FUNDAMENTALS OF ACCOUNTING, BUSINESS, AND MANAGEMENT

THE ACCOUNTING EQUATION AND THE DOUBLE ENTRY SYSTEM

ACCOUNTING EVENTS AND TRANSACTION

 Accounting Event is an economic occurrence that causes changes in an
enterprise’s assets, liabilities and/or equity, events may be internal actions, such
as the use of equipment for the production of goods or services. It can be
external event, such as the purchase of raw materials from supplier.

ACCOUNTING INFORMATION SYSTEMS

 Is the combination of personnel, records, and procedures that a business uses to
meet its need for financial information. Most firms have an accounting manual
that specifies the policies and procedures to be followed in accumulating
information within the accounting information system.

ACCOUNTING MANUAL
 Details what events are to be recorded in the accounts, and when and how the
information is to be classified and accumulated.

ECONOMIC ACTIVITIES FLOW INTO THE ACCOUNTING PROCESS

ECONOMIC
ACTIVITIES

DECISION ACCOUNTING
MAKERS INFORMATION

THE
ACCOUNTING
PROCESS

TYPES OF ACCOUNTING SYSTEMS

 MANUAL
 COMPUTER BASED
 DATABASE
 CLOUD

THE ACCOUNTING EQUATION

ASSETS = LIABILITIES + OWNER’S EQUITY

BUSINESS AND FINANCIAL TRANSACTIONS
 Business Transactions refer to an occurrence of an event or a condition that affects a
firm’s financial position and can be reliably recorded.
 Financial Transactions can be analyzed or expressed in terms of its effects on the
accounting equation. It will be analyzed by means of a financial transaction worksheet.

ACCOUNTING CYCLE:
 Step 1 Identification of events to be recorded
 Step 2 Transaction are recorded in the journal
 Step 3 Journal Entries are Posted to the Ledger
 Step 4 Preparation of Trial Balance
 Step 5 Preparation of the Worksheet including adjusting entries
 Step 6 Preparation of the financial statements
 Step 7 Adjusting journal entries are journalized and posted
 Step 8 Closing journal entries are journalized and posted
 Step 9 Preparation of a post-closing trial balance
 Step 10 Reversing Journal Entries are Journalized and posted

PREPARING THE WORKSHEET

 Enter the account balances in the unadjusted trial balance column and total the
amounts.
 Enter the adjusting entries in the adjustments column and total the amounts.
 Compute each account’s adjusted balance by combining the unadjusted trial balance
and the adjustment figures. Enter the adjusted amounts in the adjusted trial balance
columns.
 Extend the asset, liability and owner’s equity amounts from the adjusted trial
balance columns to the balance sheet columns. Extend the income and expense
amounts to the income statement columns. Total the statement columns.
 Compute profit or loss as the difference between total revenues and total expenses
in the income statement. Enter profit or loss as a balancing amount in the income
statement and in the balance sheet, and compute the final column totals.

ADJUSTMENTS AND CLOSING ENTRIES

 ADJUSTMENT ARE JOURNALIZED AND POSTED
o The adjustment process is a key element of accrual basis accounting. The
worksheet helps in the identification of the accounts that need adjustments. The
adjusting entries are directly entered in the worksheet.
 CLOSING ENTRIES ARE JOURNALIZED AND POSTED
o Income, expenses and withdrawal accounts are temporary accounts that
accumulate information related to a specific accounting period. These temporary
accounts facilities income statement preparation.
 Close the income accounts
 Close the expenses accounts
 Close the income summary
 Close the withdrawal account
POST CLOSING TRIAL BALANCE AND REVERSING ENTRIES

PREPARATION OF A POST CLOSING TRIAL BALANCE

 The post-closing trial balance verifies that all the debits equal the credits in the
trial balance.
 The trial balance contains only balance sheet items such as assets, liabilities, and
ending capital because all income and expenses accounts, as well as the
withdrawal account, have zero balance.

RESERVING ENTRIES
 Preparing the post-closing trial balance may not be last step in the accounting
cycle. Some entities elect to reverse certain end-of-period adjustment on the
first day of the new period. A reversing entry is a journal entry which is the exact
opposite of a related adjusting entry made at the end of the period. It is
basically a bookkeeping technique made to simplify the recording of regular
transaction in the next accounting period.

PHYSICAL COUNT

NEED FOR A PHYSICAL COUNT: In the periodic inventory system, purchases of

merchandise are accumulated in the purchases account. During the accounting period,
no entry is made to the merchandise inventory account such that its balance at the end
of the period.

STEPS INVOLVED IN THE PHYSICAL COUNT FOLLOWS

 All merchandise owned by the entity is counted

 The quantity counted is multiplied by the cost per unit for each inventory item.
 The costs of various items are added to determine the total cost of inventory.

COMPLETE SET OF FINANCIAL STATEMENTS

An entity shall present with equal prominence all of the financial statements in a
complete set of financial statements. Per revised International Accounting Standards
(AIS) No.1, a complete set of financial statements comprises:
 A statement of financial position as at the end of the period;
 A statement of comprehensive income for the period;
 A statement of changes in equity for the period;
 A statement of cash flows for the period;
 Notes, comprising a summary of significant accounting policies and other
explanatory information; and
 A statement of financial position as at the beginning of the earliest comparative
period when an entity applies an accounting policy retrospectively or makes a
retrospective restatement of items in this financial statement or when it
reclassifies items in its financial statements.
JOURNALS AND VOUCHERS
SPECIAL JOURNALS
 Cash Receipts Journal
 Purchases Journal
 General Journal
 Flexibility Of Special-purpose Journals

VOUCHER SYSTEM
 Voucher
 Voucher Register
 Unpaid Voucher File
 Check Register
 Paid Voucher File
 Recording Partial

ELEMENTS OF FINANCIAL STATEMENTS

ASSET
 Present economic resources controlled by the entity as a result of past events and
has the potential to produce economic benefits
LIABILITY
 Present obligation of the entity to transfer economic resources as a result of past
events.
EQUITY
 Residual interest in the assets of the entity after deducting all its liabilities
INCOME
 Increases in assets, or decreases in liabilities, that result in increases in equity, other
than those relating to contributions from holders of equity claims.
EXPENSE
 Decreases in assets, or increases in liabilities, that result in decreasing in equity,
other than those relating to distributions to holders of equity claims.

BALANCE SHEET
ASSET
 Accounts Receivable
 Cash
 Equipment
 Inventory Land
 Prepaid Expense

LIABILITIES
 Accounts Payable
 Loans Payable
 Salaries Payable
 Taxes Payable

EQUITY
 Capital
 Drawing
INCOME STATEMENT
INCOME
 Interest Income
 Net Sales
 Services Revenue

EXPENSES
 Advertising Expense
 Depreciation Expense
 Rent Expense
 Utilities Expense

INCOME STATEMENT
STATEMENT OF COMPREHENSIVE INCOME
 Shows your revenues and expenses over a period of time.

Income – Expenses = Net Income

FOR EXAMPLE:
SOFTBYTE
Income Statement
For the Month Ended September 30, 2002
Revenues
Service revenue $ 4,700
Expenses
Salaries expense $ 900
Rent expense 600
Advertising expense 250
Utilities expense 200
Total expenses 1,950
Net Income $ 2,750

Note: Net income of $2,750 shown on the income statement is added to the
beginning balance of owner’s capital in the statement of owner’s equity.

STATEMENT OF OWNER’S EQUITY

STATEMENT OF CHANGES IN EQUITY
 Explains the effects of transactions on equity during the accounting period.

Beginning Equity + Investments +/-Net Income (Loss) – Withdrawals = End Equity

SOFTBYTE
Statement of Owner’s Equity
For the Month Ended September 30, 2002

M. Doucet, Capital, September 1 $ -

Add: Investments $ 15,000
Net Income 2,750 17,750
$ 17,750
Less: Drawings (Withdrawal) 1,300
M. Douceyt, Capital September 30 $ 16,450
BALANCE SHEET
STATEMENT OF FINANCIAL POSITION
 Highlights the relative strength of a company at a point in time

Assets = Liabilities + Equity

SOFTBYTE
Balance Sheet
September 30, 2002
Assets
Cash $ 8,050
Accounts Receivable 1,400
Supplies 1,600
Equipment 7,000
Total assets $ 18,050

Liabilities and Owner’s Equity

Liabilities
Accounts payable $ 1,600
Owner’s Equity
M. Doucet, Capital 16,450
Total liabilities and owner’s equity $ 18,050

CASH FLOWS STATEMENT

STATEMENT OF CASH FLOWS
 Explains how a company obtain and use cash during the accounting period.

Net operating + Net investing + Net Financing = Net Change in Cash

SOFTBYTE
Cash Flow Statement
For the Month Ended September 30, 2022
Cash flows from operating activities
Cash receipts from customers $ 3,300
Cash payments to suppliers and employees (1,950)
Net cash provided by operating activities $ 1,350
Cash flows from investing activities
Purchase of equipment $ (7,000)
Net cash provided by investing activities (7,000)
Cash flows from financing activities
Investments by owner $ 15,000
Drawings by owner (1,300)
Net cash provided by investing activities 13,700
Net increase in cash $ 8,050
Cash, September 1 -
Cash, September 30 $ 8,050
 T-ACCOUNT
BASIC FORM OF ACCOUNT

Account Name

Debit Side Credit Side

Normal Balances
ASSET, LIABILITY, AND EQUITY ACCOUNTS

Asset Accounts Liability Accounts

Increase in Decrease in Decrease in Increase in

Debit Side Credit Side Debit Side Credit Side

Normal Debit Normal Credit

Balance Balance

Equity Accounts

Decrease in Increase in
Debit Side Credit Side

Normal Credit
Balance
NORMAL BALANCES
INCOME AND EXPENSE ACCOUNTS

Income Accounts Expense Accounts

Decrease in Increase in Increase in Decrease in

Debit Side Credit Side Debit Side Credit Side

Normal Credit Normal Debit

Balance Balance

NORMAL BALANCES
SPECIFIC EQUITY ACCOUNTS

Drawings Accounts Capital Accounts

Increase in Decrease in Decrease in Increase in

Debit Side Credit Side Debit Side Credit Side

Normal Debit Normal Credit

Balance Balance

ACCOUNTING CYCLE

ANALYZE
JOURNALIZING POSTING
TRANSACTIONS

PREPARATION OF PREPARATION OF ADJUSTING

TRIAL BALANCE WORKSHEET ENTRIES

PREPARATION OF
POST-CLOSING
FINANCIAL CLOSING ENTRIES
TRIAL BALANCE
STATEMENTS
PREPARATION OF TRIAL BALANCE

ANALYZE
JOURNALIZING POSTING
TRANSACTIONS

PREPARATION OF PREPARATION OF ADJUSTING

TRIAL BALANCE WORKSHEET ENTRIES

PREPARATION OF
POST-CLOSING
FINANCIAL CLOSING ENTRIES
TRIAL BALANCE
STATEMENTS

PREPARATION OF FINANCIAL STATEMENTS

ANALYZE
JOURNALIZING POSTING
TRANSACTIONS

PREPARATION OF PREPARATION OF ADJUSTING

TRIAL BALANCE WORKSHEET ENTRIES

PREPARATION OF
POST-CLOSING
FINANCIAL CLOSING ENTRIES
TRIAL BALANCE
STATEMENTS
CLOSING ENTRIES

ANALYZE
JOURNALIZING POSTING
TRANSACTIONS

PREPARATION OF PREPARATION OF ADJUSTING

TRIAL BALANCE WORKSHEET ENTRIES

PREPARATION OF
POST-CLOSING
FINANCIAL CLOSING ENTRIES
TRIAL BALANCE
STATEMENTS