ACCOUNTING PRINCIPLES REVIEWER

LESSON 1 LESSON 2
Evolution of Accounting Financial Accounting

Accounting Accounting Cycle

- It is an art of recording, classifying, and summarizing in - This refers to a series of sequential steps or
a significant manner and in terms of money transaction procedures to accomplish the accounting process. This
and events. cycle is repeated each accounting period.
- Accounting is a serviced activity.
- Accounting is an information system. 1. Documentation
- Accounting is the language of business. 2. Journalization
3. Posting
Why accounting?
 Financial literacy  Financial management Documentation
- To gather transaction and events by way of source
 Business acumen  Taxation
documents.
 Decision making skill  Investing - Source Documents: Transactions and events are the
 Career advancement  Compliance & regulation starting points in accounting cycle. By relying on
 Entrepreneurship  Critical thinking source documents, transactions, and events can be
analyzed as how they will affect performance and
financial position.
Evolution of Accounting
1. Primitive accounting
Common Source Documents
 Barter system
 Limited written records Official Receipt Sales invoices
 Lack of double-entry
Bank Deposit Slips Delivery Receipts
 No standardization
 Absence of professional accountants Checks Completion Reports
 Limited scope Statement of Account

2. Middle Ages accounting

Journalization
 Monastery and Church Influence
- A chronological records of entity’s transaction. A
 Single-entry Bookkeeping
journal entry shows all the effects of a business
 Focus on stewardship
transaction in terms of debits and credits.
 Lack of uniform Standard
 Lack of formal Education - A journal is called as “the book of original entry”.
 Records for taxation and control
 Arabic Numerals Content of a Journal Entry
Date Debit
3. Florintine Approach
Account title / Explanation Credit
 Double-Entry Bookkeeping
 Pioneering Accountants PR (posting reference)
 Standardize Chart of Accounts
 Emphasis on Accuracy and Accountability
 Commercial and Banking Center
 Spread of Florintine Approach

Luca Pacioli Chart of Accounts

- Father of Double-Entry Bookkeeping - A listing of all accounts and their account numbers in
- Father of Accounting the ledger. The Chart is arranged in financial
statement order that is assets first, followed by
liabilities, owner’s equity, income, and expenses.

1. Balance Sheet
 Assets
 Liabilities
 Owner’s Equity
2. Income Statement
 Revenue
 Expenses
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Balance Sheet  Notes Receivable – written pledge that the customer

Assets Liabilities Owner’s Equity will pay the business a fixed amount of money on a
certain date.
Cash Notes Payable Capital  Inventories
Accounts  Prepaid Expenses
Accounts Payable Withdrawals
Receivable
Supplies Salaries Payable Income
 Non-current Assets
Prepaid Rent Utilities Payable o residual definition.
Prepaid Insurance Interest Payable
Examples of Non-Current Assets:
Service vehicle
 Property, Plant, and Equipment – Land, buildings,
Accumulated
Machinery and Equipment, Furniture and Fixture, and
Depreciation
motor vehicles.
Office equipment
 Intangible Assets - Assets without physical substance.
These include patent, copyrights, and brand names.
Income Statement
Revenue Expenses
Service Revenue Salaries expense Utilities expense 2. Liabilities
- Liabilities are defined as “present obligations of an
Sales Supplies expense Interest expense
entity arising from past transactions or events, the
Depreciation settlement of which is expected to result in an outflow
Rent expense
expense from the entity of resources embodying benefits”.
Insurance Miscellaneous
expense expense
Essential Characteristics:
 Present Obligation
 Results of past transactions or events.
Basic Accounting Equation
ASSETS = LIABILITIES + OWNER’S EQUITY  Requires an outflow of resources embodying
economic benefits.
Elements Under Financial Position
Classification of Liabilities:
1. Assets
- Assets are defined as “resources controlled by the  Current Liabilities
entity as a result of past transactions and events and o It expects to settle the liability in its normal
from which the future economic benefits are expected operating cycle.
to flow in the entity.” o It holds the liability primarily for the purpose
of trading.
o The liability is due to be settled withing twelve
Essential Characteristics:
months after the end of the reporting period.
 Controlled by the entity o The entity does not have an unconditional right to
 Result of past transactions and events defer settlement of the liability for at least twelve
 Provides future economic benefits months after the reporting period.
 The cost of an asset can be measured reliably.
Examples of Current Liabilities:
Classification of Assets:  Accounts Payable -represents reverse relationship of
 Current Assets the accounts receivable.
o It expects to realize the asset, or intends to sell  Notes Payable – Represents reverse relationship of
or consume it, in its normal operating cycle. the notes receivable.
o It holds the assets primarily for the purpose of  Accrued Liabilities – Salaries payable, utilities
trading. payable, interest payable, and taxes payable.
o It expects to realize the asset within twelve  Unearned Revenues – when the business entity
months after reporting period. receives payment providing its customers goods or
o The asset is cash or cash equivalents unless the services, the amount received are recorded as
asset is restricted from being exchange or use to unearned revenue account.
settle a liability for at least twelve months after the  Current Portion of Long -term debt.
reporting period.

Examples of Current Assets:

 Cash
 Non-Current Liabilities
 Accounts Receivable - claims against customers
o residual definition.
arising from sale of services of goods.
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Examples of Non-Current Liabilities:  Governments and their agencies

 Mortgage Payable – long-term debt of the business  Public
which the business entity has pledged assets as
security to the security. Common Source Documents:
 Bonds Payable
 Official Receipts
 Bank Deposit Slips
3. Equity (Owner’s Equity)
- Equity is the residual interest of the entity after  Checks
deducting all its liabilities. (Equity = Assets -Liabilities)  Sales Invoices
 Delivery Receipts
 Capital – used to record the original and additional  Completion Reports
investments of the owner of the business entity. It is  Statement of Account
increased by the amount of profit earned or is
decreased by a loss.
The Journal is a chronological record of the entity’s
 Withdrawals – use to record withdrawals of cash or
transactions. A journal entry shows all the effects of a
other assets in the business entity.
 Income Summary – temporary account used to record
business transaction in terms of debits and credits. The
profit or loss for the period before closing the capital process of recording transaction is called journalizing.
account.
The standard contents of the general journal are as follow:
Elements Under Financial Performance  DATE. The year and month are not rewritten for
 Income – is increase in assets, or decrease in liabilities, every entry unless the year or month changes, or
that result in increase in equity, other than those a new page is needed.
relating to contributions from holders of equity claims.
 Expenses – are decrease in assets, or increase in  Account Titles and Explanation. The account
liabilities, that result in decrease in equity, other than to be debited is entered at the extreme left of the
those relating to distribution to holder’s equity claim.
first line while the account to be credited is
entered slightly indented on the next line.
The Account
 PR (POSTING REFERENCE). This will be use
- The basic summary device of accounting is the
ACCOUNT. A separate account is maintained for each when the entries are posted, that is until the
element that appears in the balance sheet / Financial amounts are transferred to the related ledger
Position (assets, liabilities, and Owners Equity), and in accounts.
the Income Statement / Financial Performance
(income and expenses).  Debit. The debit amount for each account is
entered in this column.

 Credit. The credit amount for each account is

entered in this column.

Accounting Cycle
- Accounting is a service activity. Its function is to provide
information, primarily Financial in nature, about
Economic events that is intended to be useful in
making economic decisions.
- The accounting cycle refers to a series of sequential
steps or procedures to accomplish the accounting
process. This cycle is repeated each accounting
period.

Users of financial information

 Investors (existing and potential)
 Lenders and other creditors
 Employees
 Customers
 ACCOUNTING PRINCIPLES REVIEWER

LESSON 3
Financial Worksheet Transaction and T-account

Normal Balance of an Account

- The normal balance of any 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
credited balances. This result occurs because
increases in accounts are usually greater than or equal
to decreases.

Accounting for Business Transactions

- Accountants observe many events that they
identify and measure in financial terms. A
business transaction is the occurrence of an
event or a condition that affect financial position
and can be reliably recorded.

Financial Transaction Worksheet

- Every financial transaction can be analyzed or
expressed in terms of its effects on the
accounting equation. The financial transactions
will be analyzed by means of a financial
transaction worksheet which is form used to
analyzed increases and decreases in the assets,
liabilities, or owner’s equity of a business entity.
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T - Accounts
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LESSON 4
Transaction Analysis
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 ACCOUNTING PRINCIPLES REVIEWER

LESSON 5 LESSON 6
Posting & Trial Balance Financial Accounting Process

Posting Adjusting Entries

- Posting means transferring the amounts from the - Involves changing account balances at the end of the
journal to the appropriate accounts in the ledger. period from what is the current balance of the account
- A grouping of the entity’s accounts is referred to as a to what is the correct balance for proper financial
ledger. A general ledger is the “reference book” of the reporting.
accounting system and is used to summarize - It assign revenues to the period in which they are
transactions, and to prepare data for basic financial earned and expenses to the period in which they are
statements. incurred.
- In effect, these entries are needed to measure properly
the profit for the period, and to bring asset and liability
The elements (assets, liabilities, equity, revenue, and accounts to correct balances for financial statements.
expenses) of the financial statement in the general ledger
are classified into two general groups: There two general types of adjustments
1. Deferrals
2. Accruals
1. Balance Sheet or permanent accounts (assets,
liabilities, and owner’s equity).
2. Income Statement or temporary accounts
(income/revenue and expenses). Deferral
- Is the postponement of the recognition of an expense
already paid but not yet incurred or of revenue already
collected but not yet earned.
Steps in posting journal entries to the ledger are as
follows:
Deferrals would be needed in two cases:
1. Transfer the date of the transaction from journal to the
ledger.  Allocating assets to expense to reflect expenses
2. Transfer the page number from the journal to the incurred during the accounting period (e.g.
journal reference column of the ledger prepaid insurance, supplies and depreciation)
3. Post the debit figure from the journal as a debit figure  Allocating revenues received in advance to
in the ledger and the credit figure from the journal as a revenue to reflect revenues earned during the
credit figure in the ledger. accounting period.
4. Enter the account number in the posting reference
column of the journal once the figure has been posted
Accrual
in the ledger.
- Is the recognition of an expense already incurred but
unpaid, or revenue earned but uncollected.
Preparation of Trial Balance
- The trial balance is a list of all accounts with their
Accruals would be required in two cases:
respective debit or credit balance. It is prepared to
verify the equality of debits and credits in the ledger at  Accruing expenses to reflect expenses incurred during
the end of each accounting period or at any time the the accounting period that are unpaid and unrecorded.
postings are updated.  Accruing revenues to reflect revenues earned during
- The trial balance is a control device that helps minimize the accounting period that are uncollected and
accounting errors. When totals are equal, the trial unrecorded.
balance is in balance. This equality provides an interim
proof of the accuracy of the records, but it does signify
the absence of errors.

The procedure in the preparation of a trial balance is

as follow:
1. List the account titles in numerical order.
2. Obtain the account balance of each account from the
ledger and enter the debit balances in the debit column
and the credit balance in the credit column.
3. Add the debit and credit columns.
4. Compare the totals.
 ACCOUNTING PRINCIPLES REVIEWER

QUIZ 1 15. Which of the following processes best defines

accounting?
1. It is a method of bookkeeping that recognizes only one side Measuring economic activities
of a business transaction and usually consists only of a record Communicating results to interested parties
of cash and personal accounts with debtors and creditors. ANSWER: both a and b
ANSWER: Single-entry Bookkeeping
16. During the lifetime of an entity, accountant produce
2. It provides a snapshot of a corporation's financial financial statements at arbitrary points in time in
health and gives insight into its performance. accordance with which basic accounting principle?
ANSWER: Financial Statement ANSWER: Periodicity

3. This stage started just with the beginning of the social 17. Which of the following is a trading business?
life of human beings. People of this stage kept their ANSWER: A pharmacy
accounting marking ticks on the clays, wall, and animal
skin. 18. Which type of business organization is owned by its
ANSWER: Primitive Accounting stockholders?
ANSWER: Corporation
4. Who is the father of double-entry accounting?
ANSWER: Luca Pacioli 19. Which accounting concept should be considered if the
owner of the business takes goods from inventory for
5. It is a method of recording transactions where for every his personal use?
business transaction, an entry is recorded in at least ANSWER: The business entity concept
two accounts as a debit or credit.
ANSWER: Double entry accounting 20. An increase in rent expense is a ____________by the
rules of debits and credits.
6. It is an art of recording, classifying, and summarizing in ANSWER: Decrease in owner's equity
a significant manner and in terms of money transaction
and events. 21. Withdrawals are increased by _________.*
ANSWER: Accounting ANSWER: Debit

7. A partnership is always owned by two (2) individuals. 22. Cash, Accounts Receivable and Equipment are
ANSWER: False example of _________________.
ANSWER: Assets
8. One characteristic of a corporation is that its owners
are personally liable for any losses incurred by the 23. What are the increases in resources that a firm earns
business. by providing goods or services to customer
ANSWER: False ANSWER: Income

9. Manufacturing companies buy raw materials, convert 24. A withdrawal by the owner is recorded as a deduction
them into products and then sell the products to other from assets and an increase in expenses.
companies or to final consumers. ANSWER: False
ANSWER: True
25. Revenue earned on account creates an asset entitled
10. A corporation is a business owned by its stockholders. _________.
ANSWER: True ANSWER: Accounts Receivable

11. For accounting purposes, a business and its owner are 26. The double-entry recording rule states that for every for
considered one and the same. every transaction, total debits must ________ to total
ANSWER: False credits. In addition, every transaction affects at least
____ ledger accounts.
12. This concept assumes that the business has an ANSWER: equal; 2
indefinite economic life.
ANSWER: Going Concern 27. The owner's current investment or equity in the assets
of a business is called _________.
13. Krishna started a speech therapy center. He also sells ANSWER: Capital
professional books on speech development. What is
the nature of his business? 28. Assets = __________ + Owner's Equity.
ANSWER: Service and Trading ANSWER: Liabilities

14. A business which prepares financial statements every 29. The liability created when supplies are bought on
year is following what concept? account is called account payable.
ANSWER: Periodicity Concept ANSWER: True
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30. Increasing expenses ultimately cause owner's equity to

________.
ANSWER: Decrease

31. Which of the following accounts has a normal debit

balance?
ANSWER: Advertising Expense

PRACTICE PROBLEM #1
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PRACTICE PROBLEM #2
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