Accounting 1

Lesson 1: Introduction to Accounting Business Organizations

Accounting- the art of recording, classifying, I. According to Ownership
summarizing in a significant manner & in terms
Single/Sole Proprietorship Partnership
of money, transactions & events, which are in
part, at least, of financial character & Corporation- organized Cooperatives
interpreting the results thereof. (American by the operation of law.
Institute of Certified Public Accountants)
History
II. Nature of Business
• Merchants used recording A. Service concern
B. Merchandising- buying & selling
• Luca Pacioli-father of Accounting, a
goods
Franciscan friar on 15th century.
C. Manufacturing
• Book- Summa de Arithmetica, a
modern way of recording business Business as an Accounting Equity
transactions.
• Board of accountancy- the body The business is distinct &
authorized by law to make rules & separate from its owners
regulations involving CPA profession.
Users of Accounting Generally Accepted Accounting
Principles
Owner Managemen Investors 1. Relevant
t 2. Reliable
Creditor Employees Governmen 3. Comparable
s t
Accounting Period- The length of
time that covers the business
Four Functions of Accounting transaction being reported upon. It can
1. Recording or Bookkeeping- business be monthly, quarterly, semi-annually, or
transactions are recorded systematically & annually.
chronologically. Calendar year- a period of twelve
2 Kinds: months starting January 1 to December
31.
a.Single-entry bookkeeping- shows only the
debit or credit. Fiscal Year- any succession of twelve
months starting with any month except
b.Double-entry bookkeeping- has debit & January and December.
credit.
5 Major Accounts
2. Classifying- sorted as assets, liabilities,
capital, revenue, & expense accounts. 1 Assets 3. Income 5. Expenses

3. Summarizing- are summarize thru financial 2. Liabilities 4. Capital

statements.
4. Interpreting- to learn if the business gains
or not.
 6. Intangible asset- ex. Goodwill, patents,
etc.
Terminologies
(100) Assets- are property or rights (200) Liabilities- obligation of the owner.
owned by the business.
1. Accounts payable- an obligation that arise
Types of Assets from the purchase of goods or services on
Current assets- cash & other assets that account.
2. Notes payable- payable within a year. An
are easily converted into cash.
obligation bearing a promissory note.
1. Property & Equipment- use in the 3. Interest payable- an interest due.
operation 4. Taxes payable
2. Cash on hand- coins, currencies, 5. Salaries payable- unpaid salary.
check, & other equivalent. Long-term liabilities- an obligation that is
3. Cash in bank- money deposited in the payable beyond one year.
bank.
4. Notes receivable- claims of the 1. Mortgage payable- an obligation secured
business from anyone evidenced by a on real estate.
note. (300) Capital/ Owner’s Equity- Refers to the
5. Marketable securities- example: stocks vested interest of the owner in the business.
6. Interest receivable- interest earned The difference between the assets & liabilities.
from customers
7. Accrued interest income- interest Owner’s drawing- the cash withdrawal made
income that has been passed due. by the owner
8. Accounts receivable- sales rendered
Income & expense summary- a temporary
on account.
account opened at the end of the accounting
9. Estimated uncollectible account- also
period to absorb the income & expense
called allowance for bad debts.
account.
10. Advances- advance payment to
employees. (400) Income- earnings of the business.
11. Merchandise Inventory- goods unsold
1. Service income- derived from service
at the end of the accounting period.
rendered.
12. Prepaid expenses- also called unused
supplies. An expenses paid in advance. 2. Fees- professional fees
13. Tools- ex. Pliers, hammer, etc.
3. Legal fee- from legal services
Non-Current Assets/Fixed Assets- long-
4. Sales- derived from the sales of goods.
term investments that are not easily
converted to cash. 5. Commission income
1. land- space owned by the business 6. Other income
2. Building
3. Furniture & fixtures- ex. Tables, (500) Expenses- Expenditures in a business
chairs, cabinets operation
4. Delivery equipment- ex. Van, truck,
1. Taxes & licenses- payment to government
motor cycle, etc.
for business operations. Ex. Mayor’s permit
5. Accumulated depreciation- a contra-
2. Salaries expense- the cost of service
asset account that is deductible from a
rendered by the employees.
particular fixed-asset.
3. Supplies expense- the cost of office items.
4. Delivery expense- cost of transportation cash P100 000 =0 + Gil, capital
5. Bad debts- a portion of accounts receivable P100 000
that cannot be collected.
6. Depreciation expense- the cost of the Oct. 3- He purchased repair supplies worth
fixed-asset w/c has been charged to income P25, 000 on credit from De Mesa Trading.
during the period. Increase in assets = increase in liabilities
7. Insurance expense- the insurance premium A = L + P
paid by the business. Repair supplies P25 000 = A/P- Mesa
8. Rent expense- the space occupied by the Trading P25 000 + 0
business
9. Interest Expense- the amount charged for Oct. 5 Billed M. Manzano for repair work done
the use of money. on his automobile, P12 000.
10. Advertising expense- promotional Increase in assets = increase in
expenses in selling the products. proprietorship
11. Utilities expense- the cost of light & water A = L + P
used in the business. A/R- Manzano P12 000= 0 + Gil
12. Repairs & maintenance capital P12 000
13. Salesmen salary
14. Cost of sales or cost of goods sold- the Oct. 7- He bought table & chairs for the
purchase price business, P6 000 cash.
Increase in one asset = decrease in one
Transactions- data recorded in the accounting asset
book. The economic activities of the firm. A = L + P
F/F P6000 = 0 + 0
Example: Mr. Tan invested cash P100 000 for Cash (P6000)
laundry shop business.
Oct. 12- Issued a promissory note to De Mesa
Lesson 2: Accounting Equation Trading to apply on his account.
Decrease in one liability=Increase in one
Steps in the Accounting Cycle liability
A = L + P
1. Journalizing 0 = A/P-De Mesa Trading (P25
2. Posting 000) Notes payable P25 000 + 0
3. Preparing the trial Balance
4. Preparing the Adjusting entries Oct. 15- Paid the salary of the assistant, P1
5. Preparing the adjusted trial balance 900.
6. Preparing the financial statements Decrease in assets= decrease in
7. Closing entries proprietorship
8. Post-closing trial balance A = L + P
9. Reversing entries Cash (P1 900) = 0 + Gil capital
(P1 900)
Accounting Equation
Oct. 20- Paid the note issued
Assets= Liabilities + Capital to De Mesa Trading
Decrease in asset= decrease in lia.
Transactions A = L + P
Oct. 1- Mr. Gil opened a motor repair shop & Cash (P25 000) = N/P- Mesa (P25 000)
invested P100, 000 cash. +0
Increase in assets = increase in
proprietorship Oct. 29- Mr. Gil withdrew P15 000 from the
A =L + P business for his personal use
Decrease in asset= decrease in lia.
 A = L + P Dat Acc.title/ PR Debi Credi
Cash (P15 000) = 0 + Gil capital e Explanatio (Post t t
(P15 000) n Reference
An Account- use to summarize the increases )
& decreases in the asset, liability, & (Posting)
proprietorship. (Acc.title)
Acc. No. : #
Rules of Debit & Credit Date Explanation F(Folio D C Balance
Page)
Debit (Asset, Expenses, Withrawal)
1. Increase assets (Trial Balance)
2. Decrease liabilities Accounts Debit Credit
3. Decrease proprietorship due to;
a. Withdrawal Process of Creating Transaction
b. Increase in expenses & losses
c. Decrease in income 1. Chart of Accounts
2. General Journal
Credit (Liabilities, Capital, Income) 3. Posting
1. Decrease assets 4. Trial Balance
2. Increase liabilities 5. Financial Statements
3. Increase proprietorship due to; 6. Statement of Cashflows
a. Investment
b. Decrease in expense & losses *Things to remember:
c. Increase in income - Never forget indentions when listing credit
title
Chart of Accounts- a list of account titles - observe double rule when highlighting the
used by the business. balance and total
Journalizing- the first step in the accounting
cycle.
Journal- a book of accounts wherein business Lesson 4: Financial Statements
transactions are recorded for the first time. Statement of Comprehensive Income-
Also called the “Book of original entry”. statement that reports the result of operation of
General Journal- the simplest form of journal the business for one accounting period.
wherein the two-column form is used.
Net Income Net Loss
Lesson 3: Trial Balance Positive results from Negative results from
Trial Balance- a list of accounts w/ open the performance of the performance of
balances in the general ledger. the business the business
operation operation
2 Types of Trial Balance
1. Trial balance of balances- accounts
with open balances either in debit or
credit balance.
2. Trial Balance of totals- both have
entries of cash in debit and credit.

Format: (Chart of Accounts)

Asse Lia. Cap. Income Expenses
t 100 200 300 400 500

(General Journal)
(P 12,000) if Net Loss ability of the company to generate cash
in the future (for expansion). Also for
long term liability (e.g. Mortgage
Payable)
Negative Cash Flow- a decrease in
Statement of Changes in Equity cash.
3. Finacing Activity- cash transactions
with equity owners & creditiors
(determines the need of loan.
Ex.:
 Cash received from issuing common
shares/ capital contributions from
owners.
*Less: Net Loss- if SCI results to net loss  Cash Received from loans
Statement of Financial Position  Cash Withrawals
 Cash payment for principal of long-term
loan
Example of Cash Flow:

2 types of format in SFP

 Account Format (ex. Above)
 Report Format

Lesson 5: Statement of Cash Flow

1. Operating Activities- Derived from the
main revenue. The ability of the
company to generate cash from its
operations. Positive cash flow implies
that there is excess cash that can be
used to purchase long-term assets, pay
debts or dividends to owners.
2. Investing Activities- For acquisition of
fixed-assets, & cash proceeds from the
disposal of non-current assets. The
 Prepaid Expense- the asset paid in advance
but not yet consumed.

Lesson 6: Adjusting Entries

Asset Method
Accrued Income- an income that is
already earned but not yet received. Ex. On March 15, 2016 Smith Agency
purchased office supplies P100 000. At the end
1. Accounts Receivable
of the year record shows that 25% worth of
2. Rent Receivable
supplies have been used.
3. Interest Receivable
4. Commission Receivable Explanation Debit Credit
Office Supplies P 100,000
Ex. A company is authorized to sell products
Cash P 100,000
w/ a 12% commission. Sales made in purchased of
December total P100 000 & the company has prepaid office
not received yet its commission. supplies.
Explanation Debit Credit Adjusting Entry
Commission P 12,000 Explanation Debit Credit
Receivable Office supplies P 25,000
Commission P 12,000 expense
Income Office supplies P 25,000
Recognition of adjustment to
accrued prepaid
commission supplies

Accrued Expense Expense Method

- An expense that is already incurred but Explanation Debit Credit
not yet paid. Office supply P 25,000
1. Commission Payable Office supplies P 25,000
2. Rent Payable expense
3. Salaries and Wages adjustment to
4. Taxes and license supplies
5. Utilities expense
6. Interest
Ex. Munich Co. has an outstanding loan w/ Unearned Income- Refers to cash that is
Swiss Bank worth P1M. An interest of P20 000 received in advance but not yet earned. Ex. an
from the date of the loan until Dec. 31 has not advance deposit for a birthday party in a
yet been recorded. restaurant.

Explanation Debit Credit LIABILITY METHOD

Interest Expense P 20,000 Ex. Oct. 1, 2015 Maslow Co. received from a
Interest Payable P 20,000 tenant an advance rent payment of P200 000
Recognition of representing 10 months rent.
accrued interest
 Explanation Debit Credit Depreciation= Cost- scrap value
Cash P 200,000
Unearned Rent P 200,000 Estimated Useful life
Unearned Rent

Adjusting Entry
Dec. 31, 2015 Unearned rent P60 000 Scrap value/salvage value/residual value

Rent income P60 000 the estimated selling price of the asset at the
end of its useful life.
adjustment to advance rent
Ex. if the asset is purchased on August 15 w/ a
(200 000/10 mos=20 000x 3 mos) cost of P50 000, no scrap value, EUL is 5
Oct 31, 2015 Unearned rent P20,000 years.

Rent income 20,000 (50 000/5yrs=10 000 x 4.5/12=P3750)

Income Method Depreciation rate= 100%

Cash P200,000 Estimated useful life

Unearned rent income P200,000 =1.00

Adjusting Entry 5

Dec. 31 Unearned rent P60,000 = 20%

rent income Ex.:Berry Co. purchased an office equipment
P60,000 on Jan. 1, 2019 for P105 000 w/ a salvage
adjustment to rent income value of P5000 at the end of its useful life of 5
years.
Accruals- the accrued income & accrued
expense transactions. Dep.= P105 000-5000

Deferrals- the prepaid expense & unearned 5yrs

income transactions. = P20 000
Depreciation Dec.31 Depreciation-office equipment P20,000
the systematic allocation of the depreciable (C)Accumulated depreciation P20000
cost of an asset over its useful life. the
decrease in value of an asset. depreciation for the year

2 Kinds of Depreciation Doubtful Accounts Expense

1. Physical depreciation- caused by wear & also known as past due accounts, an
tear, forces of nature, etc. uncollected accounts at the end of the year.

2. Functional depreciation- caused by an Dec 31 Doubtful accounts P

obsolescense of an asset. Allowance for doubtful accounts P
Straight Line Method
Writing Off of the worthless accounts 9. Merchandise inventory, end- the
receivable (removal of customer accounts unsold goods at the end of the period.
from the books)
10. Purchases- goods or items bought for
Date Allowance for doubtful accounts resale.
Accounts receivable 11. Purchase returns & allowances- the
goods returned after the purchase due
to some defects, wrong specification,
etc.

Recovery of previously written-off accounts 12. Purchase discount- a deduction from

receivable the invoice cost due to prompt payment.

Date Accounts receivable 13. Freight in- the transportation cost of

the goods bought for sale.
Allowance for doubtful accounts
14. Total goods available for sale- the
Lesson 8: Merchandising Terms total cost of the merchandise inventory
Merchandising- One engage in trading the beginning & the net cost of the
goods above cost or at a profit. purchases. (Purchase – purchase
returns & allowances, purchase
Terms discount, & freight in)
1. Sales- refer to gross receipts of the 15. Operating expenses- all expenses
business from the sale of merchandise. incurred in connection w/ the business
2. Sales returns- to designate the return operations.
of goods sold due to defects on the 16. Net income from operation- the
merchandise, wrong specifications, etc. difference between the gross profit on
3. Sales allowance- a reduction in price sales & the operating expenses.
due also to wrong specifications or 17. Other income- the revenues or income
defects on the goods, & others w/o received other than the sale of goods or
returning the goods. merchandise.
4. Sales returns & allowances- to denote 18. Other expenses- expenditures or
either an allowance or a return of goods expenses incurred not in connection w/
sold. the selling operation.
5. Sales discount- a deduction from Lesson 9: Merchandising Activity
invoice cost due to prompt payment
( cash discount) General Journal

6. Net sales- the difference between gross Date Particulars PR Debi Credit
sales, sales returns & allowances, & the (Post t
sales discounts. Reference)
Posting
7. Cost of goods sold/cost of sales- the
price or cost paid for the goods sold Dat Remarks PR Debi Credit
e (Post t
8. Merchandise inventory, beginning- Reference)
goods on hand at the beginning of the
period.
Statement of Comprehensive Income
Or