ACCOUNT be consumed in the production

process or in rendering a services.

o It is the basic storage of information
in accounting. PREPAID EXPENSES
o It is a record of the movement,
 These are expenses paid for by the
increase or decrease, in a specific
business in advance. It is an asset
item of an asset, liability, equity,
because the business avoids having
income and expense.
to pay cash in the future for a
---------------------- specific expense.
ASSETS----------------------
Example:
CASH
 Prepaid supplies – represents the cost
 Includes money or its equivalent that of unused office and other supplies.
is readily available for unrestricted  Prepaid rent – rent paid in advance
use.  Prepaid insurance – cost of insurance
 Examples: coins, currency, checks, paid in advance
money orders, bank deposits and
PROPERTY, PLANT AND EQUIPMENT
drafts.
 These are tangible assets that are
CASH EQUIVALENTS
held by an enterprise for use in the
 These are short-term, highly liquid production or supply of goods or
investments that are readily services, or for rental to others, or for
convertible to known amounts of administrative purposes and which
cash and which are subject to an are expected to be uses during more
insignificant risk of changes in value. than one period
 LAND – the lot on which the building of
NOTES RECEIVABLE the business has been constructed or a
 It is a written pledge that the vacant lot which is to be used as future
customer will pay the business a plant site. It is not depreciable.
fixed amount of money on a certain  BUILDING – The structure owned by a
date. business for use in its operation
 EQUIPMENT – consists of various
ACCOUNTS RECEIVABLE assets such as: a. Machineries and other
factory equipment
 These are claims against customers
 Transportation equipment, e.g. vehicles,
arising from sale of services or goods
delivery trucks c.
on credit. This type of receivable
 Office equipment, e.g., desks, cabinets,
offers less security than a promissory
chairs
note.
 Computer equipment
INVENTORIES  Furnitures and fixtures

 These are assets which are (a) held

for sale in the ordinary course of
ACCUMULATED DEPRECIATION
business; (b) in the process of
production for such sale; or ( c ) in  It is a contra account that contains
the form of materials or supplies to the sum of the periodic depreciation
 charges. The balance in this account amounts received are recorded in the
is deducted from the cost of the unearned revenue account. When the
related asset – equipment or building goods or services provided to the
– to obtain book value. customer, the unearned revenue is
reduced and income is recognized
INTANGIBLE ASSETS
CURRENT PORTION OF LONG-TERM
 These are identifiable, nonmonetary
DEBT
assets without physical substance
held for use in the production or  These are portions of mortgage
supply of goods or services, for notes, bonds and other longterm
rental to others, or for administrative indebtedness which are to be paid
purposes. These includes goodwill, within one year from the balance
patents, copyrights, licenses, sheet date.
trademarks, brand names, secret
MORTGAGE PAYABLE
processes, subscription list and non-
competition agreements.  This account records long-term debt
of the business entity which the
-------------------
business entity has pledged certain
LIABILITIES------------------
assets as security to creditor.
ACCOUNTS PAYABLE
BONDS PAYABLE
 This account represents the reverse
 Business organizations often obtain
relationship of the accounts
substantial sums of money from
receivable. By accepting the goods
lenders to finance the acquisition of
or services, the buyer agrees to pay
equipment and other needed assets.
for them in the near future.
They obtain these funds by issuing
NOTES PAYABLE bonds. The bond is a contract
between the issuer and the lender
 It is like a notes receivable but in
specifying the terms of repayment
reverse sense. In its case, the
and the interest to be charged.
business entity is the maker of the
note; that is, the business entity is the ---------------------
party who promises to pay the other EQUITY-----------------------
party a specified amount of money
CAPITAL
on a specified future date.
 This account is used to record the
ACCRUED LIABILITIES
original and additional investments
 Amounts owed to others for unpaid of the owner of the business entity.
expenses. This includes salaries
payable, utilities payable, interest
payable and taxes payable.
UNEARNED REVENUES WITHDRAWALS
 When the business entity receives  When the owner of a business entity
payment before providing its withdraws cash or other assets, such
customers with goods or services, the are recorded in the drawing or
 withdrawal account rather than UTILITIES EXPENSE
directly reducing the owner’s equity
 Represents the cost of utilities that
account.
have been used during the period. It
INCOME SUMMARY includes water, electricity,
technology and communication, fuel
 It is a temporary account used at the
end of the accounting period to close SUPPLIES EXPENSE
income and expenses. It shows the
 Expense of using supplies that have
profit or loss for the period before
been used in the conduct of daily
closing the capital account.
business.
---------------------INCOME---------------------
BAD DEBT EXPENSE
SERVICE INCOME
 The amount estimated losses from
 Revenues earned by performing uncollectible accounts during the
services for a customer or client. period. Other term is doubtful
account expense.
SALES
DEPRECIATION EXPENSE
 Revenues earned as a result of sale of
merchandise.  The portion of the cost of a
depreciable asset that has been
-------------------EXPENSES-------------------
allocated to the current accounting
COST OF SALES period.

 The cost incurred to purchase the ADVERTISING EXPENSE

products sold to customers during the
 Represents the cost of promotional or
period; also called the cost of goods
marketing activities during the
sold.
period.
FREIGHT-OUT
INSURANCE EXPENSE
 Represents the sellers’ costs of
 Represents rentals the cost of
delivering goods to customers. Other
insurance pertaining to the current
terms for freight-out are delivery
accounting period.
expense, transportation-out and
carriage outwards. TAXES AND LICENSES
SALARIES OR WAGES EXPENSE  Represents the cost of business and
local taxes required by the
 Represents the salaries or wages
government for the conduct of
earned by the employees for the
business. For corporations and
services they have rendered during
partnership, income taxes are
the accounting period.
recorded in a separate account called
RENT EXPENSE income tax expense.

 Represents rentals that have been TRANSPORTATION AND TRAVEL

used up during the accounting EXPENSE
period.
  Transportation expenses represent 2. The second digit in the 3-digit numbering
the necessary and ordinary cost of refers to the account title and the sequence on
employees getting from one how they are listed in the chart of accounts.
workplace to another which are
3. The third digit in the 3-digit numbering, if
reimbursable by the business.
not zero, signifies that the account is contra
 Travel expenses represent the cost
account or adjunct account.
incurred when travelling on business
trips
INTEREST EXPENSE DEBITS AND CREDITS – THE DOUBLE
ENTRY SYSTEM
 Represents the cost of borrowing
money. It is the price that a lender  Accounting is based on a double-
charges a borrower for the use of the entry system which means that the
lender’s money. Other terms for dual effects of a business transaction
interest expense are finance cost and is recorded.
borrowing cost.  A debit side entry must have a
corresponding credit side entry.
MISCELLANEOUS EXPENSE
 For every transaction, there must be
 Represents various small one or more accounts debited and
expenditures which do not warrant one or more to be credited.
separate presentation.  Each transaction affects at least two
accounts.
 The total debits for a transaction
To maintain the accounting equation, must always equal to total credits.
transactions affecting financial position  An account is debited when an
accounts may have the following effects: amount is entered to the left side of
the account and credit when an
 Increase in Assets = Increase in amount is recorded on the right side.
Owner’s Equity  Dr – debit; Cr – credit
 Increase in Assets = Increase in  The account type determines how
Liabilities increases or decreases in it are
 Increase in one Asset = Decrease in recorded.
another Asset  INCREASES IN ASSETS are
 Decrease in Assets = Decrease in recorded as debits while decreases in
Liabilities assets are recorded as credits.
 Decrease in Assets = Decrease in  Increases in liabilities and equity are
Owner’s Equity recorded by credits and decreases are
 Increase in Liabilities = Decrease in entered as debits.
Owner’s Equity  The rules of debit and credit for
income and expense accounts are
based on the relationship of these
CHART OF ACCOUNTS accounts to owner’s equity.
1. The first digit in the 3-digit numbering
refers to the major types of account.
NORMAL BALANCE
A normal balance side is the expected
balance side of each element as transaction is
captured in such elements. The normal
balance side of each element is determined
through its position in the accounting
equation.
Assets = Liabilities + Owner’s Equity
Account Normal Increase Decrease
Balances

Assets Debit Debit credit

Liabilities Credit Credit Debit
Owner’s
Equity
 Capital Credit Credit Debit
 Withdrawal Debit Debit Credit

Revenue/ Credit Credit Debit

income
Expenses Debit Debit Credit
 short description of the
transaction

This is the second step to record transactions in

the journal by means of a journal entry. This
ACCOUNTING CYCLE recording process is called journalizing.

It refers to a series of sequential steps or Journalizing transactions is the process of keeping

procedures performed to accomplish the a record of all your business transactions, tracking
accounting process. them in chronological order, and generally
includes the date, the account you’re debiting or
The accounting cycle represents the steps or crediting, and a brief description of the
procedures used to record transactions and transaction that occurred.
prepare financial statements. It implements the
accounting process of identifying, recording, and
communicating economic information.
POSTING AND TRIAL BALANCE
PERMANENT ACCOUNTS - Are those accounts
ACCOUNTING CYCLE that continue to maintain ongoing balances

STEP 1: ANALYZING BUSINESS over time.

TRANSACTIONS
TEMPORARY ACCOUNTS - These are also
This is the first step in the accounting cycle. It called nominal accounts. They are used to gather
involves identifying a business transaction and information for a particular accounting period. At
analyzing whether or not that transaction affects the end of the period, they are being transferred to
the assets, liability, equity, income or expense of a permanent owner’s equity account.
the business.

The transaction of analysis should follow these

four basic steps: STEP 3: POSTING JOURNAL ENTRIES TO
THE LEDGER
1. Identify the transaction from source
documents Posting means transferring of the amounts from
2. Indicate the accounts affected by the the journal to the appropriate accounts in the
transactions ledger.
3. Ascertain whether each account is
increased or decreased by the transaction
4. Using the rules of debit and credit, STEPS IN POSTING
determine whether to debit or credit the
1. Transfer the date of the transaction from
account.
the journal to ledger.
STEP 2: JOURNALIZING TRANSACTIONS 2. Transfer the page number from the
journal to the journal reference column
A journal entry takes the following format: of the ledger.
3. Post the debit figure from the journal as
Date
a debit figure in the ledger and the credit
Account title to be debited xx xxx figure from the journal as a credit figure
Account title to be x in the ledger.
credited 4. Enter the account number in the posting
reference number in the posting
 reference column of the journal once the accounts in order to facilitate the preparation of
figure has been posted to the ledger. financial statements. Since the basis of
information in the ledger comes from the journal,
the ledger is commonly referred to as the book of
final entry.

TWO TYPES OF JOURNALS

 SPECIAL JOURNALS - are journals used to

record recurring transactions. There are four
STEP 4: PREPARING THE TRIAL BALANCE common types of special journals, namely: (1)
sales journal; (2) purchase journal; (3) cash
The trial balance is a list of accounts with their
receipts journal; and (4) cash disbursements
respective debit or credit balances. It is prepared
journal/cash payment journal.
to verify the equality of debits and credits in the
ledger at the end of each accounting period or any
 GENERAL JOURNAL - looks like a two-
time the postings are updated.
column columnar notebook. It is the journal
The procedures in the preparation of a trial used to record all the other business
balance are: transactions not recorded in the special
journals.
1. List the accounts in numerical order.
2. Obtain the account balance of each
account from the ledger and enter the
TYPES OF SPECIAL JOURNAL
debit and balances in the debit column
and credit balances in the credit column. 1. SALES JOURNAL - It is a journal used to
3. Add the debit and credit columns. record sale of merchandise on account.
4. Compare the totals.

BOOKS OF ACCOUNTS

It is a book where you record all the financial 2. PURCHASE JOURNAL - It is a journal
transactions of the business. Entries in the book of used to record purchase of merchandise on
accounts are required to be supported with account.
documents such as official receipts, sales
invoices, vouchers and other related supporting
documents evidencing the business transactions
that occurred.
3. CASH RECEIPTS JOURNAL - It is a
JOURNAL
journal used to record receipts of cash from
It is used to record chronologically all whatever source.
transactions of a business as they occur. Since it
provides the first evidence of a formally recorded
transaction. It is commonly referred to as the
book of original entry.
4. CASH Disbursement JOURNAL - It is also
LEDGER known as the cash payments journal (CPJ),
is a journal used to record payments of cash
It is a collective record of individual accounts
for whatever purpose.
used by a business. It is used to sort all entries
made in the journal in chronological order and to
group all transactions that affect individual
 GENERAL JOURNAL

The standard contents of the general journal are

as follows:

1. Date
2. Account Titles and Explanation
3. Posting Reference (P.R.)
4. Debit(Dr.)
5. Credit (Cr.)

TWO TYPES OF LEDGER

GENERAL LEDGER - is used to accumulate and

classify individual transactions from the journal.

SUBSIDIARY LEDGER - is used to provide

detailed information about a specific ledger
account.