FINANCIAL ACCOUNTING AND REPORTING STANDARDS

Lesson 1: Introduction to Accounting DEFINITION OF ACCOUNTING

When the four factors join together, that is where

BUSINESS
accounting comes in.
The word business means different things to different
Accounting, by definition:
people.
 is a service activity. Its function is to provide
For some, it conjures up a dream of opportunity and
quantitative information, primarily financial in
excitement. For others, it represents a nightmare of
nature, about economic entities, that is
greed and exploitation.
intended to be useful in making economic
Business, according to the dictionary, is defined as decisions.
 Quantitative refers to numbers and financial
(1) one’s work or occupation means having to do with money.
 Accounting information involves the numbers
(2) A special task or duty
used to make economic decisions.
(3) A matter of affair  Accounting is a social science, developed in a
world of scarce resources. It is influenced by,
(4) Commerce or trade and interacts with, economic, social and
political environments.
(5) A commercial or industrial establishment
 Business is conducted by investor-owned
There are many definitions of the term business, but for enterprises managed and controlled by
the sake of discussion, it means either commerce or professional managers, who are held
trade as a whole or a specific company involved in responsible for providing reports to absentee
commerce or trade. owners, creditors and other external interested
parties.
Essentially, business is the process of producing  Financial Accounting communicates
(manufacturing) goods (products) and services and information about the economic effects of
then distributing (selling) them to those who desire or accounting transactions and other events on a
need them. business entity to those external users of the
information.
It includes both private and government organizations
 Thus, accounting is primarily the process of
that produce goods and services for the people in the
identifying, measuring and communicating
marketplace.
economic information to permit informed
judgements and decisions by users of the
information.
FOUR (4) FACTORS OF PRODUCTION  Key product of accounting: set of financial
statements that report financial information
1 Natural Resources - includes land and the
about a business entity to decision makers.
materials that come from the land, such as
timber, mineral deposits, oil deposits and water.
2 Labor (Human Resources) – encompasses the NATURE OF ACCOUNTING
mental and physical efforts of all workers
regardless of their skill or education, who Accounting is a process with the basic purpose of
perform many tasks required to produce and providing information about economic that is intended
sell goods and services. to be useful in making economic decisions.

3 Capital – includes buildings, machinery and Types of information provided by accounting:

tools used to produce goods ang services. This
also sometimes refer to the money used to buy 1. Quantitative information – information expresses in
those items. numbers, quantities, or units
4 Entrepreneurship – refers to the people willing to
accept the opportunities and risks of starting 2. Qualitative information – information expressed in
and running businesses. They bring the other words or descriptive form.
three factors – natural resources, labor and
 Qualitative information is found in the notes to
capital – together to form a business.
financial statements as well as on the face of
the other components of financial statements.

3. Financial information – information expressed in

money. Financial information is also quantitative
information because monetary amounts are normally
expressed in numbers.
 Accounting as a Science and Art Lesson 2: Introduction to Accounting Part 2

1. Social Science – body of knowledge that has been

systematically gathered, classified and organized. Branches of Accounting

2. Practical Art – accounting requires the use of creative A. FINANCIAL ACCOUNTING

skills and judgment.  Deals with the basic accounting processes of
recording, classifying, and summarizing
transactions in the books of accounts in such a
Accounting as an Information System way that operating result of a particular period
and financial position on a particular date can
A system is one that consists of an input, a be known. It uses standardized guidelines and
process and an output. follows common rules known as Generally
Accepted Accounting Principles (GAAP)
Similarly, in an accounting system, the inputs are the
identified accountable events; the processes are  Financial accounting focuses on the
preparation of the five basic financial
recording, classifying, and summarizing; and the output
is the accounting reports that is communicated to the statements, namely - Statement of Financial
Position, Statement of Comprehensive Income,
users.
Statement of Cash Flows, Statement of Changes
in Equity, and notes to Financial Statements.
Bookkeeping and Accounting
B. MANAGEMENT ACCOUNTING
Bookkeeping is part of accounting, but they are not the  Relates to the use of accounting data collected
same. with the help of financial accounting and cost
accounting for the purpose of policy
• Bookkeeping – the process of recording the accounts
formulation, planning, control, and decision-
or transactions of an entity.
making by the management. It deals with the
- Bookkeeping normally ends in the
needs of the management rather than strict
preparation of the trial balance. Unlike accounting, it
compliance with GAAP.
does not require the interpretation of the significance of
the information processed.
C. GOVERNMENT ACCOUNTING
• Accounting – covers the whole process of identifying,  Deals with the transactions of the national
recording, and communicating information to interested government and its different agencies. The
users. government has to collect taxes, compute
national income, fix the gross national product
target, ascertain the balance payments
Importance of Ethics in Accounting position, etc., and therefore have their own
system of accounting. It focuses on the
 One of the key traits of a professional is
safekeeping of public funds, budget
adherence to a rigorous set of ethical
allocations, and utilization.
guidelines.
 When someone veers away, their trustworthiness
D. AUDITING
and judgment come into question.
 Deals with the inspection and verification of the
The standard setting bodies for the ethical guidelines of financial statements, which were prepared in
the accountants are the following: the financial accounting, for their accuracy and
consistency. The independent CPA who
• Association of the Certified Public Accountants inspects and verifies the financial statements is
(AICPA) known as Auditor. The purpose of auditing is for
the independent CPA (called the Auditor) to
•Code of Professional Conduct
express an opinion regarding the fairness of the
• What is the Philippine counterpart? presentation of financial statements. This lends
credibility to the financial statements and thus
increases public and investor trust.
Purpose
TWO (2) Types of Auditing:
Accountants deal with the intimate financial details of
1. Internal Auditing - focuses on evaluating the
individuals and organizations. Some have multi-million
adequacy of a company’s internal control
dollar transactions, and others assist the retirement funds structure by testing segregation of duties,
of drivers, minimum wage earners and the like. policies and procedures, degrees of
authorization, and other controls
implemented by management. Its
mandate is to ensure (a) effective and
efficient operations; (b) the reliability and
integrity of financial and operational
 information; (c) safeguarding of assets; and A. EXTERNAL USERS
(d) compliance with laws, regulations, and
contracts 1. Creditors - are the persons who supply goods on credit
or lenders of money such as banks. Creditors are
2. External Auditing - refers to the examination interested in accounting information because it enables
of financial statements by an independent them to determine the credit worthiness of the business
party with the purpose of expressing an and its ability to meet its financial obligations.
opinion as to the fairness of presentation 2. Investors - are stockholders of a company. They are
and compliance with GAAP. interested in the financial information to help them make
decisions on what to do with their investments example
E. TAX ACCOUNTING if they will hold, sell, or buy more. This is to safeguard their
 Deals with taxation matters. Its functions include investment.
preparation and filing of various tax returns,
helps clients follow rules set by tax authorities, 3. Government - keeps a close watch on the firms which
rendering of tax advice to clients, such as yield good amount of profits. Government are interested
determination and verification of tax in FS for the purpose of taxation. Taxes are computed
consequences, the effect of taxes on the based on the results of operations and other tax bases.
business operations, tax minimization through
legal means, and other tax related matters. 4. Consumers - These groups are interested in getting the
Take note that tax accounting is not the same goods at reduced price. Therefore, they wish to know
as government accounting. the establishment of a proper accounting control, which
in turn will reduce the cost of production, in turn, less
F. COST ACCOUNTING price to be paid by the consumers.
 Deals with recording, classification, allocation, 5. Customers - when there is a long term involvement or
and reporting of current and prospective costs. contract between the company and its customers, the
In manufacturing business, it is necessary to customers become interested in the company’s ability
keep the records of daily stocks in hand, their to continue its existence and maintain the stability of
issues and receipts, payment of wages, operations.
overhead charges, fixing the sale-price of the
products, etc. Cost Accounting is very useful in 6. Research Scholars - accounting information, being a
manufacturing businesses since they have the mirror of the financial performance of a business
most complicated costing process. organization, is of immense value to the research scholar
who wants to make a study on the financial operations
G. ACCOUNTING EDUCATION of a particular firm.
 Accounting Education is the branch of
accounting that deals with teaching students to 7. Regulatory Authorities - Require information to be filed
gain knowledge and develop skills to achieve a with under law. By examining the accounting
recognized profession in Accounting. information, they ensure that it is in accordance with the
rules and regulations and that it protects the interests of
H. ACCOUNTING RESEARCH the stakeholders who rely on such information.
 Deals with research on the fundamental issues 8. General Public - Anyone outside the company such as
of accounting affecting the business and students, analysts, consumer organizations, media,
regulatory authorities. Carried out both by welfare organizations, and public at large are interested
academic researchers and by practicing
in the financial information in order to appraise the
accountants. Academic accounting research efficiency and social role of the enterprises in different
addresses all areas of the accounting
sectors of the economy.
profession, and examines issues using the
scientific method; it uses evidence from a
variety of sources including financial B. INTERNAL USERS
information, experiments, and computer
simulations. 1. Owners - The owners invest and provide capital for the
organization. They are interested in knowing the
User of Accounting Information condition of the business if the capital is employed
properly or not.
EXTERNAL USERS INTERNAL USERS
1. Creditors 1. Owners 2. Management - The managers of the company are
2. Investors 2. Management employed by the owners to run the business. They are
3. Government 3. Employees interested in knowing the position of the firm.
4. Consumers
5. Customers 3. Employees - The employees of the company are
6. Research Scholars employed by the owners to perform tasks needed to
7. Regulatory Authorities support the running of the business. They are interested
8. General Public in the accounting information to find out the financial
condition of the business to determine their job security.
 Forms of Business Organizations C. MANUFACTURING BUSINESS
 Buys products with the intention of using them as
A. SOLE PROPRIETORSHIP materials in making a new product. Thus, there
 also known as a sole trader is owned by one is a transformation of the products purchased.
person and operates for their benefit. The owner Manufacturing business combines raw
may operate the business alone or with other materials, labor, and factory overhead in its
people. A sole proprietor has unlimited liability production process. The manufactured goods
for all obligations incurred by the business, will then be sold to customers.
whether from operating costs or judgments
against the business. D. HYBRID BUSINESS

B. PARTNERSHIP
 owned by two or more people. In most forms of
partnerships, each partner has unlimited liability Lesson 2: Fundamental Accounting Concepts and
for the debts incurred by the business. The three Principles
most prevalent types of for-profit partnerships,
limited partnerships, and limited liability Accounting Concepts and Principles
partnerships.
1. BASIC ASSUMPTIONS
C. CORPORATION
a. Economic Entity Assumption
 the owners of a corporation have limited liability
 Assumption that business is treated as a unit or
and the business has a separate legal
entity separate from its owners, creditors, and
personality from its owners. Corporations can be
others. A business institution is a legal person
either government-owned or privately owned.
having its own entity. All business transactions
They can organize either for profit or as not-for-
are recorded in the books of accounts from the
profit organizations. A privately owned, for-profit
viewpoint of the business.
corporation is owned by its shareholders, who
elect a board of directors to direct the b. Money Measurement Assumption
corporation.  Assumption that only business transactions and
events which are financial in nature are
D. LIMITED LIABILITY COMPANY (LLC)
recorded and reported in the financial
 This business structure protects the owner’s
statements. All transactions and events must be
personal assets from financial liability and
reduced to a unit of monetary currency.
provides some protection against personal
liability. There are situations where an LLC owner c. Accounting Period Assumption
can still be held personally responsible, such as  Assumption that accounting measures activity
if he intentionally does something fraudulent, for a specified interval of time. The users of FS
reckless, or illegal. need periodical reports to know the operational
result and the financial position of the business
E. COOPERATIVE
concern.
 Often referred to as “co-op”, a cooperative is
limited liability business that can organize for- d. Going Concern Assumption
profit or not-for-profit. A cooperative differs from  Assumption that the business will continue for a
a corporation in that it has members, not long period of time and transactions are
shareholders, and they share decision-making recorded from this point of view. The business is
authority. Cooperatives are typically classified not expected to be wind up in the foreseeable
as either consumer cooperatives or worker future.
cooperatives.  Therefore, it is assumed that the concern will
continue indefinitely.

Types of Business According to Activities 2. BASIC CONCEPTS AND PRINCIPLES

A. SERVICE BUSINESS a. Duality Concept
 Provides intangible products (products with no  Is a fundamental convention of accounting that
physical form). Service type firms offer necessitates the recognition of all aspects of an
professional skills, expertise, advice, and other accounting transaction. It is underlying basis for
similar products. double entry accounting system.
B. MERCHANDISING BUSINESS
Under the double-entry accounting system,
 This type of business buys products at whole sale
transactions are classified into two main types:
price and sells the same at retail price. They are
known as “buy and sell” businesses. They make
1. Debit - is the portion of the transaction that
a profit by selling the products at prices higher
accounts for the increase in assets and
that their purchase costs.
expenses, and the decrease in liabilities,
equity, and income.
 2. Credit - is the portion of the transaction that to the succeeding accounting periods or until a
accounts for the increase in income, better principle or method comes along.
liabilities, and equity, and the decrease in
assets and expenses. j. Faithful Representation
 It requires that transactions and events should
b. Objectivity be accounted for in a manner that represents
 According to this concept, all accounting their true economic substance rather that the
record must be based on objective evidence. In mere legal form. This concept is known as
other words, the transaction recorded should be Substance over Form.
free from any bias and are capable of
verification. 3. CHARACTERISTIC OF GOOD ACCOUNTING
INFORMATION
c. Materiality
 This principle requires all relatively information a. Completeness
should be disclosed in the financial statements.  Requires that financial information contained in
Unimportant and immaterial information are the financial statement is complete in all
either left out or merged with other items. material aspects. Reliability of financial
information is achieved if it is complete, hence
d. Matching Principle it becomes useful to relevant users.
 This is the concept that, when you record
revenue, you should record all related expenses b. Understandability
at the same time. In other words, revenue is  Must be presented in a manner that is
matched with expenses. understandable to its relevant users in order for
it to be useful.
There are two primary methods in recognizing c. Reliability
revenues and expenses:  Financial Information becomes useful if users
can depend on it to be materially accurate and
1. Accrual Basis of Accounting it represents its real substance. Accounting
2. Cash Basis of Accounting information should be verifiable.
e. Accrual Principle d. Relevance
 This is the concept that accounting transactions  Relevance is the concept that the financial
should be recorded in the accounting periods information should impact the decision- making
when they actually occur, rather that in the of the relevant user.
periods when there are cash flows associated
with them. e. Neutrality
 Financial Information presented to its users must
f. Revenue Recognition Principle be free from bias. It should reflect a balanced
 Under this principle, revenue is recognized as view of the affairs of the company without
soon as a product has been sold or a service has attempting to present them in a flavored light.
been performed regardless of whether cash
from the transaction has been received or not. f. Timeliness
This principle uses the accrual concept.  Characteristic subset of relevance. Not
providing the information in a timely manner
g. Cost Principle renders it less relevant to its users.
 This is the concept that value of transaction is
recorded at the price paid to acquire it, not the
THE ACCOUNTING EQUATION
prevailing market value or future value. The
amounts shown on financial statements are Total assets = liabilities + equity
referred to as historical cost amounts. Fundamental in the accounting process. It is the
foundation in performing every procedure necessary to
h. Conservatism Principle/Prudence fulfill the purpose of accounting. The three main
 Under this principle, when given two options in elements of accounting which are ASSETS, LIABILITIES,
the valuation of business transactions, the and OWNER’S EQUITY/CAPITAL, are terms widely used in
amount recorded should be the lower rather accounting, therefore it is necessary that you
that the higher value. This principle of understand what they are.
conservatism leads accountants to anticipate The Elements of financial statements refer to the
or disclose losses but leaves all prospective quantitative information shown in the statement of
profits. financial position and statement of comprehensive
income, namely: Assets, Liabilities, Equity, Income, and
Expense
i. Consistency/Comparability Principle
 This is the concept that, once you adopt an Financial Position Financial Performance
accounting principle or method, you should Asset Income
Liability Expense
continue to use it from one accounting period
Equity
 ASSETS SHAREHOLDER’S EQUITY

 a present economic resource controlled by the  in the case of a corporation, which is publicly
entity as a result of a past event. An economic owned, equity is labeled shareholder’s equity
resource is a right that has a potential to
produce economic benefits. CHANGES IN OWNER’S EQUITY

The essential characteristics of an asset are: DECREASE INCREASE

Expenses Revenues/Gains
a. The asset is controlled by the entity Losses Owner Investments
b. The asset is the result of a past transaction or event Owner Withdraws Beginning Capital
c. The asset has potential to produce economic benefits
d. The economic resource is a right
INCOME
Assets:  Increase in economic benefit during the
 Cash accounting period in the form of inflows or
 Land enhancements of assets or decreases of
 Equipment liabilities that result in an increase in equity, other
 Buildings than those relating to contributions from equity
 Vehicles participants.
 Supplies
 Accounts Receivables / Notes Receivable Types of Income:

 Sales Revenue
CHANGES IN ASSET
 Gains
DECREASE ASSETS INCREASE ASSETS
EXPENSES
Purchasing Supplies (The Purchasing Supplies (The
asset account Cash asset account Supplies  Decrease in economic benefits during the
decreases) decreases) accounting period in the form of outflows of
Owner Draw Owner Contributions assets or incurrences of liabilities that result in a
Repaying Bank Loans Receiving Bank Loans decrease in equity, other than those relating to
distributions from equity participants.

LIABILITIES Expenses include:

 a present obligation of an entity to transfer an  Ordinary Expenses
economic resource as a result of past event are  Losses
the creditor’s claims on assets

a. The entity has an obligation

EQUATION
b. The obligation is to transfer an economic resource
c. The present obligation is a result of a past event
 The word equation comes from the word equal.
 It is a state of being essentially equal or
Liabilities:
equivalent; equally balanced.
 Accounts payable
 For any equation, one side always equals
 Notes payable
another.
 Loans

OWNER’S EQUITY

 is the residual interest in the assets of the entity

after deducting all of it’s liabilities
 Lesson 3: The Chart of Accounts

THE CHART OF ACCOUNTS

 is a listing of all accounts that a company has

identified and made available for recording
transactions in the general ledger. The accounts
included must be used consistently to prevent
clerical or technical errors in the accounting
system.
 Accounts are classified into assets, liabilities,
capital, income, and expenses; and each is
given a unique account number. This coding
system or assigning of the account number is
used to organize the accounts and for easy
referencing. The contents on the chart of
accounts depend on the needs and
preferences of the company using it. Hence,
chart of accounts differs from company to
company. A company has the flexibility to tailor
its chart of accounts to best suit its needs.

Some Accounts found in the chart of accounts and their

definitions:

CURRENT ASSET ACCOUNTS

1. Cash and Cash Equivalents - bills, coins, funds for

current purposes, checks, cash in bank, etc.

2. Receivables - Accounts Receivable (receivable

from customers), Notes Receivable (receivables
supported by promissory notes), Rent
Receivable, Interest Receivable, Due from
Employees (or Advances to Employees), and
other claims
a. Allowance for Doubtful Accounts - This is a
valuation account which shows the
estimated uncollectible amount of
accounts receivable. It is a contra-asset
account and is presented as a deduction to
the related asset accounts receivable.

3. Inventories - assets held for sale in the ordinary

course of business

4. Prepaid expenses - expenses paid in advance,

Great ambition is the passion of a great character. Those such as Prepaid Rent, Prepaid Insurance,
endowed with it may perform very good or very bad Prepaid Advertising, and Office Supplies
acts. All depends on the principles which direct them
5. Debtors - a person (individual or firm) who
- Napoleon receives a benefit without giving money or
money’s worth immediately, but liable to pay in
future or in due course of time is a debtor.

NON-CURRENT ASSET ACCOUNTS

1. Long-term investments - investments for long-

term purposes such as investment in stocks,
bonds and properties; and funds set up for long-
term purposes

2. Land - land area owned for business operations

(not for sale)
 OWNER'S EQUITY
3. Building - such as office building, factory,
warehouse, or store 1. Drawings - It is the amount of cash or value of
goods withdrawn from the business by the
4. Equipment - Machinery, Furniture and fixtures proprietor for his personal use. It is deducted
(shelves, tables, chairs, etc.), Office equipment, from the capital.
computer equipment, delivery equipment, and
others 2. Capital - it is the simplest equity account used
a. Accumulated Depreciation- This is a for sole proprietorship and partnerships. It
valuation account which represents the includes both contributed capital and invested
decrease in value of a fixed asset due to capital.
continued use, wear & tear, the passage of a. Contributed capital is the part of the capital
time, and obsolescence. It is a contra-asset that directly comes from its owners. (i.e. the
account and is presented as a deduction to initial capital deposit by owner plus any
the related fixed asset. additional capital deposits during the life of
the business in sole proprietorship and
5. Intangibles- long-term assets with no physical partnership).
substance, such as goodwill, patent, copyright, b. Invested capital is the total amount of
trademark, etc. money raised by a company by issuing
securities to shareholders and bondholders.
It is calculated by adding the total debt and
lease obligations to the amount of equity
CURRENT LIABILITIES issued to investors.
1. Trade and other payables - such as Accounts
Payable, Notes Payable, Interest Payable, Rent
Payable, Accrued Expenses, etc. INCOME

2. Current provisions -estimated short-term 1. Sales - Sales refers to the amount of goods sold
liabilities that are probable and can be that are already bought or manufactured by
measured reliably the business. When goods are sold for cash, they
are cash sales but if goods are sold and
3. Short-term borrowings -financing arrangements, payment is not received at the time of sale, it is
credit arrangements or loans that are short-term credit sales. Total sales include both cash and
in nature credit sales.
a. Sales Return or Returns Inward -When goods
4. Current-portion of a long-term liability - the are returned from the customers due to
portion of a long-term borrowing that is currently defective quality or not as per the terms of
due. sale, it is called sales return or returns inward.
To find out net sales, sales return is deducted
5. Current tax liabilities - taxes for the period and from total sales.
are currently payable
2. Service Revenue -income from a service
6. Creditors - A person who gives a benefit without business
receiving money or money's worth immediately
but to claim in future, is a creditor. 3. Professional Fees -income from profession (e.g.
doctors, actors, dentist, lawyers, etc.)
NON-CURRENT LIABILITIES
4. Rent Income -income from rental of properties
1. Bonds - A formal written promise to pay interest (e.g. house, building, boat, office space)
every six months and the principal amount at
maturity. 5. Commission Income - income from commission
(e.g. commission for selling houses and
2. Mortgage payables - A liability account whose condominiums, commission for selling goods)
balance is the unpaid principal balance as of
the balance sheet date. The amount of 6. Interest Income -income from savings in bank
principal required to be paid within 12 months of
the balance sheet date is reported as a current 7. Royalty Income - income from writing books,
liability. The unpaid principal balance not due publications
within one year of the balance sheet date is
reported as a long-term liability.

3. Long-term obligations - Obligations of the

enterprise that are not payable within one year
of the balance sheet date. Two examples are
bonds payable and long-term notes payable.
EXPENSES Lesson 4: Books of Accounts

1. Advertising Expense - amount incurred due to BOOKS OF ACCOUNTS

advertising business
 refer to the financial records or books in which
2. Rent Expense - amount incurred for rental of e.g. all financial information of business or an entity is
office, building, etc. recorded and maintained.
 represent the financial memory of the
3. Salaries Expense - amount incurred due to company, therefore they are crucial for
payment of salaries to employees continuity, decision-making, formulating of
strategies, analysis of company performance,
4. Income Tax - amount paid to tax authorities and ensuring compliance with regulatory
bodies.
5. Repairs Expense - amount incurred due to
repairs of e.g. vehicle, equipment, furniture A business maintains two books of accounts, namely:

1. Journal
6. Loss from fire, typhoon, and theft are also 2. Ledger
considered expenses
1. JOURNAL

 The Journal, also called the “book of original

entries”, is the accounting record where
business transactions are first recorded. Business
transactions are recorded in the journal through
journal entries. The process is called journalizing.
 Journal is derived from the French word, “jour”
which means a ‘daily record’
 A journal contains entries wherein the accounts
and amounts being debited and credited are
specified together with an explanation for each
entry.

The journal contains:

1. Spaces for dates

2. Particulars – Account titles and concise
explanation of a transaction
3. Posting reference of folio for easy cross
referencing with the ledger
4. Two money columns for Debit & Credit

Types of Journal:

1. SPECIAL JOURNAL - is used to record transactions of a

similar nature. They simplify recording process, thus
providing an efficient way of recording and retrieving of
information.

a. Sales Journal – used to record sales on account.

b. Purchase Journal – used to record purchases of
inventory on account
c. Cash Receipts - used to record all transactions
involving receipts of cash
d. Cash Disbursement Journal – is used to record all
transactions involving payments of cash
A Special Journal can have the following format: Kinds of Ledgers:

Ledgers can be classified into the following:

1. GENERAL LEDGER – contains all the accounts

appearing in the trial balance.

2. SUBSIDIARY LEDGER – provides a breakdown of the

balances of controlling accounts.

Controlling account (or control account) is one

which consists of a group of accounts with similar nature.
2. GENERAL JOURNAL – All transactions that cannot be The balance of the controlling account is shown in the
reported in the special journals are recorded in the general ledger, while the balances of the accounts that
general journal. comprise the controlling account are shown in the
subsidiary ledger. Not all accounts in the general ledger
Examples of transactions:
though are controlling accounts. Only those whose
a. Purchases of Inventory in exchange for notes balances necessarily need a breakdown are considered
payable controlling accounts.
b. Adjusting Entries
c. Correcting Entries
d. Reversing Entries

Take note: if the business does not use special journal, all
it uses is the general journal

Double-Entry System

 All transactions are recorded in the accounting

records using the “double-entry system” Under
this system, each transaction is recorded in two
parts – debit and credit.
 NO transaction is recorded by a debit alone or
a credit alone. For each amount that is debited,
there must be a corresponding amount that is
credited, and vice-versa. This is in order for the
accounting equation to be balanced at all
Examples:
times. If at any time the accounting equation
1. You sold barbeque to a customer who promised does not balance, there is an error.
orally to pay the sale price next week.
2. You sold barbeque to a customer who Normal Balances of Accounts
immediately paid the sale price.
The normal balance of an account is on the side where
3. You sold barbeque to a customer who promised
an increase in that account is recorded. The following
in writing to pay the sale price next week.
are the normal balances of accounts:

Type of Account Normal Balance

2. LEDGER
Asset Debit
 A systematic compilation of group of accounts. Liability Credit
It is used to classify the effects of business Equity Credit
transactions on the accounts. This is also called Income Credit
the “book of secondary entries” or the “book of Expense Debit
final entries” because it is used only AFTER
transactions have been recorded in the To help us remember the normal balance of accounts,
journals. The process of recording in the ledger is let us recall the expanded basic accounting equation:
called “posting”
Assets= Liabilities + Equity + Income – Expenses
Notes: Requirement: Using “T-Account” analysis, compute for
the ending balance of your cash
 “Assets” which is on the left side of the equation
has a normal debit balance Solution:

 “Liabilities”, “Equity” and “Income” which are

additions on the right side of the equation have
a normal credit balances

 “Expenses” which is a deduction on the right

side of the equation has a normal debit balance

 Income increases equity, thus, it has a normal

credit balance (same with equity). Expense
decreases equity, thus, it has a normal debit
balance (opposite of that of equity).

 Another way to depict the normal balances of

the accounts is as follows:

Debits: Credits:
ASSETS + EXPENSES = LIABILITIES + EQUITY +
INCOME Illustration: Rules of Debits and Credits

Case #2: Liability Account

T-ACCOUNT

 An account takes the form of a T-account which At the beginning of the period, you have a note payable
resembles the alphabetical letter T of P1,200. During the period, you obtained an additional
loan amounting to P800 and made total payments of
 The left side of all accounts is the debit side, P500.
while the right side of all accounts is the credit
side.
Requirement: Using “T-Account” analysis, compute for
 The normal balance of an account is the side the ending balance of your note payable
where that account is increased.

Solution:

Illustration: Rules of Debits and Credits

Case #1: Asset Account

At the beginning of the period, you have a cash

balance of P2,000. During the period, you had to total
cash collections amounting to P10,000 and made total
cash payments of P8,000.