ACCOUNTING

FUNDAMENTALS

ACCOUNTING

LANGUAGE OF BUSINESS
(Measures business activities, processes that information
into reports and communicates the results to decisionmakers)

ACCOUNTING
Accounting is a service activity. Its function is to provide quantitative
information, primarily financial in nature, about economic events that
is intended to be useful in making economic decisions.
(ACCOUNTING STANDARDS COUNCIL)
Accounting is an information system that measures, processes and
communicates financial information about economic entity.
(FINANCIAL ACCOUNTING STANDARDS BOARD)
Accounting is an art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and events
which are, in part at least of financial character, and interpreting the
results thereof. (AMERICAN INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS)

HISTORY
LUCA PACIOLI

- Father of Accounting

In 1494he published his book, SUMMA DE

ARITHMETICA, GEOMETRIA, PROPORTIONI ET
PROPORTIONALITA (Everything about
Arithmetic,Geometry, Proportions and
Proportionality.

Particularis de Computis et Scripturis or Details of

Calculation and Recording.
- double entry bookkeeping.
-36 Chapters.

3 Components of Accounting

1
2
3

IDENTIFYING: Analytical Component

-recognition or non-recognition of business activities as accountable events.

MEASURING: Technical Component

-assigning of peso amounts to the accountable economic transactions and
events.

COMMUNICATING: Formal Component

-process of preparing and distributing accounting reports to potential users
of accounting information.

Implicit in the
Communication Process are:
Recording
-or JOURNALIZING is the process of systematically maintaining a record of
all economic business transactions after they have been identified and
measured.

Classifying
-is the sorting or grouping of similar and interrelated economic
transactions into their respective classes.

Summarizing
-is the preparation of financial statements which include the statement of
financial position, statement of comprehensive income, statement of
changes in equity and statement of cash flows..

Objective of Accounting

-to provide quantitative financial information about a business that

is useful to statement users particularly owners and creditors, in
making economic decisions.

TYPES OF BUSINESS
SERVICE TYPE - A service type of business provides intangible
products(products with no physical form). Service type firms offer professional
skills, expertise, advice, and other similar products. Examples of service
businesses are: schools, repair shops, hair salons, banks, accounting firms, and
law firms.
Merchandising Business - This type of business buys products at wholesale
price and sells the same at retail price. They are known as "buy and sell"
businesses. They make profit by selling the products at prices higher than their
purchase costs.
A merchandising business sells a product without changing its form. Examples
are:
grocery stores, convenience stores, distributors, and other resellers.

TYPES OF BUSINESS
(According to Activities)

Manufacturing Business - Unlike a merchandising business, a

manufacturing business buys products with the intention of using them as
materials in making a new product. Thus, there is a transformation of the
products purchased.
A manufacturing business combinesraw materials, labor, and factory
overheadin its production process. The manufactured goods will then be sold
to customers.

Types of Business
Operations

TYPE

ACTIVITY

1. SERVICE

Selling peoples time

2. MERCHANDISING/TRADE

Buying and selling products

3. MANUFACTURING

Conversion of raw materials into finished

products

FORMS OF BUSINESS

Sole Proprietorship This business organization has a single owner called the
proprietor who generally is also the manager. The owner receives all profits,
absorbs all losses and is solely responsible for all debts of the business.
Partnership Is a business owned and operated by two or more persons who
bind themselves to contribute money, property and industry into the common
fund with the intention of dividing profit among themselves.
Corporation Is a business owned by its stockholders. It is an artificial being
created by operation of law, having the rights of succession and the powers,
attributes and properties authorized by law or incident to its existence.

USERS OF FINANCIAL
INFORMATION

Investors Needs information to help them determine whether they should buy,
hold or sell.
Employees are interested in information about stability and profitability of
their employers. They are also interested in information which enables them to
assess the ability of the enterprise to provide remuneration, retirement benefits
and employment opportunities.
Lenders are interested in information that enables them to determine whether
their loans and the related interest will be paid when due.

USERS OF FINANCIAL
INFORMATION

Suppliers and other trade creditors are interested in information that

enables them to determine whether the amounts owing to them will be paid
when due.
Customers have an interest in information about the continuance of an
enterprise, especially when they have a long-term involvement with, or are
dependent on, the enterprise.
Government and their Agencies are interested in an allocation of resources
and, therefore, the activities of the enterprise. They also require information in
order to regulate the activities of the enterprise, determine taxation policies and
as the bases for the national income and similar statistics.

GAAP
Encompass the conventions, rules and procedures
necessary to define accepted practice at a particular time.
Developed on the basis of experience, reason, custom,
usage and practical necessity.

FUNDAMENTAL
CONCEPTS

Entity Concept An accounting entity is an organization that stands

apart from other organizations and individuals as a separate economic
unit. The transactions of different entities should not be accounted for
together.
Periodicity Concept An entity's life can be meaningfully subdivided
into equal time periods for reporting purposes. It will be aimless to wait for
the actual last day of operations to perfectly measure the entitys net
income.
Stable Monetary Unit Concept The Philippine peso is a reasonable
unit of measure and that its purchasing power is relatively stable.

FUNDAMENTAL
CONCEPTS

Conservatism This requires understanding rather than overstating

(income) and expenses amounts that have a degree of uncertainty. The
rule is to recognize revenue when it is reasonably certain and recognize
expense as soon as they are reasonably possible.
Matching To avoid overstatement of income in any one period, the
matching principles requires that revenues and related expenses be
recorded in the same accounting period.

BASIC PRINCIPLES

Objectivity Principle Accounting records and statements should be

based on the most reliable data available so that they will be as accurate
and as useful as possible.
Historical Cost states that acquired assets should be recorded at their
actual cost and not at what management thinks they are worth as at
reporting date.
Revenue Recognition Principle revenues are to be recognized in the
accounting period when goods are delivered or services rendered or
performed.

BASIC PRINCIPLES

Expense Recognition Principle expenses should be recognized in the

accounting period in which goods and services are used to produce
revenue and not when the entity pays for those goods or services.
Adequate Disclosure requires that all relevant information that would
affect the users understanding and assessment of the accounting entity
be disclosed in the financial statements.

BASIC PRINCIPLES

Materiality Financial reporting is only concerned with information that

is significant enough to affect evaluations and decisions.
Consistency Principle the firm should use the same accounting
method from period to period to achieve comparability over time within
the single enterprise. However, changes are permitted if justifiable and
disclosed in the financial statements.

CONCEPTUAL FRAMEWORK

-describes the basic concepts that underlie the preparation

and presentation of financial statements for external users.
o Framework is not PFRS and hence does not define
standards for any particular measurement or disclosure
issue.
o In those cases where there is a conflict, the requirement
of the PFRS prevail over those of the framework.

Scope
The Conceptual Framework addresses:
1. The objective of financial reporting
2. The qualitative characteristics of useful financial
information
3. The reporting entity
4. The definition, recognition and measurement of the
elements from which financial statements are constructed
5. Concepts of capital and capital maintenance

1. OBJECTIVE OF FINANCIAL REPORTING

-to provide financial information about the reporting entity that is
useful to present and potential investors, lenders and other creditors in
making decisions in their capacity as capital providers.
2. QUALITATIVE CHARACTERISTICS
-attributes that make the information provided in the financial
statements useful to users.
Fundamental
Enhancing

QUALITATIVE
CHARACTERISTICS

FUNDAMENTAL QUALITATIVE CHARACTERISTICS

ENHANCING QUALITATIVE CHARACTERISTICS

FUNDAMENTAL QUALITATIVE
CHARACTERISTICS
-contribute

to decision usefulness of financial reporting information.

a. RELEVANCE-

capable of making a difference in decision made by

users.
1. Predictive Value- influences the economic decisions of
users by helping them evaluate past, present and future
events.
2. Confirmatory Value (Feedback Value)- confirming or
correcting their past evaluation..

FUNDAMENTAL QUALITATIVE CHARACTERISTICS

b. FAITHFUL REPRESENTATION- to be useful, financial
information must
not only be relevant, it must also represent
faithfully the phenomena it
purports to represent.
1. Completeness- information must be complete but
within the bounds of materiality and cost.
2. Neutrality- free from bias toward predetermined
result.
3. Free from error- absence of material error.
*Substance over form- if information is to represent faithfully the
transactions and other events it purports to represent, it is necessary that
they are accounted in accordance with their substance and reality and not
merely their legal form.

ENHANCING QUALITATIVE CHARACTERISTICS

(VCUT)
a. VERIFIABILITY- means that different knowledgeable
and
independent observers could reach consensus,
although not
necessarily complete agreement, that a
particular depiction
is faithful representation.
b. COMPARABILITY- can be compared with a similar
information about other entities and with similar
information
about the same entity for another period
or another date.
Intercomparability- between and across entities
Intracomparability- within the entity

ENHANCING QUALITATIVE CHARACTERISTICS

(VCUT)

c.
UNDERSTANDABILITYclassifying,
characterizing
and
presenting information clearly and concisely
makes it
understandable.
d. TIMELINESS- means that information is available to
decision-makers in time to be capable of
influencing their
decisions.

*COST-BENEFIT CONSTRAINT- cost of providing information should not

exceed benefits derived from it.
3. REPORTING ENTITY- no discussion yet.
4. ELEMENTS OF FINANCIAL STATEMENTS- are the building blocks
from which financial statements are constructed.
Relating to Financial Position:
a. ASSET- resources controlled by the entity as a result of
past events and from which future economic benefit
expected to flow to the entity.

are

Relating to Financial Position:

b. LIABILITY- present obligation of the entity arising from past
events, the settlement of which is expected to result in an outflow
from the entity of resources embodying
economic benefits.
c. EQUITY- the residual interest in the asset of the entity after
deducting all its liabilities.

Relating to Performance:

a. INCOME- increases in economic benefits during the accounting

period in the form of inflows or enhancements of assets or
decreases of liabilities that result in increases in equity, other
than those relating to contributions from equity participants.
*Encompasses both revenue and gains.
REVENUE- arises in the course of the ordinary
activities
of an entity and is referred to by a
variety of different
names including sales, fees,
interest, dividends, royalties and
rent.

Relating to Performance:

b. EXPENSEdecreases in economic benefits during the

accounting period in the form of outflows or depletions of assets or
incurrences of liabilities that result in
decreases in equity, other
than those relating to distributions to equity participants.
*Encompasses losses as well as those expenses that arise in the
course of the ordinary activities of the entity.

Recognition- process of incorporating in the financial statements an

item that meets the definition of an element and satisfies the following
criteria for recognition:

o Asset Recognition Principle- asset is recognized in the

balance sheet when it is probable that the future economic
benefits will flow to the entity and the asset has a cost or value
that can be measured reliably.
o Liability Recognition Principle- liability is recognized in the
balance sheet when it is probable that an outflow of resources
embodying economic benefits will result from the settlement of
a present obligation and the amount at which the settlement
will take place can be measured reliably.

o Income Recognition Principle- income is recognized in

the income statement when an increase in future economic
benefit related to an increase in an asset or a decrease of a
liability has arisen that can be measured reliably.
o Expense Recognition Principle- expense is recognized in
the income statement when a decrease in future economic
benefit related to a decrease in an asset or a increase of a
liability has arisen that can be measured reliably
Cause & Effect Association
Systematic & Rational Allocation
Immediate Recognition

ELEMENTS OF FINANCIAL
STATEMENTS

Assets - are probable future economic benefits obtained or

controlled by a particular entity as a result of past transactions or
events.
Liabilities - are probable future sacrifices of economic benefits
arising from present obligations of a particular entity to transfer
assets or provide services to other entities in the future as a result
of past transactions or events.
Equity - or net assets, calledshareholders equityorstockholders
equityfor a corporation, is the residual interest in the assets of an
entity that remains after deducting liabilities.

ELEMENTS OF FINANCIAL
STATEMENTS

Revenues - are inflows or other enhancements of assets or

settlements of liabilities from delivering or producing goods,
rendering services, or other activities that constitute the
entitys ongoing major, or central, operations.
Expenses - are outflows or other using up of assets or
incurrences of liabilities during a period from delivering or
producing goods, rendering services, or other activities that
constitute the entitys ongoing major, or central, operations.

Measurement of the
Elements of FS

Historical costs assets are recorded at the amount of cash or

cash equivalents paid or the fair value of the consideration given to
acquire them at the time of their acquisition.
Current Cost assets are carried at the amount of cash or cash
equivalents that would have to be paid if the same or an equivalent
was acquired currently.
Present Value assets are carried at the present discounted value of
the future net cash inflows that the item is expected to generate in a
normal course of business.

NORMAL BALANCE OF AN ACCOUNT

Increases Recorded by
Account Category
ASSET

Debit

Credit

LIABILITIES

Normal Balance
Debit

Credit

OWNERS EQUITY:
OWNERS CAPITAL
WITHDRAWALS

INCOME
EXPENSES

ACCOUNTING EVENTS AND

TRANSACTIONS

ACCOUNTING EVENT- is an economic occurrence that causes changes in an

enterprises assets, liabilities, and/or equity.
TRANSACTION- is a particular event that involves the transfer of something of
value between two entities.

ACCOUNTING CYCLE
- a series of steps taken in gathering, processing and summarizing data so as to
produce
meaningful information which are communicated to statement users by
way of financial reports.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Analyzing (Identification of events to be recorded)

Recording (Transactions are recorded in the journal)
Posting (Journal entries are posted to the ledger)
Unadjusted Trial Balance (Preparation of a Trial Balance)
Adjusting Entries (Preparation of worksheet including adjusting
entries)
Financial Statements (Preparation of Financial Statements)
Adjusted Trial Balance (Adjusting journal entries are journalized
and posted)
Closing Entries (Closing journal entries are journalized and posted)
Post-Closing Trial Balance (Preparation of Post-closing Trial
Balance)
Reversing Entries (Reversing journal entries are journalized and
posted)

Recording phase

Summarizing/
Reporting phase

Optional steps

Transaction
Transaction Analysis
Analysis
.

1. Identify the transaction from source documents.

2. Indicate the accounts assets, liabilities, equity,
income or expensesaffected by the transactions.
3. Ascertain whether each account is increased or
decreased by the transaction.
4. Using the rules of debit and credit, determine whether
to debit or credit the account to record its increase or
decrease.

Terms:
Terms:
Chart of accounts- a listing of account titles which guide the
bookkeeper in the recording of the transactions.
Account balance- the difference between the debit total and
the credit total.
Debit balance- if the debit total is higher than the credit total.
Credit balance- if the credit total is higher than the debit total.

First 4 Steps in the Accounting Cycle

SOURCE
DOCUMENTS

GENERAL JOURNAL

GENERAL LEDGER

TRIAL BALANCE

SOURCE
SOURCE DOCUMENTS
DOCUMENTS
Some of the source documents:
INVOICE- issued when service or merchandise is given to a customer or client.
OFFICIAL RECEIPT- issued when cash is received by the entity.
CASH OR CHECK VOUCHER- a document used when cash is paid or a check is
issued.
CHECK- a negotiable instrument used as a substitute for cash, the payment for
which is drawn against the entitys or individuals current account.
PROMISSORY NOTE- a written promise to pay a certain sum of money at a
future date. The maker is the debtor who makes the promise, addressing it to the
payee or the creditor.
STATEMENT OF ACCOUNT- a bill presented to a customer for service rendered
or merchandise given for which payment is demandable.

Step 1.

Transactions and events are analyzed from the source documents.

Step 2.

Recording/ Journalizing- process of recording transactions in the journal.

Journal- is a chronological record of the entitys transaction. Also called

the book of original entry.

General Journal- is the simplest journal.

Journal entry- every entry made in the journal.

Each
Eachjournal
journalentry
entrycontains
containsthe
thefollowing:
following:

Date
The account title and the amount to be debited
The account title and the amount to be credited
Explanation

Simple Journal entry- when an entry has one debit and one credit.
Compound Journal entry- when an entry has more than one debit or more
than one credit.

Step 3.
Posting- means transferring the amounts from the journal to the appropriate accounts in
the ledger.

General Ledger- book of final entry.

- the reference book of the accounting system and is used to
classify and summarize transactions, and to prepare data for basic
financial statements.
Accounts in the general ledger are classified into two general
groups:
Balance Sheet or permanent/real accounts
Income Statement or temporary/nominal accounts
*At the end of the period, balances of these accounts are
determined for the preparation of Trial Balance.

Step 4.
Trial Balance- is a list of all accounts with their
respective debit or
credit balances.
-prepared to verify the equality of debits and credits in the
ledger at the end of each accounting period or at any time the postings are
updated.
-a control device that helps minimize accounting errors.
Heading consists of three lines:
Name of the business
Title of the report
Date

Locating
Locating Errors
Errors
Errors include:
1. Error in posting a transaction to the ledger:
a) An erroneous amount was posted to the account.
b) A debit entry was posted as a credit or vice versa.
c) A debit or credit posting was omitted.
2. Error in determining the account balances:
a) A balance was incorrectly computed.
b) A balance was entered in the wrong balance column.
3. Error in preparing the trial balance:
a) One of the columns of the trial balance was incorrectly added.
b) The amount of an account balance was incorrectly recorded on the trial balance.
c) A debit balance was recorded on the trial balance as a credit or vice versa, or a
balance was omitted entirely.

Transposition error- occurs when two digits that are either individual or
part of a larger sequence of numbers are reversed (transposed) when posting a
transaction.

Slide error- is the incorrect placement of the decimal point.

References

http://
www.accountingverse.com/accounting-basics/types-of-busin
esses.html
Accounting Fundamentals of Win Ballada, 2012 issue-3rd
edition
http://content.moneyinstructor.com/1431/fundamentalconcepts.html