sale in the ordinary course of business;
2. in the process of production for sale; or
3. in the form of materials or supplies to be consumed in the production process
or in the rendering of services.
e. Prepaid • These are expenses paid for by the business in advance.
Expenses • It is an asset because the business avoids having to pay cash in the future for a
specific expense.
• These represent future economic benefits – assets – until the time these start
to contribute to the earning process; these, then, become expenses.

Examples:
1. Prepaid Advertising – advance payment of advertising in all media types and
promotional campaigns.
2. Prepaid Insurance – advance payment of insurance whether it is life insurance
or non-life insurance.
3. Prepaid Rent – advance payment of rent by the tenant or lessee.
4. Prepaid Supplies – advance payment of office supplies and/or store supplies.

- What are noncurrent assets and its examples?

All other assets which are not current, basically fall into the definition of
noncurrent assets. Take note that they do not need to have at least 12 months
remaining before their expected realization; as long as they do not meet current
asset classification, they are classified here.

a. Property, These are tangible assets that are held by an enterprise for use in the
Plant, and production or supply of goods or services, or for rental to others, or for
Equipment administrative purposes and which are expected to be used during more
(PPE) than one period/year.

Examples:
1. Land – refers to the surface of the earth that is not covered by a body of water.
2. Building – a structure with roof and walls that is constructed on land.
3. Machinery – an equipment that has power to produce movements or forces.
4. Furniture and Fixture – furniture refers to movable things that are result of
design (i.e., sofa, tables, chairs); fixture refers to something attached to a
property such as walls (i.e., lightnings, toilet fixtures).
 5. Office Equipment – refers to business machines used in workplace (i.e.,
computer, copier machines).
6. Transportation Equipment – refers to vehicles whether land transport, sea
transport, or air transport.
b. Accumulated • It is a contra account that contains the sum of the periodic depreciation
Depreciation charges.
• The balance in this account is deducted from the cost of the related asset –
equipment and buildings – to obtain book value.
c. Intangible • These are identifiable, nonmonetary assets without physical substance held
Assets for use in the production or supply of goods or services, for rental to others,
or for administrative purposes.
• These include goodwill, patents, copyrights, licenses, franchises, trademarks,
brand names, secret processes, subscription lists and noncompetition
agreements.

• Liabilities
- The present obligation of the enterprise arising from past events, the settlement of which
is expected to result in an outflow from the enterprise of resources embodying economic
benefits (per IFRS Framework). A plain definition would be – liabilities are obligations of the
entity to outside parties who have furnished resources.

- What are current liabilities and its examples?

- What are current liabilities and its examples?

An entity shall classify a liability as current when:

o It expects to settle the liability in its normal operating cycle.

o It holds the liability primarily for the purpose of trading.

o The liability is due to be settled within twelve (12) months after the end
of the reporting period.
o The entity does not have an unconditional right to defer settlement of
the liability for at least twelve months after the end of the reporting
period.

Paying out does not necessarily mean payment through cash, but it can also include
conversion and/or refinancing.

a. Accounts This account represents the reverse relationship of the accounts receivable.
Payable
 By accepting the goods or services, the buyer agrees to pay for them in the
near future.
b. Notes • Notes payable are written promises of the entity to pay a sum certain in future
Payable determinable time.
• The business entity is the maker of the note; that is, the business entity is the
party who promises to pay the other party.
c. Accrued • Amounts owed to others for unpaid expenses.
Liabilities • These refers to the benefits received by the company but not yet paid.

Examples:
1. Salaries/Wages Payable – unpaid salaries and wages of the employees. 2.
Utilities Payable – unpaid communication, electricity, and water bills 3. Interest
payable – unpaid interest in a loan transaction.
4. Rent Payable – unpaid rent.
5. Taxes Payable – unpaid property and business taxes to be paid in the
government.
d. Unearned • This refers to cash received in advance but not yet earned.
Revenues • When the business entity receives payment before providing its customers with
goods or services, the amounts received are recorded in the unearned revenue
account (liability method).
• When the goods or services are provided to the customer, the unearned
revenue is reduced and income is recognized.

- What are noncurrent liabilities and its examples?

These are liabilities which the entity expects to settle after more than a year, or
have the legal or contractual capacity to defer payment accordingly.

a. Mortgage This account records long-term debt of the business entity for which the
Payable business entity has pledged certain assets as security to the creditor.

In the event that the debt payments are not made, the creditor can
foreclose or cause the mortgaged asset to be sold to enable the entity t
settle the claim.
b. Bonds The bond is a contract between the issuer and the lender specifying the
Payable terms of repayment and the interest to be charged.
Business organizations often obtain substantial sums of money from lenders
to finance the acquisition of equipment and other needed assets, they
obtain these funds by issuing bonds.
 • Equity
- The residual interest in the assets of the enterprise after deducting all its
liabilities (per IFRS Framework). Equity may pertain to any of the following
depending on the form of business organization:

o In a sole proprietorship, there is only one owner’s equity account

because there is only one owner.
o In a partnership, an owner’s equity account exists for each partner.

o In a corporation, owners’ equity, or shareholders’ or stockholders’

equity, consists of share capital or capital stock, retained earnings and
reserves representing appropriations of retained earnings among
others.

a. Capital This account is used to record the original and additional investments of the
owner of the business entity.
It is increased by the amount of profit earned during the year or is decreased
by a loss.
Cash or other assets that the owner may withdraw from the business
ultimately reduce it.
This account bears the name of the owner.

b. Withdrawals When the owner of a business entity withdraws cash or other assets, such
are recorded in the drawing or withdrawal account rather than directly
reducing the owner’s equity account.

• Income

Income is increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increase in equity, other than those
relating to contributions from equity participants (per IFRS Framework).

• Service Income – the income derived from rendering or performing services for a customer or client
and is the primary income for a service business.
• Sales – revenues earned as a result of sale of tangible products.

Other type of income includes the following:

1. Interest Income – income earned as a result of investment in debt securities or receivables from
other entities.
2. Rent Income – income from the use of the land or unit space.
3. Dividend Income – income from share investments as a result of dividend declaration of a company.
 • Expenses
- Expenses are decreases in economic benefits during the accounting period in
the form of outflows or depletions of assets o incurrences of liabilities that
result in decreases in equity, other than those relating to distributions to equity
participants (per IFRS Framework). Expenses include the costs of any material,
labor, supplies, and services used in an effort to produce revenue.

Examples of expenses are the following:

- Cost of Sales (Cost of Goods Sold) – the cost incurred to purchase or to produce
the products sold to customers during the period.
- Salaries or Wages Expense – includes all payments as a result of an employer-
employee relationship such as salaries or wages, 13th month pay, cost of living
allowances and other related benefits.
- Utilities Expense – expenses related to use of telecommunications facilities,
consumption of electricity, fuel and water.
- Supplies Expense – expense of using supplies in the conduct of daily business.

- Rent Expense – expense for space, equipment or other asset rentals.

- Insurance Expense – portion of premiums paid on insurance coverage (e.g., on

motor vehicle, health, life, fire, typhoon or flood) which has expired.
- Interest Expense – an expense related to use of borrowed funds.

- Bad Debt Expense – the amount of receivables estimated to be doubtful of

collection and charged as expense during an accounting period.
- Depreciation Expense – the portion of the cost of a tangible asset (e.g., buildings
and equipment) allotted or charged as expense during an accounting period.

Other expenses may also include the following:

1. Advertising Expense
2. Tax Expense
3. Repair and Maintenance Expense
4. Miscellaneous Expense

How to classify
- Identify the transactions to be recorded.
- Transactions are recorded in the journal.
- Entries are posted and classified according to their nature and types to the ledger.
Summarizing
- It involves preparation of the financial statements.
- Ordinarily, the summarizing process starts from the preparation of the trial balance,
determination of adjusting entries, and the preparation of the worksheet.

What to summarize?
- Business transactions/events into lists of accounts.

Why do we need to summarize?

- To provide a listing to verify the equality of debits and credits in the ledger.
- To produce reports (financial statements)
How do we summarize?
- The accounts in the trail balance should be arranged in the following order: assets,
liabilities, capital, income, and expenses accounts.

Communicating
- Involve the process of communicating accounting reports, most common form of which
is the financial statements.
What do we communicate?
- Accounting reports/Financial statements
- The following information about the business is usually communicated:
1. The result of its financial operation, that is, whether the business is profitable or
not.
2. The status of its financial condition, that is, whether the business is stable and has
the capacity to settle financial obligations
3. The cash inflows and outflows during the period, that is where the business obtains
its cash and where it spends the said cash.
4. Other information that are probable to happen in the future.
Why do we need to communicate?
- Information processed in the accounting system is useless unless it is communicated to
interested users.
How do we communicate?
- Accounting information is communicated to interested users through accounting
reports, the most common form of which is the financial statements.

*Financial statements are formal structured statements serving as the final product of the accounting
process vis-à-vis statement of comprehensive income, statement of financial position, statement of
changes in equity, statement of cash flows, and notes to the financial)
Analyzing
- The process of analyzing and evaluating the information presented in the face of the
financial statements and the accompanying note.

What to analyze?

- Financial information/financial statements

Why do we need to analyze?

- To compare profit, cash, sales, and assets to analyze the performance of the business
and for the entity to make economic and important decisions and make necessary
allocation of resources.
- The data found on the face of the financial statements and other related accounting
information are analyzed to determine the following:
a. Profitability of the business – the ability of the business to realize more revenues
than expenses.
b. Liquidity of the business – the ability of the business to pay its current maturing
obligations or those obligations that are payable within one year.
c. Stability of the business – the ability of the business to pay its long-term financial
obligations and remain stable.
d. Management efficiency – reflects how effective and efficient the management is in
utilizing is resources.

How do we analyze?

- After the result have been summarized and reported, meaningful conclusion needs to
be drawn. Accounting helps in doing so by means of comparison.