Hello, Tigers!

NATURE OF
BUSINESS &
ACCOUNTING
 Nature of Business & Accounting

TYPES OF BUSINESSES

Service Merchandising Manufacturing

 THREE BASIC ACTIVITIES
OF ACCOUNTING

economic events of
Identifying an organization to
Recording interested users.
Communicating
 Internal Users
USERS External Users

Internal Users
- directly involved in ex. managers, board of
directors, business owners,
ETHICS IN
managing the business company officers ACCOUNTING &
BUSINESS
Information: Special Purpose
Accountants must behave in an ethical
manner so that the information they
External Users provide users will be trustworthy and,
ex. existing and potential
- not directly investors,
involved in thus, useful for decision making.
lenders, creditors,
managing the government agencies,
business customers, public

Information: General Purpose

 ROLE OF ACCOUNTING IN BUSINESS

Identiy Users Design Prepare Accounting

Accounting Reports
- Internal Users Systems
- External Users Financial Statements
Accounting Information
System

1. Statement of Financial Position (Balance

Assess Users' Information
Sheet)
Needs
Record Economic Data 2. Statement of Cash Flows
- General Purpose 3. Statement of Profit or Loss and
(Common needs) Comprehensive Income
4. Statement of Changes in Equity
- Special Purpose 5. Notes to Financial Statements
(Specific needs) 6. Additional Statement of Financial Position*
G E N E R A L LY- A C C E P T E D A C C O U N T I N G P R I N C I P L E S
(GAAP) AND ACCOUNTING ASSUMPTIONS

GAAP - common set of standards that are Accounting Assumptions- provides the
generally accepted and universally foundation for the accounting process
practiced.

• Historical Cost Principle (Cost Principle) 1. Moetary Unit Assumption

• Fair Value Principle 2. Economic Entity Assumption
• Revenue Recognition Principle (Business Entity Concept)
• Expense Recognition Principle • Proprietorship
• Full Disclosure Principle • Partnership
• Corporation
• Limited Liability Company
3. Time Period Assumption
4. Going Concern Assumption
Assets is “a present economic resource controlled by the entity as a result of past events. An economic resource is
a right that has the potential to produce economic benefits.” (Conceptual Framework 4.3 & 4.4)

Liability is “a present obligation of the entity to transfer an economic resource as a result of past events.”
(Conceptual Framework 4.26)

Equity is “the residual interest in the assets of the entity after deducting all of its liabilities” (Conceptual
Framework 4.63)

Income is "increases in assets, or decreases in liabilities, that result in increases in equity, other than those
relating to contributions from holders of equity claims" (conceptual framework 4.68)

Expenses are "decreases in assets, or increases in liabilities, that result in decreases in equity, other than those
relating to contributions from holders of equity claims" (conceptual framework 4.69)
 T H E A C C O U N T I N G E Q U AT I O N

ASSETS = LIABILITIES + OWNER'S EQUITY

business resources
claims against ownership claim on total
assets (debts & assets; residue of assets
obligations) over liabilities

Assets = Liabilities + Owner's Capital - Owner's Drawings +

Revenue - Expenses
 Steps in the Accounting Cycle:
• Identifying and analyzing
• Journalizing
• Posting
• Unadjusted Trial Balance
• Adjusting Entries
• Adjusted Trial Balance (and/or worksheet)
• Financial Statements
• Closing Entries
• Post-closing Trial Balance
• Reversing Entries
Hello, Tigers!

IDENTIFYIN
G AND
ANALYZING
 IDENTIFYING AND ANALYZING
• Involves identifying a business transaction and analyzing whether or not that
transaction affects the accounts of the business.

Accountable Events
• Transaction that has an effect on the accounts

• Record in the book of accounts

Non-accountable Events
• Transaction that has no effect on the accounts

• Not recorded in the book of accounts

Hello, Tigers!

THE RECORDING
PROCESS
(JOURNALIZING
AND POSTING)
 Steps in the Accounting Cycle:
• Identifying and analyzing
• Journalizing
• Posting
• Unadjusted Trial Balance
• Adjusting Entries
• Adjusted Trial Balance (and/or worksheet)
• Financial Statements
• Closing Entries
• Post-closing Trial Balance
• Reversing Entries
 BASIC TERMINOLOGIES

Accounts
• Basic storage of information in accounting.
• Record of the increase and decrease of specific items.

Account Title
• Describes the specific item of asset, liability, equity, income
or expense.
 BASIC TERMINOLOGIES

Debit
• The left side of the account.

Credit
• The right side of the account.

T-Account
• Resembles the letter T. The left side of the accountis called the debit side,
and the right side is called the credit side.
 I L L U S T R AT I O N

Cash Account Title

Left side of the account Debit Credit Right side of the

(Cr) account (Cr)
500
1,000 800

700
Difference between the toral debits and credits in the
account represents the balance.
• Total Dr exceeds total Cr, the account has a debit
balance
• Total Cr exceed total Dr, the account has a credit
balance
 C H A RT O F A C C O U N T S

• Chart of Account is a list of all the accounts used by a business.

ASSETS
• Assets is “a present economic resource controlled by the entity as a result of past events”
(Conceptual Framework 4.3)
• Examples: Cash, Inventory, Accounts Receivable, Supplies, Prepaid Insurance, Equipment

LIABILITIES
• Liability is “a present obligation of the entity to transfer an economic resource as a result of past
events.” (Conceptual Framework 4.26)
• Examples: Notes payable, Accounts payable, Unearned Revenue, Salaries and wages payable,
Interest payable
EQUITY
• “Equity is the residual interest in the assets of the entity after deducting all of its liabilities ”
(Conceptual Framework 4.63)
• Examples: Owner’s Capital, Owner’s Drawings, Income Summary

REVENUE
• the gross increases in owner’s equity resulting from business activities entered into for the purpose
of earning income.
• Examples: Service Revenues/ Fees Earned/Sales

EXPENSES
• the cost of assets consumed, or services used in the process of earning revenue.
• Examples: Supplies expense, Depreciation expense, Insurance expense, Salaries and Wages expense,
Rent expense, Insurance expense
DOUBLE ENTRY ACCOUNTING SYSTEM

• All transactions are recorded using the double entry accounting system.
• Purpose: ensuring that a company’s account remain balanced at all times
 Journal Entry
• This is an accounting record where business transactions are first recorded.
• Business transactions are recorded in the journal through journal entries.
• Example:

Date Account Titles Debit Credit

Jan. 1, 2021 Cash 1,000

Owner's Capital 1,000

To record the owner's capital investment to the business.
Normal Balances of Accounts
• This is on the side where an INCREASE in that account is recorded.

Type of Account Normal Balance

Asset Debit
Liability Credit
Equity Credit
Income Credit
Expense Debit
 DOUBLE ENTRY ACCOUNTING SYSTEM
a. Balance Sheet Accounts
BALANCE SHEET ACCOUNTS
ASSETS = LIABILITIES + OWNER's EQUITY
Asset Accounts Liability Accounts Owner's Equity Account

Debit for increases Credit for decreases Debit for decreases Credit for increases Debit for decreases Credit for increases
(+) (-) (-) (+) (+) (-)

Illustration:
• ·Asset—Debit for increases; Owner’s Equity—Credit for increases

Date Account Titles Debit Credit

Jan. 1, 2021 Cash 4,000

Owner's Capital 4,000

To record the owner's capital investment to the business.
 DOUBLE ENTRY ACCOUNTING SYSTEM
Illustration:
• ·Asset—Debit for increases; Asset— Credit for decreases

Date Account Titles Debit Credit

Jan. 3, 2021 Inventory 1,000

Cash 1,000
To record the acquisition of inventory.

• ·Asset—Debit for increases; Liability —Credit for increases

Date Account Titles Debit Credit

Jan. 5, 2021 Supplies 1,500

Accounts Payable 1,500

To record the supplies purchased on account.
 DOUBLE ENTRY ACCOUNTING SYSTEM
Illustration:
• ·Liability —Debit for decreases; Asset—Credit for decreases

Date Account Titles Debit Credit

Jan. 6, 2021 Accounts Payable 700

Cash 700
To record the payments on accounts payable.
 DOUBLE ENTRY ACCOUNTING SYSTEM
b. Income Statement Accounts

INCOME STATEMENT ACCOUNT

Revenue Account Expense Account
Debit for decreases (-) Credit for increases (+) Debit for increases (+) Credit for decreases (-)

Illustration:
• ·Asset—Debit for increases; Income—Credit for increases

Date Account Titles Debit Credit

Jan. 10, 2021 Cash 1,000

Sales 1,000
To record the total sales.
 DOUBLE ENTRY ACCOUNTING SYSTEM
Illustration:

• ·Asset—Debit for increases; Liability —Credit for increases

Date Account Titles Debit Credit

Jan. 11, 2021 Accounts Receivables 1,000

Sales 1,000
To record the total sales on account.

• ·Expenses—Debit for increases; Asset—Credit for decreases

Date Account Titles Debit Credit

Jan. 13, 2021 Cost of Sales/Cost of Goods Sold 500

Inventory 500
To record the cost of inventories sold as expense.
 DOUBLE ENTRY ACCOUNTING SYSTEM
c. Owner Withdrawals

DRAWING ACCOUNTS
Debit for increases (+) Credit for decreases (-)

Illustration:
• · Drawings—Debit for increases; Asset—Credit for decreases

Date Account Titles Debit Credit

Jan. 14, 2021 Owner's drawings 1,000

Cash 1,000
To record the owner's drawings.
 DOUBLE ENTRY ACCOUNTING SYSTEM
d. Normal Balances
BALANCE SHEET ACCOUNTS
ASSETS = LIABILITIES + OWNER's EQUITY
Asset Accounts Liability Accounts Owner's Equity Account

Debit for increases Credit for decreases Debit for decreases Credit for increases Debit for decreases Credit for increases
(+) (-) (-) (+) (+) (-)

BALANCE BALANCE BALANCE

INCOME STATEMENT ACCOUNT

Revenue Account Expense Account
Debit for decreases (-) Credit for increases (+) Debit for increases (+) Credit for decreases (-)

BALANCE BALANCE

DRAWING ACCOUNTS
Debit for increases (+) Credit for decreases (-)
BALANCE
 DOUBLE ENTRY ACCOUNTING SYSTEM

d. Normal Balances
Note:
• Debit to a specific ASSET, EXPENSE OR DRAWING account should be
GREATER THAN (OR EQUAL TO) the credits to that account. This is to satisfy
the normal balance rule.

• Credit to a LIABILITY, EQUITY OR INCOME account should be GREATER

THAN (OR EQUAL TO) the debits to that account. This is to satisfy the normal
balance rule.
 Simple Entry - involves only two accounts, one debit and
one credit.
JOURNALIZING Example:
Date Account Titles Debit Credit
• process of entering transaction data in the
Jan. 1, 2021 Owner's Drawings 1,000
journal.
Cash 1,000
• Separate journal entries are made for each
To record the owner's drawings.
transaction.

Compound Entry - involves only two accounts, one debit

A complete entry consists of:
and one credit.
• The date of the transaction.
• The accounts and amounts to be debited Example:

and credited, and Date Account Titles Debit Credit

• A brief explanation of the transaction. Jan. 1, 2021 Cash 1,000

Land 1,000

Owner's Capital 2,000

To record the owner's capital investment to the business.
 POSTING JOURNAL ENTRIES TO ACCOUNTS

• Process of transferring data from the journal to the appropriate accounts in the
ledger.
• Purpose: to classify the effects of transactions to provide more meaningful
information

General Ledger
• refers to the entire group of accounts maintained by a company.
• Contains all the assets, liabilities, and owner’s equity accounts.
 POSTING JOURNAL ENTRIES TO ACCOUNTS
Illustration:
Cash Accounts Receivable Inventory
Debit Credit Debit Credit Debit Credit
1-Jan 4,000 11-Jan 1,000 1-Jan 1,000
3-Jan 1,000 500
13-Jan
6-Jan 700
10-Jan 1,000 1,000 500
14-Jan 1,000
2,300

Supplies Accounts Payable Owner's Capital

Debit Credit Debit Credit Debit Credit
5-Jan 1,500 5-Jan 1,500 1-Jan 4,000
6-Jan 700

1,500 800 4,000

Sales Accounts Payable Owner's Capital

Debit Credit Debit Credit Debit Credit
10-Jan 1,000 13-Jan 500 14-Jan 1,000
11-Jan 1,000

1,200 500 1,000

 TRIAL BALANCE
• This is a list of general ledger accounts and their balances.
• The preparation of the trial balance creates a starting point for the preparation of the financial statements.
• Purpose: This is prepared to check the equality of total debits and total credits in the ledger.

Illustration: Company A
Unadjusted Trial Balance
January 7, 2021
Accounts Debit Credit
Cash P 2,300
Accounts Receivable 1,000
Inventory 500
Supplies 1,500
Accounts Payable P 800
Owner's Capital 4,000
Sales 2,000
Cost of Sales 500
Owner's Drawings 1,000
TOTALS P 6,800 P 6,800

Note: A trial balance does not prove that all transactions have been recorded or that the ledger is correct. Numerous errors may exist even though the trial balance columns agree.
 TRIAL BALANCE
The trial balance may balance even when
• A transaction is not journalized,
• A correct journal entry is not posted,
• A journal entry is posted twice,
• Incorrect accounts are used in journalizing or posting,
• Offsetting errors are made in recording the amount of the transaction.

a. Errors Affecting the Trial Balance

• Errors in Addition
• Entering a debit balance as a credit balance and vice versa
• Transposition – the order of the digit is copied incorrectly
• Slide – the entire number is copied incorrectly one or more spaces to the right or to the left

b.Errors Not Affecting the Trial Balance - Unusual Account Balances thus requiring correcting entries. (eg.
Supplies having a credit balance)
Transaction A
Julia Salas deposited P 1,000,000 in a bank account in the name of PitchPerfect.
This transaction increases the asset cash (left side of the equation) by P10,000.
Transaction B
PitchPerfect purchased Land for P 120,000.00. The purchase of the land changes the makeup of the
assets, but it does not change the total assets.
Transaction C
PitchPerfect purchased supplies for P 3,000.00 and agreed to pay supplier the near future. The
liability created by purchase on account is called accounts payable.

Transaction D
PitchPerfect received cash of 1,500.00 for providing facial services to customers. The receipt of
cash increases PogiSolutions’ assets and also increases Alvarez’s equity in business.
Transaction E
PitchPerfect receives a bill for $250 from PerfectPitch for advertising but postpones payment until
a later date
Transaction F
PitchPerfect performs $3500 of programming services for customers. The company receives cash
of $1500 from customers, and it bills the balance of $2000 on account.

Transaction G
PitchPerfect pays store rent $600 and utilities $200 in cash.

Transaction H
PitchPerfect pays the supplier $250 in cash for supplies bought previously.
Transaction I
PitchPerfect receives $600 in cash from customers who had been billed for services (Transaction
F).
Transaction J
Julia Salas withdraws $ 1000 in cash from the business for her personal use.