FUNDAMENTALS

OF ACCOUNTING
THEORY AND
PRACTICE
Joshue G. Derecho, MS
Instructor
Accounting
Accounting
“Accounting is 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 a financial character, and interpreting the results
thereof.”
What are financial statements?
What are financial statements?
Financial statements are structured representation of financial position and
financial performance of an entity. The objective of financial statements is
to provide information about the financial position, financial performance,
and cash flows of an entity that is useful to a wide range of users in making
sound economic decisions.
Six (6) basic financial statements
Six (6) basic financial statements

1. A statement of financial position as at the end of the period; (Balance Sheet)

2. A statement of comprehensive income for the period; (Income Statement)
3. A statement of changes in equity for the period; (Statement of owner’s equity)
4. A statement of cash flows for the period; (Statement of cash flows)
5. Notes, comprising a summary of significant accounting policies and other explanatory information;
and
6. 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
its financial statements or when it reclassifies items in its financial statements.
A statement of financial position or Balance Sheet

Balance sheet - is a financial

statement which shows the
financial position of an
enterprise as of a particular
date. It consists of three (3)
sections which are the
A statement of financial position or Balance Sheet

Balance sheet - is a financial

statement which shows the
financial position of an
enterprise as of a particular
date. It consists of three (3)
sections which are the Assets,
Liabilities, and Owner’s Equity
Section.
A statement of financial position or Balance Sheet

Balance sheet - is a financial

statement which shows the
financial position of an
enterprise as of a particular
date. It consists of three (3)
sections which are the Assets,
Liabilities, and Owner’s Equity
Section.
Basic elements of Financial Positions: The accounting equation

Assets Liabilities Owner’s Equity

Calculating the profit or

loss achieved in a
company
 Basic elements of Financial Positions: The accounting equation

Assets Liabilities Owner’s Equity

Properties used in business enterprise is
Calculating
presented by the the profitoforassets
relationship Calculating the profit or
to liabilities and capital.
loss achieved in a loss achieved in a
company company
 Basic elements of Financial Positions: The accounting equation

Assets Liabilities Owner’s Equity

Properties used in business enterprise is Amounts owned to outsiders, such as
Calculating
presented by the the profitoforassets
relationship Calculating
notes the profit
payable, accounts payable,orbonds
to liabilities and capital. payable. These are known as claims to
loss achieved in a loss achieved
creditors. Liabilities in
maya also include
certain deferred items, such as income
company company
taxes be allocated.
 Basic elements of Financial Positions: The accounting equation

Assets Liabilities Owner’s Equity

Properties used in business enterprise is Amounts owned to outsiders, such as The interest of owners in an enterprise.
Calculating
presented by the the profitoforassets
relationship Calculating
notes the profit
payable, accounts payable,orbonds
to liabilities and capital. payable. These are known as claims to
loss achieved in a loss achieved
creditors. Liabilities in
maya also include
certain deferred items, such as income
company company
taxes be allocated.
 Basic elements of Financial Positions: The accounting equation

Assets Liabilities Owner’s Equity

Properties used in business enterprise is Amounts owned to outsiders, such as The interest of owners in an enterprise.
Calculating
presented by the the profitoforassets
relationship Calculating
notes the profit
payable, accounts payable,orbonds
to liabilities and capital. payable. These are known as claims to
loss achieved in a loss achieved
creditors. Liabilities in
maya also include
certain deferred items, such as income
company company
taxes be allocated.

The accounting equation

 Basic elements of Financial Positions: The accounting equation

Assets Liabilities Owner’s Equity

Properties used in business enterprise is Amounts owned to outsiders, such as The interest of owners in an enterprise.
Calculating
presented by the the profitoforassets
relationship Calculating
notes the profit
payable, accounts payable,orbonds
to liabilities and capital. payable. These are known as claims to
loss achieved in a loss achieved
creditors. Liabilities in
maya also include
certain deferred items, such as income
company company
taxes be allocated.

The accounting equation

Assets = Liabilities + Owner’s Equity

Basic elements of Financial Positions: The accounting equation

The expanded accounting equation

Basic elements of Financial Positions: The accounting equation

The expanded accounting equation

Assets + Expenses = Liabilities + Owner’s Equity + Income

Basic elements of Financial Positions: The accounting equation

Assets = Liabilities + Owner’s Equity

Assets are found at the left side of the equation which we termed as “____” while Liabilities and
Owner’s Equity are found at the right side of the equation which termed as “____”.
Basic elements of Financial Positions: The accounting equation

Assets = Liabilities + Owner’s Equity

Assets are found at the left side of the equation which we termed as “debit” while Liabilities and
Owner’s Equity are found at the right side of the equation which termed as “credit”.
Basic elements of Financial Positions: The accounting equation

Assets = Liabilities + Owner’s Equity

Basic elements of Financial Positions: The accounting equation

Assets = Liabilities + Owner’s Equity

Example

Assume that the business owned assets of P100,000, owed creditors P70,000, and owed the owner
P30,000. What would be the accounting equation?
Calculating the profit or
loss achieved in a
company
Basic elements of Financial Positions: The accounting equation

Assets = Liabilities + Owner’s Equity

Example

Assume that the business owned assets of P100,000, owed creditors P70,000, and owed the owner
P30,000. The accounting equation would be
Calculating the profit or
Assets = Liabilities + Owner’s Equity
loss achieved in a P100,000 = P70,000 + P30,000

company
Basic elements of Financial Positions: The accounting equation

Assets = Liabilities + Owner’s Equity

Example

Assume that the business owned assets of P100,000, owed creditors P70,000 and owed the owner
P30,000. The accounting equation would be
Calculating the profit or
Assets = Liabilities + Owner’s Equity
loss achieved in a P100,000 = P70,000 + P30,000

Ifcompany
over a certain period the firm had the net income of P10,000, the equation would then be
Basic elements of Financial Positions: The accounting equation

Assets = Liabilities + Owner’s Equity

Example

Assume that the business owned assets of P100,000, owed creditors P70,000 and owed the owner
P30,000. The accounting equation would be
Calculating the profit or
Assets = Liabilities + Owner’s Equity
loss achieved in a P100,000 = P70,000 + P30,000

Ifcompany
over a certain period the firm had the net income of P10,000, the equation would then be

Assets = Liabilities + Owner’s Equity

P110,000 = P70,000 + P40,000
Basic elements of Financial Positions: The accounting equation
Assets = Liabilities + Owner’s Equity
Assets are found at the left side of the equation which we termed as “Debit” while Liabilities and
Owner’s Equity are found at the right side of the equation which termed as “Credit”.

Assume that the business owned assets of P100,000, owed creditors P70,000 and owed the owner
P30,000. The accounting equation would be
Calculating the profit or
Assets = Liabilities + Owner’s Equity
loss achieved in a P100,000 = P70,000 + P30,000

Ifcompany
over a certain period the firm had the net income of P10,000, the equation would then be

Assets = Liabilities + Owner’s Equity

P110,000 = P70,000 + P40,000

If the owner want to know his proprietary interest in the business, the accounting equation may be
modified:
Basic elements of Financial Positions: The accounting equation
Assets = Liabilities + Owner’s Equity
Assets are found at the left side of the equation which we termed as “Debit” while Liabilities and
Owner’s Equity are found at the right side of the equation which termed as “Credit”.

Assume that the business owned assets of P100,000, owed creditors P70,000 and owed the owner
P30,000. The accounting equation would be
Calculating the profit or
Assets = Liabilities + Owner’s Equity
loss achieved in a P100,000 = P70,000 + P30,000

Ifcompany
over a certain period the firm had the net income of P10,000, the equation would then be

Assets = Liabilities + Owner’s Equity

P110,000 = P70,000 + P40,000

If the owner want to know his proprietary interest in the business, the accounting equation may be
modified:
Owner’s Equity = Assets - Liabilities
40,000 = 110,000 - 70,000
 Elements of financial statements and account titles used

Assets are classified into two, namely

Calculating the profit or

loss achieved in a
company
 Elements of financial statements and account titles used

Assets are classified into two, namely current assets and non-current assets.

Calculating the profit or

loss achieved in a
company
 Elements of financial statements and account titles used

Assets are classified into two, namely current assets and non-current assets.
Current assets – refers to all assets that are expected to be realized, sold, or consumed within the enterprise’s normal
operating cycle. E.g. cash, cash equivalents, petty cash fund, notes receivable, accounts receivable, estimated
Calculating the profit
uncollectible accounts, or income, advances to employees, inventories, prepaid expenses, unused supplies.
accrued

loss achieved
Non-current in a– “all other assets not classified as current should be classified as non-current assets”. E.g. property
assets
and equipment, land, building, equipment, furniture and fixtures, accumulated depreciation, intangible assets.
company
 Elements of financial statements and account titles used

Assets are classified into two, namely current assets and non-current assets.
Current assets – refers to all assets that are expected to be realized, sold, or consumed within the enterprise’s normal
operating cycle. E.g. cash, cash equivalents, petty cash fund, notes receivable, accounts receivable, estimated
Calculating the profit
uncollectible accounts, or income, advances to employees, inventories, prepaid expenses, unused supplies.
accrued

loss achieved
Non-current in a– “all other assets not classified as current should be classified as non-current assets”. E.g. property
assets
and equipment, land, building, equipment, furniture and fixtures, accumulated depreciation, intangible assets.
company
Liabilities – financial obligations of the business to its creditors. Classifications of liabilities; current liabilities and non-
current liabilities.
 Elements of financial statements and account titles used

Assets are classified into two, namely current assets and non-current assets.
Current assets – refers to all assets that are expected to be realized, sold, or consumed within the enterprise’s normal
operating cycle. E.g. cash, cash equivalents, petty cash fund, notes receivable, accounts receivable, estimated
Calculating the profit
uncollectible accounts, or income, advances to employees, inventories, prepaid expenses, unused supplies.
accrued

loss achieved
Non-current in a– “all other assets not classified as current should be classified as non-current assets”. E.g. property
assets
and equipment, land, building, equipment, furniture and fixtures, accumulated depreciation, intangible assets.
company
Liabilities – financial obligations of the business to its creditors. Classifications of liabilities; current liabilities and non-
current liabilities.
Current liabilities – financial obligations of the enterprise which are (a) expected to be settled in the normal course of the
operating cycle; (b) due to be settled within one year from the balance sheet date. E.g., accounts payable, notes payable
(short term), accrued expenses, pre-collected or unearned income.

Non-current liabilities – are financial long term obligations of the enterprise which are due are payable for more than one
year. E.g., notes payable (long-term), mortgage payable.
Example 1

During the month of January, Mr. Juan Cruz, lawyer,

1. Invested P5,000 to open his law practice
2. Bought supplies (stationery, forms, pencils, etc.) for cash, P300.
Calculating the profit or
3. Bought office equipment from ABC Furniture Company on
loss account,
achieved P2,500
in a
company
4. Received P2,000 in fees earned during the month
5. Paid office rent for January, P500
6. Paid Part-time help, P200
7. Paid P1,000 to ABC Furniture Company on account.
8. After taking an inventory at the end of the month, found that he
had used P200 worth of supplies
9. Withdrew P300 for personal use
 Activity 1

1. What effect do the transactions below have on the owner’s equity (capital)? (Indicate if increase (+), decrease (-),
or no change in owner’s equity).

a) Juan Cruz invested P5,000 in the business.

Calculating the profit
b) He bought equipment or
on account, P2,400.
c) He paid half of the bill owed to the creditor.
loss achieved
d) She in a in fees.
received P2,000
e) He paid salaries for the week, P800.
company
f) He withdrew P400 from the business.
g) He paid rent for the month, P900.
h) Inventory of supplies decreased P350 during the month.
 Activity 1

2. Transactions completed by Juan Cruz appear below. Indicate increase (+), decrease (-), or no change (0) in the
accompanying table.

Assets = Liabilities + Owner’s equity

(a) Paid rent expense for the month
(b) Paid biweekly salary for lab assistant
(c) Cash fees collected for the week
(d) Bought medical equipment, paying cash
(e) Bought equipment on account
(f) Paid creditor (liability) money owed
 Assignment 1

1. Mr. Cruz begins business, investing P4,000 in cash, equipment valued at P12,000, and P1,000 worth of supplies.
What is the equity of the firm?

2. If Mr. Cruz had included a P6,000 note payable (written liability) in 2, what would have been his owner’s equity?

3. Supplies had a balance of P2,400 at the beginning of the year. At the end of the period, its inventory showed
P1,400. How is this decrease recorded?

4. Record the following transaction: Bought equipment for P22,000, paying P6,000 in cash and owing the balance.

Assets = Liabilities + Owner’s Equity

Cash + Equipment = Accounts Payable + Capital
Balance P30,000 P30,000
Entry (?)
Balance (?)

5. Based on 4, what effect does the purchase of equipment on account have on capital?