January 20, 2025

FunAc1 | 10:10 - 11:10

S.Y. 2024-2025 | Mr. Regie R. Dampil | 3rd Quarter

Made by: Abrantes, R. C., Cruz, M. S., Garcia, S. L., Gopez, A. M., Lopena, J. R. Lopez, A. M., Ocampo, J. S., Patiu, S. C.

The definition of ASC requires business that business

transactions have to be measured in terms of money. All
L1: Accounting
transactions that are non-monetary are not within the
scope of accounting.
This is an introductory course in accounting, business,
and management data analysis that will develop Accounting is a process.
students’ appreciation of accounting as a language of As a process, accounting performs series of actions
business and an understanding of basic accounting directed towards a particular outcome. It has to follow
concepts and principles that will help them analyze logical steps in accounting cycle. The diagram below
business transactions. summarizes the accounting process.

1.​ Analyzing
Definition of Accounting
2.​ Recording
3.​ Classifying
There are three widely accepted definitions of 4.​ Summarizing
accounting (Banggawan & Asuncion, 2017): 5.​ Reporting
6.​ Interpreting
1.​ The Accounting Standards Council (ASC)
defines accounting as “a service activity. Its Accounting is an information system.
function is to provide quantitative information Accounting serves as a repository of collected financial
primarily financial in nature that is intended to be data, proposed financial information, and communicated
useful in making economic decisions.” financial statements.
2.​ The American Institute of Certified Public
Accountants (AICPA) defines accounting as: Accounting is a means and not an end.
“the art of recording, classifying, and Although accounting has tangible outputs in the form of
summarizing in a significant manner and in financial statements, it still underscores that the users
terms of money, transactions and events which have the liberty to make economic decisions based on
are, in part at least of financial character, and the management assertions in the financial statements.
interpreting the results thereof.” Using this logic, accounting indeed paves the way to the
3.​ The American Accounting Association (AAA) end and it not the end itself.
defined accounting as “the process of
identifying, measuring and communicating Accounting is a service activity.
economic information to permit informed It is concerned with providing the service of ensuring that
judgments and decisions by users of the financial statements are made available to users on
information.” timely basis.

Nature of Accounting History of Accounting

From the definitions above, there is an underlying theme The origin of hard core accounting can be traced from
that describe the nature of accounting. As cited by Rabo, the Renaissance period. An Italian monk and
Tugas, & Salendrez, (2016), the following are the nature mathematician named Frater Luca Bartolomes Pacioli
of accounting: wrote a book on mathematics entitled Summa de
Arithmetica, Geometria, Proportioni et Proportionalita
Accounting is an art. (Summary of arithmetic, geometry, proportions and
It is a behavioral knowledge involving creativity and skill. proportionality) which was first published in 1494. It
By the very nature that accounting activity is systematic, contains a comprehensive summary of Renaissance
it has definite techniques and its proper application mathematics, including practical arithmetic, basic
requires a particular skill and expertise. algebra, basic geometry and accounting. It was written
for use as a textbook and reference work. Moreover, it
Accounting deals with transactions that are financial also contains a description of the double-entry
in nature. bookkeeping system.
Pacioli popularized the system of recording business that the entity will continue in operation into the
transactions using memorandum books, journal books, foreseeable future without the need or intention to stop
and ledger books. This system of bookkeeping was operation.
largely influenced by how commercial establishments in ➔​ Assumes that there is forever in the sense that it
Venice kept track of their business transactions. Pacioli’s sees the business to operate over an indefinite
work on the double-entry bookkeeping system had a period of time.
huge impact on the field of accounting. It is for this
➔​ The problem is how or when can we measure
reason that Pacioli has been regarded as the “Father of
Modern Accounting”. (Banggawan & Asuncion, 2017 & the performance if indefinitely
Rabo, Tugas, & Salendrez, 2016) ➔​ The reason why on our Balance Sheet/SFP, we
are using the term “as of”. It means “as of that
particular time, the business has this amount”
Users of Accounting Information
2. The Business Entity Concept assumes that all of
Internal Users the business transactions are separate from the
Internal users of accounting information are people business owner’s personal transactions. A business is
within a business who use financial information to make considered a distinct from the owner and therefore the
decisions that impact the business. two should be treated separately.
●​ Owners ➔​ The business is separate and distinct from the
●​ Managers owner. Many fail because of this concept.
●​ Employees and Trade Union ➔​ Suggests that personal transactions of the
owners should be separate from the business.
External Users
External users of accounting information are people
outside of a business organization who use accounting 3. Accounting Period Assumption is an offshoot of the
information to make decisions. going concern assumption. The presumed indefinite life
●​ Investors of the business is broken into distinct equal periods
●​ Lenders / Creditors called “accounting period” over which the financial
●​ Suppliers performance and financial condition of the business are
●​ Customers accounted and reported to users of the financial
●​ Government Agencies statements.
●​ () ➔​ Works hand-in-hand with Going Concern
●​ () Assumption
●​ Funding Agency ➔​ Divides the life of the business into equal
●​ Public intervals (yearly basis)
➔​ Calendar period: starts Jan 1 and ends Dec 31.
➔​ Fiscal year: ends on other dates
L2: Basic Accounting Concepts ➔​ APA - for the period /year ended Dec 31, 2024
and Principles
4. Accrual Basis Assumption requires that all business
➔​ Foundation in the process of accounting transactions and other events are recognized in the
➔​ Accounting is the language of business accounting records when they occur, rather than when
the cash or equivalent is received or paid.
➔​ Accounting totally disregards cash collection /
Accounting Concepts cash basis

Accounting principles and standards need to be taken ➔​ Underlying Principle

seriously as financial statements and transaction reports ➔​ When did you earn and have expenses?
go through the scrutiny of many users. Banggawan & ➔​ Revenue RP -recognizes revenue the moment
Asuncion (2017) provided the following basic accounting the service is rendered
assumptions: ➔​ Expense RP -expenses are recognized when
incurred regardless when paid. Incurred when
1. Going Concern Assumption is the underlying
you’ve used its economic benefit.
assumption in the preparation of financial statements.
Financial statements are prepared on the assumption

2
 ➔​ Also the reason why fully paid transactions (ex. ➔​ All revenue/expenses must be recognized the
school tuition fee) aren’t considered the same year they were earned/incurred.
business’ revenue yet.
4. Revenue Recognition Principle. Revenues are
5. Monetary Unit assumes that only transactions that recognized as soon as goods have been sold (delivered
can be expressed in terms of money are recorded. to the customer) or a service has been rendered,
Hence, any non-financial or non-monetary information regardless of when the money is actually received.
that cannot be measured in terms of money are not
recorded in the accounting books. A memorandum entry ➔​
will be prepared instead.
➔​ Why? Value fluctuates from time to time 5. Materiality Principle. This principle allows an
➔​ Memorandum entry: prepared for those accountant to violate matching principle if the amount is
transactions that cannot be measured or those insignificant. Professional judgement is needed to decide
whether an amount is material or immaterial. As a
that can be measured but don’t affect you.
general rule, an item is considered material if knowledge
➔​ Transactions measured in money (financial in of it would affect the decision of the user of the financial
nature) statement.
➔​ Currency is recorded as is ➔​ Completely counters full disclosure principle
➔​ Tests the significance of a particular information.
➔​ If a particular information will not affect our
Accounting Principles decision, we can omit it.
➔​ The problem is that it is based on the
professional judgement of the user.
The accounting principles are detailed accounting rules
and guidelines that entities must follow when measuring,
recording, and reporting financial data. Applying these 6. Conservatism or Prudence Principle. Accountants
principles enhances reliability, relevance, and apply the conservatism concept when they choose the
consistency of financial information which results to worst-case scenario for the company when it is faced
better understanding and decision-making of users. As with significant uncertainties regarding an accounting
cited by Rabo, Tugas, & Salendrez, (2016), the following problem.
are the basic accounting principles: ➔​ Accounting is a conservative art / science
➔​ You don’t assume, but you anticipate – hope
1. Cost Principle. All assets acquired should be valued
and recorded based on the actual cash equivalent or 7. Objective Principle. This principle requires the
original cost of acquisition, not the prevailing market business transactions to have some form of impartial
value or future value. supporting evidence or documentation. Also, it entails
➔​ Suggests that no matter how much the that bookkeeping and financial recording be performed
prevailing value of the asset is, it should be with independence, that is free from bias and prejudice.
recorded based on the actual consideration ➔​ Aka Objectivity Principle or Reliability Principle
given or received. ➔​ Everything should be documented and recorded
➔​ Follows historical cost (actual amount) for supporting evidence in cases there is need
for verification.
2. Full Disclosure Principle. In the preparation of the ➔​ During audits, evidence is required. Everything
financial statements, the accountant should include must be factual.
sufficient information to permit the stakeholders to make
an informed judgement about the financial condition of To know more about the application of the above
the enterprise. concepts and principles, refer to pages 49-56 of your
➔​ Any information that is relevant or that will affect textbook.
our decision-making must be disclosed.
Accounting Equation
3. Matching Principle. This principle requires that The
expenses be matched with revenues. It means that in a
given accounting period, the revenue recorded should fundamental accounting equation, also called the
have its corresponding expense recorded, in order to balance sheet equation, represents the relationship
show the true profit of the business. between the assets, liabilities, and owner's equity of a

3
person or business. It is the foundation for the double
a. Assets
entry bookkeeping system. Based on this double-entry
system, the accounting equation ensures that the
balance sheet remains “balanced,” and each entry made Assets are resources controlled by the entity as a result
on the debit side should have a corresponding entry (or of past events and from which future economic benefits
coverage) on the credit side (Fernando, 2021). Below is are expected to flow to the entity (Conceptual
the accounting equation: Framework for Financial Reporting, 2018).

Assets = Liability + Equity Assets are classified into current and non-current
assets. To know more about the classification of assets
The application of the accounting equation in various and the accounts under each category, refer to pages
transactions can be found on pages 58-66 of your 139-140 of your textbook.
textbook.
Duality Effect on Assets (Banggawan & Asuncion,
2017)
L3: Elements of the Financial Statements
A. An increase in asset of This is recorded in
the business may either accounting as
➔​ The elements of financial statements are the
be:
building blocks with which financial statements
are constructed. These elements provide very a. An income earned Increase in asset and
useful information to various users in the form of increase in income
written reports that show the financial
performance and condition of a company at a b. A liability borrowed Increase in asset and
specific period of time. increase in liability

c. A capital contributed Increase in asset and

Recognition of Elements of Financial Statements by the business owner increase in capital

d. An asset received Increase in asset and

Recognition is the process of incorporating in the exchange for another decrease in asset
balance sheet or income statement an item that meets asset
the definition of an element of financial statements. It is
also called recording. Recognition involves the depiction B. A decrease in asset of
on an item in words (account tittles and description) and the business may either
by monetary units. The monetary value is usually be:
historical cost, which is the amount of cash or cash
equivalents paid or to be paid, or the fair value of the a. A payment of Decrease in asset and
consideration given to acquire at the time of their expense decrease in expense
attainment. On the other hand, derecognition is the
removal of an element in the financial statements when it b. A payment of liability Decrease in asset and
ceases to be an element (Banggawan & Asuncion, 2017 decrease in liability
& Frias & Pefianco, 2016).
c. A return of capital to Decrease in asset and
When an element is recognized, it gives rise to the the business owner decrease in capital
recognition of another element. This is called the duality
principle. Contemporary accounting makes use of Current Assets:
double entry system. Under this system, changes on two 1.​ It is expected to be realized in, or is intended for
elements are recorded every time a transaction is sale or consumption in the entity’s normal
recorded (Banggawan & Asuncion, 2017). operating cycle.

Elements of Financial Position 2.​ It is held primarily for the purpose of being
traded.

The elements of financial position are classified into: 3.​ It is expected to be realized within 12 months
after the sheet date.

4
 4.​ It is cash or a cash equivalent (as defined in IAS - Finished Goods Inventory
7 Cash Flow Statements), unless it is restricted
from being changed, or used to settle a liability *goods on consignment/agency are generally not part of
for at least 12 months after the balance sheet your inventory because they are just in your possession
date. and pinapabenta lang.

*arrangement based on their liquidity - ability to be 8.​ Unused Supplies

converted into cash. - These are also inventory, however, they are not
intended for selling rather to be used for production
1.​ Cash on Hand processes. (day-to-day operations or normal course of
- An amount that concerns bills, coins, financial business)
statements that are in our current possession, readily - Not being traded or sold
available for use. (money in the vault, cash register, or
other places for safe-keeping) 9.​ Prepayments like Prepaid Rent, and Prepaid
Insurance
2.​ Petty Cash Fund - Prepayments – expenses paid in advance, we are
- Cash on hand intended for small business incurring an expense.
transactions/payments *unused supplies are also considered an expense
- Supported by Petty Cash Voucher to take note.
- Being replenished
- We can utilize this for transactions that do not Non-current Assets:
particularly need checks to be paid. - Resources intended to be controlled and used more
than a year
3.​ Cash in Bank - Responsible for revenue generations – most used to
- The funds of a particular entity are deposited in a bank perform our business operations.
for safe-keeping tracking, circulation of money in the
economy, and for us to settle accounts using checks. *1 - 4: Property, Plant and Equipment (PPE) – where our
business operations happen
4.​ Accounts Receivable
- Right to collect 1.​ Land
- Amount collectable or receivable from your customers - A percent or piece of a geographical location
(what they owe you) for your service. *Among our PPEs, Land is the only non-current asset
- P. O. Purchase Order - you already rendered the that is not subject to depreciation since it is being
service/delivered the goods to the customer but they upraised annually.
have not paid yet.
2.​ Buildings
5.​ Allowance for Doubtful Accounts - It is a structure where your operations take place
- Considered a Contra Asset Account
- Diminishes the balance of the accounts receivable. 3.​ Accumulated Depreciation (Contra Asset
- Application of prudence principle, assuming that there Account)
are some customers who won’t pay due to reasons. - It has a credit normal balance which diminishes our
- Among the current assets, this is a credit account while PPE except for land.
the others are all debit. - Physical wear and tear of on object – depreciation ( it
has already been used)
6.​ Notes Receivable
- Supported by a Promissory Note (promises to pay Book Value - the net amount you could recover from an
money within a specific date). – issued by customer, item after selling
received by business
4.​ Equipment / Machineries
7.​ Inventories - used for a longer period of time.
(Merchandising, Manufacturing, and Hybrid) - Hindi nauubos yung economic value
Merchandising
- Materials first intended for selling 5.​ Long-term Investments
- It may be first, cash set aside set for a specific
Manufacturing purpose, a notes receivable to be collected within a year
- Raw Materials Inventory (could either be current or non-current), can also be in a
- Work In Progress Inventory form of stock investments to other companies, and could

5
 also be in the form of land. If and only if it is being used 2.​ It is due to be settled within 12 months after the
in the company’s operations. balance sheet dates.

6.​ Intangible Assets 3.​ The entity does not have an unconditional right
- Can be in the form of first, patent, copyright, trademark to defer settlement or the liability for at least 12
(owning a specific logo), software (being used in the months after the balance sheet date.
operations), and lastly goodwill – recognition of a
company/ that it is already established in the market. 1.​ Accounts Payable
- Arises from suppliers (amount due to them)
Assets generally have a normal credit balance except for - Also supported by a Purchase Order
the contra asset accounts.
2.​ Notes Payable
- Suppliers receive the Promissory Note and we, as the
business, issues it.
b. Liabilities

Liabilities are present obligations of the entity arising 3.​ Unearned Income / Deferred Income
from past events, the settlement of which are expected - Constitutes the services or goods that were already
to result in an outflow from the entity of resources paid in advance by the customer. It gives rise to render
embodying economic benefits (Conceptual Framework service or to deliver goods
for Financial Reporting, 2018).
4.​ Accrued Expenses
Just like the assets, liabilities are also classified into - Complete opposite of prepaid expenses
current and non-current liabilities. To know more - Utilities/ Rent / Insurance Payable
about the classification of liabilities and the accounts - Any expenses that we already incurred but not yet
under each category, refer to pages 140- 141 of your paid.
textbook.
Non-current Liabilities
Liability Payable beyond 12 months
to give - a settlement or pay a liability
to do - to render services or to deliver goods 1.​ Mortgage Payable
not to do - Secured or guaranteed by a collateral ( it is the land
title that serves as the collateral)
Duality Effect on Liabilities (Banggawan & Asuncion,
2017) 2.​ Long-term Debts
- Unsecured debts – walang collateral, payable within 12
A. Increase in liability of This is recorded in
months/1 year
the business may either accounting as
be:
3.​ Bank Loans
- Owe to the bank
a. An expense which is Increase in liability and
accrued increase in expense
4.​ Long-term Notes Payable
- Promissory note that extends up to 5 years
b. An asset which is Increase in liability and
borrowed increase in asset

c. A replacement to Increase in liability and c. Equity

another liability decrease in liability
Equity is the residual interest in the assets of the entity
B. A decrease in liability of Decrease in liability and
after deducting all its liabilities. (Conceptual Framework
the business occurs when decrease in asset
for Financial Reporting, 2018). To know more about the
it is paid
accounts under equity section, refer to page 142 of your
textbook.
Current Liabilities
1.​ It is expected to be settled in the entity’s normal - A residual interest which constitutes what the business
operating cycle. owes to the owners

6
 Duality Effect on Equity (Banggawan & Asuncion, 2017) Types of Income (Banggawan & Asuncion, 2017):
●​ Sales is derived from selling goods (from
A. An increase in equity This is recorded in
manufacturers, etc.) / delivering goods.
of the business may accounting as
●​ Service Income is derived from delivery of
either be:
service (ex. consultations). It is versatile.
●​ Commission Income is displayed in the
a. An asset Increase in equity and
example of referring a supplier and earning
contributed by the owners increase in asset
commission from it. It is also either revenue or
other income.
b. A liability converted Increase in equity and
●​ Interest Income is either revenue or income.
into equity decrease in liability
Revenue — bank
Other income — others
B. A decrease in equity of Decrease in equity and
the business is a return of decrease in asset
●​ Revenue from the sale of goods or services in
capital to the owners
the normal course of business.
●​ Other Income from secondary sources such as
A decrease in liability Increase in equity
interest or dividends received from investments.
●​ Gains from selling assets of the business other
1.​ Owner’s Capital than goods that are normally held for sale.
- How much funds I invested
Duality Effect on Income (Banggawan & Asuncion,
2.​ Owner’s Drawing 2017)
- Amount withdrawn by the owner from the business The recording of income is usually accompanied by the
(cash, supplies, inventories, any other assets withdrawn recording of a/an:
for personal use) 1. Increase in asset
- It is somehow a contra-equity account in a sense that it 2. Decrease in liability
diminishes
If income generally increases equity, what is its normal
balance? Credit.
These elements are presented in the balance sheet or
statement of financial position. These are important in b.​ Expense
assessing business stability and financial condition. Expenses are decreases in economic benefits during the
accounting period in the form of outflows or depletions of
assets or incurrences of liabilities that result in
Elements of Financial Performance decreases in equity, other than those relating to
distributions to equity participants (Conceptual
The elements of financial performance are classified Framework for Financial Reporting, 2018).
into:
●​ Decreases economic benefit. Decrease in asset
a.​ Income through depletion (consumption, usage,
Income is increases in economic benefits during the expiration).
accounting period in the form of inflows or ●​ Generally decreases equity (debit).
enhancements of assets or decreases of liabilities that
result in increases in equity, other than those relating to Types of Expenses
contributions from equity participants (Conceptual ●​ Cost of Sales / Service - Expense incurred when
Framework for Financial Reporting, 2018). stock bought intended for selling. (AKA Capital)
●​ *Same with services.
Income
╱ ╲ Nature of Expense (Banggawan & Asuncion, 2017)
Revenue Other Income ●​ Period expenditures – a payment or an
- Generated from normal - Income derived obligation to pay during the period for something
course of business or beyond the normal that has no future economic benefits.
operating cycle. ​ course of business. ●​ Depletion of assets – an expiration of an asset
caused by usage or passage of time.
Main source of income. ●​ Loss – a value lost without consideration
received.

7
Duality Effect on Expense (Banggawan & Asuncion, Income and Expenses
2017)
The recording of expense is usually accompanied by the
recording of a/an:
1. Decrease in asset
2. Increase in liability

These are the elements that are presented in the income

statement. These elements are important in assessing
profitability.

REMEMBER

Debits are always on the left.

Credits are always on the right.

Both columns represent positive movements on the

account so:
• Debit will increase an asset
• Credit will increase a liability
• Debit will increase a draw
• Credit will increase an equity
• Debit will increase an expense
• Credit will increase a revenue

Hands Trick

DEBIT​ ​ ​ ​ ​ CREDIT

Debits Credits

Thumb – Assets Pointer – Liabilities

Pinky – Expenses & Middle – Equity
Drawings Ring – Income

BALANCE SHEET
Assets, Liabilities, and Equity

INCOME STATEMENT