Module 1

Review of Accounting Process

Introduction

This is a review and continuation of the first course in accounting taken in

Senior High for Accounting Business and Management (ABM). Partnership and
Corporation Accounting deals with transactions, financial statements and
problems peculiar to the operations of partnership and corporations as
distinguished from sole proprietorship.

Topics included in this subject are: accounting process, accounting for

partnership, partnerships operations and dissolution with liquidation and
accounting for corporate affairs, accounting for share capital transactions,
treasury shares, issuance of no par value share, accumulated profits/losses,
dividends, corporate financial statements, retained earnings, earnings per share,
book value per share and income taxes.

This module provides the students a clear understanding how partnership

and corporation accounting is significant as entrepreneurial activity to the
economy. The field of entrepreneurship has been one of the most topical areas of
education in schools and universities throughout the world.

Intended Learning Outcomes

1. Recall through the discussions the importance of Accounting in business.

2. To understand the concept of Generally Accepted Accounting Principle,
Accounting Standards.
3. To know the elements of financial statements and accounting equation.
4. Enlist the different chart of accounts.
5. Understand the importance of investment objectives.
6. To know and understand the steps of accounting process.
7. To understand the accounting for partnership and its operation.

Instructional Materials

Accounting

• Is an art of recording, classifying, summarizing in a significant manner and

in terms of money, transactions, and events which are, in part at least of a
financial character, and interpreting the results thereof. (AICPA)
• Is a service activity. Its function provide quantitative information, primarily
financial in nature, about economic entities, that is intended to be useful in
making economic decisions. (ASC)

Importance of Accounting in Business

Accounting provides business owners and management with information

essential to the efficient conduct and evaluation of its activities. It gathers data
which are of financial in character, stores these data in the books of accounts and
transform them into a more meaningful source of information concerning the
financial position, performance and cash flows from business operations as well.
The financial statements are communicated to various users which include
investors, employees, lenders, suppliers and other trade creditors, customers,
government and their agencies and public. This important reports and documents
are analyzed and interpreted through the accountants who are the only
knowledgeable expert professionals in this field where accounting justifies its
importance in the global world of business.

Basic Financial Statements:

1. Statement of Financial Position or Balance Sheet

This shows the financial position of an enterprise as of a particular or
specific date. This measures and evaluates in terms of enterprise’ liquidity,
solvency, financial structure and capacity for adaptation.

Liquidity – the ability of the enterprise to meet

currently maturing obligations
Solvency – the ability of cash over the longer term to
meet maturing obligations.
Financial Structure – the source of financing for the
assets of the enterprise. It indicates how much is borrowed
capital and how much is equity capital.

Capacity for adaptation – the financial flexibility of the

enterprise to use its available cash for unexpected
requirements and investment opportunities.

This shows the Assets, Liabilities and Owner’s Equity. Basically it

answers the questions:

How much the business owns? (assets)

How much the business owes? (liabilities)
How much is the business networth. (owner’s equity)
2. Statement of Comprehensive Income or Income Statement
This is a financial statement which shows the performance of the
enterprises for a given period of time. The performance is primarily measured
in the level of income earned by the enterprise through effective and efficient
utilization of its resources.
This financial report shows the Revenues, Expenses and Operating
results which could either be profit or loss.
The information presented in the income statement is important because
profitability is the primary concern to those interested in the economic activities
of an enterprise. It answers the questions: Does the business make a profit”
Does the business incur a loss?
 3. Statement of Changes in Equity
This is a financial statement which summarized the changes in equity for a
given period of time. The beginning equity of the owner is increased by the
additional investment and profit. Correspondingly, it is decreased by withdrawal
and loss.

The use of the above term depends upon the forms of business enterprise, as:

Statement of Changes in Owner’s Equity – for sole proprietorship

Statement of Changes in Partner’s Equity – for a partnership
Statement of Changes in Shareholder’s Equity – for a corporation

4. Statement of Cash Flows

A financial statement that provides information about the details of changes
in cash position of the business during a given period. This shows the sources and
uses of cash. It is the statement of cash receipts and cash disbursements. It is
classified into the following activities:

a. Operating
b. Investing
c. Financing

What are Generally Accepted Accounting Principles or GAAP

1. Principle of Relevance – that the resulting information is meaningful and

useful to those who need to know something about a status of a certain
organization.
2. Principle of Objectivity – that the resulting information is not influence by
the personal bias or judgement of those who furnish it. Objectivity means
reliability and trustworthiness. It also connotes verifiability which means
that there is some way of finding out whether the information is true and correct.
3. Principle of Feasibility – that it can be implemented without undue complexity
or cost. These criteria are conflicting with one another and to resolve, the one
which may be least objective and lest feasible is favoured.

WHAT ARE ACOUNTING STANDARDS

Accounting standards are authoritative statements of how a particular type

of transactions and other events should be reflected in the financial statements.

PICPA – Philippine Institute of Certified Public Accountants

ASC – Accounting Standards Council
SFAS – Statement of Financial Accounting Standards
GAAP – Generally Accepted Accounting Principles
Philippine Accountancy Act of 2004 (R.A 9298)when a new set of standard setting
body known as
PFRSC - Phil. Financial Reporting Standards Council was created by the PRC -
Phil. Regulation Commission upon the recommendation of the Board of
Accountancy to replace ASC. Because of this recent development the ASC’s
SFAS is now known as Phil. Accounting Standards (PAS).

WHAT ARE THE UNDERLYING ACCOUNTING ASSUMPTIONS

1. Accounting Entity Concept or Separate entity Assumption

2. Going Concern or Continuity Concept or Assumption
3. Time-Period Assumption
Calendar Year – January to December 31
Fiscal Year – begin on the 1st day of the month except
January and will end on the last day of the 12th month completing
the 1 year period.
Natural Business Year – a 12th month period that ends on any
month when the business is at the lowest or
experiencing slack season.
4. Unit of Measure (monetary Conversion)
5. Accrual Basis Assumption

ELEMENTS OF FINANCIAL STATEMENTS

There are five elements of financial statements: Assets, Liabilities, Owner’s

Equity, Revenues and Expenses.

Assets – resources controlled by the enterprise as a result of past transactions

and events and from which future economic benefit are expected to flow the
enterprise

Liabilities – present obligations of an enterprise arising from past transactions or

events, the settlement of which is expected to result in an outflow from the
enterprise of resources embodying economic benefits.

Owner’s Equity – the residual interest in the assets of the enterprise after
deducting all its liabilities. It is increased when there is profit or additional
contributions and decreased when there is loss or withdrawals by the owner.

Revenues – the gross inflow of economic benefits during the period arising in the
course of ordinary activities of an enterprise when those inflows result in increase
in equity, other than those relating to contributions from owners.

Expenses –the gross outflow of economic benefits during the arising in the
course of ordinary activities of an enterprises when those outflow result in
decrease in equity, other than those relating to distribution of owners.

Phases of Accounting

1. Recording
2. Classifying
3. Summarizing
4. Interpreting

WHAT IS THE BASIC ACCOUNTING EQUATION?

Assets = Liabilities + Owner’s

WHAT IS CHART OF ACCOUNTS?

 List of account titles that is prepared by the accountant beforehand to guide

the bookkeeper describing the exchanges of values
 Arranged according to assets, liabilities, owner’s equity, income and
expense and the same arrangement we see in the ledger.
Sample of Chart of Accounts

Sample of Chart of Accounts

Types of Accounts
1.Real Account – includes balance sheet accounts such as assets and
liabilities
2.Personal Account – includes accounts associated with companies or
individuals
3.Nominal Account – includes income and expenses
STEPS OF THE ACCOUNTING PROCESS

1. Journalizing
2. Posting
3. Trial Balance
4. Adjusting Entries
5. Worksheet
6. Financial Statements
7. Closing Entries
8. Post-Closing Trial Balance

THE ACCOUNTING PROCESS

Accounting Process, also called “accounting cycle”, refers to a series of

repetitive activities from the beginning to the end of the accounting period.
The process usually involves the following activities:

1. Identifying reportable transactions and events

Reportable transactions and events are those economic activities with
monetary effects on any of the accounting elements. Non-monetary transactions
and events are not recorded in the accounting books.

2. Documentation of reportable transactions

Transactions to be reported in the books of accounts should be supported
by documents such as sales invoice, purchase contract, vouchers, etc.
These documents are evidences in compliance to the objectivity and
fairness principles of accounting.

3. Recording in the general journal

The economic transactions based on the supporting documents are
chronologically recorded with explanations in the general journal (or special
journal). The journals are the “books of original entries.”

4. Posting to the general ledger

At the end of the day (or of the week or month), the recorded transactions
in the general journals are summarized or posted to the general ledger of each
account. The ledgers are called the “books of final entries” because the
balances of accounts in the ledger may be used to prepare financial statements.

5. Preparation of trial balance

This is an optional process. The trial balance is prepared to test the balance
of debit and credit totals, but not the accuracy of the accounts in the accounting
records.
6. Preparation of working paper and adjustments
This is also an optional process. The working paper starts with the
unadjusted trial balance, adjustments, and adjusted balances of the income
statement and balance sheet accounts. The working paper makes the preparation
of financial statement more convenient.

7. Preparation of financial statements

Although financial statements can be prepared directly from open balances
of the general ledger accounts, it is preferable that the accounts in the financial
statements are taken from the working paper because they should only certain
adjusted accounts.

8. Recording of adjusting entries to the general journal

At the end of the period, some accounts contain a mixture of asset and
expense; hence, they must be segregated through adjusting entries. The assets
accounts should be purely separated from the expense accounts to achieve
proper income determination and report proper financial condition.

9. Recording of closing entries to the general journal

At the end of the period, nominal accounts (income statement accounts)
and drawing accounts are closed to the capital accounts. This is necessary in
order not to mix economic transactions of the current period with the economic
transactions in the next period.

10. Posting of adjusting and closing entries to the ledger

The adjusting entries and closing entries should be posted to the individual
ledger accounts. When this process is done, the remaining accounts are those
with open balances which are the real accounts or balance sheet accounts.

11. Preparation of post-closing trial balance

The post-closing trial balance contains the real accounts with open
balances after the adjusting and closing entries are effected in the general ledger.

12. Reversing entries of the next accounting period

Reversing entries are inverted adjusting entries that are made at the start of
the accounting period. They are made before the recording of the regular
transactions of the next accounting period.
The purpose of reversing entries is not to correct the adjusting entries but to
simplify the recording of recurring transactions of the next accounting.
Reversing entries are made on adjusting entries for accruals, expense
method of prepayments, and income method of precollections.

Procedure/Lesson Development

This course is developed to fit in a new normal setting. It is a blended

learning platform thru online and offline learning and evaluation methods. First,
you have to read your lessons twice or read until you fully understand.
Please ask your instructor when you need any clarifications. If you have
inquiries or clarifications about the topic you can contact your instructor during
your class schedule. During the oral presentation you can choose class online or
recorded video.
If you have internet you can send your activity thru email or any social media
platform and if you don’t have internet access you can write your activities in a
paper and you can send via courtier or thru drop box. Please write your activity in
handwritten form in a short bond paper, one activity per one bond paper.
 Evaluation and Assessment

Activity #1. Choose the letter of the correct answer in each

given questions. (2 points)

1. Business transactions are recorded in the books of accounts in a

“chronological manner”. Chronological means –
a. systematic c. procedural
b. timely d. in order of occurrence
2. Accrued Income has a semblance or similar to –
a. accounts receivable c. unearned income
b. pre-collected income d. deferred income
3. Which of the following account titles that is differently
classified from the others?
a. owner’s equity c. unused supplies
b. cash in bank d. accumulated depreciation
4. An account receivable has a debit and credit entries of
P60,000 and P20,000 respectively with normal ending entries
of P50,000. Which of the following was posted as beginning
balance?
a. P50,000 c. P25,000
b. P35,000 d. P10,000
5. In its simplest description, statement of cash flows presents
a Statement of Cash Receipts and Disbursement. Which of the
following is not classified as one of its activities?
a. operating activity c. financing activity
b. lending activity d. investing activity

Activity #2. Essay. (10 points)

1. What information can we get from a balance sheet?

2. What information can we get from an income statement?
3. Why is the business regarded as an entity separate and distinct from the
owner?
4. Why is accounting considered the “language of business”?

Summary

Accounting is one of the key functions for almost any business. It may be
handled by a bookkeeper or an accountant at a small firm.

The result which are the financial statements are analysed and interpreted
through the accountants who are knowledgeable and expert professionals in this
field where accounting justifies its importance in the global world of business.

Reference
1. Accounting for Partnership and Corporation.Rafael M. Lopez, Jr., 2020-202