MODULE
INTRODUCTION
1 TO ACCOUNTING
"Accounting is the language of
business
- Warren Buffet
In this module:
Accounting Definition
Analysis of Transaction
Theory or Debit and Credit
Accounting is called the “Language of business”, it is a means of
communicating information about a business. It involves the use of generally
accepted accounting principles, analysis and interpretation of bookkeeping
records in order that income and financial position will be stated fairly. It
encompasses both the maintenance of accounting records but also the
preparation of various financial statements that enable businesses to evaluate
profitability and solvency. All of these pieces of information are provided by
the accounting process and as business students who are expected to work in
the field of business or engage in business itself it is imperative for you to
study the basic concepts and principles of accounting.
At the end of this module, you should be able to
1. Define what is accounting
2. Differentiate and discuss the types and nature of business
3. Analyze business transactions
4. Apply the rules of debit and credit
OBJECTIVES
define what accounting is
identify the different user of financial statements
analyze the basic accounting equation
INTRODUCTION
Welcome to lesson 1 of module 1! In this module you will be brought
to the world of business industry, where you will be facing a lot of
transactions. Furthermore, this comprises of concepts and rules on how
entities measure accountable transactions. You are tasked here to answer
activities designed to enhance your analytical ability and skill in solving
problems. So now, let’s get started and remember that accounting is fun!
ROLE AND PURPOSE OF ACCOUNTING
To provide useful and timely information about the financial activities of
an individual, business, or other organization. It provides information to the
stakeholders to assess economic performance and condition of the business.
NATURE OF BUSINESS
Service Business This provides services to the customers like
professional services, transportation,
entertainment etc.
Merchandising A type of business that buys and sells products
business
Manufacturing A business that converts raw materials, labor
business and overhead into finished goods that are sold to
customers
Agriculture The business is engage in planting of crops and
sells its products either in raw or finished form of
a profit
TYPES OF OWNERSHIP STRUCTURES
Proprietorship Is a business owned by a single individual
Partnership Two or more persons bind themselves to
contribute money, property, or services and
divide profits among themselves
Corporation a business that is owned by its shareholders and
is organized under operation of law that has
separate and legal entity
USERS OF FINANCIAL STATEMENTS
Investors An investor is any person or other entity (such as
a firm or mutual fund who commits capital with
the expectation of receiving financial returns
Employees a person employed for wages or salary,
especially at nonexecutive level.
Lenders lender is an individual, a public or private group,
or a financial institution that makes funds
available to another with the expectation that the
funds will be repaid
Suppliers is a person or business that provides a product
or service to an entity
Customers a person or organization that buys goods or
services from a store or business
Government the political system by which a country
or community is administered and regulated.
Public relating to, or affecting all the people or the
whole area of a nation or state
ACCOUNTING DEFINED
Accounting is a service activity. Its function is to provide quantitative
information, primarily financial in nature, about economic entities that is
intended to be uselful in making economic decision
- Accounting Standards Council
Accounting is the process of identifying , measuring and communicating
economic information to permit informed judgements and decisions by
users of the information
- American Accounting Association
Accounting is the art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and event which
are, in part or at least, of financial character, and interpreting the results
thereof
- American Institute of Certified Public Accountants
ELEMENTS OF FINANCIAL STATEMENTS
BALANCE SHEET
ASSETS
Current Assets are assets that can be realized (collected,
sold, used up) one year after year-end
date. Examples include Cash, Accounts
Receivable, Merchandise Inventory,
Prepaid Expense, etc
Cash is money on hand, or in banks, and other
items considered as medium of exchange
in business transactions.
Accounts Receivable are amounts due from customers arising
from credit sales or credit services.
Notes Receivables are amounts due from clients supported
by promissory notes.
Inventory are assets held for resale
Supplies are items purchased by an enterprise
which are unused as of the reporting date.
Prepaid Expenses are expenses paid in advance. They are
assets at the time of payment and
become expenses through the passage
of time.
Accrued Income is revenue earned but not yet collected
Short-term are the investments made by the company
investments that are intended to be sold immediately
Non-current Assets are assets that cannot be realized
(collected, sold, used up) one year after
year-end date. Examples include
Property, Plant and Equipment
(equipment, furniture, building, land), long
term investments, etc.
Property, Plant and are long-lived assets which have been
Equipment acquired for use in operations.
Long-term investments are the investments made by the company
for long-term purposes
Intangible Assets are assets without a physical substance.
Examples include franchise and copyright.
LIABILITIES
Current Liabilities Liabilities that fall due (paid, recognized
as revenue) within one year after year-
end date. Examples include Accounts
Payable, Utilities Payable and Unearned
Income
Accounts Payable are amounts due, or payable to, suppliers
for goods purchased on account or for
services received on account
Notes Payable are amounts due to third parties supported
by promissory notes.
Accrued expenses are expenses that are incurred but not yet
paid (examples: salaries payable, taxes
payable)
Unearned Income is cash collected in advance; the liability is
the services to be performed or goods to
be delivered in the future.
Non-Current Liabilities are liabilities that do not fall due (paid,
recognized as revenue) within one year
after year-end date. Examples include
Notes Payable, Loans Payable, Mortgage
Payable, etc.
OWNER’S EQUITY is the residual interest of the owner from
the business. It can be derived by
deducting liabilities from assets.
Account Titles used for Equity Account.
Capital is the value of cash and other assets
invested in the business by the owner of
the business.
Drawing is an account debited for assets withdrawn
by the owner for personal use from the
business.
INCOME STATEMENT
Income is the Increase in resources resulting from
performance of service or selling of goods.
Example of Income Accounts. Service
revenue for service entities, Sales for
merchandising and manufacturing
companies
Expense Outflows of assets resulting from the sale
of goods or services in order to produce
revenue
ACCOUNTING PROCESS
Identification those events that is financial in nature that
should be recognized and recorded
Recording transactions may be recorded manually, with the
use of mechanical devices or with the use of
computer
Classifying Is the grouping of similar items together in order
to make the recording of many different events
and transactions more efficient
Summarizing Is the stating of groups of data in concise form
Interpretation Provides explanation and develops relationships
that give meaning to the information
BASIC ACCOUNTING EQUATION
The relationship between the three basic accounting elements of the balance
sheet- Assets, Liabilities, an Owner’s Equity- can be expressed in the form of
a simple equation known as the Accounting Equation. All accounting
information is recorded within the framework of the Accounting Equation. This
equation is:
ASSETS = LIABILITIES + OWNER’S EQUITY
The accounting equation must always in balance. The peso amount on the left
side of the equation should always equal the peso amount on the right side of
the equation. If assets increase, liabilities and/or owner’s equity must
increase by the same amount. If assets decrease, liabilities and/or
owner’s equity must also decrease. An increase in an asset may also
have a corresponding decrease in another asset or an increase in a
liability may also have a corresponding decrease in another liability.
Examples:
Assets = Liabilities + Owner’s Equity
P400,000 = 150,000 + 250,000
P150,000 = 75,000 + 75,000
P250,000 = 0 + 250,000
EXPANDED ACCOUNTING EQUATION
ASSETS= LIABILITIES + EQUITY (CONTRIBUTED CAPITAL +
DRAWING + REVENUE - EXPENSE)
INCOME STATEMENT
REVENUE- EXPENSE= PROFIT (LOSS)
Congratulations! That was incredible! But as expected you managed to
complete all the activites and learning tasks for Lesson 1 of Module 1.
Hopefully, concepts and key ideas presented will be retained in your in mind
for the succedding lessons to accomplish!
You are now prepared to proceed to the next lesson. Keep working!
Lopez, R. (2016). Fundamentals of Accounting (Simplified Procedural
Approach). Ma-a, Davao City. Lopez Publishing.
Leonardo E. Aliling (2016). Fundamentals of Basic Accounting
Recedes Bartolome-Kimwell (2016). Fundamentals of Basic
Accounting.
Ballada, W., et al (2013). Basic Accounting. Sampaloc, Manila.
Domdane Publishers
Valencia, E., et al (2009-2010). Basic Accounting. Valencia
Educational Supply.
