Module-Q3-Fundamentals of Accounting

FUNDAMENTALS

OF
ACCOUNTANCY,
BUSINESS AND
MANAGEMENT 1
QUARTER 3
(COMPILATION OF LECTURES, DISCUSSIONS
AND SUPPLEMENTAL MATERIALS)
COMPILATION 1 AND 2 QUARTER 3
FUNDAMENTALS OF ACCOUNTANCY,
BUSINESS AND MANAGEMENT 1
Topic Title: Lesson 1: INTRODUCTION TO ACCOUNTING
Designation: WEEK 1
Introduction: The learners demonstrate an understanding of the definition, nature,
function, and history of accounting.
Learning Outcomes
At the end of this module, the learners should be able to:
1. define accounting;
2. describe the nature of accounting;
3. explain the functions of accounting in business; and
4. narrate the history/origin of accounting.
Lesson Proper
ACCOUNTING
It is the process of IDENTIFYING,
RECORDING, and
COMMUNICATING economic events
of an organization to interested users.
(Weygandt, J. et. al)
Explain the three highlighted words in the
graphic:

1. IDENTIFYING – this involves selecting economic events that are relevant to a particular
business transaction. The economic events of an organization are referred to as transactions.
Examples of economic events or transactions.
For example, in a bakery business:
 sales of bread and other bakery products
 purchases of flour that will be used for baking
 purchases of trucks needed to deliver the products
2. RECORDING – this involves keeping a chronological diary of events that are measured in
pesos. The diary referred to in the definition are the journals and ledgers which will be
discussed in future lectures.
3. COMMUNICATING – occurs through the preparation and distribution of financial and
other accounting reports.
THE NATURE OF ACCOUNTING
According to Accounting Theory (http://accountingtheory.weebly.com/nature-and-scope-of-
accounting.html): “Accounting is a systematic recording of financial transactions and the
presentation of the related information to appropriate persons.” Based on this definition we
can derive the following basic features of accounting:
1. Accounting is a service activity. Accounting provides assistance to decision makers by
providing them financial reports that will guide them in coming up with sound decisions.

2|INTEGRATED INNOVATION AND HOSPITALITY COLLEGES, INC.

2. Accounting is a process: A process refers to the method of performing any specific job
step by step according to the objectives or targets. Accounting is identified as a process,
as it performs the specific task of collecting, processing and communicating financial
information. In doing so, it follows some definite steps like the collection, recording,
classification, summarization, finalization, and reporting of financial data.
3. Accounting is both an art and a discipline. Accounting is the art of recording, classifying,
summarizing and finalizing financial data. The word ‘art’ refers to the way something is
performed. It is behavioral knowledge involving a certain creativity and skill to help us
attain some specific objectives. Accounting is a systematic method consisting of definite
techniques and its proper application requires skill and expertise. So by nature,
accounting is an art. And because it follows certain standards and professional ethics, it is
also a discipline.
4. Accounting deals with financial information and transactions: Accounting records
financial transactions and data, classifies these and finalizes their results given for a
specified period of time, as needed by their users. At every stage, from start to finish,
accounting deals with financial information and financial information only. It does not
deal with non-monetary or non-financial aspects of such information.
5. Accounting is an information system: Accounting is recognized and characterized as a
storehouse of information. As a service function, it collects processes and communicates
financial information of any entity. This discipline of knowledge has evolved to meet the
need for financial information as required by various interested groups.
FUNCTION OF ACCOUNTING IN BUSINESS
Accounting is the means by which business information is communicated to business owners and
stakeholders. The role of accounting in business is to provide information for managers and
owners to use in operating the business. In addition, accounting information allows business
owners to assess the efficiency and effectiveness of their business operations. Prepared
accounting reports can be compared with industry standards or to a leading competitor to
determine how the business is doing. Business owners may also use historical financial
accounting statements to create trends for analyzing and forecasting future sales.
THE HISTORY OF ACCOUNTING
Accounting is as old as civilization itself. It has evolved in response to various social and
economic needs of men. Accounting started as a simple recording of repetitive exchanges. The
history of accounting is often seen as indistinguishable from the history of finance and business.
Following is the evolution of accounting:
1. The Cradle of Civilization
 Around 3600 B.C., record-keeping was already common from Mesopotamia, China
and India to Central and South America.
 The history of accounting dates back to ancient time. The abacus which functioned as
a calculator in the ancient times, was developed by the Sumerians in 5,000 BCE
followed by the papyrus which was developed by ancient Egyptians in 4,000 BCE.

 In Egypt, archaeologists Dr. Gunter Dreyer of the German Institute of Archaeology
unearthed clay tablets considered to be among the oldest written tax accounting
records. In the tomb of King Scorpion I in Egypt, he discovered old stone labels
believed to date back to 3,000 BCE or around 5,300 years ago. The oldest evidence of
this practice was the “clay tablet” of Mesopotamia which dealt with commercial
transactions at the time such as listing of accounts receivable and accounts payable.
 The Greeks also made significant contributions to the development of accounting. In
600 BCE, they introduced money in the form of coins. Moreover, they adopted the
Phoenician writing system and invented a Greek alphabet which they used to
facilitate record-keeping.
2. 14th Century - Double-Entry Bookkeeping
 The most important event in accounting history is generally considered to be the
dissemination of double entry bookkeeping by Luca Pacioli (‘The Father of
Accounting’) in 14th century Italy. Pacioli was much revered in his day, and was a
friend and contemporary of Leonardo da Vinci. The Italians of the 14th to 16th
centuries are widely acknowledged as the fathers of modern accounting and were the
first to commonly use Arabic numerals, rather than Roman, for tracking business
accounts. Luca Pacioli wrote Summa de Arithmetica, Geometria, Proportioni et
Proportionalita, the first book published that contained a detailed chapter on double-
entry bookkeeping.
3. French Revolution (1700s)
 The thorough study of accounting and development of accounting theory began
during this period. Social upheavals affecting government, finances, laws, customs
and business had greatly influenced the development of accounting.
4. The Industrial Revolution (1760-1830)
 Mass production using of machines or power tools and the great importance of fixed
assets were given attention during this period.
5. 19th Century – The Beginnings of Modern Accounting in Europe and America
 The modern, formal accounting profession emerged in Scotland in 1854 when Queen
Victoria granted a Royal Charter to the Institute of Accountants in Glasgow, creating
the profession of the Chartered Accountant (CA).
 In the late 1800s, chartered accountants from Scotland and Britain came to the U.S. to
audit British investments. Some of these accountants stayed in the U.S., setting up
accounting practices and becoming the origins of several U.S. accounting firms. The
first national U.S. accounting society was set up in 1887.
 The American Association of Public Accountants was the forerunner to the current
American Institute of Certified Public Accountants (AICPA). In this period rapid
changes in accounting practice and reports were made. Accounting standards to be
observed by accounting professionals were promulgated.
6. 20th Century - The Development of Modern Accounting Standards and Commerce
 The accounting profession in the 20th century developed around state requirements

for financial statement audits. Beyond the industry's self-regulation, the government
also sets accounting standards, through laws and agencies such as the Securities and
Exchange Commission (SEC). As economies worldwide continued to globalize,
accounting regulatory bodies required accounting practitioners to observe
International Accounting Standards. This is to assure transparency and reliability, and
to obtain greater confidence on accounting information used by global investors.
Nowadays, investors seek investment opportunities all over the world. To remain
competitive, businesses everywhere feel the need to operate globally.
7. The Information Age
 The Information Age, otherwise known as the Computer Age, Digital Age, or New
Media Age, has brought about a significant change in the work load of accountants.
Transactions can be consummated online with the help of the Internet.
8. 21st Century – Accounting in the Modern Times
 The 21st century opened with the replacement of the International Accounting
Standards Committee (IASC) by the International Accounting Standards Board
(IASB) established in January 2001. In the same year, the Enron Scandal, the greatest
corporate fraud case recorded in American history, caused Arthur Andersen, one of
the top audit firms in the United States to close business. In order to protect investors
from corporate misinformation, the Sarbanes Oxley Act was passed by the US
Congress in 2002.
Topic Title: Lesson 2: THE BUSINESS ENVIRONMENT
Designation: WEEK 2
Introduction: The learners demonstrate an understanding of the definition, nature,
function, and history of accounting. The learners demonstrate an
understanding of the varied branches and areas of accounting, particularly:
financial accounting, management accounting, government accounting,
auditing, tax accounting, cost accounting, accounting education, and
accounting research; and understanding of the external and internal users
of financial information.
Learning Outcomes
1. differentiate the branches of accounting;
2. explain the kinds/types of services rendered in each of these branches;
3. define external users and gives examples;
4. define internal users and give examples; and
5. identify the type of decisions made by each group of users.
Lesson Proper
BRANCHES OF ACCOUNTING
1. Financial Accounting
 It deals with the theoretical framework covering accounting principles and concepts
relative to measurement and valuation as applied to assets, liabilities, stockholder’s
equity, retained earnings, revenue, and expense accounts in relation to the preparation
and presentation of financial statements. These financial statements include disclosure
requirements as governed by the Generally Accepted Accounting Principles (GAAP).

 The financial information provided by financial accounting is used for decision
making by both internal and external users.
2. Management Accounting
 Institute of Management Accountants (IMA) defines management accounting as a
profession that involves partnering in management decision making, devising
planning, and performance management systems, and providing expertise in financial
reporting and control to assist management in the formulation and implementation of
an organization’s strategy.
3. Government Accounting
 Section 109 of Presidential Decree No. 1445 states that government accounting
encompasses the process of analyzing, classifying, summarizing, and communicating
all transactions involving the receipt and disposition of government funds and
property, and interpreting the results thereof.
4. Auditing
 It is the examination and review of accounting reports in order to ascertain their
fairness, propriety, and reliability. The independent auditor’s opinion provides
reasonable assurance that the financial statements under examination fairly present
the company’s financial position and results of operation in accordance with
Generally Accepted Accounting Principles (GAAP).
5. Tax Accounting
 It includes the preparation of monthly value added tax, percentage tax, expanded
withholding tax returns, quarterly and annual tax returns, and any other taxes
applicable to business.
6. Cost Accounting
 It includes the collection, determination, allocation, assessment, interpretation, and
control of cost data, particularly the cost of production in a manufacturing concern.
The cost of production includes the raw materials, direct labor, factory overhead, and
all other costs involved incident in each stage of production of the finished goods.
7. Accounting Education
 It involves planned grading and formal teaching in an educational institution. The
professional accountant imparts knowledge to students enrolled in an accounting
subject either in basic accounting or in higher accounting subjects.
8. Accounting Research
 It involves conducting a careful and diligent study aimed at discovering and
interpreting facts, revising accepted theories in the light of new facts, or the practical
application of such new or revised theories for the generation of a new knowledge.
USERS OF FINANCIAL INFORMATION
A. INTERNAL USERS
 primary users of financial information who are inside the reporting entity and are
directly involved in managing the company’s daily operations.
i. Investors/Owners/Stockholders
 These parties provide the financial resources to keep the business going. They
decide whether to invest or not depending on the estimated amount of income
on the investment.

ii. Management
 Organizational managers use financial information to set goals for their
companies. Managers evaluate their progress towards these goals and use
financial data as a guide for future management actions.
iii. Employees
 Employees are interested in the financial information of the company to
determine if they have a future in the company.
B. EXTERNAL USERS
 secondary users of financial information in the decision making of the company and
may not be directly involved in the company’s operations but their decisions may
significantly affect the business entity.
i. Financial Institutions/Creditors
 Financial institutions use financial information to determine the capacity of
the business organization to pay its obligations and their interests at the
appropriate time.
ii. Government
 Financial information is important for tax purposes and in checking of
compliance with Securities and Exchange Commission (SEC) requirements.
iii. Potential Investors
 Potential investors or creditors may not only be interested in the company’s
current financial position and results of operations, but also in the company’s
financial history.
Topic Title: Lesson 3: FORMS OF BUSINESS ORGANIZATION AND TYPES OF

BUSINESS ACCORDING TO ACTIVITIES
Designation: WEEK 3
Introduction: The learners demonstrate an understanding of the various forms of
business organizations, as follows: sole/single proprietorship, partnership,
corporation, and cooperatives and understanding of the types of business
according to activities, particularly: service business, merchandising
business, and manufacturing business.
Learning Outcomes
1. identify the forms of business organizations by nature of ownership;
2. give examples of businesses in their respective communities and identify the form;
3. identify the advantages and disadvantages of the four forms of business organization; and
4. identify the types of business according to activities.
Lesson Proper
1. Sole Proprietorship is a business organization owned and managed by one person and no
legal distinction between the owner and the business. Sole proprietor registers with the
Department of Trade and Industry (DTI).

Advantages of Sole Proprietorship
1. It is easy to organize.
2. It is least expensive form of ownership to organize.
3. Sole proprietor has the full control of profits.
4. Sole proprietor is free to make business decision.
5. The owner pays individual income tax only.
6. The business is easy to dissolve, if wanted.
Disadvantages of Sole Proprietorship
1. Sole proprietor has unlimited liability.
2. It is very difficult to raise capital.
3. If the owner dies or owner has physically or mentally incapacity, it may result in the
termination of the business.
2. Partnership is a business organization owned by two or more persons who act as co-owners
of the business. Each partner contributes money, property, or service to business. The
partnership needs to register with Securities and Exchange Commission (SEC).
Advantages of Partnership
1. It is relative easy to organize.
2. There is more available capital and credit.
3. Partners share business ideas to the business.
4. The income tax imposed is imposed only to the partners’ personal tax return and not on
the business.
Disadvantages of Partnership
1. There is unlimited liability where partners are jointly and individually liable.
2. If one of the partners dies or withdraws from the business, the partnership will dissolve.
3. Different ideas may cause disagreements and lead to termination of partnership.
3. Corporation is an artificial being created by operation of law, having the right of succession,
and the powers, attributes and properties. It can sue or be sued, can enter into contracts, and
must pay taxes. It needs at least 5 individuals to open a corporation and they are called as
incorporators. They register with the Securities and Exchange Commission (SEC).
Advantages of Corporation
1. Shareholders have limited liability. The liability of shareholders is limited only to their
investment.
2. There are additional funds can be raised by selling stocks in corporation.
3. It is assured of at least 50 years of existence by law.
4. Death or change in ownership has no effect on the existence of the corporation.
Disadvantages of Corporation
1. It is complicated and expensive to set-up.
2. It is strictly regulated and supervised by the government.
3. It is subject to special taxes.
4. Cooperative is a duly registered association of persons, with a common bond of interest,
who voluntarily joined together for the benefit of those using its services. It needs at least 15
individuals to open a cooperative and they are called as members. They register with the
Cooperative Development Authority (CDA).

Advantages of Cooperative
1. It is least likely to be dissolved.
2. The liability of the members is limited to the extent of their capital.
3. It has separate legal entity between the cooperative and the members.
4. There is no limit on maximum members.
5. There follows democratic control and members have ready access to supply.
Disadvantages of Cooperative
1. Return on capital invested is limited.
2. Not all members of the cooperative have the spirit of cooperation.
TYPES OF BUSINESS ACCORDING TO ACTIVITIES OR OPERATIONS
1. Service Business – provides intangible products with no physical form such as professional
skills, expertise, advice, etc.
Example: dental clinic, barber shop, laundry services
2. Merchandising Business – provides products at whole sale price and sells the same at a
retail price. It is called as buy and sell business.
Example: grocery, sari-sari store
3. Manufacturing Business – provides products which are used as materials in making new
consumer products. It follows production process which includes combining the raw
materials, labor, and factory overhead.
Example: shoe factory, food processing
Topic Title: Lesson 4: ACCOUNTING CONCEPTS AND PRINCIPLES

Designation: WEEK 4
Introduction: The learners demonstrate an understanding of accounting Concepts and
Principles.
Learning Outcomes
1. enumerate the principles of accounting;
2. differentiate each principle; and
3. apply the accounting principle in a business setting.
Lesson Proper
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GMP)
 These are broad, general statements or "rules" and "procedures" that serve as guides in
the practice of accounting.
 These are standards, assumptions, and concepts with general acceptability.
 These are measurement techniques and standards used in the presentation and
preparation of financial statements.
Accounting system comprises the methods used by a business to keep records of its financial
activities and to summarize these accounts in periodic accounting reports. Transaction is a
completed action Which can be expressed in monetary terms.
Fundamental Concepts
1. Entity Concept regards the business enterprise as separate and distinct from its owners and
from other business enterprises. Example: Dr. Teng has a skin clinic and a spa. The skin

clinic is considered as a separate entity distinct from the spa and the owner, Dr. Teng. The
expenses of the skin clinic should not be mixed with the expenses of the spa and the personal
expenses of Dr. Teng. The two businesses are considered to be separate economic units,
separate and distinct from their owner. As such, they should be treated as different from each
Other' although owned and operated by only one person. Hence, the personal expenses of Dr.
Teng should not be mixed with the expenses of any of the businesses.
2. Periodicity is the concept behind providing financial accounting information about the
economic activities of an enterprise for specified time periods. For reporting purposes, one
year is usually considered as one accounting period. Example: Separate financial reports are
prepared yearly for the skin clinic and the spa of Dr. Teng. Hence, Dr. Teng can measure the
income of the two businesses annually.
An accounting period may be classified as either of the following:
a. Calendar year — a twelve-month period that starts on January 1 and ends on December 31
b. Fiscal year — a twelve-month period that starts on any month of the year other than January
and ends twelve months after the starting period, e.g., a business whose fiscal year starts May
1, 2016 ends its fiscal year on April 30, 2017. Note: A natural business year is any twelve-
month period that ends when business activities are at their lowest point.
3. Going Concern is a concept which assumes that the business enterprise will continue to operate
indefinitely. Example: In preparing the financial statements of the skin clinic and the spa, the
accountant assumes that the businesses will not close or shut operations within the next years.
Basic Accounting Principles
1. Objectivity principle states that all business transactions that will be entered in the
accounting records must be duly supported by verifiable evidence.
Example: Payments must he supported by official receipts and bank deposits must be
supported by deposit slips.
2. Historical cost means that all properties and services acquired by the business must be
recorded at their original acquisition cost.
Example: Land bought in 2001 for two million pesos should be recorded at two million
pesos even though its market value in the year 2016 is already three million pesos.
3. Accrual principle states that income should be recognized at the time it is earned such
as when goods are delivered or when services have been rendered. Likewise, expenses
should be recognized at the time they are incurred, such as when goods and services are
actually used and not, at the time when the entity pays for those goods and services.
Example: A resort cannot consider as income the advance payment of a customer who
paid his two-week resort, accommodation in advance until the customer has checked in.
This is because the resort has not yet rendered the service to the customer. As such, he
advance payment by the customer should be considered as a liability on the part of the
resort in the form of services to be rendered.
4. Adequate disclosure states that all material facts that will significantly affect the
financial statements must be indicated.
Example: Land bought at two million pesos in 2001 should be recorded at historical cost
in the 2016 financial statements. However, the current market value of three million
pesos in the year 2016 may be indicated in the financial statements for the year 2016 in
the form of a footnote or parenthetical note.
5. Materiality means that financial reporting is only concerned with information
significant enough to affect decisions. This refers to the relative importance of an item
10 | I N T E G R A T E D I N N O V A T I O N A N D H O S P I T A L I T Y C O L L E G E S ,
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or event. An item is considered significant if knowledge of it would influence prudent
users of the financial statements.
Example: Items of insignificant amount such as paper clips can be charged outright to
expenses.
Topic Title: Lesson 5: ASSETS, LIABILITIES, CAPITAL, REVENUE, AND

EXPENSES OF THE FINANCIAL STATEMENTS
Designation: WEEK 5
Introduction: The learners demonstrate an understanding of the assets, liabilities, capital,
revenue, and expenses of the financial statements.
Learning Outcomes
1. classify the types of financial statements; and
2. identify the typical accounts used in financial statements.
Lesson Proper
TYPES OF FINANCIAL STATEMENTS
The key product or the end product of the accounting process is a Set of called the
financial statements comprised of the following:
1. Statement of Financial Position or Balance Sheet —shows the financial condition/
position of a business as of a given period. It consists of the assets, liabilities, and capital.
2. Income Statement or Statement of Comprehensive Income – The Income Statement shows
the result of operations for a given period. It of the revenue, cost, and expenses.
The statement of comprehensive income consists of the revenue, cost, and expenses
components of other comprehensive income (including reclassification las follows: changes in
revaluation surplus, gains and losses on benefit plans, gains and losses from investments in
equity instruments, finance costs, share of associates, and joint ventures under the equity
method, tax expense, gain or loss from discontinued operations, gain or loss on realization of
assets from discontinued operations, gain or loss from foreign operations, and all other operating
and financial events affecting the owner's equity in the business.
International Accounting Standards 1 defines Total Comprehensive Income the "change
in equity during a period resulting from transactions and other events, other than those changes
resulting from transactions with owners in their capacity as owners. For purposes of lessons in
single proprietorship, the activities will consist of the usual revenue, cost, expense, and
transactions with owners in their capacity as owners. Hence, the Income Statement will be, used
to show the results of operations since there is no activity beyond the regular profit and loss
items.
3. Statement of Changes in Owner's Equity or Statement of Owner's Equity— shows the
changes in the capital or owner's equity as a result of additional investment' or withdrawals by
the owner, plus or minus the net income or net loss for the year.
4. Statement of Cash flows – summarizes the cash receipts and cash disbursements for the
accounting period. It summarizes the cash activities of the business by classifying cash inflows
(receipts) and cash outflows (payments) into operating, investing, and financing activities. It
shows the net increase or decrease of cash in a given period and the cash balance at the end of
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the period. This allows management to assess the business' ability to generate cash and project
future cash flows.
Typical Account Titles Used
Balance Sheet (Statement of Financial Position) - Balance sheet accounts, namely assets,
liabilities, and owner's equity, are classified as real or permanent accounts.
Assets — economic resources owned by the business expected for future gain. They are
property and rights of value owned by the business.
Liabilities - include debts, obligations to pay, and claims of the creditors on the assets of
the business.
Owner’s Equity or Capital - include interest of the owners on the business; claims of the
owners on the assets of the business; and the investment of the owner plus or minus the
results of operations. Owner’s equity or capital comes from the two main sources –
investment of owners and earnings of the business.
THE FUNDAMENTAL ACCOUNTING EQUATION
Assets = Liabilities + Owner's Equity
1. Given liabilities of Php 50,000 and the owner's equity of Php 150,000, find the value of
assets.
Solution:
Assets = Liabilities + Owner's Equity
= P 50,000 + P150,000
= P 200,000
2. Given assets of P 180,000 and the owner's equity of P 110,000, find the liabilities.
Solution:
Liabilities = Assets — Owner's Equity
= P 180,000 – P 110,000
= P 70,000
3. Given assets of P 250,000 and liabilities of P 90,000 find the owner's equity.
Solution:
Owner's Equity = Assets — Liabilities
= P 250,000 – P 90,000
= 160,000
Topic Title: Lesson 6: ASSETS, LIABILITIES AND OWNER’S EQUITY
Designation: WEEK 6
Introduction: The learners demonstrate an understanding of the assets, liabilities and
owner’s equity.
Learning Outcomes
1. classify assets as a basic element of accounting;
2. identify assets as a basic element of accounting;
3. classify liabilities and owner’s equity as a basic element of accounting; and
4. identify liabilities and owner’s equity as a basic element of accounting.
Lesson Proper
ASSETS
INC.
Classification of Current Assets
Improvements to International Accounting Standards 1 (December 2003) classify an asset as
current asset when it is:
1. expected to be realized in, 'or is intended for sale or consumption in the entity’s normal
operating cycle;
2. held primarily for the purpose of being traded;
3. expected to be realized within twelve months of the balance sheet date; or
4. cash or a cash equivalent unless it is restricted from being exchanged or used to settle a
liability for at least twelve months after the balance sheet date.
Examples of current assets are as follows:
1. Cash includes coins, currencies, checks, bank deposits, and other cash items readily available
for use in the operations of the business.
2. Cash equivalents. are short-term investments that are readily convertible to known amounts
of cash which are subject to an insignificant risk to changes in value (per SFAS No. 22,
revised 2000).
3. Marketable securities are stocks and bonds purchased by the enterprise and are to be held
for only a short span of time or duration. They are usually purchased when a business has
excess cash.
4. Trade and other receivables include the amounts collectible from any of the accounts:
a. accounts receivable — amount collectible from the customer to whom sale have been
made or services have been rendered on account or credit.
b. notes receivable — promissory note issued by the client or the customer in exchange for
services or goods received as evidence of his/her obligation to pay.
c. interest receivable — amount of interest collectible on promissory notes received from
customers and clients.
d. advances to employees— certain amount of money loaned to employees payable in cash
or through salary deductions.
e. accrued income — income already earned but hot yet received.
5. Inventories represent the unsold goods at the end of the accounting period. This is applicable
only to a merchandising business.
6. Prepaid Expenses include supplies bought for use in the business or services and benefits to
be received by the business in the future paid in advance.
7. Contra-Asset Accounts are accounts deducted from the related asset accounts.
a. Allowance for bad debts – losses due to uncollectible accounts. This is deducted from
the accounts receivable account to get the net realizable value. This is in line with the
financial statements' qualitative characteristic of conservatism wherein no profits would
be anticipated but all probable or estimable losses should be provided.
b. Accumulated depreciation— represents the expired cost of property, plant, and
equipment as a result of usage and passage of time. This is deducted from the cost of the
related asset account to get the carrying value or book value of the asset.
Classification of Non-Current Assets
a. Long-term investments are assets held by an enterprise for the accretion of wealth
through capital distribution such as interests, royalties, dividends and rentals, for capital
appreciation or for Other benefits to the investing enterprise such as those obtained
through trading relationships. Investments are classified as long-term when they are
intended to be held for an extended period of time (International Accounting Standards
No. 25),
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b. Property, plant, and equipment are tangible that are held by an enterprise for use in the
production or supply of goods or services, or for administrative purposes. These assets
are expected to be used for more than one period.
Examples:
 land— a piece of lot or real estate owned by the enterprise on which a building can be
constructed for business purposes
 building — edifice or structure used to accommodate the office, store, or factory of a
business enterprise in the conduct of its operations
 equipment — includes typewriter, air-conditioner, calculator, filing cabinet, computer,
electric fan, trucks, and cars used by the business in its office, store, or factory. Specific
account titles maybe used such as office equipment, store equipment, delivery
equipment, transportation equipment, and machinery equipment.
 furniture and fixtures — include tables, chairs, carpets, curtains, lamp and lighting
fixtures, and wall decors. Specific account titles maybe used such as office furniture and
fixtures, and store furniture and fixtures
 intangible assets — identifiable; non-monetary assets without physical substance held
for use in the production or supply of goods or services, for rental to others, or for
administrative purposes. These include goodwill, patents, copyrights, licenses, franchises,
trademarks, brand names, secret processes, subscription lists, and non-competition
agreements (International Accounting Standards No. 38).
CLASSIFICATION OF CURRENT LIABILITIES
Improvements to International Accounting Standards 1 (December 2003) classify liability as a
current liability when:
1. it is expected to be settled in the entity's normal operating cycle;
2. it is held primarily for the purpose of being traded;
3. it is due to be settled within twelve months after the balance sheet date; or
4. the entity does not have an unconditional right to defer settlement of the liability for at
least twelve months after the balance sheet date.
Trade and Other Payables — include payables from any of the following accounts:
1. Accounts payable includes debts arising from the purchase of an asset or the acquisition
of services on account.
2. Notes payable includes debts arising from the purchase of an asset or the acquisition of
services on account evidenced by a promissory note.
3. Loan Payable is a liability to pay the bank or other financing institution arising from
funds borrowed by the business from these institutions payable within twelve months or
shorter. (NOTE: If the loan is payable beyond twelve months, then it is classified under
non-current liabilities.)
4. Utilities payable is an obligation to pay utility companies for services received from
them. Examples of this are telephone services to PLDT, electricity to Meralco, and water
services to Maynilad.
5. Unearned revenues represent obligations of the business arising from advance payments
received before goods or services are provided to the customer. This will be settled when
certain goods or services are delivered or rendered.
6. Accrued liabilities include amounts owed to others for expenses already incurred but are
not yet paid. Examples of these are salaries payable, utilities payable, taxes payable, and
interest payable.
INC.
CLASSIFICATION OF NON-CURRENT LIABILITIES
Non-current liabilities are long term liabilities or obligations which are payable for a period
longer than one year. Examples of non-current liabilities are as follows:
1. Mortgage payable is a long-term debt of the business with security or collateral in the
form of real properties. In case the business fails to pay the obligation, the creditor can
foreclose or cause the mortgaged asset to be sold and use the proceeds of the sale to settle
the obligation.
2. Bonds payable is a certificate of indebtedness under the seal of a corporation' specifying
the terms of repayment and the rate of interest to be charged.
OWNER'S EQUITY
Capital is an account bearing the name of the owner representing the original and additional
investment of the owner of the business increased by the amount of net income earned during the
year. It is decreased by the cash or other assets withdrawn by the owner as well as the net loss
incurred during the year.
Drawing represents the withdrawals made by the owner of the business in cash or other assets.
Income Summary is a temporary account used at the end of the accounting period to close
income and expense accounts. The balance of this account shows the net income or s for the
period before it is closed to the capital account. This will be taken up in discussion of closing
entries.
Topic Title: Lesson 7: INCOME STATEMENT

Designation: WEEK 7
Introduction: The learners demonstrate an understanding of the income and expenses
accounts.
Learning Outcomes
1. classify income and expenses as a basic element of accounting;
2. identify income and expenses as a basic element of accounting; and
3. able to prepare the single-step income statement of a service business.
Lesson Proper
INCOME STATEMENT Income statement accounts, namely revenue and expense, are
classified as nominal or temporary accounts.
a. Service income includes revenues earned or generated by the business in performing
services for a customer or client. The following are different examples of income and the
accounting term used to describe the income:
 Laundry services by a laundry shop (Laundry Income)
 Medical services by a doctor (Medical Fees)
 Dental services by a dentist (Dental Fees)
 Legal services by a lawyer (Legal Fees)
 Advisory services by a consultant (Consultancy Fees)
 Accounting or auditing services by a certified public accountant (Audit Fees)
b. Salaries or wages expense include all payments made to employees or workers for
rendering services to a company. Examples are salaries or wages, 13th month pay, cost of
living allowances, and other related benefits given to the employees.
INC.
c. Utilities expense is an expense related to the use of electricity, fuel, water, and
telecommunication facilities.
d. Supplies expense covers office supplies used by a business in the conduct of its daily
operations.
e. Insurance expense is the expired portion of premiums paid on insurance coverage such as
premiums paid for health or life insurance, motor vehicles, or other properties.
f. Depreciation expense is the annual portion of the cost of tangible assets such as buildings,
machineries, and equipment charged as expense for the year.
g. Uncollectible accounts expense/ doubtful accounts expense/ bad debts expense means the
amount of receivables charged as expense for the period because they are estimated to be
doubtful of collection.
h. Interest expense is the amount of money charged to the borrower for the use of borrowed
funds.
Pro-forma Presentation of Income Statement
NAME OF THE COMPANY
INCOME STATEMENT
For the Period Ended xxx
Service Revenue Php xxx

Add: Other Income xxx
Total Income Php xxx
Less: Expenses
Salaries Php xxx
Depreciation xxx
Supplies xxx
Rent xxx
Insurance xxx
Other Expenses xxx
Finance Cost xxx xxx
Net Income Php xxx
Illustration: Below are accounts taken from the books of Luffy’s Ship Repair Services for the
Month of January 2020. Prepare an income statement from the given data.
Repairs Revenue – Php 200,000; Rent Income – Php 10,000; Salaries Expense – Php 35,000;
Utilities Expense – Php 14,000; Supplies Expense – Php 11,000; Depreciation Expense – Php
2,000; Miscellaneous Expense – Php 3,000
LUFFY’S SHIP REPAIR SERVICES

INCOME STATEMENT
For the Month Ended January 31, 2020
Service Revenue Php 200,000

Add: Other Income 10,000
Total Income Php 210,000
Less: Expenses
Salaries Php 35,000
INC.
Utilities 14,000
Depreciation 2,000
Supplies 11,000
Miscellaneous 3,000 65,000
Net Income Php 145,00
Topic Title: Lesson 8: EFFECTS OF TRANSACTIONS ON THE ACCOUNTING EQUATION
Designation: WEEK 8
Introduction: The learners demonstrate an understanding of the effects of transactions
on the accounting equation.
Learning Outcomes
1. identify the effects of transactions on the assets, liabilities, and owner’s equity as a result
of different transactions affecting the accounting equation;
2. identify the effects of transactions on the assets, and owner’s equity as a result of income
earned and payment of expense; and
3. analyze the different transactions in the service type of business
Lesson Proper
The following instances that will illustrate the effect of transactions on the accounting equation.
The abbreviations in the examples shall mean the following:
INC – Increase; DEC - Decrease; NC – No Change
Transactions Assets Liabilities Capital Analysis
An entity has separate and distinct from
1. Owner
the owner is created. Cash investment of
invests INC NC INC
the owner increases the assets of the
cash
business and the capital of the owner.
The equipment increases the assets of the
2. Owner
business. Since this is an investment of
invests INC NC INC
the owner, capital of the owner increases
equipment.
correspondingly.
The business earned an income by
rendering services and collecting
3. Renders revenues in cash. The effect in the
services INC NC INC accounting equation is an increase in
for cash cash for the cash collected and an
increase in capital as revenue increases
capital.
Assets increase by the amount of revenue
4. Renders
expected to be collected from the
services on
INC NC INC customer to whom the services were
credit or
rendered. Capital also increases since
on account
rendering of services represent revenue.
5. Collects INC/ NC NC Assets increase as there is cash inflow in
account in DEC the amount of the collection. However,
transaction assets correspondingly decrease with the
#4 amount of the collection us the accounts
receivable, an asset account, will
decrease. This is because the amount the
INC.
customer owes has been collected.
Supplies increase the assets of the
6. Purchases
business and the liabilities
supplies on INC INC NC
correspondingly increase as supplies
credit
were bought on account or credit.
Assets decrease with the amount of
7. Returns
supplies returned. Liabilities
defective DEC DEC NC
correspondingly decrease as the returned
supplies
supplies decrease the amount owed.
The transaction is n payment of account.
8. Pays the
Since there is cash outflow representing
supplies
the payment of an existing liability,
bought on DEC DEC NC
assets decrease in the amount of cash
account or
paid and liabilities decrease in the
credit
amount of the liability on supplies paid.
Cash increases the assets of the business
9. Borrows as there is an inflow of each because the
cash business borrowed money. Notes payable
INC INC NC
issuing a increases the liabilities of the business as
note it represents an obligation on the part of
the business to pay at a future date.
10. Purchase Land increases the assets of the business
INC/
land using NC NC but cash correspondingly decreases due
DEC
cash to the payment for the purchase of land.
11. Pays Payment represents cash outflow
utilities decreasing the assets of the business.
expense DEC NC DEC Expenses decrease the as they have
for the opposite effect income.
month
The transaction is a payment of liability.
Since there is cash outflow representing
12. Pays the
DEC DEC NC the payment of the note, assets decrease
note in full
in the of cash paid and liabilities
decrease in the amount of notes payable.
References
N. Aduana. (2017). Fundamentals of Accountancy, Business, and Management 1 (Procedural
Approach) for Senior High School. C & E Publishing, Inc.
Valix, Conrado T. et.al. (2015). Financial Accounting, Vol. 1, First part. GIC Enterprises & Co.
Inc.
Weygandt, J. et. al. (2012) Accounting Principles 10th ed. John Wiley & Sons (Asia) Pte. Ltd.
INC.

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FUNDAMENTALS

2|INTEGRATED INNOVATION AND HOSPITALITY COLLEGES, INC.

3|INTEGRATED INNOVATION AND HOSPITALITY COLLEGES, INC.

4|INTEGRATED INNOVATION AND HOSPITALITY COLLEGES, INC.

5|INTEGRATED INNOVATION AND HOSPITALITY COLLEGES, INC.

6|INTEGRATED INNOVATION AND HOSPITALITY COLLEGES, INC.

Topic Title: Lesson 3: FORMS OF BUSINESS ORGANIZATION AND TYPES OF

7|INTEGRATED INNOVATION AND HOSPITALITY COLLEGES, INC.

8|INTEGRATED INNOVATION AND HOSPITALITY COLLEGES, INC.

Topic Title: Lesson 4: ACCOUNTING CONCEPTS AND PRINCIPLES

9|INTEGRATED INNOVATION AND HOSPITALITY COLLEGES, INC.

Topic Title: Lesson 5: ASSETS, LIABILITIES, CAPITAL, REVENUE, AND

Topic Title: Lesson 7: INCOME STATEMENT

Service Revenue Php xxx

LUFFY’S SHIP REPAIR SERVICES

Service Revenue Php 200,000

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