Accounting Reviewer

MODULE 1
LESSON 1: Introduction to Accounting and Business
HISTORY - as early as when man learned how to acquire things for his personal and other needs.

- It was in the 15th century when a Franciscan friar by the name of Luca Pacioli published a book,
Summa de Arithmetica that gave way to the modern way of recording business undertaking.
THE ACCOUNTING PROFESSION

- The Accountancy profession has already attained its status as in other professions like law and
medicine.
- It has a separate curriculum for those who would like to take the Certified Public Accountant (CPA)
examinations.
Accounting and Business

- Accounting is often called the language of business because it is used in describing all types of
business activities.
- Business is a field of endeavor.
- A person engages in business for the purpose of attaining an objective which is profit.

Accounting and Bookkeeping

- The Statement of Financial Accounting Standards (SFAS) Bulletin No. 1 defines Accounting as a
service activity, which provides quantitative information, primarily financial in nature, about business
organizations.
- The American Institute of Certified Public Accountants (AICPA) defined Accounting as the process
of recording, classifying, 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 result thereof.
- The AICPA definition gives us the functions of accounting before the financial statements can be
completed.
Functions of Accounting
1. Recording is the writing down of the business transactions in a record book called journal.
 Bookkeeping is technically defined as the process of recording business transaction in a
chronological order.
2. Classifying means arranging or organizing transactions in classes of categories.
3. Summarizing is the summing up of events to find the total so that financial statements can be
prepared.
4. Interpreting is defined by the Webster dictionary as to set forth the meaning of; to understand in a
particular way.
Flow of Accounting Information
 Economic activities refer to the field of endeavor (business).
 Business documents are produced by business transactions like cash voucher, official receipt,
checks, sales invoices, journal vouchers, and others.
 Accounting process refers to the steps from journalization, posting up, to the preparation of
accounting reports.
 Accounting reports refer to the financial statements, the Balance Sheet, and the Income
Statement.
 Decision-makers are the people in need of accounting reports to help them in their decisions.

Areas of Accounting
1. Public Accounting
- render independent and expert financial services to the public for a fee.
Auditing
- the examination of financial statements by an independent certified public accountant for the fairness of
the financial statements.
Management Advisory Services
- Individuals engaged in this area provide professional advisory services for the purpose of improving the
client's use of its capabilities and resources to achieve the objectives of the organization.
Taxation
- refers to the preparation of annual income tax returns and other services related to taxation.
2. Private Accounting
- These are CPAs employed in a business enterprise. They may occupy the position of a chief
accountant, accounting staff, or internal auditor.
3. Government Accounting
- been defined as the process of analyzing, summarizing, and communicating all transactions involving
the receipts and dispositions of government funds and property and interpreting the result thereof.
4. Research and Education
- Accountants enter the teaching profession. Some are engaged in research work for some companies.
Accounting versus Bookkeeping
- Accounting is a broader field which includes Bookkeeping.
- Bookkeeping deals with the procedures of keeping records while Accounting is conceptual. It covers
almost everything about the profession of Accountancy.
Accounting versus Accountancy
- the two terms are synonymous because both refer to the field of accounting. They refer to the
principles, theories, and practice of accounting.
Financial Accounting versus Management Accounting
Both deal with accounting records. In Financial Accounting, the focus is on the preparation of financial
reports, the Income Statements, and the Balance Sheets for internal and external use.
Management Accounting on the other hand, refers to the function of providing professional advisory services
for the purpose of improving a client's use of its capabilities and resources to achieve the objectives of the
organization.
Users of Accounting Reports
1. Internal users - include management and the business itself.
2. External users - are the people outside the business like the reading public, government agencies,
creditors, investors, employees.

 Investors - the information they get from the financial reports of the business will help them determine
whether or not they will put their money in that business. They can estimate the rate of return in their
investment.
 Customer - will get information on whether or not they can get the services of the business on a
particular product or commodity.
 Employees – need information to know whether or not the company can provide the salaries and other
benefits they need.
 Creditors - are interested to determine whether or not the loans extended to the business can be paid
at maturity.
 Government – can regulate the activities of the business for purposes of taxation and other
government needed information. For example, the BIR will use computation of income tax of the
business.
 Public - the information will help the people or public to know how the business contributes to the
national economy of the country. They will also know whether or not employment is available to help
solve unemployment.

How to Start a Business?

 A business is started by investing the personal money or funds of the owner.
 In Accounting, this is what we call the "business entity" concept.
 After deciding to start a business, the next question will be the type of business activity we shall engage
in.
Types of Business Activity
1. Service business - income is derived from services rendered.
Example:
 Computer repair services.
 Renovation and Interior Design services.
 Grocery delivery services.
 Printing services.
 Transport Services (Airlines, Uber)
2. Merchandising - type of business engaged in buying and selling goods or merchandise.
Examples:
 Grocery stores
 Department stores
 Distributors
 Real estate dealers
 Car dealers
3. Manufacturing - a business engaged in transforming raw materials into finished products.
Examples:
 Toy Manufacturer
 Smartphone Accessory Maker
 Plastic Container Manufacturer
 Furniture Maker
Forms of Business Organization
a. Single or sole proprietorship - an organization owned by only one person.
b. Partnership - an organization whereby two or more persons contribute money, property, or industry
into a common fund and then divide the profits among themselves.
c. Corporation - an organization composed of five or more persons not exceeding fifteen registered
with the Securities and Exchange Commission having the rights, powers, and attributes of a person.
 After considering the type of business activity and the form of business organization, the next step is
to register the business name with the Bureau of Domestic Trade and pay the necessary taxes and
licenses before starting its operation.
 The necessary things needed in the business for sale or for its use will be bought
 Service for income (service business) or sells goods above cost (for merchandising business) will be
rendered.
 At a certain time, the business will close its books of accounts to determine the result of a period
operation.
Accounting Period
- Accounting period varies depending on the policy of the owner or management. It may cover a
month, a quarter, six months, or one year.
a. Calendar year or period - a period of twelve months starting January 1 and ending December 31.
b. Fiscal year - any succession of twelve months starting with any month except January and ending in
any month except December.

LESSON 2: ACCOUNTING CONCEPTS & PRINCIPLES

Accounting Concepts and Principles are a set of broad conventions that have been devised to provide a
basic framework for financial reporting.
1. Business entity concept: A business and its owner should be treated separately as far as their financial
transactions are concerned.
Examples: If the owner has a barber shop, the cash of the barber shop should be reported separately from
personal cash.
2. Going concern concept: In accounting, a business is expected to continue for a fairly long time and carry
out its commitments and obligations. This assumes that the business will not be forced to stop functioning and
liquidate its assets at “fire-sale” prices.
Example: When preparing financial statements, you should assume that the entity will continue indefinitely.
3. Time period principle: Each business chooses a specific time period to complete a cycle of the accounting
process—for example, monthly, quarterly, or annually—as per a fiscal or a calendar year.
Examples: Philippine companies are required to report financial statements annually.
4. Monetary unit principle – amounts are stated into a single monetary unit
Example: Jollibee should report financial statements in pesos even if they have a store in the United States.
5. Objectivity principle – financial statements must be presented with supporting evidence.
Example: When the customer paid Jollibee for their order, Jollibee should have a copy of the receipt to
represent as evidence.
6. Cost principle – accounts should be recorded initially at cost.
Example: When Jollibee buys a cash register, it should record the cash register at its price when they bought it.
7. Accrual Accounting Principle – revenue should be recognized when earned regardless of collection and
expenses should be recognized when incurred regardless of payment.
Example: When a barber-finishes performing his services he should record it as revenue. When the barber
shop receives an electricity bill, it should record it as an expense even if it is unpaid.
8. Matching principle – cost should be matched with the revenue generated.
Example: When you provide tutorial services to a customer and there is a transportation cost incurred related
to the tutorial services, it should be recorded as an expense for that period.
9. Disclosure principle – all relevant and material information should be reported.
Example: The company should report all relevant information.
10. Materiality principle – in case of assets that are immaterial to make a difference in the financial
statements, the company should instead record it as an expense.
Example: A school purchased an eraser with an estimated useful life of three years. Since an eraser is
immaterial relative to assets, it should be recorded as an expense.

MODULE 2
LESSON 2A: ACCOUNTING TERMINOLOGIES
Accounting Terminologies
ASSETS – are property or rights on property owned by the business.
 Current Assets – refers to cash and other assets that are easily converted into cash or consumed
during the accounting period usually one year.
 Non-Current Assets – refers to assets that have the following characteristics:
1. More or less permanent in nature;
2. They possess physical existence;
3. They are not for sale;
4. They are intended for use in the operation.

CURRENT ASSET
➢ Cash on hand – refers to cash and other cash items which are not yet deposited in the bank.
➢ Cash in bank – is money deposited in the bank.
➢ Notes Receivable – are claims of the business from anyone evidenced by a note.
➢ Interest Receivable – interest earned on an interest-bearing note not yet collected.
➢ Accounts Receivable – refers to claims of the business from anyone for sales made or services rendered
on account.
➢ Estimated Uncollectible Account – sometimes called allowance for bad debts.
➢ Advance to officers and employees – is a term that refers to amounts given to officers and employees
usually deductible from their salaries.
➢ Merchandise inventory – refers to goods unsold at the end of the accounting period or on hand at the
beginning of the year.
➢ Prepaid Expenses – are expenses paid in advance or items that are bought which will be used during
accounting period.

NON-CURRENT ASSETS
➢ Tools – refers to small items of equipment like pliers, hammer, screwdrivers, etc.
➢ Land – refers to land space owned by the business.
➢ Building – refers to the building or edifice constructed, owned and intended for use by the business.
➢ Furniture and Fixtures – is a term used to, include tables and chairs, cabinets, counters, and other pieces
of furniture used in the business.
➢ Delivery equipment – is a term that includes cars, jeeps, trucks, van, and other transportation vehicles
owned by the business.
➢ Accumulated Depreciation – is a contra-asset account. It is a deduction from a particular fixed asset
account.
➢ Intangible assets – are assets that do not have physical existence owned by the business. Examples are
goodwill, patents.

LIABILITIES - is an obligation that a business owes to someone and its settlement involves the transfer of
cash or other resources.
 Current liabilities – a liabilities that are expected to be settled within one year from the reporting date.
 Non-current liabilities – a liability which will be settled over the long term.

CURRENT LIABILITIES
➢ Accounts Payable – is a current liability which refers to debts or obligations that arise from purchase of
goods or services on account.
➢ Notes Payable – is a current liability if the note is payable within one year.
➢ Interest Payable – is the interest due to an interest-bearing note. Accrued interest expense is term
synonymous with interest payable.
➢ Taxes Payable – are taxes due the for government are not yet paid by the business.
➢ Salaries Payable – are salaries not yet paid by the business to its employees or workers.

NON-CURRENT LIABILITIES
➢ Long-term liabilities – are obligations or debts of the business that will be due and payable beyond one
year.
➢ Mortgage Payable – is a long-term liability account that refers to debt secured by a mortgage on real
estate.

INCOME – is generally term to mean any earning made by the business.

➢ Service Income – refers to earnings derived from services rendered whether on cash or on account.
➢ Fees – is another generally term used to designate income.
➢ Legal Fee – is income from rendering legal services.
➢ Sales – is a term to denote income derived from the sales of goods.
➢ Commission income – is an income account to designate earnings received from selling anything on a
commission basis.
➢ Other income – is another income account to designate earnings received from sources other than its main
source of income.

COST AND EXPENSE

➢ Taxes and Licenses – are payments made by the business to the ‘s government for it’s business
operations.
➢ Salaries Expenses – refers to the cost of services rendered by the employees or workers of the business.
➢ Supplies Expense – refers to the cost of office items like stationery, bond papers, carbon papers and etc.
➢ Delivery Expense – refers to the cost of transportation in delivering goods or services to customers.
➢ Bad debts Expense – refers to the portion of accounts receivable which may not be collected.
➢ Depreciation expense – refers to the portion of the cost of the fixed asset which has been charged to
income during the period.
➢ Insurance expense – refers to the insurance premium paid by the business.
➢ Rent Expenses – refers to the space occupied by the business or the payment for the use of any property
by the business.
➢ Interest Expense – refers to the amount charged for the use of money.
➢ Advertising Expense – includes promotional expenses in the selling of the product.
➢ Utilities Expense – is a term used to denote the cost of light and water consumed by the business.
➢ Repair and Maintenance Expense – are expenses for repairing or servicing buildings, machinery, or
equipment of the business.
➢ Salesmen Salaries – are fixed wages given to salesmen.
➢ Cost of Good Goods Sold – is the purchase price or the manufacturing cost of goods sold.

CHART OF ACCOUNTS
A chart of accounts is a list of account titles used by the bookkeeper as a guide in recording business
transactions. The chart is arranged in the financial statement order, that is, assets first, followed by liabilities,
owner's equity, income and expenses.

LESSON 2B: ELEMENTS OF ACCOUNTING

ELEMENTS OF BASIC ACCOUNTING
Bookkeeping is centered on three elements: assets, liabilities, and owner's equity.
Assets = Liabilities + Owner's Equity.
It means that the total assets of the business are contributed by the owner and creditors.

THE ACCOUNT
The basic summary device of the accounting is the account. A separate account is maintained for each
element that appears in the balance sheet (assets, liabilities and equity) and in the income statement (income
and expenses).

Account Title
 Left side or Right side or
Debit side Credit side

NORMAL BALANCE OF AN ACCOUNT

The normal balance of any account refers to the side of the account--debit or credit where increases are
recorded.

ACCOUNTING EVENTS AND TRANSACTIONS

An 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.
TYPES AND EFFECTS OF TRANSACTIONS
 Source of Assets (SA). An asset account increases and a corresponding claims (liabilities or owner's
equity) account increases. Examples: (1) Purchase of supplies on account; (2) Sold goods on cash on
delivery basis.
 Exchange of Assets (EA). One asset account increases and another asset account decreases.
Example: Acquired equipment for cash.
 Use of Assets (UA). An asset account decreases and a corresponding claims (liabilities or equity)
account decreases. Example: (1) Settled accounts payable; (2) Paid salaries of employees.
 Exchange of Claims (EC). One claims (liabilities or owner's equity) account increases and another
claims (liabilities or owner's equity) account decreases. Example: Received utilities bill but did not pay.

The four types of transactions above may be further expanded into nine types of effects as follows:
1. Increase in Assets = Increase in Liabilities (SA)
2. Increase in Assets = Increase in Owner's Equity (SA)
3. Increase in one Asset = Decrease in another Asset (EA)
4. Decrease in Assets = Decrease in Liabilities (UA)
5. Decrease in Assets = Decrease in Owner's Equity (UA)
6. Increase in Liabilities = Decrease in Owner's Equity (EC)
7. Increase in Owner's Equity = Decrease in Liabilities (EC)
8. Increase in one Liability = Decrease in another Liability (EC)
9. Increase in one Owner's Equity = Decrease in another Owner's Equity (EC)
ACCOUNTING FOR BUSINESS TRANSACTIONS
Accountants observe many events that they identify and measure in financial terms.
Financial Transaction Worksheet
Every financial transaction can be analyzed or expressed in terms of its effects on the accounting equation.
Use of T-Accounts
Analyzing and recording transactions using the accounting equation is useful in conveying a basic
understanding of how transactions affect the business.
MODULE 3
LESSON 1: BUSINESS DOCUMENTS
• Business Documents
Business transactions are supported with documents.
Cash voucher is a document which evidences payment.It contains information about the transaction, the
payee, and the approving official.

Official Receipt is a document which evidences receipt of cash. It contains information as to payer and the
transaction involved.

Cash Sales Invoice is a business

document which evidences sale of
service or merchandise for cash only.
Sales on account are recorded in a
separate invoice, Account Sales Invoice.
 Account Sales Invoice is a
document prepared for sales on
account only. It contains
information about the buyer, the
description of the things bought
and the terms and conditions
surrounding the transaction.

Check is issued when payment is

made from the cash deposited in
the bank.

Credit Memorandum is a business

paper issued by the seller to the
buyer when the buyer returns the
thing bought or asks for an
allowance for the defect on the
thing.

Purchase Invoice is a business document which shows the name of the supplier, the items bought and other
terms and conditions surrounding the purchase.
Debit Memorandum is a business paper showing that your account has been reduced by items that are
charged against you. Both debit and credit memos are just notices about your account.
Deposit Slip is a document evidencing the deposit of money in the bank. Every time a deposit is made, a
deposit slip is filled up.
Promissory Note is a written promise made by the maker to pay the payee (creditor) a sum certain in money
at a fixed or determinable future time.
LESSON 2: ACCOUNTING CYCLE
The accounting cycle refers to a series of sequential steps or procedures performed to accomplish the
accounting process. The steps in the cycle and their aims follow:
Step 1 Identification of Events to be Recorded
Aim: To gather information about transactions or events generally through the source documents.
Step 2 Transactions are Recorded in the Journal
Aim: To record the economic impact of transactions on the firm in a journal, which is a form that facilitates
transfer to the accounts.
Step 3 Journal Entries are Posted to the Ledger
Aim: To transfer the information from the journal to the ledger for classification.
Step 4 Preparation of a Trial Balance
Aim: To provide a listing to verify the equality of debits and credits in the ledger.
Step 5 Preparation of the Worksheet including Adjusting
(Entries) Aim: To aid in the preparation of financial statements.
Step 6 Preparation of the Financial Statements
Aim: To provide useful information to decision-makers.
Step 7 Adjusting Journal Entries are Journalized and Posted
Aim: To record the accruals, expiration of deferrals, estimations and other events from the worksheet.
Step 8 Closing Journal Entries are Journalized and Posted
Aim: To close temporary accounts and transfer profit to owner's equity
Step 9 Preparation of a Post-Closing Trial Balance
Aim: To check the equality of debits and credits after
Step 10 Reversing Journal Entries are Journalized and Posted
Aim: To simplify the recording of certain regular transactions in the next accounting period.
This cycle is repeated each accounting period. The first three steps in the accounting cycle are accomplished
during the period. The fourth to the ninth steps generally occur at the end of the period. The last step is
optional and occurs at the beginning of the next period.
 The General Journal

(the book of original entry)

Office Equipment xx
Cash xx
Accounts Payable xx
Posting

Transferring the amounts from the

general journal to appropriate
CASH
accounts in the ledger.

OFFICE
EQUIPMENT

The Ledger

A groupings of accounts. Used to classify

and summarize transactions and to ACCOUNTS
prepare data for basic financial PAYABLE
statements.

Shows all the effects of a transaction in terms of debits

and credits.

TRIAL BALANCE
Assets
Listing of all ledger accounts, in order, Liabilities
with Owner’s Equity
their respective debit or credit balances. Revenues
Expenses

TRANSACTION ANALYSIS (Step 1)

TRANSACTION ANALYSIS (Step 1)

The analysis of transactions should follow these four basic steps:
Identify the transaction from source documents
Indicate the accounts – either assets, liabilities, equity, income or expenses – affected by the transaction.
Ascertain whether each account is increased or decreased by the transaction.
Using the rules of debit and credit, determine whether to debit or credit the account to record its increase or
decrease.
TRANSACTIONS ARE JOURNALIZED (Step 2)
TRANSACTIONS ARE JOURNALIZED (Step 2)
After the transaction or event has been identified and measured, it is recorded in the journal. The process of
recording a transaction is called journalizing.
THE JOURNAL
The journal is a chronological record of the entity's transactions.
Format
The standard contents of the general journal are as follows:
1. Date. The year and month are not rewritten for every entry unless the year or month changes or a new page
is needed.
2. Account Titles and Explanation. The account to be debited is entered at the extreme left of the first line
while the account to be credited is entered slightly indented on the next line.
3. P. R. (posting reference). This will be used when the entries are posted, that is, until the amounts are
transferred to the related ledger accounts.
4. Debit. The debit amount for each account is entered in this column.
5. Credit. The credit amount for each account is entered in this column.
Simple and Compound Entry
In a simple entry, only two accounts are affected-one account is debited and the other account
credited. An example of this is the entry to record the initial investment of Diaz.
The Ledger
A grouping of the entity's accounts is referred to as a ledger. Although some firms may use various
ledgers to accumulate certain detailed information, all firms have a general ledger. A general ledger is the
"reference book" of the accounting system and is used to classify and summarize transactions, and to
prepare data for basic financial statements.
The accounts in the general ledger are classified into two general groups:
 balance sheet or permanent accounts (assets, liabilities and owner's equity).
 income statement or temporary accounts (income and expenses). Temporary or nominal
accounts are used to gather information for a particular accounting period. At the end of the
period, the balances of these accounts are transferred to a permanent owner's equity account.
Posting
Posting means transferring the amounts from the journal to the appropriate accounts in the ledger.
Debits in the journal are posted as debits in the ledger, and credits in the journal as credits in the ledger.
The steps are illustrated as follows:
 Transfer the date of the transaction from the journal to the ledger.
 Transfer the page number from the journal to the journal reference (J.R.) column of the ledger.
 Post the debit figure from the journal as a debit figure in the ledger and the credit figure from the
journal as a credit figure in the ledger.
 Enter the account number in the posting reference column of the journal once the figure has
been posted to the ledger.
The Journal
LEDGER ACCOUNTS AFTER POSTING
At the end of an accounting period, the debit determined to enable us to come up with a trial balance.
Each account balance is determined by footing (adding) all the debits and credits.

TRIAL BALANCE (Step 4)

The trial balance is a list of all accounts with their respective debit or credit balances. It is prepared to
verify the equality of debits and credits in the ledger at the end of each accounting period or at any time the
postings are updated.
The procedures in the preparation of a trial balance follow:
 List the account titles in numerical order.
 Obtain the account balance of each account from the ledger and enter the debit balances in
the debit column and the credit balances in the credit column.
 Add the debit and credit columns.
 Compare the totals.
The trial balance is a control device that helps minimize accounting errors.