i-Link College of Science and Technology, Inc.

Fundamentals of ABM 1

MODULE 1 INTRODUCTION TO ACCOUNTING

Module Overview:

It is imperative for a business to keep its records for proper monitoring and evaluating of
transactions. Because of the global need for records and financial information in making
economic decisions, accounting has become a basic need for every business.

This module contains the basic concepts of accounting - its definitions, nature,
functions, and history. It explains the role and importance of accounting to the business.

Module Outline (List of Topics)

Lesson 1 Introduction to Accounting

1.1 Definition of Accounting

1.2 Nature of Accounting
1.3 Functions of Accounting
1.4 History of Accounting

Target Learning Competencies (MELC)

LC 1.1.a The learners define and describe the nature, functions and history of
accounting.

Performance Standard:
The learners cite specific examples in which accounting is used in making
business decisions

LESSON 1: Introduction to Accounting

Lesson Objective:

At the end of the lesson, you will have been able to:

a. define and describe the nature, functions and history of accounting.

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Discussion:

Definition of Accounting

Accounting has been defined in many ways such as the following:

1. 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 decisions. (Accounting Standards Council)

2. Accounting is an art of recording, classifying, and summarizing, in a significant

manner and in terms of money, transactions and events which have at least financial
character, and interpreting the results thereof. (Committee on Accounting
Terminology of the American Institute of Certified Public Accountants)

3. Accounting is the process of identifying, measuring, and communicating economic

information to permit informed judgment and decision by users of the information.
(American Accounting Association)

4. The American Institute of Certified Public Accountants (AICPA) defines accounting

as the 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.

Natures of Accounting

Based on the said definitions, various natures of accounting may be considered. These
include the following:
1. Accounting as the language of business
Accounting is the language of business because it is used to communicate financial
information to interested parties, such as stakeholders, management, government, creditors,
and employees. Through accounting, the users of financial information understand what is
happening in the business.

2. Accounting as a science
Accounting is a science because it involves the systematic process of recording,
summarizing, and communicating financial information to a wide range of users.
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3. Accounting as an art
Accounting is an art because it requires a creative way of recording, classifying, and
summarizing, in a significant manner and in terms of money, transactions and events which
have at least financial character.

4. Accounting as an information system

Accounting is an information system because it is a practice that deals with recording
and summarizing business transaction.

Functions of Accounting in Business

The following are the functions of accounting in business.

1. Recording - Recording is the basic function of accounting. It is not just about

ensuring that transactions with financial character are recorded but recording them
in an orderly manner. Recording is done in a book called general journal.

2. Classifying - Classification deals with the grouping in one account of similar

transactions in the entries found in the journal. Classification is done in a book called
general ledger.

3. Summarizing - Summarizing transforms the classified data into various reports in

an understandable and useful form. This process leads to the preparation of trial
balance and financial statements.

4. Analyzing and Interpreting - After the financial data are recorded, classified, and
summarized, these data are analyzed and interpreted in such a way that they will be
useful for the users in making sound economic decisions.

5. Communicating - Communication is done through preparation of financial reports

that help the users in making meaningful judgements when forming economic
decisions for their organization. Financial reports are the output of the accounting
process.

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History and Development of Accounting

Accounting, as a witness of history, is as old as mankind. It is believed that even during

the creation, God made use of accounting to ensure that plants, animals, human beings, and
other creatures are fully accounted for. During the time of Noah, in the account of the great
flood, it is believed that animals got into the ark in pairs and were fully accounted for. In the
New Testament, two famous collectors were mentioned. They were Matthew, one of the 12
disciples, and Zacchaeus, the one who climbed the sycamore tree to see Jesus.
The timeline of history and development of accounting is presented below. It maps out
general and specific events that contributed to the accounting that we are studying today.

Time
Events
Period
4000 B.C. The income of temples was recorded in lower Mesopotamia. 2500 B.C.
Historical accounting records had been found in ancient civilizations like the
Egyptian, Roman, and Greek Empires as well as ancient Arabia. During that
2500 B.C.
time, accounting records were kept by rulers for taxing and spending on public
works.
The Phoenicians created an alphabet with accounting so that they were not
1000 B.C.
cheated through trades with ancient Egyptians.
Egyptians carried on with accounting records and even invented the first bead
500 B.C and wire
abacus.
The auditing profession was born to double check storehouses as to what
came in and
423 B.C. out the door. The reports that were taken by these accountants were given
orally hence
the name "auditor."
Emperor Wang Mang (45 B.C. to 23 of Xin Dynasty) of China instituted the
10 first known
income tax at a flat rate of 10% of profits.
1200 to In 1300, accountants were mentioned in historical records for the first time in
1493 the Statute of Westminster indicating they are considered important

The first requirement for businesses to keep accounting records spread

across many of the Italian Republics in the 13th century. These records were
mainly taken to keep track of the day to day transactions and credit accounts
with other businesses.

In 1327, early books from the commune of Genoa displayed an early form of
bookkeeping. The oldest double entry books entitled "Massari (Treasury
Officials Ledgers of Commune of Genoa" were written in 1340. In today's
accounting system, this is simplified into the T-account and expanded into the
Ledger.

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In Florence, writing debits over credits accounted for its double-entry

recording. In today’s accounting system, this is similar to preparing journal
entries.

In 1400, the Italian trading period saw sophisticated accounting systems

developed within banking houses. Double-entry bookkeeping was discovered.

During this period, there were two prevailing approaches to reporting. These
were the
Florentine approach (journal entries) which was introduced by Amatino
Manucci and the Venetian approach (ledger postings) which was introduced
by Andrea Bargarigo.
Luca Pacioli, the father of modern accounting, wrote his famous paper
"Summa de Arithmetica, Geometria, Proportioni et Proportionalita" The
treatise that he wrote was mainly a study that Pacioli performed on the
common practices of merchants in Venice, Florence and Milan. He revealed
1494 that several merchants kept books of debits which meant "he owes” as well as
credits which meant "he trusts”. With this early double entry accounting
system merchants were able to maintain records so that they could improve
the efficiency of their businesses. With these records came the primitive
income and balance sheet statements.
As the time progressed, large and smell innovations were added to the double
entry records. For example, the East India Company developed invested
capital and dividend distribution during the 17th century. This also created the
need for a change in financial accounting and managerial accounting. The first
1500 to
for presentation to gain investors and the next was used so that the business
1700
could be run as efficiently as possible.

Jacques Savary, in his Commercial Code of France (1673), used historical

cost as the basis of valuation
During the Industrial Revolution, accounting really took off as industrial
companies sought out to gain financing and maintain efficiency through
operations. Several of the double entry accounting methods was truly
developed in this area as there was a focus on business as never before.
Shortly after the first accounting organization was developed in New York in
1700 to the year 1887.
1900
Napoleon Bonaparte, in his Commercial Code (1804) and its supplement
Code of Commerce of France (1807), asserted that assets must be carried at
their market value and not based on historical cost.

Eugen Schmalenbach utilized price level accounting as the basis of valuation.

1913 The first income tax law in the Philippines was enacted.
Accounting in the 1920s became important to reduce the amount of fraud and
scandals that were performed in businesses, particularly in the United States
1920 to of America (USA).
1940
In 1923, the first Accountancy Law (Republic Act No. 3105) in the Philippines
was passed
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Globalization of business resulted in diverse accounting practice around the

world. Thus, the need for harmonization.
1940 to
In 1967, the Accountancy law in the Philippines was revised and passed
1970
under Republic Act No. 5166. This law standardized the accounting education
and regulated the practice of accountancy. This law also spelled out the
examination process of CPA registration.
The International Accounting Standard Committee IASC) was created through
an agreement made by professional accountancy bodies from Australia,
Canada, France Germany, Japan, Mexico, the Netherlands, the United
Kingdom and Ireland, and the USA, Headquartered in London, United
1973 Kingdom, the committee is an independent private sector body, with the
objective of achieving uniformity in the accounting principles which are used
by business and other organizations for financial reporting around the world.
The pronouncements were designated as International Accounting Standards
(IAS).
In the Philippines, the Accountancy law was revised and passed under
1975
Presidential Decree No. 692
In 1981, the Philippine Institute of Certified Public Accountants (PICPAI
created the Accounting Standards Council (ASC) lo establish and improve
accounting standards generally accepted in the Philippines.
1981 –
1996
Until 1996, most if not all of Philippine accounting standards, called Statement
of Financial Accounting Standards (SFAS), were based on accounting
standards in the USA.
The Philippines started transitioning from applying American accounting
1997
standards to applying IAS.
The International Accounting Standards Board (ASB) succeeded the IASC. It
has still adopted the body of standards issued by the ASC but moving forward,
2001
all standards were designated as International Financial Reporting Standards
(IFRS).
The European Union (EU) required all EU listed companies to adopt IFRS
2002
starting 2005.
In the Philippines, the Professional Regulation Commission (PRC) created the
Financial Reporting Standard Council (FRSC). This replaced the ASC and
was created to assist the Board of Accountancy (BOA) to carry out its powers
and functions provided under Republic Act No. 9298, the Philippine
Accountancy Act of 2004. Complimenting IAS and IFRS were the Philippine
Accounting Standards (PAS) and Philippine Financial Reporting Standards
2004
(PFRS)

Republic Act No. 9298, an oct regulating the practice of Accountancy in the
Philippines, repealing for the purpose Presidential Decree No. 692, otherwise
known as the Revised Accountancy Law, was also passed and enacted in this
year.
2005 to
The Philippines become fully compliant with IFRS.
present

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i-Link College of Science and Technology, Inc. Fundamentals of ABM 1

Assessment 1.1a True or False. Write TRUE if the statement is correct and FALSE if the
statement is wrong.

1. The ability to turn a need into an opportunity to undertake a business is consistent with
the concept of environmental scanning.
2. The cash-in versus cash out technique of measuring business performance will always
result in the correct net profit.
3. A complete set of financial statements has five basic components.
4. The financial statements are outputs of the accounting process.
5. The objective of financial statement is to provide information about the financial position,
financial performance, and cash flows of a business that is useful to specific users so
that they can make sound decisions.
6. Financial statements provide information about a business' assets, liabilities, equity,
income and expenses, cash flows, and contributions by and contributions to owners in
their capacity as owners.
7. Business transactions are limited to interactions being engaged by businesses with
customers and suppliers.
8. There is only one acceptable definition of accounting.
9. Accounting is only applicable to businesses rendering services because accounting is a
service activity.
10. Because accounting is systematic, definite techniques and their application require
particular skill and expertise.

Assessment 1.1b Fill in the blanks. Write the term (word or phrase) that is being described or
completes the thought of each statement

1. The _______________ dictates that the business owes its stakeholders fair information
on how the business performed for and as of a particular period.
2. ________________ are the means by which a business communicates to interested
user’s significant information about its economic activities.
3. According to AAA, accounting is the _____________ of identifying, measuring, and
communicating economic information to permit informed judgments and decisions by
users of the information.
4. According to AICPA, accounting is the _____________ of recording, classifying, and
summarizing in a significant manner and in terms of money, transactions, and events
which are in part of least of financial character, and interpreting results thereof.
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i-Link College of Science and Technology, Inc. Fundamentals of ABM 1

5. The definition provided by the ASC requires that business trans actions have to be
measured in terms of ______________.
6. A/An ________________ is a set of interrelated components that work together to
achieve a common purpose.
7. The three basic functions of accounting in business is supportive of the fact that
accounting is being regarded as the ________________.
8. Unlike accounting _________________ is confined with the recording of monetary
transactions.
9. Because of the enormous impact of his work in the field of accounting,
_______________ is being regarded as the "Father of Modern Accounting”.
10. ________________ are the interactions between business and other stakeholders like
customers and suppliers,

Performance Check 1.1a

Visit any Philippine-based company website and download its most recent annual
report. From the annual report, find and describe the basic components of its financial
statements.

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i-Link College of Science and Technology, Inc. Fundamentals of ABM 1

MODULE 2. BRANCHES OF ACCOUNTING

Module Overview:

The world recognizes the importance of accountants in nation building and development
because as long as there are businesses, there will always be a need for financial information.
Financial information is used by different users for economic decision-making processes. For
this reason, accounting is divided according to the type of information it gives to the users.

This module explains and differentiate the different branches of accounting and the type
of services they render.

Module Outline (List of Topics)

Lesson 1 Branches of Accounting

1.1 Branches of Accounting

1.2 Types of Services rendered by each Branch of Accounting

Target Learning Competencies (MELC)

LC 1.1.a The learners differentiate the branches of accounting and explain the
type of services they render.

Performance Standard:
The learners make a list of business within the community on the types of accounting
services they require.
The learners solve exercises in the identification of the branches of accounting
described through the types of services rendered.

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i-Link College of Science and Technology, Inc. Fundamentals of ABM 1

LESSON 1: Branches of Accounting

Lesson Objective:

At the end of the lesson, you will have been able to:

a. differentiate the branches of accounting.

Discussion:

In the Philippines, the Philippine Institute of Certified Public Accountants (PICPA) is an

association of Certified Public Accountants engaged in the various fields of accounting. PICPA
classifies these fields or branches of accounting into four main sectors, namely: public
accounting (public practice), private accounting (commerce and industry), government
accounting, and accounting education. This chapter first discusses these main areas of
accounting and finishes off with some specialized areas in accounting.

PUBLIC ACCOUNTING

The several branches of accounting are grouped into specialized areas such as: (1)
public accounting; (2) private accounting; (3) government accounting; and (4) accounting
education. In public accounting, the accountant performs or offers to perform any activity that
will result to the issuance of an attest report that is in accordance with professional standards.
Such activities include consulting services, personal financial planning services, the
preparation of tax returns, and advice on tax matters for a fee. Usually, a public accountant
works in a firm offering its services to various clients. Certified Public Accountants (CPAs) refer
to those who had passed the licensure examination for accountants.
In the Philippines, some known public accounting firms are SyCip Gorres Velayo & Co.,
Isla Lipana & Co., Reyes Tacandong & Co., Punongbayan & Araullo, Navarro Amper & Co.,
R.G. Manabat & Co., and BDO Alba Romeo & Co., CPAs, among others. Examples of public
accounting services are as follows:

External Auditing

In external auditing, public accountants examine the financial statements in order to

express an opinion on whether statements have been fairly presented or not. The auditor
critically examines the accounting records of the client to check if business transactions have
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been properly recorded. The auditor then issues an independent audit report of his or her
findings.

Tax Preparation and Planning Service

Some Certified Public Accountants (CPAs) also offer tax services wherein they advise
and help their clients in tax planning and preparing tax returns. In this branch of public
accounting, the accountant is a tax specialist. He or she is expected to be knowledgeable
about revenue regulations and tax laws. He or she also represents the client in any tax-related
case filed by the Bureau of Internal Revenue (BIR).

Management Advisory Services

Management consulting is an area in public accounting that involves financial planning

and control, and the development of accounting and computer systems. The accountant
advises management on matters such as the installation of an accounting system, finance,
budgeting, business processes, introduction of new products, and other business activities.

PRIVATE ACCOUNTING

Private accounting involves setting up systems of recording business transactions that

are aggregated into financial statements. It includes the development and interpretation of
accounting information intended to assist management in operating the business.
A private accountant is a salaried employee who deals with the company's day-to-day
accounting needs. He/she is trained in the processing of accounting transactions such as
billings and account payables. His or her knowledge may be limited to the areas of accounting
for which they are responsible.
The branches of accounting under private accounting are as follows:

Financial Accounting

This branch of private accounting provides economic and financial information for
investors, creditors, and other external users. It uses a system of reporting designed to meet
the information needs of external users. Financial accounting is governed by an established
body of standards and principles. It focuses on the recording and classifying of business
transactions while applying generally accepted accounting principles (GAAP).

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Financial accounting ends in the preparation and presentation of general purpose

financial statements. These documents should show the business financial position, operating
results, and cash activities. It is also best to include supporting explanatory notes to these
financial statements to further explain its report or findings.
Information from this branch of accounting helps investors and creditors in deciding
where to place their scarce resources. Such decisions are crucial since it determines which
companies and industries will receive the financial resources needed for economic growth.

Cost Accounting

Cost accounting focuses on accumulating manufacturing costs for financial reporting

and decision-making purposes. It covers the reporting of financial information relevant to
manufacturing operations. It provides management with the necessary tools and information
for planning and controlling activities.
The primary role of a cost accountant is to determine the inventory cost for financial
reporting purposes.

Budgeting

Budgeting provides a detailed collection and reporting of the expenditures and revenues
involved in a business or company operations. This branch of private accounting tracks the
financial details of the firm, including the money taken in and the money spent by the company
and the staff. It also assists the management in quantifying goals concerning revenue, cost of
sales or services, and operating expenses.

Accounting Information System

Accounting information system collects and processes transaction data. It also

disseminates information to interested parties. It involves the designing of both manual and
computerized data processing systems.

Tax Accounting

It deals with the preparation of various tax returns and doing tax planning for the
business. This is similar to the tax services done in public accounting.

Internal Auditing

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i-Link College of Science and Technology, Inc. Fundamentals of ABM 1

This branch of private accounting reviews the business operations to check if they are

complying with management policies. It also evaluates the efficiency of business operations.

Normally, an internal auditor is a hired employee of a company.

GOVERNMENT ACCOUNTING

Government accounting is a system used in government offices to record and report

financial transactions. It is the systematic process of collecting, recording, classifying,
summarizing, and interpreting the financial transactions relating to the revenues and
expenditures of government offices. Government accounting reveals how public funds have
been generated and utilized. It is employed in both national and local governments.
CPAs are needed in all levels of government. He or she could be a provincial
accountant, a Commission on Audit (COA) auditor to various government agencies, a BIR
examiner to local and national businesses, a budget officer of the Department of Budget and
Management, or a bank examiner of Bangko Sentral ng Pilipinas.

ACCOUNTING EDUCATION

This branch of accounting is responsible for training future accountants. It engages in

teaching accounting, financial management, taxation, and other related business course. As
per Commission on Higher Education (CHED) Memorandum Order (CMO) No. 3, Series 2007,
a CPA in accounting education should possess the educational qualifications, professional
experience, classroom teaching ability, computer literacy, scholarly research productivity, and
other attributes that are essential for the successful conduct of a professional accounting
program.
CPAs are encouraged to be part of the academe and become an integral force in
inspiring learners pursue a career in accounting. Accounting educators could be teachers,
administrators, or researchers.

Accounting Research

Accounting research is broader in scope and wider in coverage. It encompasses

research interests in the areas of financial accounting management accounting, auditing and
assurance, and taxation, among others.

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CPAs in Specialized Areas

1. Forensic Accounting. Forensic accountants provide the detective work needed to

investigate and examine evidence of white-collar financial crimes such as stealing and
fraud. They often act as expert witnesses in legal proceedings and prepare evidence to
be presented in court.

2. Information Technology Services. Businesses often seek individuals who can design
and implement customized software systems. CPAs who possess strong skills in
information technology can work with e-commerce ventures and consult with others to
determine which decisions are the most financially and technologically sound for a
company.

3. Environmental Accounting. CPAs involved in environmental accounting determine

how companies can be both profitable and environmentally- responsible. They do
environmental compliance audits and set up preventative systems to ensure compliance
and avoid future environmental-related claims or disputes.

4. International Accounting. International accountants are knowledgeable in international

trade rules and regulations, international mergers, government regulations, tax laws,
and overseas transactions. CPAs who work in this area often travel abroad and can
speak and understand different languages.

Assessment 2.1a Identification. Identify what branch of accounting is being referred to.

Choose from the following items below.

A. Public Accounting F. Tax Accounting

B. Private Accounting G. Cost Accounting
C. Financial Accounting H. Budgeting
D. Auditing I. Government Accounting
E. Management Advisory Services J. Forensic Accounting

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1. Preparation of the overall plan by evaluating the cost of services and the types of

company operations earning the most profits.

2. Recording daily transactions and preparing financial statements and related information.

3. Preparing tax returns and tax planning for the business.

4. Determining the cost of producing specific products.

5. Examining financial statements in order to express an opinion as to the fairness of

presentation.

6. Utilizing accounting, auditing, and investigative skills to conduct an examination into a

company's financial statements.

7. Performing any engagement that will result in the issuance of an attest report that is in

accordance with professional standards.

8. Processing of company's day-to-day accounting needs.

9. Consulting services performed by Certified Public Accountants (CPAs) firms to improve

client efficiency and effectiveness.

10. Accounting system employed in national and local government.

Assessment 2.1b True or False. Write TRUE if the statement is correct and FALSE if the

statement is incorrect.

1. External Auditing is the review of the company's operations to determine its adherence

to the policies of the management.

2. The main branches of public accounting include Cost Accounting, External Auditing, and

Tax Services..

3. People who prepare financial statements are called Financial Accountants

4. Tax Accounting covers the filing of appropriate returns with the authorized governmental

and non-governmental agencies.

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5. The Cost Accountant is most concerned with the interpretation of financial statements

for decision making.

6. A Public Accountant is a hired employee of the government.

7. A Private Accountant examines financial statement prepared by Public Accountant.

8. Accounting Information System designs both manual and computerized data processing

systems.

9. Environmental Accountants look into how companies can be both profitable and

environmentally responsible.

10. An Accountant who engages in international accounting could offer expert service to the

general public.

11. Cost Accounting involves the recording of how much the product was produced.

12. The Branch of Accounting that is concerned with the preparation of financial statements

is management accounting.

13. Auditing Deals with the professional services offered in public accounting

14. Taxation accounting covers the filing of the appropriate tax with the authorized

government agencies.

15. A faculty teaching accounting must be a certified public accountant.

Performance Check 2.1a

1. Explain the four areas of accounting.

2. Explain the differences between public accounting and private accounting

3. Differentiate the branches of accounting in public and private practice.

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MODULE 3. USERS OF ACCOUNTING

Module Overview:

Accounting information or financial information has a great impact on the way the users
make economic decisions. The users of financial information are divided into primary users
and secondary users. They depend on the figures and disclosures presented in the financial
statements. This is why there are guidelines the accountants follow in preparing financial
information that will be useful for the users.

This module explains the different users of financial information and the specific
information they needed.

Module Outline (list of topics)

Lesson 1 Users of Financial Information

1.1 Users of Financial Information

1.2 Types of Information needed by the users of information

Target Learning Competencies (MELC)

LC 1.1.a The learners identify the internal and external users of information and
the type of information they need in the business.

Performance Standard:
The learners solve exercises and problems on the identification of users of information,
types of decisions to be made, and type of information needed by the users.
The learners cite users of information and identify whether they are external or internal
users.

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LESSON 1: Users of Accounting Information

Lesson Objectives:

At the end of the lesson, you will have been able to:

a. identify the external and internal users of information and give examples; and
b. identify the type of information needed by each group of users and the type of
decisions they make.

Discussion:

ACCOUNTING INFORMATION

The accounting information is the output or end product of the accounting cycle known
as financial reports, which may vary depending on the needs of the users. It is also referred to
as financial information. The financial information is classified into private information and
public information. Private information refers to managerial accounting which provides
information to internal users. This includes cost-profit-volume relationships, efficiency and
productivity, planning and control, pricing decisions, capital budgeting, and similar matters.
This information is not generally disseminated outside the company. Public information refers
to financial accounting which provides and disseminates information to external users. This
includes the periodic report of the company's financial position and the results of operations
through financial statements.
Financial statements are reports about an entity's financial position, financial results of
activities, and cash flows prepared by the management. It is a standard practice for
businesses to prepare financial statements that strictly adhere to the standards, guidelines,
rules, and principles of Generally Accepted Accounting Principles (GAAP) and Conceptual
Framework for Financial Reporting, for consistent and comparable reporting across
international borders. Financial statements are the means by which the information,
accumulated and processed in financial accounting, is communicated to users on a timely
basis.

Objective of the General-Purpose Financial Report

The objective the general-purpose financial report is to provide financial information

about a reporting entity that is useful to existing and potential investors, lenders, and other
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creditors in making decisions about providing resources to the same reporting entity. Those
decisions involve buying, selling or holding equity and debt instruments, and providing or
settling loans and other forms of credit.
The existing and potential investors, lenders, and other creditors cannot generally
require reporting entities or companies to provide information directly to them and must rely on
general-purpose financial reports for much of the financial information they need.
Consequently, they are the primary users to whom general-purpose financial reports are
directed.

USERS OF FINANCIAL INFORMATION

Accounting communicates financial information to decision makers. Different decision

makers are users of these accounting information. Users of accounting information are
collectively referred to as stakeholders. These stakeholders can be classified as internal and
external users.

Internal Users

Internal users are those who make decisions on behalf of the organization. They
include:
1. Managers/management - they plan, organize and run a business.
a. Top-level management - Chief Executive Officer (CEO), Chief Financial Officer
(CFO), and Chief Operating Officer (COO), among others. They use the information
to oversee the performance of the whole organization and set its strategic direction.
b. Middle-level management - Department heads, branch managers, and junior
executives, among others. They ensure that their units' performances are aligned
with the organization's objectives.
c. Lower-level management - supervisors and team leaders. They oversee the day-to-
day operations and direct employees in the performance of tasks.

2. Employees/labor unions - they assess the company's profitability and stability and
their consequence on future salary and job security.

3. Owners - they provide the capital to the business. Owners need these accounting
information to help them decide whether they should withdraw or increase their
investments. They are interested to know the returns on their investment.
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External Users

The external users of financial reports are those who make their decisions form of
management reports based on the company's financial information. They are the following:

1. Potential and existing investors - they need information to help them decide whether
they should invest or not in the business. Through past performances or operating
results of the company, they would want to know potential returns on their investment.

2. Creditors and potential creditors - they assess the credit worthiness and the
capability of the business to pay its obligation including the related interests on maturity
date.

3. Customers - they assess the financial position of their suppliers which for them to
maintain a stable source of supply in the long term. They are interested to know
whether the business will continue to honor its product warranties.

4. Suppliers – they use the financial statements of their customers to determine whether
the debts owed to them will be paid when due or whether the customer has enough
funds or resources to pay the goods to be delivered or the services to be rendered.

5. Tax authorities – they use financial reports to determine the credibility of the tax
returns filed on behalf of the company. They are interested to know if the business paid
the correct amount of taxes.

6. Regulatory bodies - they want to ensure that the company's disclosure of accounting
information is in accordance with the rules and regulations set in order to protect the
interest of the stakeholders who rely on such information. Examples of these regulatory
bodies are the Securities and Exchange Commission (SEC) and the Bangko Sentral ng
Pilipinas (BSP).

7. Public - they use the financial information to know how the business affects the
economy possible prospects for employment, and/or for educational and research
purposes.

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Assessment 3.1a Internal vs. External Users

The following are users of financial statements. Identify if the users mentioned below is
external or internal.
1. Customers
2. Bureau of Internal Revenue
3. Labor unions
4. Factory manager
5. Vice-president of Finance
6. Securities and Exchange Commission
7. Investors
8. Suppliers
9. Factory workers
10. A bank company

Assessment 3.1b Internal vs. External Users

The following questions could be asked either by an external or internal user. Identify
each of the questions as being more likely to be asked by an internal user or an external user.

1. What price should we set for our product?

2. Did the company earn a satisfactory income?
3. Should we hire more employees?
4. How does the company's profitability compared to other companies
5. What does it cost us to manufacture each unit produced
6. Which product should we emphasize?
7. Will the company be able to provide a return to its stakeholders?

Assessment 3.1c True or False. Write TRUE if the statement is correct or FALSE if the
statement is incorrect.
1. Potential investors are interested in financial information that will help them know the
ability of the entity to pay dividends.
2. The financial statements provide all the needed information by decision makers.

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3. The financial statements assist the investors decide whether to sell or hold their
investment in the entity.
4. The shareholders or owners, management, and the company employees are external
users with indirect interest in the business.
5. Internal users of financial information are decision-makers who belong to the business
organization itself.
6. Taxing authorities are external users of financial information with direct interest in the
business entity.
7. Suppliers use accounting information as bases of decisions on whether to extend credit
to the economic entity.
8. Financial reports provide information on the ability of the firm to pay wage increase for
their employees.
9. Managers use financial information to set goals for the company
10. Creditors make use of financial report to know how the business used the money lent to
the entity.

Performance Check 3.1a Identify what kind of stakeholder is being referred to. Choose from
the following items below

A. Owners F. Management
B. creditors G. Suppliers
C. potential investors H. Bureau of Internal Revenue
D. employees I. Public
E. regulatory bodies J. Customers

1. To plan, organize, and run the business

2. To know how the business helps the economy
3. To determine whether debts owed to them will be paid when due
4. To determine the correctness of the tax returns filed by the company
5. To decide whether to invest in the company or not
6. To decide whether they should withdraw or increase their investments
7. To know whether an entity can continue to honor product warranties
8. To ensure that the company's disclosure of accounting information is in accordance
with rules and regulations

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9. To find out the financial capacity of the company in order to bargain for benefits
10. To assess the capability of the business to pay its obligation including the related
interests on maturity date.

Performance Check 3.1b Choose the letter of the best answer.

1. Which of the following are considered interested in determining the return of investment
in the business?
a. management c. creditors
b. employees d. owners
2. Which of the following is not considered as an external user?
a. regulatory agencies c. employees
b. taxing authorities d. suppliers
3. Which of the following statements about users of accounting information is correct?
a. Management is an external user.
b. Tax authorities are internal users.
c. Employees are external users.
d. Creditors are external users

4. Who carries the responsibility to review the work of the accountants and issue opinions
as to the fairness of financial statements?
a. the board of directors c. the external auditor
b. the internal auditors d. management
5. Which of the following is an internal user of a company's financial information?
a. creditors with long-term contracts with the company
b. holders of the company's bonds
c. stockholders in the company
d. board of directors

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MODULE 4. FORMS OF BUSINESS ORGANIZATION

Module Overview:

A business is an organization that utilizes resources and information, supplying the

wants and needs of the customers through goods and services, in exchange for money or
giving back a different kind of goods or services.

This module presents the several types of businesses, categorized according to

ownership and to activities.

Module Outline (List of Topics)

Lesson 1 Forms of Business Organization according to Ownership

Lesson 2 Forms of Business Organization according to Activities

Target Learning Competencies (MELC)

LC 1.1.a The learners differentiate the forms of business organizations according

to ownership and identify the advantages and disadvantages of each form.

Performance Standard:
The learners differentiate the forms of business organizations in terms of nature of
ownership.
The learners make a list of existing business entities in their community and identify the
form of business organization.

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LESSON 1: Forms of Business Organization according to Ownership

Lesson Objectives:

At the end of the lesson, you will have been able to:

a. differentiate forms or business organizations in terms of nature of ownership; and

b. identify the advantages and disadvantages of each form.

Discussion:

TYPES OF BUSINESSES ACCORDINGTO OWNERSHIP

There are four types of business according to ownership - sole proprietor- ship,
partnership, corporation, and cooperative. All of these vary in some aspects and have different
risks and benefits.

Sole Proprietorship

A sole proprietorship is a business that is owned by only one individual for the practice
of trade or profession. It is the simplest and least costly form of ownership among other forms
of business. However, a business under sole proprietorship is quite risky since the owner
assumes unlimited liability and, in most cases, even his or her personal assets are on the line
if the business cannot pay the creditors. This form of business is common to small business
entities like grocery store, repair shop, and beauty parlor.

Advantages Disadvantages
• Unlimited liability--the owner is legally
• Full control of operations
obliged to pay all business debts
• Limited life-the business ceases to operate
• Easy to start, easy to dissolve if the owner dies, becomes physically or
mentally incapacitated, or is imprisoned
• All profits go directly to the owner • Difficulty in raising capital
• Less regulations
• The government taxes the owner and not
the business.

Steps Used in Registering Sole Proprietorship

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 Register the preferred business name with the Department of Trade and Industry
(DTI). The approved registration should be renewed every five years.
 Secure a barangay permit in the barangay where the business will be located.
This permit should be renewed every year.
 Apply for a business permit in the municipality where the business is situated.
This permit is renewable every year.
 Register the business with the Bureau of Internal Revenue (BIR). BIR requires a
sole proprietorship business to pay its registration fee every year.
 Register the business with Social Security System (SSS), Philippine Health
Insurance Corporation (PhilHealth) and Home Development Mutual Fund
(HDMF) or Pag-ibig. Partnership

Partnership

A partnership is a business that is owned by two or more individuals pooling their

resources together as common fund. The partners are normally involved in the management
and operation of the business. The profit of the business is divided among the partners as per
partners' agreement. The written agreement between or among partners is called articles of co
partnership
The articles of co-partnership contain the following: name of partnership; names of
partners, place of business partnerships effectivity date; nature of business, investments of
each partner and the corresponding capital credit; rights, power, and duties of the partners;
accounting period, profit and loss sharing compensation for services offered by partners, and
dissolution procedures
There are two main types of partnership. The first type is a general partnership where
each partner is a general partner with unlimited liability. The second type is a limited
partnership with limited partners and at least one general partner: The general partner has
unlimited liability while the limited partners enjoy limited liability to the extent only of their
capital contribution.

Advantages Disadvantages
• Increased potentials from two or more
• Unlimited liability of one or all owners
different strengths
• Limited life-the business ceases to operate
• Easy to form with proper agreements on its
if one of the partners dies, becomes its
formation
formation physically or mentally
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incapacitated, or is imprisoned
• High possibility of dispute and conflicts
• Less regulations compared to corporations
between partners

Steps Used in Registering Partnership

 Verity business name with the Securities and Exchange Commission (SEC)
 File articles of co-partnership with SEC
 Register the business name with DTI (optional)
 Secure a barangay permit in the place where business is located (renewable
every year)
 Apply business permit in the municipality where the business is located
(renewable every year)
 Register the business with the BIR (BIR requires an annual registration fee)
 Register the business with the SSS, PhilHealth, and HDMF

Corporation

A corporation is a business required to have five to fifteen incorporators. Incorporators

refer to those who originally formed the corporation. Section 2 of the Corporation Code of the
Philippines defines corporation as an artificial being created by operation of law, having the
right of succession and the powers attributes and properties expressly authorized by law or
incident to its existence". It has a legal personality that is separate and distinct from the
owners. The owners have limited liability and limited involvement from the operations. The
board of directors, who are elected by the owners themselves, will take control of the
corporation's activities. A profit corporation issues to its owners or shareholders shares of
stocks which are evidenced by stock certificates. A non-profit corporation, on the other hand,
does not issue shares of stocks. Its owners are called members.
The existence of the corporation is evidenced by articles of incorporation and by-laws
that are duly approved by SEC. The articles of incorporation detail the powers and limitations
bestowed by the government. It includes the following name of corporation; purpose of
corporation; location of principal office of business, term of existence of the corporation; name,
nationalities, and addresses of incorporators, names of board of directors authorized share
capital, types of shares to be issued, and par value per share, subscription amount,
subscribers' names, and their corresponding subscriptions, and the total paid subscriptions of
each subscriber.
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By-laws contain provisions for internal administration of the corporation. These normally
contain the following the date, place, and manner of calling the annual shareholders' meeting
manner of conducting meeting conditions which may warrant special meeting manner of voting
and use of proxies; manner of electing board of directors and the number of directors; term of
office of directors; manner of appointing officers; authority and responsibilities of officers;
procedures to amend articles of incorporation; and procedures to amend by-laws.

Advantages Disadvantages

• more sources of funds • more regulations to be followed

• easy to transfer ownership • profit is taxed at the corporate tax rate

• liability of owners is limited • costly to incorporate

• stockholders are taxed again when profits
• Unlimited commercial life
are distributed to them

Steps Used in Registering Corporation

• Verify business name with SEC

• Draft and execute the articles of incorporation and by-ławs by incorporators
• Deposit the cash collected from subscription
• File articles of incorporation and by-laws with SEC
• Register the business name with DTI (optional)
• Secure a barangay permit in the place where business is located (renewable
every year)
• Apply business permit in the municipality where the business is located
(renewable every year)
• Register the business with the BIR (BIR requires an annual registration feel
• . Register the business with the SSS, PhilHealth, and HDMF

Cooperative

A cooperative is a business that is owned by a group of individuals who also serve as

benefactors to the business endeavor. A cooperative usually requires at least fifteen members
to function. Usually, a board of directors and officers are elected to manage the business

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operation. Members can become part of the cooperative by purchasing shares. A cooperative
can either be incorporated or unincorporated.
Similar to a corporation, a cooperative usually have a set of by-laws and articles of
cooperation. The by-laws contain rules and regulations governing the operation of cooperative.
The articles of cooperation provide the details about the following: name of the cooperative;
purpose of the cooperative; term of existence of the cooperative; amount of share capital;
names and residences of its contributors; and type of cooperative. The following are the types
of cooperatives:
1. credit cooperative 11. education cooperative
2. consumer cooperative 12. electric cooperative
3. producers cooperative 13. financial service cooperative
4. marketing cooperative 14. fisherman cooperative
5. service cooperative 15. health services cooperative
6. multi-purpose cooperative 16. housing cooperative
7. advocacy cooperative 17. insurance cooperative
8. agrarian reform cooperative 18. transport cooperative
9. cooperative bank 19. water service cooperative
10. dairy cooperative 20. workers cooperative

Advantages Disadvantages
• Obtaining capital through investors.
Cooperative has a "one-member one vote"
• Unlimited life. The change of members philosophy. Big investors may choose to
does not dissolve the business. invest their money to other firms where their
voting power is equal to their ownership
interest.
• Democratic organization. Social equality of • Lack of membership and participation. The
members is the most important component cooperative may not fully function if members
of cooperatives. It ensures that it serves its do not involve themselves in the routine
members' needs. business operation.

Steps Used in Registering Cooperative

• Prepare general statement to help measure the cooperative's chance of success

• Draft cooperative's by-laws
• Draft the articles of cooperation
• Secure bond for accountable officer(s)

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• Register with Cooperative Development Authority (CDA

Assessment 4.1a Identify what concept is being referred to. Choose from the following items

below.

A. business F. merchandising business

B. sole proprietorship G. incorporators
C. service business H. corporation
D. cooperative I. by-laws
E. partnership J. manufacturing business

1. A business organization formed by at least fifteen individuals, operated to benefit

each member
2. Business operation that involves purchasing and converting raw materials into
finished product
3. An economic unit that sells goods and services with the prime objective of generating
profit
4. A business organized by two or more individuals who agreed to contribute money or
property
5. Contains provisions for internal administration of the corporation
6. A business which is easy to form and with minimal requirements
7. A vulcanizing shop
8. A business organization with unlimited commercial life
9. Owners who originally formed the corporation,
10. A boutique shop

Performance Check 4.1a

1. How does sole proprietorship differ from partnership?
2. Discuss the legal requirements in organizing a cooperative.
3. Give examples of each form of organization according to ownership in your locality.
List down at least 3 each.

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4.
LESSON 2: Forms of Business Organization according to Activities

Lesson Objectives:

At the end of the lesson, you will have been able to:

a. differentiate forms or business organizations in terms of nature of activities; and

b. identify the advantages and disadvantages of each form.
Discussion:

TYPES OF BUSINESSES ACCORDINGTO ACTIVITIES

There are different types of business according to activities. Three major types are
services provider, merchandising and manufacturing business.

Service Business

Service type businesses focus on providing intangible products, such as offering

professional skills, proposals, and expertise.
Examples of service businesses are accounting firms, law firms, schools, medical Clinic,
banks, hair salons and spas, and repair shops.

Advantages Disadvantages

• No need for inventory. • Services are harder to value.

• Skills can be improved and can produce

• Less demand during economic downturns.
better service.

Merchandising Business

This type of business is commonly known as the "buy and sell" business. Products are
bought from manufacturers or other merchandisers and are sold as is at an amount higher
than the purchase price. Examples of merchandising business are grocery stores, hardware,
department stores, and drug stores.

Advantages Disadvantages

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• Good merchandising attracts more • Profits are highly dependent on

customers. prices set by merchandise supplies.

• It is flexible to changes. • Merchandise inventory maybe perishable.

Manufacturing Business

This is the type of business wherein materials are bought to create a new product.
Examples of manufacturing businesses are food factories, garment factories, and car
manufacturing companies.

Advantages Disadvantages
• Because of the scope of activities,
• There is a continuous demand on
manufacturing firms are often more labor and
manufactured goods.
capital intensive.
• The creation of a manufactured product
leads to higher job satisfaction. The • The cost of the manufactured products
manufacturer gets satisfaction knowing that highly depends on the price and avail ability
their finished product is something that of the raw materials.
people need and use.

Assessment 4.2a Indicate the type of business activity performed by the following firms.

1. Flauta Accounting Office 11. United Laboratories

2. DeRose Supermarket 12. Cuts and Curls Beauty Parlor
3. Harold’s Laundry Shop 13. Bert Vulcanizing Shop
4. Bag Factory 14. Dexter’s Pizza
5. Rojas Dental Clinic 15. Novo Department Store
6. Janitorial Agency 16. Plastic Factory
7. Mercury Drug Store 17. Mindanao Star Bus Company
8. Unilever Company 18. MDCHI
9. CW Home Depot 19. National Book Store
10. Ad and Promo Agency 20. Style and Fashion Boutique

Performance Check 4.2a

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1. What are the three types of business activities? Distinguish one from the other.

2. Give examples of each form of organization according to ownership in your locality. List

down at least 5 each.

MODULE 5. ACCOUNTING CONCEPTS AND PRINCIPLES

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Module Overview:

There are concepts and principles that guide businesses in preparing financial
statements. They must be strictly observed to avoid errors in reporting financial transactions.
They protect the users of financial statements for the trust these users give when making
economic decisions. These concepts and principles improve the credibility and transparency of
financial statements.

This module contains the important accounting concepts and principles.

Module Outline (list of topics)

Lesson 1 Accounting Concepts and Principles

Lesson 1.1 Underlying Accounting Assumptions

Lesson 1.2 Basic Accounting Principles

Target Learning Competencies (MELC)

LC 1.1.a The learners explain the varied accounting concepts and principles
LC 1.1.b The learners solve exercises on accounting concepts and principles

Performance Standard:
The learners identify generally accepted accounting principles

LESSON 1: Accounting Concepts and Principles

Lesson Objectives:

At the end of the lesson, you will have been able to:

a. explain the different accounting concepts and principles; and

b. solve problems involving accounting concepts and principles.

Discussion:

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Accounting Concepts and Principles

Accounting is called the language of business. It communicates the financial condition

and performance of a business to interested users for decision-making purposes.
A widely accepted set of rules, concepts, and principles referred to as the General
Accepted Accounting Principles (GAAP) governs the application of accounting procedures.
The GAAP has been developed by the accounting professionals guide preparers of financial
statements in recording and reporting financial information regarding a business enterprise,
hence aiding in the effective execution of the accounting procedure and in communicating the
financial condition of the business
The current set of principles that accountants use rests upon some underlying
assumptions. The basic assumptions and principles are considered GAAP and apply to most
financial statements. In addition to these concepts, there are other, more technical standards
accountants must follow when preparing financial statements. The accounting standards used
in the Philippines are the Philippine Accounting Standards (PAS) and Philippine Financial
Reporting Standards (PFRS). They are adopted by the Financial Reporting Standards
Committee (FRSC).
GAAP is exceedingly useful because it attempts to standardize and regulate accounting
definitions, assumptions, and methods. Because of GAAP, we are able to assume that there is
consistency from year to year in the methods used to prepare a company's financial
statements. Although variations may exist, we can make reasonably confident conclusions
when comparing one company to another, or comparing one company's financial statistics to
industry's statistics. Over the
years, the GAAP has become more complex along with the growing complexity of financial
transactions.

Underlying Accounting Assumptions

In the practice of financial accounting, basic assumptions are important to an

understanding of the manner in which data are processed and presented. The following basic
assumptions underlie the financial accounting structure:

1. Economic Entity Assumption. It assumes that all of the business transactions are
separate from the business owner's personal transactions. A business is considered a
distinct entity from the owner and therefore the two should be treated separately. Any
personal transaction of its owner should not be recorded in the company's accounting
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book, and vice versa, unless the owner's personal transaction involves investing or
withdrawing resources from the business. Also, accounting records of the business
must not include the personal assets or liabilities of the owner.
For example, Mr. Alex Cruz, the owner of Bilis Serbisyo Repair Shop, bought
supplies for the school project of his son using his own money. This is a personal
transaction of the owner and should not be recorded in the accounting books of the
business.

2. Accrual Basis Assumption. It requires that all business transactions and other events
are recognized in the accounting records when they occur, rather than when the cash or
equivalent is received or paid.
It is assumed that revenue is recorded in the period it is earned, regardless of the
time the cash is received or collected. The same is true for expense. Expense is
recognized and recorded at the time it is incurred, regardless of the time that cash is
paid. This assumption adheres to the revenue recognition, matching, and cost
principles.

3. Going Concern Assumption. In the absence of contrary information, a business entity

is assumed to remain in existence for an indeterminate period of time. The current
relevance of the historical cost principle is dependent on the going concern assumption.
This assumes that a company will continue to exist long enough to carry out its
objectives and commitments and will not liquidate in the foreseeable future. Because of
this assumption, assets are recorded at their original acquisition costs and not based on
their market values. Assets are assumed to be used for an indefinite period of time and
not intended to be sold immediately. It also allows the company to defer some of its
prepaid expenses until future accounting periods.

4. Monetary Unit Assumption. Economic activities of a Philippine entity are measured

and reported in Philippine peso. The peso is assumed to remain relatively stable over
the years in terms of purchasing power. It disregards any inflation in the economy in
which the entity operates.
It assumes that only transactions that can be expressed in terms of money are
recorded. Hence, any non-financial or non-monetary information that cannot be
measured in terms of money are not recorded in the accounting books. A memorandum
entry will be prepared instead.
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For example, the purchase of equipment by Bilis Serbisyo Repair Shop in 1980 is
presented in the statements along with the purchase of equipment in 2014. Also, if the
business introduced a new repair service which cannot be easily quantified in monetary
units then these would not appear in the company's accounting records.

5. Time-Period Assumption. The life of an economic entity can be divided into artificial
time periods for the purpose of providing periodic reports on the economic activities of
the entity. It means that financial statements are prepared at equal time intervals.
This assumption requires a business to complete the whole accounting process
of a business over a specific operating time period. It may be monthly, quarterly, or
annually. For an annual accounting period, it may follow a calendar or fiscal year. A
calendar year is a twelve-month period that ends on December 31. A fiscal year is a
twelve-month period which may or may not end on December 31. It is the accounting
period a company follows for tax purposes. A natural business year is a twelve-month
period which ends on the month when the sales activities of the company is at its
lowest. It may follow a calendar year or a fiscal year.
It is very important that the time interval (or period of time) be shown in are paid.
Electricity consumed in December 2014 paid on January 7, 2015 the heading of each
financial statement to indicate whether it covers a day, week, month, quarter, year or
any specific period and the date that marks the last day of such period (e.g. one week
ended December 31, 2014; the month ended December 31, 2014; three months ended
December 31, 2014; or the year ended December 31, 2014).

Basic Accounting Principles

The basic accounting principles are detailed accounting rules and guide lines that
entities must follow when measuring, recording, and reporting financial data. Applying these
principles enhances reliability, relevance, and consistency of financial information which results
to better understanding and decision-making of users.
The following are the basic accounting principles:

1. Cost Principle. Cost refers to the amount spent (cash or the cash equivalent) when an
item was originally obtained, whether that purchase happened last year or ten years

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ago; amounts are not adjusted upward for inflation. The amounts shown in financial
statements are referred to as historical cost amounts.
All assets acquired should be valued and recorded based on the actual cash
equivalent or original cost of acquisition, not the prevailing market value or future value.
Acquisition cost is the most objective and verifiable basis upon which to account
for assets and liabilities of a business enterprise. Cost has been found to be more
definite and determinable than other valuation methods.
For example, Bilis Serbisyo Repair Shop bought one computer unit for $42,000,
but it could have been purchased at P40,000 from another vendor. The shop should
record the transaction at P42,000 because that is the amount given in exchange for the
computer unit.

2. Full Disclosure Principle. In the preparation of financial statements, the accountant

should include sufficient information to permit the stakeholders to make an informed
judgement about the financial condition of the enterprise.
If certain information is important to an investor or lender using the financial
statements, that information should be disclosed within the statement or in the notes to
the statement. A company usually lists its significant accounting policies as the first note
to its financial statements.

3. Matching Principle. This principle requires that expenses be matched with revenues. It
means that in a given accounting period, the revenue recorded should have its
corresponding expense recorded, in order to show the true profit of the business. The
use of accrual accounting procedures assists the accountant in allocating revenues and
expenses properly among the accounting periods that compose the life of a business
enterprise.
For example, sales salaries expense should be reported in the period when the
sales were made (and not reported in the period when the salaries were paid). Wages
to Bilis Serbisyo employees are reported as an expense in the week when the
employees worked and not in the week when the employees worked and not in the
week when the employees are paid. Electricity consumed in December 2014 paid on
January 7, 2015 should be reported as utility expense in 2014 income statement and
the amount unpaid at December 31, 2014 should be reported as a liability in the
statement of financial position.

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4. Revenue Recognition Principle. Revenues are recognized as soon as goods have

been sold (delivered to the customers) or a service has been rendered, regardless of
when the money is actually received. Revenue is recognized when the earning process
is virtually complete and an exchange transaction has occurred.
For example, on June 25, Bilis Serbisyo Repair Shop rendered service to a client
for P15,000. The service fee was collected on July 4. The entity should record the
revenue of P15,000 in June, the time service was rendered to the customer, and not the
time cash was received.

5. Materiality Principle. Business transactions that may affect the decision of a user of
financial information are considered important or material, and thus, must be reported
properly.
This principle allows an accountant to violate another accounting principle if an
amount is insignificant. Professional judgement is needed to decide whether an amount
is insignificant or immaterial. Ten thousand pesos may not be material to Ayala
Corporation, but that same figure is quite material to a small business like Bilis Serbisyo
Repair Shop.
An example of an obviously immaterial item is the purchase of a P300 paper
puncher by a company. The estimated useful life of the paper puncher is five years. The
matching principle directs the accountant to expense the cost over the five-year period.
The materiality guideline allows this company to violate the matching principle and to
expense the entire cost of P300 in the year it is purchased. The justification is that no
one would consider it misleading if P300 is expensed in the first year instead of P60
being expensed in each of the five years that it is used.

6. Conservatism or Prudence Principle. This principle states that given two options in
the valuation of business transactions, the amount recorded should be the lower rather
than the higher value. If a situation arises where there are two acceptable alternatives
for reporting an item, conservatism directs the accountant to choose the alternative that
will result in less effect on net income and/or less asset amount. Conservatism helps the
accountant break a tie while remaining unbiased and objective. Similar to materiality
principle, conservatism is a modifying constraint that allows the accountant to violate
another accounting principle if there are alternatives to be selected.

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The basic accounting principle of conservatism leads accountants to anticipate or

disclose losses, but it does not allow a similar action for gains. Losses and costs are
recorded when they are probable and can be reasonably estimated, while gains are
recorded only when they are realized. Thus, probable losses from lawsuits will be
reported on the face of financial statements or in the notes, but probable gains will not
be reported.

7. Objectivity Principle. This principle requires business transactions to have some form
of impartial supporting evidence or documentation. Also, it entails that bookkeeping and
financial recording be performed with independence, that is free of bias and prejudice.
For example, the purchase of merchandise from a vendor requires an invoice to
support the transaction. This invoice should be approved by the Bureau of Internal
Revenue and should state the name of the supplier, the description, quantity, and the
value of the goods purchased. Utility expenses must be supported by statements of
account from utility companies like Meralco and Maynilad.

Other Characteristics of Accounting Information

When financial reports are generated by professional accountants, users expect that
the accounting information presented is reliable and verifiable. The consistency and
comparability of the accounting information reported are also expected from the accountants.
To be useful, financial information must be relevant, reliable, and prepared in a
consistent manner. Relevant information helps a decision maker understand a company's past
performance, present condition, and future outlook so that informed decisions can be made in
a timely manner. Since the information needs of individual users may differ, the manner of
presenting information may also be different. Internal users often need more detailed
information than external users. External users might only be interested on the company's
value or its ability to repay loans, while internal users such as management need a more
comprehensive examination of the company's financial performance and condition.
Reliable information is verifiable and objective. Consistent information is prepared
using the same methods across accounting periods. Consistency thus allows meaningful
comparisons to be made between different accounting periods and between and among
different companies.

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QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION

The following are the qualitative characteristics of useful financial information.

Fundamental Qualitative Characteristics

To be useful, financial information must be relevant and faithfully represent what it

purports to represent.

1. Relevance - Relevant financial information can make a difference in the decisions

made by its users. Information is relevant if it has the following values.
a. Predictive Value - Financial information has predictive value if it can be used as an
input to processes employed by users to predict future outcomes. For example, the
management of Cruz Company is preparing the annual company budget for 2020.
One of the relevant sources of information for making the budget would be the
information contained in the prior period financial statements.
b. Confirmatory Value - Financial information has confirmatory value if it provides
feedback (confirms or changes) about previous evaluations. For example, Camique
Corporation manufactures and sells two bulbs products, X and Y. After a careful
study, Camique’s management decided to introduce a new product, Z, effective
January 1, 2020. The financial statements of Camique Corporation for 2020, if
properly prepared and presented, can be used to confirm if the decision to
manufacture and market product Z is in accordance with expectations. Based on the
financial information presented, Camique's management may decide to produce or
cancel product Z. It may even decide to drop product X or Y (or both) and
concentrate on product Z
The predictive value and the confirmatory value of financial information are
interrelated. For example, information on revenue for the current year can be used both
as the basis for predicting revenues in future years, and as a point of comparison with
predictions made in prior years of revenue versus the predictions made for the current
year. The results of those comparisons can help a user correct and improve the
processes that have been used to make the previous predictions.
Materiality is an entity-specific aspect of relevance based on the nature or
magnitude, or both, of the items to which the information relates in the context of an
entity's financial report. In other words, information is material and therefore, relevant, if

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omitting or misstating it could influence the decisions of the users of financial

information about a specific entity. Materiality does not have a clear-cut amount to be
considered "material" - what is material to one company may be immaterial to another.
Below are some examples to illustrate the concept of materiality.
 P1.2 million is given as donation to Familia Foundation. This amount may
be material if the donor is a small-sized supermarket. But it may be
considered immaterial if given by a multinational company that earns
billions of pesos every year.
 Ask four classmates about their "ideal" monthly allowance. You are most
likely to receive four different answers. Different people have different
ways of attaching value to numbers. P 4,000 may be just enough for some
of your classmates; it may be insufficient to some or maybe too much for
others.

2. Faithful Representation - Financial information must faithfully represent the financial

transactions or events that it purports to represent. This means that the actual effects of
transactions should be properly accounted for and reflected in the financial statements.
To be faithfully represented, the information from a certain event should have the
following characteristics.
a. Completeness - Useful financial information should include all information, such as
necessary descriptions and explanations which may help users to understand the
financial transactions or events being described. For example, a complete depiction
of an asset would include a description of the nature of the asset, a numerical
depiction of the asset and a description of what numerical depiction represents
(purchase price, carrying value, or fair value).
b. Neutrality - Financial information must be selected and presented without bias.
Financial statements are not neutral if, by the selection or presentation of
information, they influence the decision making or judgments in order to achieve a
predetermined result or outcome. For example, Bedoya Company is applying for a
loan with OBD Bank. One of the requirements of the bank is for Bedoya to provide
the bank with its latest financial statements. In preparing its financial statements,
Bedoya intentionally omits some expenses in its statement of comprehensive
income, thus, showing higher net income and increasing its chances of obtaining the

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loan. This is a violation of neutrality because the information favors Bedoya

Company to the detriment of OBD Bank.
c. Freedom of Error - This means that there are no errors or omissions in the
description and in the process of producing the information but such does not
necessarily imply that the information is accurate in all aspects. For example, an
estimate of an unobservable price or value cannot be determined to be accurate or
inaccurate. However, a representation of that estimate can be faithful if the amount
is described clearly and accurately as being an estimate, the nature and limitations
of the estimating process are explained, and no errors have been made in selecting
and applying an appropriate process for developing the estimate.
It is important to note that faithful representation requires transactions to be reported in
accordance with its substance rather than its legal form.

Enhancing Qualitative Characteristics

The usefulness of financial information is enhanced if it is comparable, verifiable, timely
prepared, and understandable.

1. Comparability is the qualitative characteristic that enables the users to identify and
understand similarities and differences among items. This is important because it allows
the users to compare a set of financial statements with those of prior periods and those
of other companies. The following are examples of comparability.
 Users can compare 2019 financial statements of Stringent Company with its
2020 financial statements to know whether its performance and financial position
have improved or deteriorated.
 Users can compare the Stringent Company financial statements with those of
Astrid Company if both are prepared in accordance with same set of accounting
standards, such as PFRS.
 When preparing 2017 financial statements, the preparers are required to present
each of the 2017 figures with the corresponding 2016 figures. This is done to
make the financial statements more comparable.

2. Verifiability means that different knowledgeable and independent observers could

reach a consensus, although not necessarily a complete agreement, that a particular
depiction is a faithful representation. For example, Uy Company lists a piece of

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equipment worth P 410,000 as an asset. If Uy Company has told an outside accountant

how much the equipment originally cost; how old it is, and what schedule the company
has used to depreciate the equipment, that accountant should come up with the same
figure. If not, the result is not verifiable.

3. Timeliness means having information available to decision-makers in time to influence

their decisions. For example, at a publicly held meeting, a company must make certain
reports at quarterly or annual intervals. If not, the company will not be compliant with the
requirements of the supervising government entity.

4. Understandability is the ability of the users, who have reasonable knowledge of

business and economic activities and who review and analyze the information, to
understand the financial information being presented. Understandability requires the
financial statements to be identified by presenting the name of the financial statement,
the name of the entity, and the period covered by the statement. Moreover,
understandability also requires the notes to be properly numbered and cross-referred to
the original statement of financial position and statement of comprehensive income
items. For example, the note number of disclosure on accounts receivables should be
mentioned in front of the accounts receivables line item appearing on the face of the
statement of financial position.

Other Qualitative Characteristics of Useful Financial Information

1. Substance over form - This means that the financial information should represent the
actual intention over the legal document evidencing the transaction. Financial
information should represent the substance of an economic event rather than merely
represent its legal form.

2. Prudence (formerly known as conservatism) - This involves the inclusion of greater

degree of caution in making estimates. It also means that only estimated and expected
losses can be recognized; gain can only be recognized when actually earned. For
example, bad debts are probable in many businesses, so companies create a special
contra-account to accounts receivable called allowance for bad debts, which brings the
accounts receivable balance to the amount that is expected to be realized and hence,

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prevents overstatement of assets. An expense called bad debts expense is also

recorded to prevent net income from being overstated.

3. Consistency refers to the use of the same methods for the same items, either from
period to period within a reporting entity or in a single period across entities.
Consistency, although related to comparability, is not the same as comparability.
Comparability is the goal; consistency helps to achieve that goal. For example, Liza's
shop sells gift certificates during the holidays every year. When these gift certificates are
sold, Liza sometimes credits a sale and sometimes he credits a gift-cards payable
account. Liza decides what to credit at the end of the month when Liza's income
numbers come in. If the shop needs more income, Liza credits sales. This is a clear
violation of the consistency concept for accounting. By not accounting for the gift cards
consistently, Liza makes the financial statements misleading,

Assessment 5.1a Write TRUE if the statement is correct and FALSE if the statement is
incorrect.

1. GAAP is a widely accepted set of rules, concepts and principles that govern the
application of the accounting procedures.
2. The owner of Linis Bango laundry Shop bought a residential dwelling for his parents.
The cost of the house is recorded as property of the business.
3. Financial statements are prepared at the end of the 12-month period because of the
going concern assumption.
4. Accountants must use their judgment to record transactions that require estimation.
Conservatism principle should be applied by the accountants in exercising judgment.
5. The monetary unit assumption assumes that the monetary unit used in recording
business transactions is stable.
6. Going concern assumes that financial statements are prepared only once at the end of
the economic life of the entity.
7. Users of financial reports expect that accounting information is reliable, verifiable, and
objective.
8. Cost is more definite and determinable than other valuation methods.
9. Materiality principle states that the requirements of any accounting principle may be
ignored when there is an effect lo the users of financial information.
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10. Cash paid for expenses still to be incurred is recognized as expense under the accrual
method of accounting.

Performance Check 5.1a Identify the accounting assumption or principle that suits the
statement.

1. Ensures that financial information is reported at regular intervals.

2. This assumption adheres to the revenue recognition, matching, and cost principles.
3. The framework, rules, and guidelines of the financial accounting profession with the
purpose of standardizing the accounting concepts, principles, and procedures.
4. It requires that all business transactions and other events are recognized in the
accounting records when they occur rather than when cash or its equivalent is received
or paid.
5. Any personal transaction of its owner should not be recorded in the business accounting
books, and vice versa.
6. This assumes that a company will continue to exist long enough to carry out its
objectives and commitments and will not liquidate in the foreseeable future.
7. The life of an economic entity can be divided into artificial time periods for the purpose
of providing periodic reports on the economic activities of the entity.
8. This assumption disregards any inflation or deflation in the economy in which the entity
operates
9. Assets are recorded al cost, which equals the value exchanged at the time of its
acquisition
10. Important information to users of financial statements should be disclosed within the
statement or in the notes to the statement
11. This accounting principle requires companies to use the accrual basis of accounting.
12. Revenue is recognized when the earning process is virtually complete and an exchange
transaction has taken place.
13. This principle allows errors or violations of accounting valuation involving immaterial and
small amounts of recorded business transactions.
14. The basic accounting principle that leads accountants to anticipate or disclose losses,
but does not allow a similar action for gains.
15. Accountants are expected to apply the same accounting principles, procedures, and
practices from year to year.

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MODULE 6. THE ACCOUNTING EQUATION AND TYPES OF MAJOR ACCOUNTS

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Module Overview:

Every business needs accounting in order to faithfully represent the assets, equity and
liabilities put by the owners in the entity. This module introduces the basic concepts of
accounting through the accounting equation and the types of major accounts.

Module Outline (List of Topics)

Lesson 1 The Accounting Equation

Lesson 2 The Types of Major Accounts

Target Learning Competencies (MELC)

LC 1.1.a The learners illustrate the accounting equation

LC 1.1.b The learners solve problems involving simple cases with the use of
accounting equation
LC 1.1.c The learner discuss the five major accounts and cite examples for each
LC 1.1.d Prepare the Chart of Accounts

Performance Standard:
The learners solve problems applying the accounting equation
The learner define, identify and classify accounts according to the major types

LESSON 1: The Accounting Equation

Lesson Objectives:

At the end of the lesson, you will have been able to:

a. ilustrate the accounting equation

b. solve problems involving simple cases with the use of accounting equation

Discussion:

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The biggest contribution of the Italian scholars of the Renaissance period (14th to 16th
century) to the field of accounting is the documentation and dissemination of double-entry
system employed by Venetian merchants to record their business trans- actions in the
accounts books. In the Summa de Arithmetica, Geometria, Proportioniet Proportionalita book
of Frater Luca Bartolomes Pacioli, 36 chapters were devoted to describing double-entry
bookkeeping and other commerce-related concepts. Double-entry bookkeeping is a system in
which at least one debit entry (left side) and at least one credit entry (right side) are entered for
each transaction. In short, every transaction has two effects; for every debit entry, there will
always be an equal credit entry. This stays true to the concept of duality. Duality is a
fundamental convention of accounting that necessitates the recognition of all aspects of an
accounting transaction. This is the underlying concept of the double-entry accounting system
that businesses employ today.

THE BASIC ACCOUNTING EQUATION

In relation to double-entry bookkeeping, ensuring equal debit effect and credit effect is
fundamental to the universal acceptance of the basic accounting equation. Because of this, the
basic accounting equation should be in balance at all times.

A
ASSETS LIABILITIES OWNER’S EQUITY

Assets must equal the sum of liabilities and owner's equity. The equal sign in the
equation ensures balance of the movement in the three main accounts being used in
accounting. The equal sign also separates the left side (debit) from the right side (credit) of the
equation. This equality should be preserved at all times.
This basic equation serves as the backbone of the entire accounting cycle. All the steps
that go with the accounting cycle should abide by this equation. Journalizing for instance,
which will be discussed in the preceding chapters, always ensures that debit equals credit.

DEFINITION OF AN ACCOUNT

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The accounting equation "assets equal liabilities plus owner's equity" perfectly captures
the major accounts. These major accounts, which also happen to be the main classification of
accounts, are assets, liabilities, and owner's equity. Owner's equity includes revenues and
expenses. An account is an individual accounting record of the movements (increases and
decreases) in specific accounts. For now, it will suffice to say that each specific account
(account title) has two sides as illustrated below:

Account Title

Left side for debit Right side for credit

Movements in specific accounts are either debit or credit depending upon the account's
normal balance. Asset accounts have normal balances of debit while liability accounts and
owner's equity accounts have normal balances of credit. This is consistent with how they
appear in the basic accounting equation.

DEBIT (Left Side) CREDIT (Right Side)

A
ASSETS LIABILITIES OWNER’S EQUITY

COMPUTATION OF MISSING AMOUNTS

We shall now proceed with applying the basic accounting equation and the expanded
accounting equation by computing missing amounts. The key in solving the missing amounts is
the preservation of the balance in the accounting equations and the knowledge of how they
increase or decrease using debits or credits.

Sample Problem 1. Mr. Pedro Perez started a car wash business on January 1, 2019. His
initial investments were cash amounting to P50,000 and one piece of cleaning equipment
worth P20,000. Compute for the correct total owner's equity as of January 1, 2019.
Answer to Problem 1: Since Mr. Perez invested these to the company, it forms part of
the company’s Owner’s Equity as well. Thus, the total owner’s equity as of January 1,
2019 is P70,000.
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Owner’s Equity
Account Title Assets = Liabilities +
(or Capital)
Cash P50,000 P50,000
Cleaning Equipment 20,000 20,000
Total P70,000 - P70,000

Sample Problem 2. Complete the table below by filling up the exact amounts of Assets,
Liabilities and Owner’s Equity of the identified companies.

Owner’s Equity
Name of Company Assets = Liabilities +
(or Capital)
Company V 980,000 563,000
Company W 448,000 998,500
Company X 782,000 349,000
Company Y 610,000 487,000
Company Z 0 1,200,400

Answer to Problem 2: Using the basic accounting equation which is assets equal
liabilities plus owner’s equity, we can re-arrange the items and derive a new equation to
compute for other missing items. Thus,

Owner’s Equity
Name of Company Assets = Liabilities +
(or Capital)
Company V 980,000 563,000 417,000
Company W 1,446,500 448,000 998,500
Company X 782,000 249,000 533,000
Company Y 610,000 123,000 487,000
Company Z 1,200,400 0 1,200,400

Take note:
 For Novo Department Store, use the formula:
Owner’s Equity = Assets – Liabilities
 For DeRose Shopping, use the formula:
Assets = Liabilities + Owner’s Equity
 For Quality Emporium, use the formula:
Owner’s Equity = Assets – Liabilities
 For CBE Marketing, use the formula:
Liabilities = Assets – Owner’s Equity
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 For DM Supermarket, use the formula:

Assets = Liabilities + Owner’s Equity

Assessment 6.1a True or False. Write TRUE if the idea being expressed is correct and
FALSE if otherwise.
1. According to double entry bookkeeping system, every transaction has two effects, the
debit effect and the credit effect.
2. Duality is the underlying concept behind the double entry bookkeeping system.
3. Labilities must be equal to the sum of assets and owner's equity
4. Owner's equity is the difference between assets and liabilities
5. The sum of current assets and current liabilities is the working capital
6. At all times, the balance in the accounting equation should be preserved
7. Change or movement in on account may be increase, decrease or no change or
movement at all
8. Journals and ledgers are books of accounts
9. All accounts have the same normal balances
10. The basic accounting equation has two sides, the left side, which is credit, and the right
side, which is debit

Assessment 6.1b Identification. The terms labeled A to J are the ones being described in the

sentences numbered 1 to 10 Match each term with the correct sentence.

a. Account f. Duality
b. Assets g. Liabilities
c. Basic Accounting equation h. Expenses
d. Chart of Accounts i. Operating Cycle
e. Double-entry Bookkeeping j. Revenues

1. It is a fundamental convention of accounting that necessitates the recognition of all

aspects of an accounting transaction.
2. Assets equal the sum of liabilities and owner's equity.
3. It is an individual accounting record of the movements (increases and decreases) in
specific accounts.

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4. A guide to accountants and bookkeepers, it is a listing of all the accounts and is usually
tailored to the operations of the business
5. These are resources controlled by the business as a result of past transactions and
events and from which future economic benefits are expected to flow to the business
6. It is the overage time that is required to go from cash to cash in producing revenue
7. These are present obligations of on entity arising from post transactions or events, the
settlement of which is expected to result in an outflow from the business of resources
embodying economic benefits
8. These are earnings arising from the main line of operations of the business. Such as
rendering of services or selling of goods
9. They represent the costs being incurred by the business in generating revenues
10. A system in which a debit entry and a credit entry is entered for each transaction.

Performance Check 6.1a Supply the missing amounts to satisfy the basic accounting
equation.

Owner’s Equity
Name of Company Assets = Liabilities +
(or Capital)
Company A 980,000 563,000 417,000
Company B 1,446,500 448,000 998,500
Company C 782,000 249,000 533,000
Company D 610,000 123,000 487,000
Company E 1,200,400 0 1,200,400

LESSON 2: THE FIVE MAJOR ACCOUNTS

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Lesson Objectives:
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MAJOR ACCOUNTS: DEFINITION, CLASSIFICATION, AND EXAMPLES

The major accounts in accounting are assets, liabilities, owner's equity, revenues, and
expenses. Though revenues and expenses are under owner's equity account, they are shown
separately because they are the main income statement accounts. So, effectively, there are
five major accounts.
Assets are resources controlled by the business as a result of past transactions and
events and from which future economic benefits are expected to flow to the business. Simply
put, these are anything of value that is owned by the business. With reference to the
photocopying business of Jose Mercado, assets include Cash, Unused Supplies, and
Photocopying Equipment, among others. These are called assets because they are controlled
by the business, are the result of past transactions or events, and provide future economic
benefits. Their amounts can be measured reliably as well.
Assets can be classified further into two. These are current assets and non-current
assets. Current assets are those reasonably expected to be realized in cash within one year
from the reporting date or the normal operating cycle, whichever is longer. If an asset cannot
be classified as current, then
its rightful classification is non-current asset. If future economic benefits of the asset exceed
one year, then the operating cycle of the business is the basis for the asset classification.
Operating cycle is the average time it takes the business to turn the cash used in the business
to cash received from selling goods or rendering services. In the case of the photocopying
business of Jose Mercado, it is the average time from the moment cash was spent to put up
what are needed to render photocopying services up to the time photocopying revenues were
realized in the form of cash.
Examples of asset accounts include:
1. Cash - this includes cash on hand (bills, coins, checks, money orders, or bank drafts),
cash deposited in bank (savings account, or checking account), and cash fund (petty

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cash fund, or payroll fund) which are unrestricted in use. Cash equivalents are short-
term, highly liquid investments that are acquired three months before maturity or earlier.

2. Accounts Receivable - this refers to open accounts which represent the amount of
money owed by the customers to the business. This arises from the business rendering
services or selling goods to customers.

3. Notes Receivable - this represents the amount of money owed by the customer or
debtor to the business evidenced by a promissory note. A promissory note is a written
and signed promise to pay by the maker to the payee a sum certain in money on
demand at a specified future date.

4. Inventories - this represents assets held for sale in the ordinary course of business, in
the process of production for sale or in the form of materials or supplies to be consumed
in the production process or in the rendering of services end of the accounting period. to
cover for future rental payments.

5. Unused Supplies – this represents supplies which remain unused at the end of the
accounting period.

6. Prepaid Rent – this refers to an advance payment made by the business to cover for
future rental payments.

7. Equipment – this represents manual or automated machines used in the business and
they include photocopying equipment, computers, laptops, ring binders, laminating
machines, delivery vehicles, and vans.

8. Furniture and Fixtures – this represents assets such as tables, chairs, filing among
others, cabinets, and display racks.

9. Building - this refers to the physical structure owned and used by the business to
conduct its business operation.

10. Land - this refers to the physical site owned by the business where the building is
situated. It is not subject to depreciation.

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11. Allowance for Doubtful Accounts - this is a contra-asset or a valuation account which
refers to the portion of accounts receivable that is estimated to be uncollectible at the
end of a particular accounting period.

12. Accumulated Depreciation - this is a contra-asset or a valuation account which refers

to the aggregate portion of the total cost of property, plant, and equipment that has been
charged to depreciation expense.

Liabilities are present obligations of an entity arising from past transactions or events,
the settlement of which is expected to result in an outflow from the business of resources
embodying economic benefits. Simply put, these represent claims against the assets of the
business. These are what the business owes. With reference to the photocopying business of
Jose Mercado, liabilities include Accounts Payable (to his father) and Utilities Payable to the
electricity company, among others. These are called liabilities because they represent the
current obligation of the business, which arose from past transactions or events, and require
an outflow of resources embodying economic benefits.
Liabilities can be classified further into two. These are current liabilities and non-current
liabilities. Current liabilities are those reasonably expected to be settled by payment of cash,
delivery of goods or performance of service within its normal operating cycle or within one year
from the reporting
date, whichever is longer. Therefore, non-current liabilities are obligations reasonably expected
to be paid in cash beyond one year.
Examples of liability accounts include:

1. Accounts Payable - this refers to open accounts which represent the amount of money
owed by the business to creditors or suppliers

2. Notes Payable - this represents the amount of money owed by the business to the
supplier or creditor evidenced by a promissory note

3. Loan Payable - this represents the amount of money borrowed by the business from
third party creditors

4. Mortgage Payable - this represents the amount of money borrowed by the business
from a bank or a lending institution which is secured by collateral

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5. Unearned Revenues - this represents cash collected by the business in advance for a
service or good that is yet to be rendered or delivered

The owner's equity or residual interest contains the net difference between total assets
and total liabilities. It represents ownership and its terminology changes depending on the form
of business organization. If it is a sole proprietorship form of business organization, owner's
capital account is used and this is classified under owner's equity or equity. Thus, for JM
Photocopying Center, we use Mercado, Capital account. The owner's capital account is
increased by additional contribution of the owner and recognition of business' net income and
decreased by withdrawals of the owner and recognition of business net losses.
Moreover, the owner's drawing account is used when withdrawal is made by the owner
to determine total withdrawals for each accounting period. Accordingly, partners' capital and
shareholder's equity are used when the form of business organization is partnership or
corporation, respectively,
Revenues are the earnings arising from the main line of operations of the business.
Revenues result from rendering of services or selling of goods. For JM Photocopying Center,
photocopying revenues arise from rendering of photocopying services to its customers.
Examples of revenue accounts include:

1. Service Revenue - this refers to the earnings made by any business that is into
rendering services. The term "revenue" is used and not "income to distinguish that such
an earning arises from the main line of operations of the business.

2. Interest Income - this represents interests credited by the bank to the account of the
business arising from bank deposits. Notice that the term "income” was used since
earning interests from bank deposits is not the main line of operations of the business.

3. Sales - this represents the earnings made by any business that is into selling goods or
merchandise

4. Professional Fees - this represents earnings made by professionals or experts from

rendering services to their clients. Professionals include lawyers, doctors, and certified
public accountants, among others. Thus, this can be considered as a revenue account
or an expense account. To distinguish between the two, a company's chart of accounts
can have both Professional Fees Income and Professional Fees Expense.

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Expenses are the costs being incurred by the business in generating revenues. For JM
Photocopying Center, expenses include payment of taxes and licenses, salaries and
recognition of utilities expense incurred.
Examples of cost and expenses accounts include:

1. Utilities Expense - this refers to costs associated with the usage of electricity, water,
and communication for a particular accounting period.

2. Salaries Expense – this refers to costs incurred associated with the services rendered
normally by permanent and full-time employees who are paid on a regular basis, usually
monthly.

3. Wages Expense - this refers to costs incurred associated with the services rendered
normally by contractual and temporary employees and workers who are paid on an
hourly rate or based on output.

4. Taxes and Licenses Expense - this represents costs incurred to register the business,
to acquire the right to operate, and to settle taxes

5. Cost of Sales - this refers to the cost of merchandise or goods that were sold during a
particular accounting period

6. Supplies Expense - this refers to the amount of supplies that was used during a
particular accounting period

7. Doubtful Accounts Expense - this refers to the amount of accounts receivable that is
estimated as uncollectible and is recognized as an expense in the current accounting
period

8. Depreciation Expense - this refers to the allocated portion of the cost of property plant
and equipment charged to expense in the current accounting period

ACCOUNTS AND FINANCIAL STATEMENTS

The Statement of Financial Position presents the assets, liabilities, and owner's equity
of the business while the Income Statement presents its revenues and expenses. Because of
this, assets, liabilities, and owner's equity are called statement of financial position accounts

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i-Link College of Science and Technology, Inc. Fundamentals of ABM 1

(or real accounts), and revenues and expenses are called income statement accounts (or
nominal accounts).
These statements will be discussed further in the preceding chapters.

EXPANDED ACCOUNTING EQUATION

Now that other accounts have been introduced, let us expand the accounting equation
by including the revenue, expenses, and withdrawal accounts. The expanded equation will
look like this:

Assets = Liabilities + Owner's Equity

(or Capital)

+ Revenues
- Expenses
- Withdrawal

Notice that the significant difference between the basic accounting equation and the
expanded accounting equation is brought about by the transactions (acronym: CREW) that
directly affect change in the owner's equity account. These are capital contributed and
withdrawals made by the owner and revenues earned and expenses incurred during a
particular accounting period.

NORMAL BALANCES AND INCREASES AND DECREASES

At this point, it is important that you master the normal balances of each major account
and two of the contra-asset accounts discussed so far. Summarized below in a table are the
normal balances of major accounts and contra-asset accounts and how they move (increase
or decrease) through debit or credit.

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i-Link College of Science and Technology, Inc. Fundamentals of ABM 1

Normal Balance Increase When Decrease When

+ -

Assets Debit Debit Credit

Liabilities Credit Credit Debit

Owner's equity
- Owner, Capital Credit Credit Debit
- Owner, Drawing Debit Debit Credit

Revenues Credit Credit Debit

Expenses Debit Debit Credit

Contra-asset accounts:
• Allowance for Doubtful
Accounts Credit Credit Debit
• Accumulated
Depreciation Credit Credit Debit

DEFINITION AND PREPARATION OF CHART OF ACCOUNTS

Now that we have learned what basic accounting equation is and what accounts are,
the next important thing that we have to know is the chart of accounts. A chart of accounts is a
listing of all accounts and is usually tailored to the operations of the business. It functions as a
guide to the accountant or the bookkeeper in ensuring uniformity of and consistency in time, it
is prepared in a manner such that the five main or major accounts the use of all the accounts
in recording business transactions. Most of the are grouped and organized. As such, at the
earliest possible time, the business should anticipate all specific accounts it may use in its
lifetime that will be included in the list. Moreover, businesses also just assign a range of
numbers (block) to major accounts to accommodate additional specific accounts that may be
created or might arise in the future.
Accordingly, the specific accounts may also be coded numerically to facilitate a more
efficient posting of the entries to the ledger or in preparation for the transition to a
computerized accounting system once the business decides to acquire a computerized
accounting system in the future.

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i-Link College of Science and Technology, Inc. Fundamentals of ABM 1

Illustrative Example: Chart of Accounts

To illustrate, Jose Mercado's photocopying business would have the following chart of
accounts which reflects the major accounts:

JM Photocopying Center
Chart of Accounts

Assets Owner's Equity

101 Cash 301 Mercado, Capital

112 Accounts Receivable 302 Mercado, Drawing
113 Allowance for Doubtful Accounts 399 Income Summary
114 Notes Receivable
115 Interest Receivable
122 Unused Supplies Revenues
123 Prepaid Rent
151 Photocopying Equipment 401 Photocopying Revenues
152 Accumulated Depreciation- 402 Interest Income
Photocopying Equipment 499 Other Income
153 Furniture and Fixtures
154 Accumulated Depreciation -
Furniture and Fixtures
199 Other Assets

Liabilities Expenses

201 Accounts Payable 501 Taxes and Licenses Expense

202 Notes Payable 502 Salaries Expense
203 Salaries Payable 503 Supplies Expense
204 Income Tax Payable 504 Utilities Expense
205 Interest Payable 505 Rent Expense
208 Unearned Photocopying Revenues 506 Depreciation Expense
212 Mortgage Payable 507 Doubtful Accounts Expense
215 Loan Payable 512 Interest Expense
299 Other Liabilities 599 Other Expense

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i-Link College of Science and Technology, Inc. Fundamentals of ABM 1

Assessment 6.2a True or False. Write TRUE if the idea being expressed is correct and
FALSE if otherwise.
1. Except for contra-asset accounts, all asset accounts have normal balances found in the
debit side
2. Generally, labilities and owner's equity accounts have normal balances found in the
credit side
3. All businesses have a chart of accounts
4. To establish uniformity, all businesses use the same chart of accounts formal.
5. A good chart of accounts captures all possible foreseen transactions using uniform and
consistent account titles but still offers flexibility to capture unforeseen transactions by
providing a range of account codes for the account tires that will be used in these
unforeseen transactions
6. Coding chart of accounts is helpful in locating specific accounts when posting to the
ledger
7. Account titles in the chart of accounts are usually arranged chronologically
8. Account titles in the chart of accounts are usually grouped according to major accounts
9. The business can no longer add an account title to the chart of accounts once it is fixed
and finalized
10. The business can no longer delete an account lite from the chart of accounts once it is
fixed and finalized

Assessment 6.2b Identification. The terms labeled A to J are the ones being described in the
sentences numbered 1 to 10 Match each term with the correct sentence.
a. Accounts Receivable f. Furnitures and Fixtures
b. Building g. Inventories
c. Cash h. Land
d. Cash Equivalent i. Notes Receivable
e. Equipment j. Prepaid Rent

1. These are short term, highly liquid investments that ore acquired three months before
maturity or earlier.
2. This represents the amount of money owed by the customer or debtor to the business
evidenced by a promissory note
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3. This refers to an advance payment made by the business to cover for future rental
payments.
4. Not subject to depreciation, this refers to the physical site owned by the business where
the building is situated
5. This includes bills, coins, checks, deposits in banks, and bank drafts.
6. This represents manual or automated machines used in the business like computers,
laptops, ring binders, and delivery vehicle.
7. This refers to the physical structure owned and used by the business to conduct its
business operation.
8. Examples these assets include tables, chairs, filing cabinets, and display racks.
9. This represents assets held for sale in the ordinary course of business, in the process of
production for sale, or in the form of materials or supplies to be consumed in the
production process or in the rendering of services
10. This refers to open accounts which represent the amount of money owed by the
customers to the business.

Performance Check 6.2a A portion of financial statements dated December 31, 2019 with the
following accounts and balances were gathered from Victor's Rental Studio:

Accounts Payable P25,600

Accounts Receivable 52,400
Accumulated Depreciation-Building 18,000
Building 200,000
Cash 37,700
Depreciation Expense 18,000
Interest Income 1,080
Interest Receivable 1,680
Land 50,000
Mortgage Payable 151,600
Notes Payable 19,800
Notes Receivable 14,000
Office Supplies 13,600
Supplies Expense 9,900
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Taxes and licenses 22,800

Utilities Expense 36,600

Based solely from the information above,

a. Compute for the Total Assets

b. Compute for the Total Liabilities
c. Compute for the Total Expenses
d. Compute for the Total Owner’s Equity

Performance Check 6.2b The following are some transactions of Virginia Services:

A L OE

1. Received cash as additional investment _______ ________ ________

2. Purchased supplies on account _______ ________ ________
3. Charged customers for services made on account _______ ________ ________
4. Rendered services to cash customers _______ ________ ________
5. Paid cash for rent on building _______ ________ ________
6. Collected on account receivable in full _______ ________ ________
7. Paid cash for supplies _______ ________ ________
8. Returned supplies purchased on account _______ ________ ________
9. Paid cash to settle accounts _______ ________ ________
10. Paid cash to owner for personal use _______ ________ ________

Required:

For each transaction, indicate whether the assets (A), liabilities (L) or owner’s equity

(OE) increased (+), decreased (-) or did not change (0) by placing the appropriate sign in the

appropriate column.

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ANSWER SHEET

Name: _______________________________________ Year and Section: _____________

Subject Teacher: _______________________________ Date Submitted: _____________

Assessment 1.1a True or False. Write TRUE if the statement is correct and FALSE if the
statement is wrong. Write the correct answer in the space provided.

1. The ability to turn a need into an opportunity to undertake a business is consistent with
the concept of environmental scanning
2. The cash-in versus cash out technique of measuring business performance will always
result in the correct net profit.
3. A complete set of financial statements has five basic components.
4. The financial statements are outputs of the accounting process.
5. The objective of financial statement is to provide information about the financial position,
financial performance, and cash flows of a business that is useful to specific users so
that they can make sound decisions.
6. Financial statements provide information about a business' assets, liabilities, equity,
income and expenses, cash flows, and contributions by and contributions to owners in
their capacity as owners.
7. Business transactions are limited to interactions being engaged by businesses with
customers and suppliers.
8. There is only one acceptable definition of accounting
9. Accounting is only applicable to businesses rendering services because accounting is a
service activity.
10. Because accounting is systematic, definite techniques and their application require
particular skill and expertise.

Assessment 1.1b Fill in the blanks. Write the term (word or phrase) that is being described or
completes the thought of each statement.

1. The _______________ dictates that the business owes its stakeholders fair information
on how the business performed for and as of a particular period.
2. ________________ are the means by which a business communicates to interested
user’s significant information about its economic activities

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3. According to AAA, accounting is the _____________ of identifying, measuring, and

communicating economic information to permit informed judgments and decisions by
users of the information.
4. According to AICPA, accounting is the _____________ of recording, classifying, and
summarizing in a significant manner and in terms of money, transactions, and events
which are in part of least of financial character, and interpreting results thereof.
5. The definition provided by the ASC requires that business trans actions have to be
measured in terms of ______________.
6. A/An ________________ is a set of interrelated components that work together to
achieve a common purpose.
7. The three basic functions of accounting in business is supportive of the fact that
accounting is being regarded as the ________________.
8. Unlike accounting _________________ is confined with the recording of monetary
transactions.
9. Because of the enormous impact of his work in the field of accounting,
_______________ is being regarded as the "Father of Modern Accounting”.
10. ________________ are the interactions between business and other stakeholders like
customers and suppliers,

Performance Check 1.1a

Visit any Philippine-based company website and download its most recent annual
report. From the annual report, find and describe the basic components of its financial
statements.

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

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ANSWER SHEET

Name: _______________________________________ Year and Section: _____________

Subject Teacher: _______________________________ Date Submitted: _____________

Assessment 2.1a Identification. Identify what branch of accounting is being referred to.

Choose from the following items below.

A. Public Accounting F. Tax Accounting

B. Private Accounting G. Cost Accounting
C. Financial Accounting H. Budgeting
D. Auditing I. Government Accounting
E. Management Advisory Services J. Forensic Accounting

1. Preparation of the overall plan by evaluating the cost of services and the types of

company operations earning the most profits

2. Recording daily transactions and preparing financial statements and related information

3. Preparing tax returns and tax planning for the business

4. Determining the cost of producing specific products

5. Examining financial statements in order to express an opinion as to the fairness of

presentation

6. Utilizing accounting, auditing, and investigative skills to conduct an examination into a

company's financial statements

7. Performing any engagement that will result in the issuance of an attest report that is in

accordance with professional standards

8. Processing of company's day-to-day accounting needs.

9. Consulting services performed by Certified Public Accountants (CPAs) firms to improve

client efficiency and effectiveness

10. Accounting system employed in national and local government

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Assessment 2.1b True or False. Write TRUE if the statement is correct and FALSE if the

statement is incorrect.

1. External Auditing is the review of the company's operations to determine its adherence

to the policies of the management

2. The main branches of public accounting include Cost Accounting, External Auditing, and

Tax Services.

3. People who prepare financial statements are called Financial Accountants

4. Tax Accounting covers the filing of appropriate returns with the authorized governmental

and non-governmental agencies.

5. The Cost Accountant is most concerned with the interpretation of financial statements

for decision making.

6. A Public Accountant is a hired employee of the government.

7. A Private Accountant examines financial statement prepared by Public Accountant.

8. Accounting Information System designs both manual and computerized data processing

systems.

9. Environmental Accountants look into how companies can be both profitable and

environmentally responsible.

10. An Accountant who engages in international accounting could offer expert service to the

general public.

11. Cost Accounting involves the recording of how much the product was produced.

12. The Branch of Accounting that is concerned with the preparation of financial statements

is management accounting.

13. Auditing Deals with the professional services offered in public accounting

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14. Taxation accounting covers the filing of the appropriate tax with the authorized

government agencies.

15. A faculty teaching accounting must be a certified public accountant.

Performance Check 2.1a

Read the statements below, and answer them comprehensively.

1. Explain the four areas of accounting.

____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
_________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
_______________________________________________________________________________________

2. Explain the differences between public accounting and private accounting.

____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
__________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
_______________________________________________________________________________________
3. Differentiate the branches of accounting in public and private practice.

____________________________________________________________________________________________
____________________________________________________________________________________________
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____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
__________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
_______________________________________________________________________________________

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ANSWER SHEET

Name: _______________________________________ Year and Section: _____________

Subject Teacher: _______________________________ Date Submitted: _____________

Assessment 3.1b Internal vs. External Users

The following questions could be asked either by an external or internal user. Identify
each of the questions as being more likely to be asked by an internal user or an external user.

1. What price should we set for our product?

2. Did the company earn a satisfactory income?
3. Should we hire more employees?
4. How does the company's profitability compared to other companies
5. What does it cost us to manufacture each unit produced
6. Which product should we emphasize?
7. Will the company be able to provide a return to its stakeholders?

Assessment 3.1c True or False. Write TRUE if the statement is correct or FALSE if the
statement is incorrect.
1. Potential investors are interested in financial information that will help them know the
ability of the entity to pay dividends.
2. The financial statements provide all the needed information by decision makers.
3. The financial statements assist the investors decide whether to sell or hold their
investment in the entity.
4. The shareholders or owners, management, and the company employees are external
users with indirect interest in the business.
5. Internal users of financial information are decision-makers who belong to the business
organization itself.
6. Taxing authorities are external users of financial information with direct interest in the
business entity.
7. Suppliers use accounting information as bases of decisions on whether to extend credit
to the economic entity.

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8. Financial reports provide information on the ability of the firm to pay wage increase for
their employees.
9. Managers use financial information to set goals for the company
10. Creditors make use of financial report to know how the business used the money lent to
the entity.

Performance Check 3.1a Identify what kind of stakeholder is being referred to. Choose from
the following items below.

A. Owners F. Management
B. creditors G. Suppliers
C. potential investors H. Bureau of Internal Revenue
D. employees I. Public
E. regulatory bodies J. Customers

1. To plan, organize, and run the business

2. To know how the business helps the economy
3. To determine whether debts owed to them will be paid when due
4. To determine the correctness of the tax returns filed by the company
5. To decide whether to invest in the company or not
6. To decide whether they should withdraw or increase their investments
7. To know whether an entity can continue to honor product warranties
8. To ensure that the company's disclosure of accounting information is in accordance
with rules and regulations
9. To find out the financial capacity of the company in order to bargain for benefits
10. To assess the capability of the business to pay its obligation including the related
interests on maturity date

Performance Check 3.1b Encircle the letter of the best answer.

1. Which of the following are considered interested in determining the return of investment
in the business?
a. management c. creditors
b. employees d. owners
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2. Which of the following is not considered as an external user?

a. regulatory agencies c. employees
b. taxing authorities d. suppliers
3. Which of the following statements about users of accounting information is correct?
a. Management is an external user.
b. Tax authorities are internal users.
c. Employees are external users.
d. Creditors are external users

4. Who carries the responsibility to review the work of the accountants and issue opinions
as to the fairness of financial statements?
a. the board of directors c. the external auditor
b. the internal auditors d. management
5. Which of the following is an internal user of a company's financial information?
a. creditors with long-term contracts with the company
b. holders of the company's bonds
c. stockholders in the company
d. board of directors

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i-Link College of Science and Technology, Inc. Fundamentals of ABM 1

ANSWER SHEET

Name: _______________________________________ Year and Section: _____________

Subject Teacher: _______________________________ Date Submitted: _____________
Assessment 4.1a Identify what concept is being referred to. Choose from the following items

below.

A. business F. merchandising business

B. sole proprietorship G. incorporators
C. service business H. corporation
D. cooperative I. by-laws
E. partnership J. manufacturing business

1. A business organization formed by at least fifteen individuals, operated to benefit

each member
2. Business operation that involves purchasing and converting raw materials into
finished product
3. An economic unit that sells goods and services with the prime objective of generating
profit
4. A business organized by two or more individuals who agreed to contribute money or
property
5. Contains provisions for internal administration of the corporation
6. A business which is easy to form and with minimal requirements
7. A vulcanizing shop
8. A business organization with unlimited commercial life
9. Owners who originally formed the corporation,
10. A boutique shop

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i-Link College of Science and Technology, Inc. Fundamentals of ABM 1

Performance Check 4.1a

Directions: Read the essay items below and answer them comprehensively.
1. How does sole proprietorship differ from partnership?
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
_______________________________________________________________________________________

2. Discuss the legal requirements in organizing a cooperative.

____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
__________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
_______________________________________________________________________________________

3. Give examples of each form of organization according to ownership in your locality.

List down at least 3 each.

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i-Link College of Science and Technology, Inc. Fundamentals of ABM 1

____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
__________________________________________________________________________________
____________________________________________________________________________________________
__________________________________________________________________________________________
ANSWER SHEET

Name: _______________________________________ Year and Section: _____________

Subject Teacher: _______________________________ Date Submitted: _____________

Assessment 5.1a Write TRUE if the statement is correct and FALSE if the statement is
incorrect.

1. GAAP is a widely accepted set of rules, concepts and principles that govern the
application of the accounting procedures.
2. The owner of Linis Bango laundry Shop bought a residential dwelling for his parents.
The cost of the house is recorded as property of the business.
3. Financial statements are prepared at the end of the 12-month period because of the
going concern assumption.
4. Accountants must use their judgment to record transactions that require estimation.
Conservatism principle should be applied by the accountants in exercising judgment.
5. The monetary unit assumption assumes that the monetary unit used in recording
business transactions is stable.
6. Going concern assumes that financial statements are prepared only once at the end of
the economic life of the entity.
7. Users of financial reports expect that accounting information is reliable, verifiable, and
objective.
8. Cost is more definite and determinable than other valuation methods.
9. Materiality principle states that the requirements of any accounting principle may be
ignored when there is an effect lo the users of financial information.
10. Cash paid for expenses still to be incurred is recognized as expense under the accrual
method of accounting.

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Performance Check 5.1a Identify the accounting assumption or principle that suits the
statement.

1. Ensures that financial information is reported at regular intervals.

_______________________________________________________________
2. This assumption adheres to the revenue recognition, matching, and cost principles.
_______________________________________________________________

3. The framework, rules, and guidelines of the financial accounting profession with the purpose of
standardizing the accounting concepts, principles, and procedures.
_______________________________________________________________
4. It requires that all business transactions and other events are recognized in the accounting
records when they occur rather than when cash or its equivalent is received or paid.
_______________________________________________________________
5. Any personal transaction of its owner should not be recorded in the business accounting books,
and vice versa.
_______________________________________________________________
6. This assumes that a company will continue to exist long enough to carry out its objectives and
commitments and will not liquidate in the foreseeable future.
_______________________________________________________________
7. The life of an economic entity can be divided into artificial time periods for the purpose of
providing periodic reports on the economic activities of the entity.
_______________________________________________________________
8. This assumption disregards any inflation or deflation in the economy in which the entity
operates.
_______________________________________________________________
9. Assets are recorded at cost, which equals the value exchanged at the time of its acquisition.
_______________________________________________________________
10. Important information to users of financial statements should be disclosed within the statement
or in the notes to the statement.
_______________________________________________________________
11. This accounting principle requires companies to use the accrual basis of accounting.
_______________________________________________________________
12. Revenue is recognized when the earning process is virtually complete and an exchange
transaction has taken place.
_______________________________________________________________
13. This principle allows errors or violations of accounting valuation involving immaterial and small
amounts of recorded business transactions.
_______________________________________________________________

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i-Link College of Science and Technology, Inc. Fundamentals of ABM 1

14. The basic accounting principle that leads accountants to anticipate or disclose losses, but does
not allow a similar action for gains.
_______________________________________________________________
15. Accountants are expected to apply the same accounting principles, procedures, and practices
from year to year.
_______________________________________________________________

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i-Link College of Science and Technology, Inc. Fundamentals of ABM 1

ANSWER SHEET

Name: _______________________________________ Year and Section: _____________

Subject Teacher: _______________________________ Date Submitted: _____________

Assessment 6.2a True or False. Write TRUE if the idea being expressed is correct and
FALSE if otherwise.
1. Except for contra-asset accounts, all asset accounts have normal balances found in the
debit side.
2. Generally, labilities and owner's equity accounts have normal balances found in the
credit side.
3. All businesses have a chart of accounts.
4. To establish uniformity, all businesses use the same chart of accounts formal.
5. A good chart of accounts captures all possible foreseen transactions using uniform and
consistent account titles but still offers flexibility to capture unforeseen transactions by
providing a range of account codes for the account tires that will be used in these
unforeseen transactions.
6. Coding chart of accounts is helpful in locating specific accounts when posting to the
ledger.
7. Account titles in the chart of accounts are usually arranged chronologically.
8. Account titles in the chart of accounts are usually grouped according to major accounts.
9. The business can no longer add an account title to the chart of accounts once it is fixed
and finalized.
10. The business can no longer delete an account lite from the chart of accounts once it is
fixed and finalized.

Assessment 6.2b Identification. The terms labeled A to J are the ones being described in the
sentences numbered 1 to 10 Match each term with the correct sentence.
a. Accounts Receivable f. Furnitures and Fixtures
b. Building g. Inventories
c. Cash h. Land
d. Cash Equivalent i. Notes Receivable
e. Equipment j. Prepaid Rent

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i-Link College of Science and Technology, Inc. Fundamentals of ABM 1

1. These are short term, highly liquid investments that ore acquired three months before
maturity or earlier.
2. This represents the amount of money owed by the customer or debtor to the business
evidenced by a promissory note
3. This refers to an advance payment made by the business to cover for future rental
payments.
4. Not subject to depreciation, this refers to the physical site owned by the business where
the building is situated
5. This includes bills, coins, checks, deposits in banks, and bank drafts.
6. This represents manual or automated machines used in the business like computers,
laptops, ring binders, and delivery vehicle.
7. This refers to the physical structure owned and used by the business to conduct its
business operation.
8. Examples these assets include tables, chairs, filing cabinets, and display racks.
9. This represents assets held for sale in the ordinary course of business, in the process of
production for sale, or in the form of materials or supplies to be consumed in the
production process or in the rendering of services
10. This refers to open accounts which represent the amount of money owed by the
customers to the business.

Performance Check 6.2a A portion of financial statements dated December 31, 2019 with the
following accounts and balances were gathered from Victor's Rental Studio:

Accounts Payable P25,600

Accounts Receivable 52,400
Accumulated Depreciation-Building 18,000
Building 200,000
Cash 37,700
Depreciation Expense 18,000
Interest Income 1,080
Interest Receivable 1,680
Land 50,000
Mortgage Payable 151,600
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i-Link College of Science and Technology, Inc. Fundamentals of ABM 1

Notes Payable 19,800

Notes Receivable 14,000
Office Supplies 13,600
Supplies Expense 9,900
Taxes and licenses 22,800
Utilities Expense 36,600

Based solely from the information above,

a. Compute for the Total Assets

b. Compute for the Total Liabilities
c. Compute for the Total Expenses
d. Compute for the Total Owner’s Equity

Performance Check 6.2b The following are some transactions of Virginia Services:

A L OE

1. Received cash as additional investment _______ ________ ________

2. Purchased supplies on account _______ ________ ________
3. Charged customers for services made on account _______ ________ ________
4. Rendered services to cash customers _______ ________ ________
5. Paid cash for rent on building _______ ________ ________
6. Collected on account receivable in full _______ ________ ________
7. Paid cash for supplies _______ ________ ________
8. Returned supplies purchased on account _______ ________ ________
9. Paid cash to settle accounts _______ ________ ________
10. Paid cash to owner for personal use _______ ________ ________
Required:

For each transaction, indicate whether the assets (A), liabilities (L) or owner’s equity

(OE) increased (+), decreased (-) or did not change (0) by placing the appropriate sign in the

appropriate column.

81