LEARNING MODULES

FUNDAMENTALS OF
ACCOUNTING

Compiled by Jayson James C. Balbin

1|Page
 Overview
This module guides you on how to conduct the accounting cycle
by discussing the following:
- The accounting environment: The introduction to the
subject matter. You will learn the history, definition and
importance will be discussed.
- Assets, Liability and Equity: The in-depth look on the
elements of the financial statements.
- The Accounting Process: The in-depth discussion of the
equation, assets = liabilities + equity. You will learn its
significance in conducting the accounting cycle. The study
of the double-entry system. You will learn the principle
behind the system and how to apply the system.
- Journalizing: The demonstration of the most crucial step in
the accounting cycle. You will learn when to debit or credit
an asset, liability and equity. You will also meet income and
expenses.
- The Ledger: After accomplishing the journal, the next step
will be to accomplish the ledger. You will be guided in using
the ledger in coming up with the balances of each account.
- Adjusting Entries: After journalizing, the next step in the
cycle is the creation of the year-end entries, primarily the
adjusting entries. At this point, you will be thought on how
to compute depreciation, bad depths, accrual and deferrals
of income and expenses.
- The Financial Statements: The final step is to form the
financial statements of a business. You will learn how to
build the income statement, balance sheet and the
statement of cash flow.

2|Page
 Objectives of the Module
At the end of this module, you should be able to:
- Explain the definition of accounting.

- Differentiate, asset, liability, equity, income and

expense.

- Implement the double-entry system.

- Form and organize journal entries.

- Compute, form and organize adjusting entries.

- Accomplish the ledger.

- Produce financial statements.

3|Page
 Guide to Module Activities
TYPES SYMBOLS
Self Test
Your result for these This represent the One = 50% of items
activities will not affect your desired percentage of Two = 75% of items
school grade. The answers correct answers. Three = 100% of items
are provided for you to check If you do not get the
your own. desired percentage,
please review the
chapter.
Quiz
Way of submission

Your result for these This represent the The output can
activities will affect your number of points for the be written online
school grade. Your output activity. (ex. Messenger)
should be submitted. One = 20 points The output
Two = 30 points should be
Three = 40 points written in a
paper
(preferably
yellow pad).
The output
should be
written in a
worksheet.
Requirement

These outputs should be This represent the This means that you should get
submitted to complete the number of points for the 50% of the number of points
course. requirement. for your submission to be
One = 30 points accepted.
Two = 60 points
Three = 90 points

4|Page
 Table of Contents
Title of the Lesson Page

The Accounting Environment 6-18

Assets, Liability & Equity 19-30

Accounting Process 31-44

Journalizing 45-56

Ledger 57-67

Adjusting Entries 68-79

The Financial Statements 80-91

5|Page
Assets, Liabilities and Equity

Module 2

6|Page
 Assets, Liabilities and
OBJECTIVE:

OBJECTIVES
At the end of this module, you should be able to:
- Differentiate the different accounts..
- Craft an Asset – Liability = Equity table.

I. The Accounts
To understand accounting, you need to have a good idea of how a business
works. How does a legit business start?
The first thing that you should have is capital or seed money. Although, in this
modern time, there are already ways to start a business even without
withdrawing cash from your personal account. You can borrow from banks. Or,
you can have investors (persons who will lend you money in exchange of gains
in the future).
The next thing that you should think about is the concept of your business.
Specifically, what will you provide? What will be your product?
After deciding what your product will be, you need to determine the place of
your business. If it is a restaurant, of course, you should put it up in a place with
a lot of people.
When you already have the money, the product and the place, it is time to
acquire/buy equipment that you need.
The last step is to legitimize your business by getting a business name from DTI.
By getting a business name from DTI (Department of Trade and Industry), your
business now has a name that others cannot copy or have. Although, a business
name from DTI is not a permit to start the operation of your business. The
permit to operate comes from the Local Government Unit. It is the Mayor’s
Permit that will give the right for a business to operate in a city or municipality.
Although, a Mayor’s Permit is not enough because you also need to register your
business to the Bureau of Internal Revenue. Those are the three legal papers
(legalities) that you need to have to legitimize your business.
If you now have those five you can now start your business.
How can a business run? Of course, you need financial capacity to spend for the
needs of the business. That financial capacity can either come from the wallet of
the owners or from other entities through borrowing.
You also need tangible equipment and materials for the production of your
goods or services. Of course, the goods that you are selling should also be
accounted. Sometimes your customers will borrow from you, so you also need to
take note of that.
In short, there are these needed elements for the proper flow of the entity.
These elements are represented by the ACCOUNTS in accounting.
7|Page
 There are three main categories of accounts.
a. Assets
Are the economic resources of the entity. They are presumed to entail
probable future economic benefits for the owner. The entity draws the
benefits of these assets for the furtherance of the entity.
Asset are classified into two: current assets and noncurrent assets. It is a
current asset if:
- If it expects to realize the asset, or intends to sell or consume it, in its normal
operating cycle or as a rule of thumb, in 12 months. So, if you received a
cheque today and it is dated August 1, 2021, it is a current asset because it can
be cash-in in 12 months. If it is December 1, 2021 and today is September 1,
2020. It is not a current asset because it is beyond 12 months.
It is a non-current asset if it is not a current asset.
What is a Normal Operating Cycle?
It is the time it takes to start with cash, buy necessary items to produce
revenues (such as materials, supplies, labor, and/or finished goods), sell
services or goods, and receive cash by collecting the resulting receivables.
Companies in service industries and merchandising industries generally have
operating cycles shorter than one year. Companies in some manufacturing
industries, such as distilling and lumber, have operating cycles longer than one
year. However, since most operating cycles are shorter than one year, the one-
year period is usually used in identifying current assets and current liabilities
1. Current Assets
a) Cash – is any medium of exchange that a bank will accept for deposit at
face value. It includes coins, currency, checks, money orders, bank
deposits and draft.
b) Cash Equivalents – these are short-term, highly liquid investments that
are readily convertible to know amounts of cash and which are subject to
an insignificant risk of changes in value.
c) Notes Receivable – is a written pledge that the customer will pay the
business a fixed amount of money on a certain date.
d) Accounts Receivable – these are claims against customers arising from
sale of services or goods on credit. This type of receivable offers less
security than a promissory note.
e) Inventories – these are assets which are (a) held for sale in the ordinary
course of business, (b) in the process of production for such sale; or (c) in
the form of materials or supplies to be consumed in the production
process or in the rendering of services.
f) Prepaid Expenses – these are expenses paid for the business in
advances. It is an asset because the business avoids having to pay cash in
the future for a specific expense. These include insurance and rent. These
prepaid items represent future economic benefit – assets – until the time
these start to contribute to the earning process, these, then, become
expenses.
2. Non-current Assets
a) Property Plant and Equipment – these are tangible assets that are held
by an enterprise for use in the production or supply of goods or services,
or for rental to others, or for administrative purposes and which are

8|Page
 expected to be used during more than one period. Included are such items
as land, building, machinery and equipment, furniture and fixtures, motor
vehicles and equipment.
b) Intangible Assets – These are identifiable, without physical substance
held by a company for use in the production or supply of goods or
services, or for rental to others, or for administrative purposes which are
expected to be used for more than a year. Example are patent, copyright,
lease rights, trademark and others.
b. Liabilities
Are amounts owed to others relating to loans, extensions of credit, and other
obligations arising in the course of business.
Just like assets, liabilities are classified into current and non-current. It is a
current liability if:
- If it expects to settle the liability in its normal operating cycle or it is due to be
settled within twelve months after the reporting period.
1. Current liabilities
a) Accounts Payable – amount due for the acquisition of goods or services
on credit. Example: if you have are face shields and your supplier
provided you with 1,000 pieces worth P30.00 and told you that you can
pay the P30,000, after two weeks. This is an accounts payable.
b) Notes Payable – obligations to pay a certain sum of money with written
evidence. Example: promissory note. In the example for current liabilities,
if you signed a document stating that you owed the supplier P30,000, to
be paid in two weeks, that is now a notes payable, not an accounts
payable.
c) Accrued Liabilities – expenses already incurred but are not yet paid.
Examples are interest, salaries payable, taxes, utilities payable and
others.
d) Unearned Revenues – advance payment received from customers
before providing services and goods.

2. Non-current liabilities
a) Loans Payable – A borrowing of cash without collateral.
b) Mortgage Payable – obligations which are secured by collateral.
c) Bonds payable – long term indebtedness as evidenced by a formal
certificate.

c. Equity
This is the value of the interest of the owner to the business. Who are these so-
called owners? It depends on the type of the entity.
There are three main types of entity.
1. Sole Proprietorship is the simplest form of business. It is basically owned by
one person. Many small service businesses and retail establishments are also
single proprietorships. No legal formalities are necessary to organize such
businesses, and usually business operations can begin with only a limited
investment.

9|Page
 In a single proprietorship, the owner is solely responsible for all debts of the
business. For accounting purposes, however, the business is a separate entity
from the owner. Thus, single proprietors must keep the financial activities of the
business, such as the receipt of fees from selling services to the public, separate
from their personal financial activities. For example, owners of single
proprietorships should not enter the cost of personal houses or car payments in
the financial records of their businesses.
2. Partnership is an unincorporated business owned by two or more persons
associated as partners. Often the same persons who own the business also
manage the business.
A partnership begins with a verbal or written agreement. A written agreement is
preferable because it provides a permanent record of the terms of the
partnership. These terms include the initial investment of each partner, the
duties of each partner, the means of dividing profits or losses between the
partners each year, and the settlement after the death or withdrawal of a
partner.
Each partner may be held liable for all the debts of the partnership and for the
actions of each partner within the scope of the business. However, as with the
single proprietorship, for accounting purposes, the partnership is a separate
business entity.
3. Corporation is a business incorporated under the laws of a state and owned by a
few stockholders or thousands of stockholders. The corporation is unique in that
it is a separate legal business entity. The owners of the corporation are
stockholders, or shareholders. They buy shares of stock, which are units of
ownership, in the corporation.
Should the corporation fail, the owners would only lose the amount they paid for
their stock. The corporate form of business protects the personal assets of the
owners from the creditors of the corporation. Stockholders do not directly
manage the corporation. They elect a board of directors to represent their
interests.
II. Business transactions
It is time for you to start experiencing accounting. Let us do that by first defining
a transaction. Transaction is an exchange of value between at least two parties
in terms of money. These are actually events that occurs in the business.
Now, let us see how every transaction affects a business by using this formula:
Assets – Liabilities = Equity
In general, the formula is telling us that to know how much is the value of the
ownership in the business, you deduct liabilities from your asset. Sa madaling
salita, pinapakita nito na ang Equity (ang value ng pag-mamay-ari ng may-ari ng
business) ay malalaman mo kapag ibinawas mo yung utang mula sa kanyang
mga assets.
As inculcated to you in Module 1, accounting’s #1 goal is to record transaction.
So, let us begin your journey in embracing the accounting process by simplifying
things, first.
To have a glimpse of how it works, here is an illustration.
ILLUSTRATION: Business #1
Assets - Liabilities = Equity

10 | P a g e
a. Si Makoy ay sampung taon na nagsasaka. Sa pagsasaka, may mga buwan na wala
masyadong ginagawa kaya naisipan niya na gamitin ang kanyang naipon na P100,000 para
magpatayo ng bentahan ng pakain sa mga manok.
b. Bumili siya ng isang maliit na store para gawin niyang bentahan ng kanyang mga produkto.
P30,000 ang kanyang binayad.

a. +100,000 100,000
b. -30,000 | +30,000 100,000
Ang + ay nagsasabi na nadagdagan at ang – naman ay nagsasabi na nabawasan. Sa A,
pinakita natin ang umpisa ng kanyang business kung saan P100,000 na pera ang capital
niya. Sa B naman, makikita niyo na nabawasan ng P30,000 ang kanyang asset kasi siya
ay nagbayad ng pera. Sa pagbabayad niya ng P30,000, hindi na sa kanya yung P30,000.
Ngunit ang kapalit naman nito ay nakuha niya yung maliit na store, na isa din na asset.
c. Kumuha siya ng mga kailangan niyang papeles mula sa DTI, BIR at Local Government Unit.
P4,500 lahat ang nagastos niya.
d. Mukhang hindi kasya ang P100,000 niya para masimulan ng tama ang negosyo kaya umutang
siya ng P50,000 sa kanyang tatay.

c. -4,500 95,500
d. +50,000 +50,000 95,500
Total 145,500 50,000 95,500
Sa C, gumastos siya ng P4,500. Wala siyang nakuha na asset sa kanyang ginawa kaya
naman diretsong bawas lang ang epekto nito sa kanyang asset. Sa D naman, umutang
siya. Ang kanyang inutang ay pera at ang pera ay asset. Kaya naman nadagdagan ng
P50,000 ang asset. Samantalang nadagdagan din ng P50,000 ang liabilitiy kas inga
utang iyon.

Tignan naman natin ang kanyang equity. P95,500 na lang ito. Ang ibig sabihin, P95,500
lang ang value ng kanyang pagmamay-ari sa business.

Yes, P145,500 ang kanyang asset pero alam natin na kapag nagtapos ang business sa
araw na iyan, kakailanganin niyang bayaran yung utang na P50,000 sa kanyang tatay.
Iyan ang sense ng formula na Asset minus Liabilities equals Equity.
e. Bumili siya ng mga aparador na paglalagyan niya ng mga produkto niya at isang
lamesa. Ang kabuuang halaga ng binayad niya ay P34,000.
f. Bumili na din siya ng mga produkto na nagkakahalaga ng P50,000 ang bayad.
e. -34,000 | +34,000
f. -50,000 | +50,000
Parehong nabawasan ang asset sa dalawang transaction kasi nagbayad sila ng
pera/cash. Pero nadagdagan din kasi Furniture yung mga binili nila sa E at Invetory
naman sa F.
SUMMARY
Assets - Liabilities = Equity
a. +100,000 100,000
b. -30,000 | +30,000 100,000
c. -4,500 95,500
d. +50,000 +50,000 95,500
e. -34,000 | +34,000
f. -50,000 | +50,000
Total 145,500 50,000 95,500

11 | P a g e
 Magfocus tayo ng konti sa Total. Matapos ang anim na transaction, makikita niyo na
P95,500 pa rin ang value ng pagmamay-ari ng may-ari. Muli, kahit P145,500 ang
kanyang asset, P50,000 doon sa utang na kailangan niyang bayaran.
Kung aaralin mo ang mga transaction, makikita mona yung pagbayad niya ng gastos niya
sa C ang siyang nagbawas ng kanyang pagmamay-ari.
Bakit?
Dahil gastos yun. Hindi pa tayo umabot sa mga transaction kung saan kikita ang
business. Makikita niyo naman ang magiging epekto nito.

ILLUSTRATION: Business #2

Here is another illustration. In this one, we will now interject the specific assets
and liabilities for you to have a better visualization of how a business and
accounting works.
Here are the transactions. In the next page, you will see the Assets – Liabilities
= Equity table. The last one will be the explanations.
a) Ben borrowed P300,000 from the bank to start buying and selling fishes.
b) Ben purchased a 2nd hand van, for P185,000 cash.
c) The supplier provided P200,000 worth of fishes, to be paid next month. They agreed verbally.
d) Ben will used his own small building for the business, worth P240,000.
e) Ben paid P2,000 for the gasoline of the van.
f) Ben sold P90,000 fishes for P150,000 cash.
g) Ben received the electric bill for the month, worth P1,200.
h) Ben sold all the remaining fishes to Ray, who will pay the P150,000 price next week. They agreed
verbally.
i) Ben decided to pay P100,000 for his debt to the supplier.
j) Ben decided to purchased P100,000 from the supplier, to be paid next month. They agreed verbally.
k) Ben decided to sell his 2nd hand van for P185,000 cash.
l) To replace the van with a bigger vehicle, he decided to invest his own truck to the business, worth
P185,000.
m) Ben sold half of his products for P100,000 cash.
n) Ben received the payment of Ray, who paid his debt in full.
o) Ben paid the electric bill.
p) Ben purchased P185,000 worth of fish from a new supplier. He gave a promissory note because he
q) will pay it next month.
r) He paid the wages of his laborers, worth P20,000.

12 | P a g e
 13 | P a g e
ASSETS - LIABILITIES EQUITY
Accounts Notes Accounts
Cash Receivable Receivable Inventories PPE Payable Notes Payable Loans Pay
+300000 +3000
-185000 +185000
+200000 +200000
+240000
-2000
150000 -90000
+150000 -110000
-100000 -100000
+100000 +100000
+185000 -185000
+195000
+100000 -50000
+150000 -150000
-1000
+105000 +105000
-20000
577,000 0 0 155,000 435,000 200,000 105,000 3
Total Assets = 1167000 Total Liabilities = 6
1,167,000- 607,000=562,000
 Explanations:
a) Pwede mong simulan ang isang negosyo sa paghiram ng pera. Makikita mo dito na wala pang value yung
sa equity kasi kahit P300,000 yung cash ni Ben, ito naman ay hindi kanya kundi inutang niya. May mga
bagay na ipapahawak sa iyo pero hindi mo pwedeng ariin at dapat mo ring ibalik sa darating na panahon.
Utang ang isa sa mga halimbawa nito.
b) Ang mga sasakyan ay parte ng Property, Plant and Equipment. Pero ang binayad kaya may pagbabawas
ng cash.
c) Saan mo ba naririnig ang salitang supplier? Yes. Ito ang termino na karaniwan na ginagamit para sa mga
nagproprovide ng produkto ng isang business. Sinabi sa transaction na ito ay babayaran sa susunod na
buwan. So, anong meron? Tama. Kumbaga inutang ito ni Ben. Magkano ang halaga ng utang? P200,000,
ang halagang babayaran niya sa susunod na buwan. Ang utang ay ilalagay natin sa Accounts Payable.
Bakit? Ang Loans Payable ay para sa utang na pera. Kung gamit o produkto ang inutang, sa accounts
payable ito. Notes Payable naman kung merong kasulatan patungkol sa utang.
d) Binili ba ni Ben yung building? Hindi. Ito ay pagmamay-ari niya na gagamitin na niya sa business. In short,
investment niya ito sa business. Kaya naman kadagdagan lang sa PPE ang makikita niyo sa table.
e) Ang pambayad ay? Syempre pera. Kaya naman pagbawas sa pera ito.
f) Dito, nakabenta si Ben. Naalala mo ba na binili ni Ben ang kanyang binebenta? Yung P90,000 ay ang cost
nito. Magkano niya binili yung nabenta niya sa araw na ito na isda? P90,000. Magkano naman niya ito na
benta? P150,000. In short? Yes. May kita siya na P60,000. At mapapansin mo nga sa kanyang equity na
ito ay nadagdagan ng P60,000. Dahil ang equity ay nagrerepresenta ng halaga ng pagmamay-ari ng may-
ari sa isang business. At kapag may kita ito, nadadagdagan ito.
g) Muling nakabenta si Ben. Ang pinagkaiba lang, hindi ito binayaran agad ng bumili. So, anong meron? May
utang si Ben. Mali. May nagkautang kay Ben at ito ay yung bumili na si Ray. Magkano ang dapat ibayad
ni Ray? P150,000. Saan nanggaling yung P110,000? P200,000 lahat ng produkto na binili niya sa
umpisa. Nabenta na niya yung P90,000. Lahat ng natira ay nabenta sa transaction na ito. Kaya kapag
binawasan mo yung P200,000 ng P90,000 lalabas ang naiwan na P110,000.
h) Kapag nagbayad ng utang, cash ang pambayad. At dahil nagbayad ng utang, dapat bawasan yung utang.
Supplier? Ang nagprovide ng produkto. At makikita mo na yung Accounts Payable ang may current na
halaga.
i) Muling umutang si Ben ng produkto mula sa kanyang mga supplier.
j) Binenta ni Ben yung binili niya na Van na nagkakahalaga ng P185,000. Kaya nagbawas tayo sa PPE at
nagdagdag sa cash kasi cash ang nakuha niya na kapalit.
k) Kanino yung truck? Sa kanya. Binili niya ba ito? Hindi. Ito ay pagmamay-ari niya na ipapasok na niya sa
business kaya nagdagdag lang sa PPE.
l) Saan nanggaling yung P50,000? Kalahati daw ng produkto niya ang nabenta. Magkano ba ang halaga ng
kasaukuyan niya na hawak na produkto? Naubos na niya yung P200,000 na una niyang binili. Yung
P100,000 na bago ang hindi pa niya nasimulan. Ang kalahati nito ay? P50,000. Tama!
m) Nagbayad si Ray na inutang ang kanyang mga produkto. Buo ang binayaran niya, kaya naman nawala na
lahat ang Accounts Receivable.
n) Nagbayad ng P1,000 cash.
o) Dito, hindi sa accounts payable nilagay ang inutang na produkto. Bakit? Kasi may kasulatan. Kaya naman
sa Notes Payable.
p) Ano ang wages? Ito ay sweldo para sa mga arawan ang trabaho. Nagbayad, kaya nabawasan ang cash.
14 | P a g e
Self
Test 3

A – L = E Table: Provide the A-L=E table

for the following transactions of the two
problems.
Problem A
1. Popo will start a small sari-sari store. He borrowed P50,000
cash from his gf.
2. Popo purchased needed f&f for P10,000 cash.
3. Popo paid P1,000 for his business permit.
4. Popo purchased P30,000 worth of products paid in cash.
5. In the first week of operation, Popo sold half of the products for
P18,000 cash.
6. Popo agreed to purchased P25,000 additional products, that he
will pay after a week.
7. Popo sold all his products for P43,000 cash.
8. Popo paid P10,000 to his girlfriend for his loan.

Problem B
1. Toto will buy and sell motor parts. He will start with his
P80,000 worth of inheritance.
2. Toto purchased a laptop for P18,000 cash.
3. Toto purchased P50,000 worth of motor parts, paid in cash.
4. Toto sold half of it for P30,000 cash.
5. The half of the remaining inventories were sold for P20,000, to
be paid after a month.
6. Toto paid P500 for his internet.
7. Toto acquired P45,000 additional products through credit.
8. The customers in #5 transaction settled their account.

15 | P a g e
 SELF TEST –
PROBLEM A ASSETS
Answers (3) - LIABILITIES EQUITY
Accounts Notes Accounts Loans
Cash Receivable Receivable Inventories PPE Payable Notes Payable Payable Equity
+5000
0 +50000
-10000 +10000 0
-1000 -1,000
-30000 +30000 -1,000
+1800
0 -15000 2,000
+25000 +25000 2,000
+4300
0 -40000 5,000
-10000 -10000 5,000
60,000 0 0 0 10,000 15,000 0 50,000 Total
Total Assets = 70,000 Total Liabilities = 65,000
70,000 - 65,000 = 5,000

PROBLEM B ASSETS - LIABILITIES EQUITY

Accounts Notes Accounts Loans
Cash Receivable Receivable Inventories PPE Payable Notes Payable Payable Equity
+8000
0 80,000
80,00
-18000 +18000 0
80,00
-50000 +50000 0
+3000 85,00
0 -25000 0
92,50
+20000 -12500 0
92,00
-500 0
92,00
+45000 +45000 0
+2000 92,00
0 -20000 0
61,500 0 0 57,500 18,000 45,000 0 0 Total
Total Assets = 137,000 Total Liabilities = 45,000
137,000 - 45,000 = 92,000

References
16 | P a g e
Henio, Edrian. 1992. “Accounting Numbers as ‘inscription’:
Action at a Distance and the Development of Accounting.”
Accounting, Organizations and Society, 17 (7): 685–708.
Oldroyd, David & Dobie, Alisdair: Themes in the history of
bookkeeping, The Routledge Companion to Accounting
History, London, July 2008, ISBN 978-0-415-41094-6,
Chapter 5, p. 96
Hermanson, Edwards et. Al. 2011. Accounting Principles:
A Business Perspective,
Walther, Larry M. 2010. Basics of Accounting and
Information Processing. Bookboon
http://www.professorguerrero.com/2008/07/luca-pacioli-and-
leonardo-davinci.html - figure 3

17 | P a g e