AE1- ACCOUNTING 1

SMA | 1ST SEMESTER | A.Y. 2024 - 2025

WHAT ARE THE SOURCES OF CAPITAL?

1.0 MODULE 1: THE BASIC ACCOUNTING ENVIRONMENT
The primary source of capital is the owner or investor.
WHO CARES ABOUT ACCOUNTING? • If the business owner or entrepreneur does not have
On a Personal Level. enough funds, one may borrow from relatives, friends or
• daily expenditures financing institutions such as banks and cooperatives.
• accounting will help you prepare a budget
On a Professional Level An entrepreneur is one who takes the risk of putting a
• financial impact in your profession business to produce and sell goods or services.
• terms in understanding accounting
▪ and in decision-making
The successful entrepreneur is one who creates new ideas
On a Business Level.
▪ vital to one's daily activities or differentiates a product that would entice the buyer.
▪ more felt in the business from a small
neighborhood bakery to a multinational food company WHAT IS BUSINESS RISK?
The reality is that any money making venture is risky. The
All businesses, from simple to the most complicated, have
higher profit you desire, the riskier the venture.
one thing in common: they need financial information
before making decisions.
Risk is the element of uncertainty in an outcome.

HOW HAS ACCOUNTING DEVELOPED

◊ found as early as 2000 BC FORMS OF BUSINESS ORGANIZATIONS
◊ in the cities of Babylonia, Greece, Egypt in 350 BC in ● Sole / Single Proprietorship
Assyria. ● Partnership
◊ records of taxes imposed by the king ● Corporation
◊ collected from the people by the tax collectors ● Cooperatives
The first accounting book was written by Cotrugli in Naples.
TYPES OF BUSINESS ACCORDING TO BUSINESS ACTIVITIES
FR. LUCA PACIOLI • SERVICE
- He is the “Father of Double-Entry Bookkeeping” - money is received for the cost of service rendered
first person to publish a comprehensive treatise on
• MERCHANDISING
the double-entry accounting system.
- money is received for the cost of merchandise given
• MANUFACTURING
- Pacioli was an Italian mathematician and
- money is received for the cost of the product given
Franciscan friar who lived from 1447 to 1517.
- Wrote the modern-day double entry bookkeeping WHAT ARE THE TYPES OF BUSINESS ACTIVITIES?
in 1494 entitled Summa de Arithmetica, • FINANCING ACTIVITIES
Geometria, Proportioni et Proportionalita. -the owner "finances" the business with a capital in cash and
- Modern bookkeeping has evolved from his “ Model other resources.
of Venice” which he developed to help the Italian • INVESTING ACTIVITIES
- Involve the acquisition of properties such as land, furniture,
merchants in their trade practice. This has earned
machineries and equipment.
for him the title of Father of Accounting.
• OPERATING ACTIVITIES
- day to day activities related to earning of income when
What is Business? goods or services are sold and the incurring of expenses
Business when wages, rent, utilities, transportation are paid.
🡪 simply defined as an economic activity of buying and
selling in order to obtain profit. USERS OF ACCOUNTING INFORMATION
Internal Users - those who make decisions that affect the
🡪 A major concern of a business is how best to use the
internal operations of the company
resources
External Users - those who make their decisions based on
the company's financial information
PROFIT
Profit is obtained when the amount you receive is more
than the amount you paid for the goods or services you
sold.
GROSS INCOME – EXPENSES = NET INCOME
 Summarizing
Involves the preparation of the formal accounting reports or
financial statements at the end of the accounting period.
Interpreting
Involves the analysis of the financial statements by
developing financial ratios and explaining their significance

to make the statements more meaningful.

WHAT ARE THE FINANCIAL STATEMENTS PREPARED IN Role of Accounting in Business

ACCOUNTING? • It helps the owner/s or managers make plans and
The three primary information needed by the users relate
decisions
to:
• It reports and analyzes business transactions thru
1. Financial Performance ( Income Statement) also called
Profit or Loss financial statements
Statement or Statement of Earnings • It communicates financial information to all interested
🡪 report which describes how business operated or parties.
produced wealth over a given period of time.
2. Financial Position ( formerly called the balance sheet )
🡪 show how healthy or robust the enterprise when it shows a ★ BRANCHES OF ACCOUNTING
listing of accumulated resources (cash and properties)
● After deducting the liabilities (debts or obligations to ➔ FINANCIAL ACCOUNTING
pay). ➔ MANAGEMENT ACCOUNTING
● After deducting the liabilities from the assets, the net ➔ GOVERNMENT ACCOUNTING
assets show the new value or net worth of the firm which ➔ TAXATION
belongs to the owner.
➔ AUDITING
Accounting Equations:
➔ COST ACCOUNTING
ASSETS = LIABILITIES + OWNER’S EQUITY
Expanded Accounting Equation: ➔ ACCOUNTING EQUATION
ASSETS = LIABILITIES + OWNER’S EQUITY + REVENUE = ➔ ACCOUNTING RESEARCH
EXPENSES
Statement of Changes in Owner’s Equity is another report
prepared by the accountant which explains the activities 2.0 MODULE 2: BUSINESS ENVIRONMENT
for a period of time that caused the owner’s equity to
What Changes are Taking Place in the Environment?
change.
3. Cash Flow Statement of the business ●Information Age and Accounting
🡪 is a financial statement which explains why the amount of ● High Technology Gadgets
cash changed over a period of time. The report makes a ● Business Strategies
listing of the cash inflow activities (cash receipts) and the
cash outflow (cash payment) of the business.
The accountant of the 21st century is not simply expected to
keep records and produce financial reports.
NATURE OF ACCOUNTING
Accounting is relevant for decision making.
Accounting is a service activity.
As a business planner, as economic forecaster, as financial
◊ to provide quantitative information
analyst.
◊ primarily financial in nature, about economic entities
ACCOUNTING AREAS (BRANCHES OF ACCOUNTING)
◊ useful in making economic decision
1. Basic Accounting or Bookkeeping – routine activity of
DEFINITION OF ACCOUNTING
recording, classifying, and summarizing business
Accounting is the art of recording, classifying,
transactions in a systematic manner. It is the procedural
summarizing, in a significant manner and in terms of
aspect of accounting.
money, transactions and events, which are in part at least of
2. Financial Accounting – involves the preparation and
a financial character, and interpreting the results thereof.
interpretation of financial statements primarily intended for
Recording
external users. Financial Statements are primarily
Involves putting into writing all the business transactions
concerned with historical financial information regarding
including significant events which might occur and well
performance(profit and loss), position (liquid, solvent),
affect the business.
structure (loan, equity) and compliance with legal and
Classifying
regulatory requirements.
Involves grouping together similar items or accounts for the
3. Cost Accounting – deals with recording, classifying and
purposes of systematic recording and preparation of
summarizing the details of material, labor and overhead
reports.
necessary to produce and sell a product of service.
4. Management Accounting – deals with financial and Consistency - This simply means that for the financial
non-financial information primarily for managers and other statements to be comparative, the application of the
internal users to assist them in planning, directing and accounting methods, procedures, or principles must be
controlling the affairs of business. consistent with the previous period.
5. Auditing – deals with the independent verification and Accounting Period - Considering that the business is
examination of the accounting records for the purpose of assumed to be a going concern, its life is divided into
giving credibility to the financial statements. periods ( usually one year) at the end of which financial
6. Government or Non-Profit Accounting - uses “Fund statements are prepared.
Accounting” which deals with the administration or use of Full Disclosure -This simply means that the financial
public community funds to bring about service to the statements should reflect all significant events or facts,
people. which might influence the decisions to be made by any
7. Tax Accounting – deals with tax matters affecting firms . It interested party.
involves preparation of tax returns, interpretations and
application of tax rules in the determination of tax liability,
3.0 MODULE 3: STARTING UP A BUSINESS
analyzing tax effects on firm’s or individual’s projects or
plans. THE FINANCIAL STRUCTURE OF A BUSINESS

8. Forensic Accounting – is getting to be recognized as a (BASIC ACCOUNTING ELEMENTS OR VALUES)

new discipline which integrates accounting, auditing and Based on the Framework of Accounting, the financial

investigative skills. The fraud examiner or forensic position or structure of a business entity is based on three

accountant works closely with lawyers and helps in solving elements – assets, liabilities, and owner’s equity while its

fraud which could be tracked down by reviewing financial financial performance is based on two elements called

records, papers and electronic trails. revenues and expenses.

ASSETS

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP), - are economic resources by the business. They are
CONCEPTS & ASSUMPTIONS used in operating the business and are expected to
Generally Accepted Accounting Principles (GAAP) benefit the business over a number of years. The
– are principles (including concepts and assumptions), most common properties or assets of a business
which have gained international acceptance in the business are:
world and accountancy profession. The accounting Tangible Assets
procedures, the profit determination, preparation and Cash, receivables, furniture and fixtures, office equipment,
financial statements must be in conformity with generally machineries, delivery truck, land, building etc.
accepted accounting principles (GAAP). Intangible Assets
Franchise, patent, trademark, copyright, goodwill etc.
Selected accounting principles, concepts and assumptions CURRENT ASSETS [12 months]
Business Entity Concept - The business is treated as - Cash, Accounting receivables (collection),
Supplies, Merchandise Inventory
having a separate personality from the owner/s such the
NON-CURRENT ASSETS [more than a year]
transactions of the business must be divorced from the
- PPE (Property, Plant, Equipment)
transactions of the owner/s. Account Title
Going Concern Concept – It is assumed that the business - Land
will continue operations indefinitely unless there is evidence - Building
to the contrary. - Furnitures and Fixtures
LIABILITIES
Accrual Basis of Accounting - This simply means that
expenses of the business are recognized or recorded when - These are amounts owed by the business. They
incurred whether paid or not the revenue is recognized are debt or legal obligations of the business to
individuals or other businesses.
when earned whether collected or not.
Examples: payables to suppliers, loan with a bank,
Objectivity - This simply means that transactions recorded,
mortgage payable, taxes payable, and other unpaid
or amounts reported can be verified through supporting
(accrued expenses, etc.
documents.
Cost Principle - This simply means that properties or assets CURRENT LIABILITIES [12 months]
acquired must be recorded at the actual acquisition cost - Accounts Payable, Notes Payable
and not an estimated cost. NON-CURRENT LIABILITIES [more than a year]
- Loans Payable, Mortgage Payable (Collateral)
Matching Costs Against Revenue - This simply means that
OWNER’S EQUITY
all costs and expenses incurred during the period in
generating the revenue, must be matched (subtracted) - Owner's Equity is equal to total assets minus total
liabilities.
against the revenue for the same period.
● This is the owner’s interest or claim in the assets of
 the business after subtracting the interest of the to a carrier every time merchandise is delivered to a
creditors. It is the difference between the amount customer.
of assets and the amount of liabilities.
● The relationship of these 3 accounting values or B. Resources or assets that will benefit the business over a
elements can be expressed in the form of a simple number of years should be allocated (spread out) as
equation as the Accounting Equation. expenses over the years that will benefit from its use.
Example: ABC Padala purchased a delivery truck
Owner's Equity are effective by: for ₱500,000. It has a useful life of 10 years. The delivery truck
1. Capital which will be used to deliver the packages of the customer
2. Drawings cannot stay as an asset forever. It is subject to wear and tear
for 10 years. In this case, it means that it should be
3. Revenues
depreciated and expensed for ₱ 50,000 every year for ten
4. Expenses
years (₱500,000/10years). The truck will have a book value
- INVESTMENT of ₱450,000 after year one and ₱400,000 after year 2.
- < CAPITAL
- < DRAWINGS, WITHDRAWAL C. Periodic expenses are necessary to operate the business
such as salaries for services received from employees, rent
for use of office space, utilities for telephone, light and water
BUSINESS TRANSACTION AND THE ACCOUNTING ELEMENTS
use.
The accounting elements are affected by the business
transactions or economic activities occurring daily in a
ACCRUAL CONCEPT AGAINST CASH CONCEPT
business. A transaction is defined as an exchange of values
The Accrual requires that revenues and expenses be
between two parties expressed in monetary terms. It has
recognized based on the time period they relate on the
three characteristics:
occurrence of the revenue and expense.
-Exchange of values
-Between two parties The Cash Concept recognizes revenue only when cash is
-In terms of money collected and expenses only when cash is paid. This
STATEMENT OF FINANCIAL POSITION concept is applicable for a small business which has a short
operating cycle and where the focus of attention may be
This statement is not prepared every time there is a change
more liquidity or short-term cash position of the firm.
in the accounting equation. Under the principle of period of
OPERATING A BUSINESS FOR PROFIT
time, this is usually prepared yearly with balance shown at
The expanded structure of an accounting equation with the
the end of the particular year. Interim statements may be
owner’s equity affected by four elements: Contributions and
prepared (monthly or quarterly) as needed by the users.
revenues on one hand (increasing owner’s equity),
withdrawals and expenses on the other hand. (decrease
owner’s equity).
4.0 MODULE 4: DETERMINING INCOME THROUGH
OPERATION

RECOGNITION OF INCOME

Also called the Realization principle, it recognizes revenue

when it is earned regardless of collection. For a service
business, revenue it earns when service is rendered while
merchandising or manufacturing concern, it is earned when
the merchandise or product is sold and delivered to the
customer. The Framework states further that recognition of INCOME
income or revenue brings about an increase in assets or a An income represents inflow of cash or other assets coming
decrease in liabilities. from a client for service rendered or for merchandise sold.
RECOGNITION OF EXPENSES Income encompasses revenues and gains.
Expenses are recognized in association with the earnings of Example, a machine no longer being used is sold at
specific income items within a specific period of time. This more than its purchase cost. The word revenue may be
is also called the Matching Principle since there can be no used interchangeably with income.
revenue earned without some sacrifice ( in the form of
expense) made by the business. Examples of revenues :
- amount received by an airline or bus company from
There are three(3) ways of recognizing expenses in passengers for transportation services rendered,
generating income. - amount received by a hospital from patients for medical
A. Expense is recognized when revenue is recognized services rendered,
because it is not possible to earn revenue without incurring - amount received by a drugstore from customers for
expenses. medicine sold.
Example: Commission is paid to a salesman every -The account title used to describe revenue common to all
time he makes a sale; Freight or transportation cost is paid service providers is Service Income or Professional Income.
Sales is the revenue title used by Merchandisers and service or merchandising given amount and
Manufacturers signature of employee preparing it.
OFFICIAL RECEIPT
EXPENSES
- issued when cash is received by the entity. It gives
A business cannot operate to earn revenue without the following information: name of the entity,
consuming some assets or using up the services of other address phone number, business number, VAT
businesses or persons. The consumption of assets or using
number (if registered), official receipt number,
up services to generate revenue is called an expense. An
date, name of the party giving cash, the amount of
expense will decrease an asset or increase a liability with a
corresponding decrease in owner’s equity. cash and reason for giving cash, form of payment
and signature of the cashier.
Example of expenses: CASH OR CHECK VOUCHER
- Telephone Expense for service received from PLDT, - A document used when cash is paid or a check is
- Light Expense for service received from Meralco,
issued. It contains the name of the entity, its
- Salaries Expense for services received from employees.
address and telephone number, voucher number
* Use of all forms of communication, electric power and
and date, name of the payee amount paid, check
water could be represented by one account.
Communication, Power and Water Expense or Utilities number is issued and description payment.
Expense. - It is signed by the employee preparing it and the
officer authorizing the payment.
If the expense is paid in cash, the assets will decrease with - Also signed by the payee who received the cash
corresponding decrease in the owner’s equity.
payment.

5.0 MODULE 5: PROCESSING TRANSACTIONS OF A SERVICE CHECK

PROVIDER - A negotiable instrument used as substitute for
ACCOUNTING CYCLE cash, the payment for which is drawn against the
entity’s or individual’s current account.
- The first step is collecting data based on various
PROMISSORY NOTE
documents and business papers.
- Written promise to pay a certain sum of money at
- The second step involves analyzing and recording
a future date.
the documents in a book called the journal.
- The maker is the debtor who makes the promise,
- The third step involves classifying and posting
addressing it to the payee or creditor.
from the journal to another book called the ledger.
- The fourth step is extracting the balances of each
STATEMENT OF ACCOUNT
of the accounts found in the general ledger and
- Bill presented to a customer for service rendered
preparing a trial balance.
or merchandise given for which payment is
- The remaining steps in the accounting cycle,
demandable.
which are usually done at the end of the year at the
end of the accounting period, are discussed in the
THE CHART OF ACCOUNTS
succeeding chapter.
- is a listing of account titles which guides the
★ THE FIRST FOUR STEPS IN ACCOUNTING
bookkeeper in the recording of the transactions.

➔ OFFICIAL RECEIPT/ CHECK VOUCHER - The number and the nature of the account depend
➔ GENERAL JOURNAL on the type of business operation. The accounts
➔ GENERAL LEDGER are properly arranged with the assets listed first,
➔ TRIAL BALANCE followed by the liabilities and lastly by the owner's
equity. Accounts numbers are assigned for each
BUSINESS PAPERS account for easy reference.

- These are source documents evidencing

T-ACCOUNT
transactions of business. Some of the typical
business papers (used by practically all - This is the simplest tool used to analyze the effects
businesses) are the following: of the transactions for each account, hence it has
INVOICE two sides, one side for recording increases and the
- issued when service or merchandise is given to a other side for recording decreases. Its shapes
customer or client. It has the name of the entity, comes from Letter T, hence it is called a T account
address and phone number, invoice number, date, - The left side of the T Account is called DEBIT SIDE
customer's name and address, description of and the right part is called the CREDIT SIDE.
 - The title of the account is placed on top. There are page all the changes (increases or decreases) that
as many accounts corresponding to each of the took place for a particular account.
elements - General Ledger =
- The process of transferring the debit and credits
To summarize, the following rules for debit and credit should from the journal to the ledger is called posting.
be observed in processing transactions: TRIAL BALANCE
1. Increases in assets are recorded on the debit side of the - A trial balance is a list of accounts with ledgers
account, while decreases in assets are recorded on the balances. Assets, owner's drawing and expenses
credit side of the account. have normal alance Of son the on the debit side
2. Increases in liabilities are recorded on the credit side of while liabilities, owner's capital and revenue have
the account, while decreases in liabilities are recorded on normal balances on the credit side.
the debit side of the account
3. Increases in owner's equity are recorded on the credit side TRANSPOSITION
of the account, while decreases in owner's equity are - The order of digits are interchanged.
recorded on the debit side. - Example is the amount of 29, 560 was copied as
29,650
THE VENETIAN MODEL TRANSPLACEMENT
- is called the Double Entry Bookkeeping System or - The decimal point is displaced is misplaced
Venetian Model which was introduced by Luca - Example is that the amount of 290,000 was copied
Pacioli. as 29,000
- The transactions must always affect two accounts
(example cash and capital) and at least one or ACCOUNTING CYCLE
two accounting elements (example assets only or Step 1: Identification of Events to be Recorded
assets and owner's equity). Aim: To gather information about transactions or events
- The reason is that a transaction is an exchange of generally through the source documents.
value: one value received and another value Step 2: Transactions are Recorded in the Journal
parted with. Aim: To record the economic impact of transactions on the
THE LEDGER firm in a journal, which is a form that facilitates transfer to

- used by accountants to analyze transactions and the accounts.

immediately determine balances of accounts. Step 3: Journal Entries are Posted to the Ledger

There is a formal book of accounts which is used in Aim: To transfer the information from the journal to the

actual practice called the general ledger wherein a ledger for classification.

separate page is maintained for each account. Step 4: Preparation of a Trial Balance

Each page is called a ledger and it contains, aside Aim: To provide a listing to verify the equality of debits and

from the account title, the date, amount, page credits in the ledger.

reference to identify the entry source, account Step 5: Preparation of the Worksheet including Adjusting

number and the balance of account. Entries

THE JOURNAL Aim: To aid in the preparation of financial statements.

Step 6: Preparation of the Financial Statements
- The transactions are initially recorded in the journal
Aim: To provide useful information to decision-makers.
which is called the book of original entry. The
Step 7: Adjusting Journal Entries are Journalized and
simplest form of journal is the two-column general
Posted
journal and the process of recording in this book is
Aim: To record the accruals, expiration of deferrals,
called journalization. Every entry made is called a
estimations and other events from the worksheet.
journal entry.
Step 8: Closing Journal Entries are Journalized and Posted
Each journal entry contains the following items:
Aim: To close temporary accounts and transfer profit to
1. Date
owner's equity.
2. The account title and the amount to be debited.
Step 9: Preparation of a Post-Closing Trial Balance
3. The account title and the amount to be credited.
Aim: To check the equality of debits and credits after the
4. Explanation
Step 10: Reversing Journal Entries are Journalized and
POSTING TO THE LEDGER
Posted
- The journal does not replace the ledger. The journal Aim: To simplify the recording of certain regular
provides a complete recording of a transaction in transactions in the next accounting period.
chronological order while a ledger shows in one