ADVANCE
ACCOUNTING
SESSION 2
TOPIC OUTLINE
▰ Brief History of Accounting from earliest civilization up to recent
▰ Steps of Accounting Cycle
▰ Rules of Debit and Credit
▰ Normal Balances of Elements of the Financial Statements
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Brief History of Accounting
Let’s start with the first set of slides
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Earliest Record of Accounting
The earliest accounting records were found
over 7,000 years ago among the ruins of Ancient
Mesopotamia. At the time, people relied on accounting to
keep a record of crop and herd growth. They used
accounting techniques that are still used today to
determine if there was a surplus or shortage after crops
were harvested each season.
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Accounting History During the
Roman Empire
Later, during the reign of the Roman Empire, accounting continued to evolve
much further. “The Deeds of the Divine Augustus” is an account of Emperor
Augustus’ financial dealings. It listed such quantities as distributions to the
people, grants of land, building of temples, money to military veterans, religious
offerings, and money spent on theatrical shows and gladiator events. This
discovery hints at the scope of accounting information available to the emperor,
which he then probably used for planning and decision-making purposes.
Roman historians also recorded public revenues, the amount of money in the
state treasury, taxes, slaves, freedmen, and more.
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Luca Pacioli’s Contribution to the
Accounting Profession
▰ In 1494, Pacioli wrote Summa de Arithmetica, Geometria, Proportioni et
Proportionalita, which included a twenty-seven-page treatise on bookkeeping
titled, Particularis de Computis et Scripturis (Details of Calculation and
Recording) on the subjects of record keeping and double-entry accounting.
Pacioli’s book became the reference text and teaching tool on the subjects of
bookkeeping and accounting for the next several hundred years. This was the first
time that symbols for plus and minus appeared in a printed book. This book was
the first known published work on the topic of double-entry bookkeeping. Summa
Arithmetica was also the first known book printed in Italy to contain algebra.
▰ Accounting basics are also mentioned in the New Testament of the Bible in the
Book of Matthew as well as in other religious texts such as the Qur’an. 6
Accounting During the Middle Ages
▰ During the Middle Ages, bartering was the primary form of money-
changing, but when Europe changed to a monetary economy is the 13th
Century, merchants began relying on bookkeeping to keep a record of
multiple transactions. This is when double-entry bookkeeping got its start,
which is when a debit and credit value is entered for each transaction by
the accountant. Merchants at the time used accounting as an ad-hoc
ordering system. It provided them with constant information about their
businesses that they could use in decision-making to grow their business as
they saw fit. This laid the foundation of how we use and understand
accounting today.
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ACCOUNTING CYCLE
Journalizing
Reversing Entries Posting
Post-Closing Trial Trial Balance
Balance
Closing Entries Adjusting Entries
Financial Statements Worksheet
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RULES OF DEBIT AND
CREDIT
Normal Balances of the Elements of
Financial Statement
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BUSINESS TRANSACTION AND EVENTS
Not all business activities are ACCOUNTABLE. Business activities are said to be
accountable only when they affect the assets, liabilities, and owner’s equity.
External Transactions- these involves economic resources by a business
enterprise with another business enterprise. Ex. Selling of services and goods to
customers
Internal transactions- transactions or events the happened or take place within
the business enterprise only. Ex. Conversion of raw materials into finished
products
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RULES OF DEBIT AND CREDIT
DEBIT = CREDIT
“Value received” = “value parted with”
“left” = “right”
1. For every value received, another value is given away as an exchange
2. These values are measured in terms of pesos which are presumed to be
equal
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ANALYSIS OF BUSINESS TRANSACTIONS
(Business is analyzed from the view of the business)
“YOU ARE THE BUSINESS”
If Jona gives you an alcohol and you will give her a mask
Debit- Alcohol
Credit- mask
If you give Jona an alcohol and she will give you a mask
Debit- Mask
Credit- Alcohol
(Note! The debit must be written on the left side and the credit is written on the right side. Make an
indent to emphasize both sides)
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EXAMPLE
The business bought a car for cash, P850,000
1. Who bought the car? Business
2. What is the value received? Car
3. What is the value parted with? Cash
4. What is the peso equivalent of these exchanges? P850,000
Car P850,000
Cash P850,000
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The business sold car for cash P600,000
1. Who sold the car? Business
2. What is the value received? Cash
3. What is the value parted with? Car
4. What is the peso equivalent? P 600,000
Cash P600,000
Car P600,000
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NORMAL BALANCES
ASSETS = LIABILITIES + OWNER’S EQUITY
This equation is referred to as the basic accounting equation. This accounting equation is applied to all
economic entities regardless of size, nature of business, or forms of business organizations. This
means that:
ASSETS - normal balance is Debit
LIABILITIES - normal balance is Credit
OWNER’S EQUITY - normal balance is Credit
The accounting equation, A=L+OE has developed the rules to be followed in the study of accounting.
The equation stands for the “normal balances” or “increase sides” in each of the accounting elements.
In other words, the normal balances refer to the increase side which may either be debit or credit.
Now do the following exercises!
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THANKS!
Any questions?
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Introduction to
Accounting
OBJECTIVES
❖ Define what accounting is
❖ Identify Nature of Business and Types of Ownership
Structures
❖ Identify the different users of Financial Statements
❖ Describe the Elements of Financial Statements
❖ Analyze the basic accounting equation
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What is
Accounting?
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Accounting…
﹡ is a service activity. Its function is to provide quantitative
information, primarily financial in nature, about economic
entities that is intended to be useful in making economic
decision
-Accounting Standards Council
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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
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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
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What is the Role
and Purpose of
Accounting?
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﹡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.
﹡
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What are the
Nature of
Businesses?
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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
business products
Manufacturing A business that converts raw materials,
business labor 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
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What are the
Types of
Ownership
Structures?
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Nature of Business
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
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What are the
Elements of
Financial
Statement?
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Statement of Financial Position
﹡1. Assets
﹡2. Liabilities
﹡3. Owners’ Equity
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Assets
CURRENT ∙ are assets that can be realized (collected, sold, used up) one year after
year-end date. Examples include Cash, Accounts Receivable,
ASSETS 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 that are intended to be sold
investments immediately
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Assets
NON-CURRENT ∙ are assets that cannot be realized (collected, sold, used
up) one year after year-end date. Examples include
ASSETS Property, Plant and Equipment (equipment, furniture,
building, land), long term investments, etc.
Property, Plant and ∙ are long-lived assets which have been acquired for use in
Equipment operations.
∙
Long-term ∙ are the investments made by the company for long-term
investments purposes
Intangible Assets ∙ are assets without a physical substance. Examples include
franchise and copyright.
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Liabilities
CURRENT ∙ Liabilities that fall due (paid, recognized as revenue)
within one year after year-end date. Examples include
LIABILITIES 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 ∙ are expenses that are incurred but not yet paid
Expenses (examples: salaries payable, taxes payable)
Unearned Income ∙ is cash collected in advance; the liability is the services to
be performedor goods to be delivered in the future.
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Liabilities
NON-CURRENT ∙ are liabilities that do not fall due
(paid, recognized as revenue)
LIABILITIES within one year after year-end
date. Examples include Notes
Payable, Loans Payable,
Mortgage Payable, etc.
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Owner’s Equity
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.
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Income Statement
﹡ 1. 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
﹡ 2. Expenses - Outflows of assets resulting from the sale of goods or
services in order to produce revenue
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What is the
Basic
Accounting
Equation?
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Asset = 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.
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Expanded Accounting Equation
Asset = Liabilities + Equity ( -
Drawing + Revenue
- Expenses)
Income Statement
Profit (Loss) = Revenue - Expenses
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ACCOUNTING FOR
A SERVICE
BUSINESS
Learning Objectives
◍ identify, analyze and measure a
business transaction
◍ record accountable business
transactions
◍ apply the rules of debit and credit
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Hello!
Can you give examples of business
entities under Service Concern?
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“
The actual sequence of events begins with the
identification of transactions are considered as
accountable and what are not. The rule is, only
transactions and events which are of financial
bearing to the business are being recognized.
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“
The basis of identifying transactions are the supporting
documents that are on the file or yet to be filed as evidence
of transactions to assure the reliability and verifiability of
records. After identifying, follows next is analyzing. You
should analyze what is the “value received” or debit and the
“value parted with” or credit. Peso is used as the financial
denominator when it comes to measuring of transaction
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Source Documents
Statement of Account is a formal notice to the debtor detailing the accounts
already due
Official Receipt Evidences the receipt of cash by the seller or the authorized
representative. It notes the invoices paid and other details of
payment
Deposit slips Are printed forms with depositor’s name, account number
and space for details of the deposit.
Check Is a written order to a bank by a depositor to pay the amount
specified in the check from his checking account to the
person named in the check
Purchase requisition Is a written request to the purchaser of an entity from an
employee or user department of the same entity that goods
be purchased
Purchase order Is an authorization made by the buyer to the seller to deliver
the merchandise as detailed in the form
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Cash Basis Vs. Accrual Basis
Under cash basis, income is recorded only when cash
is actually received. Likewise, expenses are recorded
only when actually paid. This practice could not give
meaning picture of a financial statement because it could
not show the true results of business operations, as well
as its financial condition. To simplify, there is no
recognition of Accounts Receivable for income earned
when not yet collected and no recognition of Accounts
Payable for the expenses incurred when not yet paid
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Cash Basis Vs. Accrual Basis
Under accrual basis, income is recorded even
cash in not received yet for as long as it is
earned. Likewise, expenses are recorded even
no payment has been made yet for as long as
they are incurred. This practice results to a
proper matching of income or revenue against
costs or expenses and could therefore show a
meaningful financial statements.
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Components of Income Statements for
Service and Merchandising Entities
Service Merchandising
Revenues from services Net Sales
Minus Minus
Expenses Cost of Sales
Equals Equals
Profit Gross Profit
Add or Minus
Income or Expenses
Equals
Profit
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Books of Accounts
Journal Book of the original entry
General Journal Refers to a book of original entries, in which accountants and
bookkeepers record raw business transactions, in order according to
the date events occur. A general journal is the first place where data
is recorded, and every page in the item features dividing columns for
dates, serial numbers, as well as debit or credit records .
Special Journal are designed as a simple way to record the most frequently occurring
transactions. There are four types of Special Journals that are
frequently used by merchandising businesses: Sales journals, Cash
receipts journals, Purchases journals, and Cash payments journals.
Ledger Book of the final entry
General Ledger The general ledger is comprised of all the individual accounts needed
to record the assets, liabilities, equity, revenue, expense, gain, and
loss transactions of a business. In most cases, detailed transactions
are recorded directly in these general ledger accounts
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A picture is worth a thousand words
JOURNALIZING ENTRIES AND
POSTING
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Rules of Double-Entry System
◍ Two or more accounts are affected by
each transaction
◍ The sum of the debits for every
transaction equals the sum of the
credits
◍ The equality of the accounting equation
is always maintained
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Illustration
JOURNALIZING SERVICE CONCERN TRANSACTIONS
Maureen Cruz , who has Wedding Consultancy business, entered into the following
transactions during the month of May 2021:
May 1 -Invested in the business P250,000 cash
1 -Rented office space and paid two months’ rent in advance, P8,000
2 -Cruz issued a promissory note for a P210,000 loan from Metrobank
2 -Hired an office assistant and account executive each to receive
P300 per day for the 26-day work month
4 -Acquired service vehicle for P420,000
4 -Paid Prudential Guarantee and Assurance Inc. P14,400 for
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Illustration
JOURNALIZING MERCHANDISING TRANSACTIONS
Maureen Cruz , who has Wedding Consultancy business, entered into the following
transactions during the month of May 2021:
May 5 -Acquired office equipment from Fair and Square Emporium for
P60,000; paying P15,000 in cash and the balance next month
8 -Purchased supplies on credit for P18,000 from San Jose Mktg.
9 -Paid San Jose Mktg. P10,000 of the amount owed.
10 -Coordinated and finalized simple bridal arrangements for three
couple and collected fees of P8,000 per couple.
13 -Paid salaries, P6,600. The entity pays salaries every two Saturdays
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Illustration
JOURNALIZING MERCHANDISING TRANSACTIONS
Maureen Cruz , who has Wedding Consultancy business, entered into the following
transactions during the month of May 2021:
May 15 -The entity is earning additional revenues by referring consulting
clients to friendly hotels, caterers, etc. Received P10,000 advance
fees for three clients referred.
19 -Coordinated and finalized elaborate bridal arrangements for three
couples and billed fees of P12,000 per couple.
25 -Cruz withdrew P14,000 for personal expenses
27 -Paid salaries, P7,200 55
Illustration
JOURNALIZING MERCHANDISING TRANSACTIONS
Maureen Cruz , who has Wedding Consultancy business, entered into the following
transactions during the month of May 2021:
May 30 -Received P24,000 from two clients for services billed last May 19
31 -Settled the electricity bill of P3,000 for the month
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👍
Thanks!
Any questions?
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POSTING
AND
TRIAL BALANCE
LEARNING OBJECTIVES
▫ Classify accounts either assets, liabilities, equity,
income and expenses- affected by transaction
▫ Analyze transactions into debit and credit parts
▫ Prepare a trial balance
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HELLO!
Do you have any question for the Journalizing of
Entries?
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POSTING TO
THE LEDGER
2ND STEP OF THE ACCOUNTING
CYCLE
Posting means updating the ledger accounts
due to the effects of the transactions recorded in
the journal. Whenever the transaction is
recorded in the journal, the entries would be
transferred to another book called “Ledger: for
final recording
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Procedures in Posting Journal Entries to the Ledger
(Using our illustrative problem, the CRUZ WEDDING CONSULTANCY, the following are the
steps in posting the journal entries to the General Ledger)
1st step As the first account in the General Journal entry is “Cash in Bank”, turn the
ledger to the page where the account “Cash in Bank” is located
2nd step In the ledger of the account “Cash in Bank” enter in the date column at the
left side (debit) of the said ledger the date when transaction occurred as
shown in the journal”
3rd step In the “particular: column of the ledger, state briefly the nature of the
transaction, how cash existed in the record
5th step Enter in the debit money column of the ledger “Cash in Bank” the amount
and the same procedure is followed in posting the next the account and
subsequent journal entries
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TRIAL
BALANCE
3RD STEP OF THE ACCOUNTING
CYCLE
TRIAL BALANCE- is a listing of all the asset, liability, capital,
revenue and expense account balances at one point of time. All
debits are summed, as are all credits, to ensure that total debits
equal total credits.
Purpose of Trial Balance:
▫ It indicates if the ledger is in balance by showing whether the
total accounts with debit balances equals the total accounts with
credit balances.
▫ It aids in locating error
▫ It assists in the preparation of financial statements
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Procedures in Preparing Trial Balance
1st step See to it that summing up of account balances in the ledger is done properly
2nd step List down all accounts in the General Ledger with “open balances” following the
sequence of filling the accounts in the ledger and simultaneously write down the
accounts’ amount balance in the debit or credit column of the trial balance
depending on what account balance they may have. No indentions are made in
listing the account titles
3rd step After listing the last account title, draw a single line across the two amount
columns and foot the debit and credit money columns. This single line drawn is
called “single rule”
4th step As the debit and credit totals are equal, draw a double line under the totals of
both columns. The double line drawn is called “double rule” which signifies that
the trial balance is already “ in balance”
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Double rule
It signifies that debit
and credit are equal
Note: A trial balance has the following headings
a. name of the business or proprietor
b. title of the report
c. period covered by the report
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THANKS!
Any questions?
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