ASSETS ADVANCE TUTORIALS

Basic Concepts
Basic Accounting
1.1 Definition of Accounting

Accounting Standards Council (ASC) definition

Accounting is a service activity. The accounting function is to provide quantitative information,
primarily financial in nature, about economic entities that is intended to be useful in making
economic decisions.

American Institute of Certified Public Accountants (AICPA) definition

Accounting is the art of recording, classifying, and summarizing in a significant manner in
terms of money, transactions, and events, which are in part at least of a financial character, and
interpreting the results thereof.

American Accounting Association (AAA) definition

Accounting is the process of identifying, measuring, and communicating economic
information to permit informed to permit informed judgment and decision by users of the
information.
1.2 Objective of Financial Reporting
The primary output of accounting is the financial statements.
The overall objective of financial reporting is to provide financial information about the
reporting entity that is useful to **existing and potential investors, lenders, and other creditors
in making decisions about providing resources to the entity.
The five financial statements:
Statement of Financial Performance (Income Statement)
Statement of Financial Position (Balance Sheet)
Statement of Changes in Owner’s Equity
Statement of Cash flows
Notes to the Financial Statements

**Primary users of financial information

1.3 Fundamental Concepts and Principles
Generally Accepted Accounting Principles (GAAP) encompass the conventions, rules, and procedures necessary to
define accepted accounting practice at a particular time.

FUNDAMENTAL CONCEPTS (Remember: PEGS)

AKA as the underlying assumptions under the 2018 Revised Conceptual Framework

PERIODICITY
An entity’s life can be meaningfully subdivided into equal time periods for reporting purposes. This concept allows
the users of financial statements to obtain timely information to serve as a basis for making decisions about future
activities. Typical accounting period: 1 year (May be a calendar year or fiscal year)

ENTITY
Accounting entity - an organization or a section of an organization that stands apart from other organizations and
individuals as a separate economic unit. Transactions of different entities should not be accounted for
together. Each entity should be evaluated separately.

GOING CONCERN
Financial statements are normally prepared on the assumption that the reporting entity will continue in operation
for the foreseeable future. In the absence of evidence to the contrary, the accounting entity is viewed as
continuing in operations indefinitely. If there is evidence that the entity would experience large and persistent
losses or that the entity’s operations are to be terminated, the going concern assumption is abandoned.

STABLE MONETARY UNIT

The Philippine Peso is a reasonable unit of measure, and that its purchasing power is relatively stable. An entity’s
assets, liabilities, and equity should be stated in terms of a unit of measure, which is the Philippine Peso. This is the
basis for ignoring the effects of inflation in the accounting records.
 BASIC PRINCIPLES (Remember: CREAM-OH)

Consistency
Firms should use the same accounting method from period to period to achieve
comparability over time within a single enterprise.
Nonetheless, changes are permitted if justifiable and disclosed in the financial
statements.

Revenue Recognition
The **accrual basis of accounting underlies this principle.
Revenue is to be recognized in the accounting period when goods are delivered, or
services are rendered or performed and not when cash is received.

Expense Recognition
The **accrual basis of accounting underlies this principle.
Expenses should be recognized in the accounting period in which goods and
services are used up to produce revenue and not when the entity pays for those
goods and services.
 Adequate Disclosure
Requires that all relevant information that would affect the user’s understanding and assessment of the accounting
entity be disclosed in the financial statements.

Materiality
Financial reporting is only concerned with information that is significant enough to affect evaluations and decisions.
Materiality depends on the relative size and nature of the item judged in the particular circumstances of its omission.

Objectivity
Accounting records and statements are based on the most reliable data available so that they will be as accurate and
as useful as possible.
Reliable data are verifiable when they can be confirmed by independent observers.
Accounting records are based on information that flows from activities documented by objective evidence.

Historical Cost
Acquired assets should be recorded at their actual cost and not at what management thinks they are worth as at
reporting date.

**Accrual basis - income is recognized when earned regardless of when received, and expense is recognized when
incurred regardless of when paid.
 1.4 Elements of Financial Statements

Assets, liabilities, and equity Relate to a reporting entity's financial position.

Income and expenses Relate to a reporting entity’s financial performance.

Element Definition

A present economic resource controlled by the entity as a result of past events.

Asset
With future economic benefits; may silbi or magamit in the future.

Statement of Financial
Position (Balance sheet) - A present obligation of the entity to transfer an economic resource as a result of
Liability
reports the permanent past events. What the company owes; utang
accounts (ALE)

The residual interest in the assets of the entity after deducting all its liabilities
Equity
(assets minus liabilities).

Increases in assets or decreases in liabilities that result in increases in equity,

Statement of Financial Income
other than those relating to contributions from equity claims.
Performance (Income
Statement) - reports the
temporary accounts (IE) Decreases in assets, or increases in liabilities, that result in decreases in equity
Expense
other than those relating to distributions to holders of equity claims.
1.5 The Account
The basic summary device of accounting is the account.
A separate account is maintained for each element that appears on the balance sheet (ALE) and
income statement (IE).
It is a detailed record of the increases, decreases, and balances of each element that appears in
the entity’s financial statements.
The simplest form of the account is known as the “T” account.

ACCOUNT TITLE

Left side or debit side Right side or credit side

1.6 The Accounting Equation
The most basic tool of accounting,
It states that assets must always equal liabilities and owner’s equity.
ASSETS = LIABILITIES + EQUITY

Note that the assets are on the left side of the equation, opposite of the liabilities and owner's equity.
The equality of the accounting equation must always be maintained.
The accounting equation corresponds to the logic of debits and credits (increases in assets are recorded
on the left/debit side, whereas increases in liabilities and equity are recorded on the right/credit side).
Note that income and expenses are part of the owner’s equity.
ILLUSTRATION 3. At the beginning of the year, the assets of AB
Plumbing Services were P460,000, and its owner’s
1. If liabilities amount to 108,000 and owner’s equity was P200,000. During the year, assets increased
equity amounts to 760,000, how much is the by P120,000, and liabilities increased by P20,000. What
firm’s assets? was the owner’s equity at the end of the year?

ASSETS = LIABILITIES EQUITY ASSETS = LIABILITIES EQUITY

868,000 108,000 760,000

160,000
Beginning
360,000 (360,000 - 200,000
balance
200,000)
2. If assets amount to 760,000 and liabilities amount to 360,000,
how much is the firm’s equity?
Change in 100,000
each 120,000 20,000 (120,000
ASSETS = LIABILITIES EQUITY element - 20,000)

Year-end
760,000 360,000 400,000 480,000 180,000 300,000
balance
1.7 The Double-Entry System (Rules of Debit and Credit)

Double-entry system - the dual effects of a business transaction is recorded.

A debit side entry must have a corresponding credit side entry.
For every transaction, there must be one or more accounts debited and one or more accounts
credited.
Total debits must ALWAYS equal total credits (ALWAYS MAINTAIN THE BALANCE OF THE
ACCOUNTING EQUATION).
An account is debited when an amount is entered on the left side of the account and credited
when the amount is entered on the right side.

ACCOUNT TITLE

Left side or debit side Right side or credit side

The account type determines how increases or decreases in it are recorded, as follows:
The rules of debit and credit for income and expense accounts are based on the relationship of these accounts
to owner’s equity.
Income increases owner’s equity; hence increases in income are recorded as credits.
Expenses decrease the owner’s equity, hence increases in expense are recorded as debits.
The Normal Balance of an Account refers to the side of the account (debit or credit) where increases are
recorded.
Always remembert: DEALER
1.8 Accounting Events and Transactions
Accounting Event - an economic occurrence that causes change in an enterprise’s assets, liabilities,
and/or equity. It may be internal or external.
Internal - the use of equipment for production of goods or services.
External - purchase of raw materials from a supplier.
Transaction - a particular kind of event that involves the transfer of something of value between two
entities.

The following are the types and effects of transactions:

Source of Assets (SA) - an asset account increases and a corresponding claim account increases.
Exchange of Assets (EA) - one asset account increases and another asset account decreases.
Use of Assets (UA) - an asset account decreases and a corresponding claim account decreases.
Exchange of claims (EC) - one claim account increases, and another claim account decreases.
SHORT EXERCISES: Identify the type of transaction.
1. ABC Company purchased office supplies on account.
2. ABC Company purchased raw materials for cash.
3. J&T Company rendered delivery services and received cash from customers.
4. XYZ Company hired an experienced general manager with a monthly salary
of P40,000.
5. ABC Company received a bill from Petron GAs for gas and oil used by the
service vehicle for the month.
6. ABC Company paid a trade creditor P2,000 on account.
1.9 Account Titles Used

ASSETS
Assets should be classified into two: current the assets and noncurrent assets. An
entity shall classify an asset as current when:
It expects to realize the asset or intends to sell or consume it in its normal
operating cycle.
It holds the asset primarily for the purpose of trading.
It expects to realize the asset within 12 months from the reporting period.
The asset is a cash or cash equivalent (PAS 7) unless the asset is restricted from
being exchanged or used to settle a liability for at least 12 months after the
reporting period.
All other assets shall be classified as a non-current asset.
 Current Assets

Cash - medium of exchange; includes coins, currency, checks, money

orders, bank deposits, and drafts.
Cash Equivalents - Short-term highly liquid investments that are readily
convertible into cash (acquired 3 months or less before date of maturity).
Accrued Income - already earned (rendered/delivered) but not yet
received the customer’s payments.
Accounts receivable - claims against customers arising from the sale of
services or goods on credit.
Notes receivable - same with A.R. but with promissory note.
Short-term investments - more than 3 months to 1 year.
Inventories - goods/products to be sold; these are assets held for sale in
the ordinary course of business (PAS 2).
Prepaid Expenses - expenses paid for by the business in advance. It is an
asset because these prepaid items represent future economic
benefits. Prepaid rent, prepaid insurance, supplies, prepaid advertisig.
 Noncurrent Assets

Property, plant and equipment (PAS 16) - tangible assets held by an entity for use in
the production or supply of goods or services, for rental for others, or for administrative
purposes. (Ex.land, building, machinery, equipment, furniture and fixtures, motor
vehicles)
Accumulated depreciation - a contra account to PPE that contains the sum of the
periodic depreciation charges. The balance in this account is deducted from the cost of
the related asset to get the carrying amount.
Cost of Asset - Accumulated Depreciation = Carrying Amount
Intangible assets (PAS 38) - identifiable, nonmonetary assets without physical
substance. (ex. Goodwill, patent, copyrights, franchises, trademarks, brand names etc.)
Long-term investments - more than 1 year from maturity.
LIABILITY
An entity shall classify a liability as current when:
It expects to settle the liability in its normal operating cycle
It holds the liability primarily for the purpose of trading.
The liability is due to be settled within twelve months after the reporting
period
The entity does not have an unconditional right to defer settlement of the
liability for at least twelve months after the reporting period.
By residual definition, all other liabilities should be classified as noncurrent.
 Current Liabilities

Accounts payable - the reverse relationship of accounts receivable; payable to the seller after receiving
the goods/services. Notes payable - same with accounts payable but with promissory note. The business
entity is the maker of the note - the entity promises to pay to the other party a specified amount of
money at a future date.
Accrued liabilities - amounts owed to others for unpaid expenses; incurred but not yet paid (ex. Salaries
payable, utilities payable, interest payable, taxes payable).
Unearned revenues - recognized when an entity receives payment before providing its customers with
goods or services (received payment from customer, but not yet earned). When goods or services are
provided to the customer, unearned revenue is derecognized and income is recognized.
Current portion of long-term debt - portions of mortgage, notes or bonds which are to be paid within
one year from the balance sheet date.

Noncurrent Liabilities

Mortgage payable - this account records long-term debt of the business entity for which the entity has
pledged certain assets as security to the creditor.
Bonds payable - a contract between the issuer and the lender specifying the terms of repayment and
the interest to be charged; a debt contract. When large amounts are needed, an entity may have to
borrow from the general investing public through the use of a bond issue.
OWNER’S EQUITY

Capital - used to record the original and additional investments of the

owner of the business entity. It is increased by the amount of profit
during the year and is decreased by a loss.
Withdrawals - When the owner of the business entity withdraws cash
or other assets, such are recorded in the withdrawals account.
Income Summary - it is a temporary account used at the end of the
accounting period to close income and expenses. This account shows
the profit or loss for the period before closing to the capital account.
 INCOME STATEMENT
Income

Service Income - revenues earned by performing services for a customer or client

Sales - revenues earned as a result of sale of merchandise

Expense

Cost of Goods Sold - the cost incurred to purchase or produce the products sold to customers during the
period; gastos sa nabentang produkto - also known as cost of sales.
Salaries or Wages Expense - includes all payments as a result of an employer-employee relationship.
Utilities Expense - includes expenses related to the use of telecommunications facilities, consumption of
electricity, fuel and water.
Rent Expense - expense for space, equipment, and other asset rentals.
Supplies Expense – expense of using supplies in the conduct of daily business.
Insurance Expense - portion of premiums paid on insurance coverage which has expired.
Depreciation Expense - the portion of the cost of PPE allocated or charged as expense during an accounting
period.
Interest Expense - cost of borrowing funds.
II. RECORDING BUSINESS TRANSACTIONS

A business transaction is the occurrence of an event or a

condition that affects the financial position and can be
reliably recorded.

The Accounting Cycle

The accounting cycle refers to a series of sequential steps or procedures

performed to accomplish the accounting process.
This cycle is repeated each period. The first three steps are accomplished during the
period. The 4th to 9th step generally occurs at the end of the period. The last step is
optional and occurs at the beginning of the next period.
STEP 1 - IDENTIFICATION OF EVENTS TO BE RECORDED
Source documents identify and describe transactions and events entering the accounting process. These written
evidence contain information about the nature and the amounts of transactions.
Source documents are the bases for the journal entries.
Source documents include sales invoices, official receipts, bank statements, checks, purchase orders, and statements
of account.
STEP 2 - TRANSACTIONS ARE RECORDED IN THE JOURNAL
Journal - a chronological record of the entity's transactions.
Aka the book of original entry.
A journal entry shows all the effects of a business transaction in terms of debits and credits.

The standard contents of the general journal are as follows: (1) Date, (2) Account Titles and Explanations, (3) Posting
Reference/P.R., (4) debit, (5) Credit.

For example, assume that Mr. Lim established ABC Company with an initial investment of P400,000 on June 1, 2023.
Simple and Compound Entry
Simple Entry - only two accounts are affected - one account is debited and the other account is credited. An
example of this is to record the initial investment as presented above.
Compound Entry - Three are more accounts are affected.

Sample Compound Entry: Assume ABC Company acquired an office building for P60,000 on July 2, paying 25%
downpayment and the balance on account due on August 1.

CHART OF ACCOUNTS - a listing of all the accounts and their account numbers in the ledger. When analyzing
transactions, the accountant refers to the chart of accounts to identify the pertinent accounts to be increased or
decreased.
SAMPLE PROBLEM - JOURNAL ENTRIES (STEP 2 OF THE ACCTG. CYCLE)
Mark Han opened a plumbing service, XYZ Plumbing. Operations began on April 1, 2023. The chart of
accounts for XYZ Plumbing is as follows:

Assets Income

110 Cash 410 Plumbing Revenues

120 Accounts Receivable Expenses

130 Plumbing Supplies 510 Salaries Expense

140 Prepaid Advertising 520 Rent Expense

150 Service Vehicle 530 Telephone Expense

Liabilities 540 Miscellaneous Expense

210 Accounts Payable

220 Notes Payable

Owner’s Equity

310 Han, Capital

320 Han, Withdrawals

Prepare the journal entries for the following transactions during April 2023.
 April 1 - Withdrew P67,000 from a personal savings account and used it to open a new account in the name of XYZ
Plumbing.

Analysis: Asset Increased. Equity Increased

Rule: Increase in asset recorded by debit, Increase in equity recorded by credit.
Type of Transaction: Source of Assets

April 2 - Acquired a service vehicle costing P81,000. A payment of P17,500 in cash was made, and a note payable for the
remainder.

Analysis: Asset Increased. Asset Decreased. Liability Increased.

Rule: Increase in asset recorded by debit, decrease in asset recorded by credit, increase in liability recorded by credit.
Type of Transaction: Source of Assets and Exchange of Assets
 April 3 - Paid rent for the month, P7,150.

Analysis: Equity decreased. Asset decreased.

Rule: Decrease in equity recorded by debit, decrease in asset recorded by credit.
Type of Transaction: Use of Assets

April 6 - Acquired plumbing supplies on account, P15,700.

Analysis: Asset Increased. Liability Increased

Rule: Increase in asset recorded by debit, increase in liability recorded by credit.
Type of Transaction: Source of Assets
 April 7 - Paid for three months of advertising in the amount of P6,000.

Analysis: Asset Increased. Liability Increased

Rule: Increase in asset recorded by debit, increase in liability recorded by credit.
Type of Transaction: Source of Assets

April 8 - Cash in the amount of P18,350 was received for plumbing services renedred.

Analysis: Asset Increased. Equity Increased.

Rule: Increase in asset recorded by debit, increase in equity recorded by credit.
Type of Transaction: Source of Assets
 April 9 - Acquired additional plumbing supplies for cash, P8,050.

Analysis: Asset Increased. Asset Decreased.

Rule: Increase in asset recorded by debit, decrease in asset recorded by credit.
Type of Transaction: Exchange of Assets

April 11 - Paid salaries, P11,600

Analysis: Equity Decreased. Asset Decreased.

Rule: Decrease in equity recorded by debit, decrease in asset recorded by credit.
Type of Transaction: Use of Assets
 April 15 - Rendered plumbing services and billed the customer, P42,200.

Analysis: Asset Increased. Asset Decreased.

Rule: Increase in asset recorded by debit, decrease in asset recorded by credit.
Type of Transaction: Exchange of Assets

April 16 - Paid P5,700 of the amount owed from the transaction of April 6.

Analysis: Liability Decreased. Asset Decreased.

Rule: Decrease in liability recorded by debit, decrease in asset recorded by credit.
Type of Transaction: Use of Assets
 April 19 - Paid miscellaneous expenses, P4,300.

Analysis: Equity Decreased. Asset Decreased.

Rule: Decrease in equity recorded by debit, decrease in asset recorded by credit.
Type of Transaction: Use of Assets

April 20 - Collected P21,000 from the customer on the April 15 transaction.

Analysis: Asset Increased. Asset Increased.

Rule: Increase in asset recorded by debit, decrease in asset recorded by credit.
Type of Transaction: Exchange of assets
 April 21 - Withdrew P14,500 from the business.

Analysis: Equity Decreased. Asset Decreased.

Rule: Decrease in equity recorded by debit, decrease in asset recorded by credit.
Type of Transaction: Use of Assets

April 22 - Paid salaries, P14,100

Analysis: Liability Decreased. Asset Decreased.

Rule: Decrease in liability recorded by debit, decrease in asset recorded by credit.
Type of Transaction: Use of Assets
 April 24 - Paid the first installment of the note payable, P3,850

Analysis: Liability Decreased. Asset Decreased.

Rule: Decrease in liability recorded by debit, decrease in asset recorded by credit.
Type of Transaction: Use of Assets

April 25 - Paid telephone expense - P1,250

Analysis: Equity Decreased. Asset Decreased.

Rule: Decrease in equity recorded by debit, decrease in asset recorded by credit.
Type of Transaction: Use of Assets
 April 27 - Billed Queen Resorts for plumbing services rendered, P14,150. m

Analysis: Asset Increased. Equity Increased.

Rule: Increase in asset recorded by debit, increase in equity recorded by credit.
Type of Transaction: Source of Assets
STEP 3 - JOURNAL ENTRIES ARE POSTED TO THE LEDGER

Posting - transferring the amounts from the journal to the appropriate accounts in the ledger.
Once the figures have been posted, enter the account number in the posting reference column
of the journal.
ILLUSTRATION: The ledger accounts of XYZ Plumbing are shown as follows. The balance of each
account has been determined.
STEP 4 - PREPARATION OF TRIAL BALANCE

A trial balance is a list of 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.
The trial balance is also a control device that helps minimize accounting errors.
Note: The equality of the trial balance does not signify the complete absence of errors.
ILLUSTRATION: The Trial Balance of XYZ Plumbing follows:
ASSETS ADVANCE TUTORIALS

Thank you!