Essential Elements of the Definition

Nature of Accounting

✓ Accounting is a service activity. Services are intangible products (i.e. they

cannot be seen or touched as opposed to goods) performed to clients or
customer, Examples Legal Services of Lawyers. Health Care Services of our
Medical Frontliners and of course the Accounting, Audit. Tax. and
Management Consultancy Services of Accountants which provide
quantitative financial information (information expressed in numbers,
quantities, or units, particularly in money)

✓ Accounting is a process. It involves systematic methods to perform tasks to

achieve objectives

1. Identifying - the process of recognition or rn-recognition of business

transactions as accountable events for recording purpose Note: the event is
said to be accountable when it affects the assets, liabilities, equity income
and expenses of a business

2. Measuring the process of assigning peso value or amount to the identified

accountable event.

3. Communicating the process of Preparation and distribution of financial

reports. The information from different transactions and events is identified,
processed, and measured in an accounting inforration system to produce
meaningful reparts commonly known as financial statements

✓ Accounting is a practical art. It consists of definite techniques and its

proper application requires the use of creative skills, functions, expertise, and
judgment

1. Recording - the preparation of journal entry in the process called

journalizing
2.Classifying - the grouping of accounts with similar nature and
characteristics

3. Summarizing - the preparation of financial reports

4. Interpreting -the analytical function

✓ Accounting is a social science. It is a body of knowledge which has been

systematically gathered, classified and organized.

Users of Financial Information

Classification of User

1. Primary Users -are the fund providers of the business.

a. Investors- are those who provide money. investment, capital, or other

resources for a business

b. Lender and Other Creditors- could be a person, bank, or other

enterprise that has lent money or extended credit to another party/ies

2. Other Users - are users of financial information other than primary users

a. Employee someone who is paid to work for others.

b. Customer an individual or enterprise that purchases the products of the

business

c. Government and their Agencies (BIR, SEC) to determine the income

earned by the entity for the computation of tax payable.

d. Public relating to people in general, to assist the public with the trend
and the range of activities of the entity.

Basic Accounting Concepts

1. Entity concept each entity should be evaluated separately, it separates
owners from the business

2. Periodicity concept - divides the life of an entity into equal time periods,
like month, quarter or years, allows users to obtain timely data for a specific
period to serve as a basis of decision making

3. Stable monetary unit concept treats peso amounts as though each peso
has the same purchasing power as any other peso at any time, effects of
inflation are ignored

Basic Accounting Principles

1. Objectivity principle accounting records and statements are based on

reliable data and supported by verifiable documentation.

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

3. Revenue recognition principle revenue is to be recognized in the

accounting period when goods are delivered or services are rendered or
performed.

4. Expense recognition principle - expenses should be recognized in the

accounting period in which goods & services are used to produce revenue
and not when entity pays for those goods & services.

5. 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

6 Materiality - dictates that financial reporting should only be concerned

with information that is significant to affect evaluations and decisions.
7. Consistency - dictates that firms should use the same accounting method
from period to period to achieve comparability over time within a single
enterprise

8. Matching Principle - the costs of doing business are recorded in the same
period as the revenue they help to generate.

MODULE 2

Financial statements

✓ are the means by which the information accumulated and processed in

financial accounting periodically communicated to the users

✓ are the end product or main output of the financial accounting process.

✓ are a structured financial representation of financial position and financial

performance of an entity.

Types of Financial Statements

1. General Purpose Financial Statements are those statements intended to

meet the needs of general users

2. Specific Purpose Financial Statements are those statements intended to

meet the needs of specific or particular users

Components of a Complete Set of General Purpose Financial Statements

1. Statement of Financial Position

2. Income Statement
3 Statement of Comprehensive Income

4. Statement of Changes in Equity

5 Statement of Cash Flows

6. Notes to Financial Statements

1. Elements under Financial Position

a. Assets- resources controlled by the entity as result of past transactions and

events and from which future economic benefits are expected to flow to the
entity Examples Cash, Accounts Receivable, Inventories Land Building
Equipment

b. Liabilities present obligation of the entity arising from past transactions

and events the settlement of which s expected to result in an outflow from
the entity of resources embodying economic benefits Examples: Accounts
Payable, Salaries Payable, Interest Payable Utilities Payable

C. Equity is the residual interest in the assets of the entity after deducting all
its liabilities c

✔ Sole Proprietorship - Owner’s Equity.

✔Partnership - Partner’s Equity

✓ Corporation - Shareholder’s Equity

2. Elements under Financial Performance

a. Income is increases in economic benefits during the accounting period

 ✓ Revenue- arises in the ordinary course of business Ex. Sales, fees interest

✔ Gains increase in economic benefits not arising from the ordinary course
of business

b. Expense decreases in economic benefits during the accounting period. Ex.

Salaries Expense Interest Expense. Utilities expense

MODULE 3

The Accounting Equation Expense:

All the process in an accounting system must observe the equality of the
accounting equation Accounting equation is the most basic tool of accounting
and the equality of it must be maintained at all times because if not, there is
an error The basic accounting equation is shown below

ASSETS = LIABILITIES + EQUITY

L= A - E E=A + L

The Account and T-account

Account (also known as the basic summary device) it the basic storage of
information in accounting. It is a record of the increases and decreases in a
specific item of asset, liability, equity. income or expense. An account may be
represented through a “T-account” known as simplest form of account.

ACCOUNT TITLE

Debit. Credit

Left Side Right Side

Debit - from the Latin word debere, the left side of the account or accounting
equation Credit - from the Latin word credere; the right side of the account
or accounting equation

Double-entry Accounting System

✓ Accounting is based on a double-entry system which means that the dual

effects of a business transaction are recorded.

✓ Each transaction is recorded in two parts - debit and credit.

✓ No transaction is recorded by a debit alone or a credit alone.

✓ For each amount that is debited, there must be a corresponding amount

that is credited, and vice-versa

✓ The total debits for a transaction must always equal the total credits

MODULE 4

Accounting event is an economic occurrence that causes changes in an

entity’s assets, liabilities and/or equity’s

Types of events

1. External events are events that involve the business and another external
party Examples include sale, purchase, borrowing of money, payment of
liabilities.

2. Internal events are events that do not involve an external party. Example.
production of goods or services.
Transaction is a particular kind of event that involves the transfer of
something of value between two entities. Examples include acquiring assets
from owner, borrowing funds from creditors, purchasing or selling of goods
or services.

MODULE 5

Accounting cycle is, the series of sequential steps or procedures performed

to accomplish the accounting process. Clearly, accounting cycle is the way to
make sure that accounting process will be accomplished. Without accounting
cycle, it’s impossible to accomplish the accounting process that will produce
the accounting output.

Steps in the Accounting Cycle

Steps Objective
1. Identification of the events to be To gather information about transactions or events
generally through source documents.
recorded
To record economic impact of transactions on the
firm in a journal which is a form that facilitates
2. Transactions are recorded in the
transfer to the accounts
journal

3. Journal Entries are posted to the To transfer the journal to the ledger for
classification
ledger
To provide a listing to verify the equality of debits
and credits in the ledger
4. Preparation of Trial Balance

5. Preparation of Worksheet including To aid in the preparation of financial statements,

adjusting entries
6. Preparation of Financial Statements To provide useful information to decision makers
7. Adjusting Journal Entries are To record the accruals, expiration of deferrals,
estimations and other events from the worksheet.
journalized and posted

8. Closing Journal Entries are journalized To close temporary accounts and transfer profit to
owner’s equity
and posted
9. Preparation of Post-Closing Trial To check the equality of debits and credits after
closing entries.
Balance

10. Reversing Journal Entries are To simplify the recording of certain regular
transactions in the next accounting period.
journalize and posted
1. Identification of the events to be recorded

Objective: To gather information about transactions or events generally

through source documents.

Time line: During the accounting period

This step involves identifying a business transaction and analyzing whether or

not that transaction affects the assets, liabilities, equity income or expenses
of the business. A transaction that has an effect on the accounts is an
accountable event which needs to be recorded in the books of account

Transactions are normally identified from source documents Source

documents are the written evidences containing information about the
transactions Some documents come in various forms which include, but not
limited to, the following

1. Sales invoices 5. Bank deposit slips

2. Official receipts 6. Bank statements
3. Purchase orders 7. Checks
4. Delivery receipts 8. Statement of accounts
Steps to analyze the transaction

a. Determine the accounts affected - In which of the 5 accounts (AL Eq I Ex)

are affected?

b. Identify the effect on the accounts What happened (increased or

decreased) to the accounts affected?

c. Apply the rules of debit and credit What rule of debit and credit will be
applied if the effect in the account is increase? Decreased?
 Analyzing business transactions is critical and important in accounting cycle.
It is an important step to make sure the reliability of information to be
processed in accounting.

Step 2: Transactions are recorded in the journal

journal by means of a journal entry in the recording process called

journalizing. After an accountable event is identified and analyzed the second
step is to record it in the journal by means of a journal entry in the recording
process called journalizing.

1. Date-journal entries are recorded in the journal chronologically (arrange

according to date)

2. a. Account titles under double entry accounting system, each transaction

is recorded in the journal in two parts

✔Debit account title aligned in the left

✔ Credit account title - indented to the right (to show credit represents
right side)

b. Explanation - short description of the transaction (to record fine)

3. Posting Reference code assigned for each account titles to facilitate the
transferring or posting journal entries to ledger

4. Amount debit and credit amount written the same way as account title.

Types of Journal Entry

1. Simple journal entry one which contains a single debit and credit element
Same as the illustration in the previous page

2. Compound journal entry illustration below one which contains two or

more debits or credits.