LESSON 1

DEFINITION OF ACCOUNTING
Accounting is a system designed to identify, collect, process, measure and
communicate economic information about the business entity to those users having
interest in the financial affairs of the entity. Information produced by accounting serves
as a service activity which informs users as to its financial status, condition and other
quantifiable measures of a business. The need for effective and efficient information as
the end product of accounting cycle becomes more in- demand today.
Three known organizations defined accounting in three different thing. According
to the Accounting Standards Council (ASC), accounting is a service activity. Its function
is to provide quantitative information, primarily financial in nature, about finances, about
economic entities, that is intended to be useful in making economic decision.
On the other hand, Committee on Accounting Technology of the American
Institute of Certified Public Accountants define accounting is the art of recording
classifying and summarizing in a significant manner and in terms of money, transactions
and events which are in part at least of financial character and interpreting the results
thereof.
Lastly, American Accounting Association (AAA) in its Statement Basic
Accounting Theory describes accounting as the method of recognizing, appraising and
communicating economic details to permit informed judgment and decision by users of
the information.
From the definitions of accounting given above, three important points should be
given focused for discussion. First, accounting provides quantitative information. The
main orientation of accounting is economic events quantifiable and measurable in terms
of money. Second, accounting information is financial in nature. Most businesses’
reports may be financial or nonfinancial in nature but financial accounting reports are
financial in nature. Last, the information affects the decision making of the particular
users. Decision making plays a vital role in the development and growth of one entity.
Also, accounting plays an important role with decision making in which it provides the
necessary information to be used.
NATURE OF ACCOUNTING

• Standards of Discipline. Just like any other person (lawyer, engineer,

architect, etc.) engaged in professional services, accountants follow certain
standards in performing their professional services.
• Art and Science. Accounting as an art follows certain style to make its
reporting more meaningful, relevant and useful to the users of financial
statements. Example, journal entries should maintain a slant format to give
distinction of the item to be debited and to be credited.
• Accounting as a science on the other hand follows a systematic process
before the financial statements will be produced. Step by step procedure to
attain the reliable and relevant information for the users of financial
information. This coherent system is condensed into the accounting cycle
process.
• Service Activity. Accountants are merely concerned with giving professional
services to the client rather than engage in the actual business of the
company.
• Language of Business. Through the end- product of accounting, financial
statements, different users of financial information can be able to ask for its
assistance for their individual needs. By means of accounting, users may be
able to assess the following:

FUNCTIONS OF ACCOUNTING
Accounting plays significant role in the business today. The functions of
accounting can be summarized into five categories:
Recording
This is the simple and basic function of accounting. It is essentially focus on not
just ensuring all business transactions of at least financial in nature are completely
recorded but also, they are recorded in manner acceptable to both users of financial
information. Recording is done in the books of original entry, the “Journal”.
Classifying
Classification is concerned with the systematic analysis of the journalized data,
in view to group of transactions or entries of one nature at one a certain account. The
work of classification is completed in a book known as the “Ledger”.
Summarizing
This involves presenting and condensing the classified data in a system manner
which is understandable and useful to the internal as well as external end users of
accounting statements. These procedures lead to the preparations of the following
statements:

1. Trial Balance
2. Income Statement
3. Capital Statement
4. Cash Flow Statement
5. Statement of Financial Position

Analysis and Interprets

This is the final end-function of accounting. The recorded, classified and
summarized financial data is analyzed and interpreted in a manner that the end-users
can make a meaningful judgment about the conditions, stability, and profitability of the
business operation. The data is also used for preparing the future plan and developing
of policies and procedures in executing financial and non-financial plans.
Communicate
The accounting information after being meaningfully analyzed and interpreted
has to be communicated in a proper form and manner to the proper person. This is
done through preparation and distribution of accounting reports, which include besides
the usual income statement and the balance sheet, additional information in the form of
accounting ratios, graphs, diagrams, funds flow statements etc.

BRIEF HISTORY OF ACCOUNTING

The origins and work of accounting is generally attributed to Fra Luca Pacioli, an
Italian mathematician. But studies found that accounting existed as early as the birth of
civilization. Facts have shown that early people have already practice the art of
bookkeeping.
The origin of keeping accounts has been traced as far back as 8,500 BC., the
date archaeologists have established for certain clay tokens- cones, disks, spheres, and
pellets – found in Mesopotamia (modern Iraq). Around 3,600 BC, record- keeping was
already common also from Mesopotamia, China and India to central and South America.
The oldest evidence of this practice was the “clay tablet” of Mesopotamia, 90% of which
dealt with commercial transactions, accounts payable and receivables. Tithes to ruling
theocratic class were faithfully recorded in many occasions as to both quantity and
value. Researchers have found then that this clay tablet contains ancient writings which
were translated and found to be early tax assessments and payments.
People in the ancient civilizations of China, Babylonia, Greece and Egypt maintained
various types of record of business activities. Account records date back to the
1st dynasty of Babylonia (2286- 2242 B.C.), its law which was based on the Code of
Hammurabi, requires merchants trading goods to give buyers a sealed memorandum 7
containing the agreed price before it can be considered enforceable. The agreed- upon
transaction was recorded by the Scribe (the predecessor of the modern accountant on a
small mound of clay with the parties affixing “their signatures” on it. This clay was
allowed to dry and served as the record of the transaction. For the more important
transactions, the record can be klindried.
Development of more formal account- keeping methods is attributed to the merchants
and bankers of Florence, Venice and Genoa during the 13th to 15th centuries. The earliest
of these methods consisted of accounts kept by a Florentine banker in 1,211 A.D. The
system was primitive, accounts were not related in any special way, and balancing of
the accounts was lacking. Systematic bookkeeping evolved from these methods,
however, and double- entry records first appeared in Genoa in 1,340 A.D.
The first treatise on the art of systematic bookkeeping appeared in 1494, in Venice.
“Everything about Arithmetic, Geometry, Proportions and Proportionality” (Summa de
Arithmetica, Geometira, Proportioni et Proportionalita) was written by the Franciscan
monk, Fra Luca Pacioli, one of the most celebrated mathematicians of his day. The
work was intended to summarize the existing knowledge of mathematics. Included in
the arithmetical part the work was a section that explained in detail the double- entry
system of bookkeeping. Although Pacioli made no claim to developing the art of
bookkeeping, he has been regarded as the father of double- entry accounting.
In the 17th century, Nicolas Petri was the first person to group similar transactions in a
separate record and enter the monthly totals in the journal, rather than recording all
transactions seriatim, that is, in series.
The need for accounting services emerged slowly, but by the early decades of the
19th century a flurry of textbooks and handbooks on accounting had appeared, reflecting
the impact of the Industrial Revolution. This revolution, which occurred in England from
the mid- 18th to the mid- 19th century, changed the method of producing commercial
goods from the handcraft method to the factory system. With this change came the
problem of costing for a large volume of products. The specialized field of cost
accounting emerged to meet this need for the analysis of costs behavior.
Accountancy was still an indeterminate calling in Britain as late as the 1830s. Men then
engaged in accounting not only made simple accounts but also found it
Financially necessary to act as auctioneers, appraisers, agents and debt
collectors. The profession was shaped by the legislation. Accountancy reached the
shores of the United States of America as a natural result of the investments being
made by British businessmen into the land of opportunities.
As of today, accounting plays a vital role and has already reached the age of technology.
There is an abundance of accounting applications and modules to suit the businesses’
various needs. The continuous development of technology will surely affect the
innovative development of accounting.

BRANCHES OF ACCOUNTING
The varied branches and areas of accounting are:
Financial Accounting- is the discipline of accounting concerned with recording and
classifying business transactions concluding to the preparation of general- purpose
financial statements. This branch of accounting is mainly concerned on the reports on
the entity’s financial position (its resources and claims), financial performance (income
and expenses), and the changes in a particular owners’ equity.
Management Accounting- The main objective of management accounting is to provide
assistance to the internal users of financial information particularly the management in
doing economic decisions such as planning, controlling, and strict implementation of the
plan.
Example: A company plans to produce 300,000 doughnuts this year (planning). Based
on the plan, the company will have to buy for its needed materials in order to execute
the plan. It needs to allocate its business resources to produce the 300,000 doughnuts
(executing). During the production, managers strictly monitor the materials being used,
the labor employed and other miscellaneous cost in other to assure that the plan will be
implemented (controlling).
Government Accounting - This branch of accounting is mostly focused on the
allocation of the resources and funds of the National Government. It basically reports on
the income and expenditures of government, the allotment to different Departments
(DOH, DepEd, DBM, etc.), agencies and projects.
Auditing - External primarily focuses on the systematic, coherent and critical
examination of financial statements by an independent Certified Public Accountant.
Using the professional judgment and skepticism of the external CPA, the main objective
of external auditing is to express an opinion by issuing an audit report regarding the
fairness of the contents of the financial statements in accordance with the given
reporting standards.
Internal Auditing deals with determining the operational efficiency and effectiveness of
the company regarding protection and safeguarding of the company’s assets, accuracy
and reliability of the accounting data, and adherence to prescribed managerial policies
set by the Board of Directors.
Tax Accounting- Taxes are the life-blood of one country. Without these taxes one
country could not allot income to its operating departments. There will be no funds to be
used for the continuous development of infrastructure, transportation and tourism. The
proper collection and valuation of taxes depends on the use of one of the branches of
accounting – tax accounting. It is concerned on the proper measurement of the amount
to be paid by one entity or individual.
Cost Accounting - Have you wondered how a company knows the price of their
individual product? The price a bakery sells its “pandesal”? The cost of labor and
materials a candy shop have incurred to finish a piece of its candy? Cost accounting
information can answer that. Basically speaking, cost accounting deals with the
valuation of the materials, labor and other cost incorporated in producing one product. It
is mainly oriented on manufacturing business.
Accounting Education - One of the professional fields one Certified Public Accountant
can engage with is the Accounting Education. One of the requirements before one CPA
candidate can take the licensure examination is to have a degree of Bachelor of
Science in Accountancy. Because of this, the need to have an Accounting teacher
which will train every individual.

USERS OF ACCOUNTING INFORMATION

Users need different types of financial information. They are classified as external and
internal users based on their interest to one entity. Users of financial information are
enumerated below with their corresponding interest in the financial statements of one
Specific entity.

1. Government - concern not only with the taxes being paid by one entity based
on the

reported net income but also with the compliance of the entity with their particular
regulations.

1. Lenders - may be existing or potential users of financial statement. With the

financial statements represented by one entity, this type of user can assess
the capability of one entity to pay its long- term and short- term obligations.

1. Investors - may also be classified as existing or potential users of financial

statement. Investors are mostly concerned with how much will they earn
(earning power) if they will invest in one company. How will be the return on
their investment and the turnover of their investment or return of investment?

1. Management - described by the nature of accounting, accounting as the

language of business focuses on the status of the growth and possible
downfall of every client. The financial statements will help managers predict
their future. Plan certain inputs and control and apply corrective actions. For
instance, F Company using the previous data for sales presented in the
financial statement can predict what will be the next period sales. From the
forecast, manufacturing and planning

of actions for the production can now be possible.

1. Public - As part of the public, user will be concerned on the particular pros
and cons as well as the benefits and cost if one company will start operation.
Pros and benefits will focus on how one entity responds to the corporate
social responsibility.

TYPES OF FINANCIAL INFORMATION

Needs of users of financial information vary according to the interest and effect to their
financial decision making. Here are some of the needs that are common in the decision
making of the users.
Profitability - The increase in the owner’s capital as a results of the business
operations or simply the company’s net income at the end of one period.
Liquidity - The availability of cash that one entity has in able to meet the currently
maturing obligations and claims and to sustain its business operations.
Solvency - The availability of cash that one entity has in able to meet the long-term
obligations.
Stability - The capacity of one entity to sustain its growth and to meet future expansion
requirement.
Capital Structure - The source of financing one company has. Resources of one entity
may come from external financing which provided by the creditors and lenders and the
internal financing which come from the investors and owners.
Financial flexibility - Whether the company has excess cash after satisfying its claims
and obligation to meet additional investment (e.g Investment in Banks) and contingency
requirement.
LESSON 2

CONCEPTUAL FRAMEWORK
The conceptual framework is composed of ideas, concepts, and assumptions that
underlie the preparation and presentation of accounting information for external users.
One of the purposes of this framework is to assist users of accounting information in
interpreting the data contained in financial statements prepared in conformity with the
set of rules enumerated in the Philippine Generally Accepted Accounting Principles
(GAAP).
The Conceptual Framework for Financial Reporting is complete, comprehensive and
single document promulgated by the International Accounting Standards Board.
Conceptual Framework describes the concepts for general purpose financial reporting.
The Conceptual Framework is intended to guide standard-setters, prepares and users
of financial information in the preparation and presentation of statements.
The Conceptual Framework provides the foundation for Standards that:

1. Contribute to transparency by enhancing international comparability and quality of

financial information.
2. Strengthen accountability by reducing information gap between the providers of
capital and the people to whom they have entrusted their money.
3. Contribute to economic efficiency by helping investors to identify opportunities and
risks across the world.

The figure shown below will illustrate the basic components of a Conceptual Framework.

Qualitative Characteristics Elements of Financial Statements

· Faithful Representation · Assets
1. Completeness · Liabilities
2. Neutrality · Equity
3. Free from Error · Income
· Relevance · Expenses
1. Predictive Value (Forecasting outcome)
2. Confirmatory Value (Historical)

The objective of financial reporting forms the foundation of the Conceptual Framework.
The overall objective of financial reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders and other
creditors in making decisions about providing resources to the entity.
Readers should realize, therefore, that they cannot know the precise meaning of many
of the items in an accounting report unless they know which of the several equally
acceptable possibilities has been selected by the person who prepared the report. The
meaning intended in a specific situation requires knowledge of the context of the
financial report.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The Generally Accepted Accounting Principles (GAAP) may be described as
broad rules adopted by the accounting profession as guides in measuring, recording,
and activities of a business. Accounting assumptions are the solid foundation of
accounting to permit understanding and enhance the usefulness of the financial
statements. The framework on the preparation of financial statement issued by the
Philippine Accounting Standards enumerates the following underlying assumptions.
Generally accepted accounting principles represent the rules, procedures, practice and
standards followed in the preparation and presentation of financial statements. It is like
laws that must be followed in financial reporting.

PURPOSE OF ACCOUNTING STANDARDS

The overall purpose of accounting standards is to identify proper accounting practices
for the preparation and presentation of financial statements. It creates common
understanding between the preparers and users of financial statements particularly the
measurement of assets and liabilities.

Generally Accepted Accounting Principles

1. Accrual Basis -‐ Under this basis, the effects of transactions and other events are
recognized when they occur and not as cash or its equivalent is received or paid on
the period to which they relate. The essence of accrual accounting are:
0. The recognition of receivables for the sale of goods or services even
though cash is not yet received;
1. The recognition of payables for the purchase of goods or services even
though cash is not yet paid;

1. The recognition of expenses for expenses paid in advance and not yet consumed;

1. The recognition of expenses for expenses incurred but the expense is not yet paid;

1. The recognition of income for cash received but the income is not yet earned, and

1. The recognition of income for income earned but the income is not yet received.

1. Going Concern -‐ Financial statements are normally prepared on the assumption

that an enterprise will continue in operation for the near future. Hence, it is assumed
that the enterprise has neither the intention nor the need to liquidate or curtail. Cost
Principle -‐ Under the Measurement of the Elements of Financial Statements, assets
are recorded at an amount of cash or cash equivalents paid or the fair value of the
consideration given to acquire them at the time of acquisition.
2. The Entity Concept – This assumes that the business enterprise is separate from the
owner, managers, and employees who constitute the firm. Accordingly, the
transaction of the enterprise should not be merged with the transactions of the
owners.
3. Time Period Assumption – This concept requires that the indefinite life of the
enterprise be divided into equal interval of time called time period or accounting
period for the purpose of preparing financial reports on financial position,
performance, and cash flows. Such interval of time may be a calendar year, which is
a twelve-‐month period that ends on December 31 or a natural business year that is,
any twelve-‐month period ending on any month when the production of the business
is at the lowest.
4. Monetary Unit assumption -‐ This speaks of the ability to quantify the assets, the
liabilities, and the capital in terms of a unit of measure. The unit of measure used in
the Philippines is peso. This concept also assumes the stability of peso’s purchasing
power. Any adjustments to reflect changes in the purchasing power of the peso are
ignored in accounting.

DEFINITION OF TERMS
1. Assumptions-‐ that the International Accounting Standards Committee recognize as
underlying the preparation of financial statements and which is not necessary to
disclose although there must be disclosure and an explanation if the financial
statement is not based on assumption
2. Principles-‐ standards of accuracy and probity that apply to those carrying out
accounting procedures
3. Policies-‐the accounting bases used by a company when preparing its financial
statements
4. Conceptual Framework-‐a set of theoretical principles that underlies the practice and
regulations of financial accounting.

LESSON 3

ACCOUNTING EQUATION
The basic accounting equation can be explained by how resources (assets) of a
company are being acquired. These resources are to be used in their business
operations. Accordingly, a company’s asset can be obtained by external financing and
internal financing. External financing means resources are acquired on credit (liability)
while internal financing by means of investment (equity) of other person to the entity.
For this, we can illustrate accounting equation as:
Needless to say, assets of the company are owned by claims from creditors and equity
of the investors.

ILLUSTRATIVE PROBLEM ON ACCOUNTING

EQUATION
Case 1

ASSETS P?

LIABILITIES 500,000

EQUITY 500,000

With the equation that Asset = Liabilities + Equity (? = 500,000 + 500,000) We can say
that the asset is 1,000,000. Remember that the ASSETS should be equal to
LIABILITIES and EQUITY.
Checking:
1,000,000 = 500,000 + 500,000
1,000,000 = 1,000,000
Case 2

ASSETS P2,000,000

LIABILITIES ?

EQUITY 500,000

With the equation of Asset = Liabilities + Equity (2,000,000 = ? + 500,000) we can

derive the formula to get the liabilities. Asset – Equity = Liabilities (2,000,000 – 500,000
= 1,500,000). So liability is 1,500,000.
Checking:
2,000,000 = 1,500,000 + 500,000
2,000,000 = 2,000,000

Case 3

ASSETS P2,000,000

LIABILITIES 300,000

EQUITY ?

With the equation of Asset = Liabilities + Equity (2,000,000 = 300,000 + ?) we can

derive the formula to get the equity. Asset – Liabilities = Equity (2,000,000 – 300,000 =
1,700,000). So, Equity is 1,700,000.

Checking:
2,000,000 = 1,300,000 + 700,000
2,000,000 = 2,000,000

T-ACCOUNT
This is called T-account because it is look like letter T. It is divided into
two sides, the right side (credit), the left side (debit).
In the equation, the resources owned, controlled, and manipulated by the business are
on the left side and the indebtedness and obligation of the business and investments of
the owner are posted on the right side. In the T-‐account the left side is the debit side
and the right side is the credit side. Therefore, it is concluded that the original side of the
assets is on the debit side and that the original side of the liabilities and capital is the
credit side. It states that assets must always equal liabilities and owners’ equity.

T-ACCOUNT

DEBIT CREDIT

Asset Liability

Withdrawals Capital

Expenses Revenue

The normal balance of Asset is Debit, and the normal balance of Liability and
Equity is Credit.
Given the value of assets and equity, lets compute how much is the liabilities using T-
account.
Case 1

ASSETS P?

LIABILITIES 500,000

EQUITY 500,000

T-ACCOUNT
DEBIT CREDIT

1,000,000 500,000

500,000

1,000,000 (Total Asset) 1,000,000 (Total liabilities and Equity)

Since the accounting equation says that the Total asset is equal to Total liabilities and
Equity. We can assume that if the total liabilities and equity is 1,000,000, thus the total
asset is also 1,000,000.

Checking:
Assets = Liabilities + Equity
Assets = 500,000 + 500,000
1,000,000 = 1,000,000

Case 2

ASSETS P2,000,000

LIABILITIES ?

EQUITY 500,000

T-ACCOUNT

DEBIT CREDIT
2,000,000 500,000 (LIABILITY)

1,500,000 (EQUITY)

2,000,000 (Total Asset) 2,000,000 (Total liabilities and Equity)

Since the accounting equation says that Total asset is equal to Total liabilities and
Equity. We can assume that the total liabilities and equity is equal to 2,000,000.
(2,000,000 – 1,500,000 = 500,000)

Checking:

Assets – Equity = Liabilities

2,000,000 – 1,500,000 = 500,000
2,000,000 = 1,500,000 + 500,000
2,000,000 = 2,000,000

Case 3

ASSETS P2,000,000

LIABILITIES 300,000

EQUITY ?

T-ACCOUNT

DEBIT CREDIT

2,000,000 300,000 (EQUITY)

1,700,000 (LIABILITY)

2,000,000 (Total Assets) 2,000,000 (Total liabilities and Equity)

Since the accounting equation says that Total asset is equal to Total liabilities and
Equity. We can assume that the total liabilities and equity is equal to 2,000,000.
(2,000,000 – 300,000 = 1,700,000)
Checking:
Assets – Liabilities = Equity
2,000,000 – 1,700,000 = 300,000
2,000,000 = 1,700,000 + 300,000\
2,000,000 = 2,000,000
Remember that the debit and credit should be balance or equal.
DEFINITION OF TERMS

1. Assets – all items of property that contribute to the value of an

organization
2. Liabilities –are the indebtedness of the business
3. Owner’s Equity – also known as capital. It is the residual value between
assets and liabilities.
4. Proprietorship – a business solely owned by one individual
5. Proprietor – owner of a sole proprietorship business
6. Accounting equation – is represented by assets is equal to liabilities plus
owner’s equity

LESSON 4

TYPES OF MAJOR ACCOUNT

The purpose of accounting is to present accurate financial picture of the business
operations. By principles, financial accounting consists of five basic elements, in
preparing financial reports, each activity will touch at least one of these elements.

The term “account” is used often in accounting. Thus, we need to understand what it is
before we proceed. In accounting, an account is a descriptive storage unit used to
collect and store information of similar nature. For example, “Cash”.
Cash is an account that stores all transactions that involve cash receipts and cash
payments. All cash receipts are recorded as increases in Cash and all payments are
recorded as deduction in the same account.

Recognition of Five Major Accounts of

Accounting
The term “recognition” technically refers to the process of incorporating in the financial
statements an item that meets the definition of an accounting element and satisfies the
criteria for recognition.
Recognition means recording of quantifiable business transactions and events in
the books of the business. These quantifiable events should be reflected in the financial
statements.
Two criteria for an item to be recognized, namely:

1. It should meet the definition of accounting elements.

2. It should satisfy the criteria for recognition.

Accounting Elements
There are five accounting elements and these are:

1. Assets
2. Liabilities
3. Equity (Owner’s Equity or Capital)
4. Income
5. Expense

The elements directly related to the measurement of financial position or balance

sheet are:

1. Asset
2. Liability
3. Equity

The elements directly related to the measurement of financial performance or income

statement:

1. Income
2. Expense

All business transactions and events in the financial statements can fall into one of
these 5 classifications which we call accounting elements.

1. ASSETS

Assets are the properties of a business entity. They can be resources of the entity which
came from past transactions and which can generate future economic transactions or
events for the entity. Examples are the physical resources such as buildings, offices,
furniture, equipment, computers controlled by the entity. Also parts of assets are cash,
accounts receivables, inventories.
A business entity can generate income or revenues from these assets in the course of
its business operation. The assets of a café will include the coffee-‐making equipment,
display cabinets, kitchen equipment, furniture, etc. which will enable the business to
gain revenues. Anything owned by the business is asset.
Accounting Standards defines:

• Assets are future economic benefits controlled by the entity as the outcome of
past dealings or other past actions. Asset should be recognized if:

It is probable that future economic benefits embodied in the asset will eventuate
The value can be reliably measured.

This means:
The business has ownership on the “things.”
That ownership must have come about by a transaction or other event.
That “things” will give financial or other benefits in future.
That benefit is likely to come out in end.
Can put a Peso value on it reliably.

Essential characteristics of asset

1. The asset is a present economic resource.

2. The economic resource is a right that has the potential to produce economic
benefit.
3. The economic resource is controlled by the entity as a result of past events.

Assets may be classified as current or non-‐current

1. Current assets – Assets are considered current if they are held for the
purpose of being traded, expected to be realized or consumed within twelve
months after the end of the period or its normal operating cycle (whichever is
longer), or if it is cash.

The term normal operating cycle refers to the span of time from the point of acquisition
of goods or materials for processing up to the realization in cash or cash
equivalent.Examples of current assets are:

1. Cash – It is any medium of exchange that a bank will accept for deposit at
face value. It includes bills, coins, funds for current purposes, checks, cash in
bank, cash on hand, etc.
2. Cash Equivalents – These are short-term highly liquid investments that are
readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value.

c. Receivables – these are the claims against

customers arising from sale of services or goods
on credit.
1. Accounts Receivables are receivables from customers
2. Notes Receivables are receivables that are supported by promissory notes

iii. Rent Receivables are claims from rental business

1. Interest Receivables are claims from earnings of interest

2. Due from Employees are advances to employees

vi Advances to Employees

In business, not all receivables can be collected; a valuation account which shows
estimated uncollectible amount of accounts receivable should be established. It is called
“Allowance for Bad Debts”. It is a deduction to asset and is presented as a deduction to
the related asset – accounts receivable.
Accounts Receivable – Allowance for bad debts = Net Realizable Value

1. Inventories – assets which are held for sale in the ordinary course of
business. Examples of Inventories:
2. Merchandise Inventory – goods held for sale by the trading or
merchandising company
3. Raw Materials Inventory – materials held for use in the production of
finished goods of a manufacturing company

iii. Goods in Process Inventory -‐ materials in process in the production area but not
yet finish

1. Finished Goods Inventory – finished product held for sale by the

manufacturing company

1. Prepaid Expenses – expenses paid in advance.

2. Prepaid Rent – rental expense paid in advance
3. Prepaid Insurance – advance payment of insurance

iii. Prepaid Advertising - advance payment in promotion

1. Non-‐current assets -‐ assets that do not meet the criteria to be classified as

current. They are long term in nature and are useful for a period longer than
12 months or the company’s normal operation cycle. Examples of Non-‐
current assets accounts include:
2. Property, Plant and Equipment – long term assets with physical substance
3. Land – land area owned for business operation and not for sale
4. Building – office building, factory, warehouse or store use in business
operations

iii. Equipment – machinery, office equipment, computer equipment, delivery equipment

and others

1. Machinery
2. Vehicle
3. Furniture and fixtures – shelves, cabinets, tables, chairs, and others

Accumulated Depreciation is a valuation account which represents the decrease

in value of a fixed asset except for land due to continued use, wear and tear, passage of
time and obsolescence. It is a contra asset account and is presented as a deduction to
the related fixed asset such as building, machinery, equipment, furniture and fixtures,
plant, warehouse, store building and others.
Cost of Building – Accumulated depreciation = Carrying amount
1. Intangibles – long term assets with no physical substance
2. Patent – this is the authority or license given by the government to a person
to exclude others from making, using, or selling an invention.
3. Goodwill – this is the asset that is not identifiable

iii. Copyright – it is an intellectual property that will give the owner an exclusive right to
make copies of creative works, usually for a limited time.

1. Trademark – it is an intellectual property that consists a recognizable sign,

design, name, or expression.

Amortization is the valuation account which represents the decrease in value of

intangible assets.

Patents – Amortization = Carrying amount of patent

1. Other long term assets

2. LIABILITIES
Liabilities are the present “debts” or monetary obligations of a business. These are
the current obligations that result from previous transactions. When a business settles
its liabilities, it would normally result in outflow from the assets. Examples are bank
overdrafts, accounts payables, etc.
The liabilities of a coffee shop business will include the unpaid salaries of staff, interest
payment for a bank loan, SSS premiums, and withholding taxes. Liabilities may be
classified as Current and Non-‐Current Liabilities

1. Current Liabilities are obligations or debts of the business which will be paid
during the accounting cycle by means of payment of current assets or a
creation of another current liability.

An entity shall classify a liability as current when (PAS No.1):

1. it expects to settle the liability in its normal operating cycle:

2. it holds the liability primarily for the purpose of trading;
3. the liability is due to be settled within twelve months after the reporting period;
or
4. the entity does not have an unconditional right to defer settlement of the
liability for at least twelve months after the reporting period.
Examples of Current Liabilities are:

1. Payables
2. Accounts Payable is a current liability which refers to debts or obligation that
arise from the acquisition of merchandise or services on account.
3. Notes Payable is a payable supported by promissory notes. It is current if
payable within a year. If the note is payable beyond one year, it is classified
as a long-‐term liability.

iii. Interest Payable is the interest due to an interest bearing note.

1. Salaries payable are wages/salaries already served by the employees but

not yet paid by the employer
2. Taxes Payable are taxes due for the government not yet paid by the
business
3. Rent Payable are rental incurred but not yet paid

vii. Light and Water Payable or Utilities Payable are utilities incurred but not yet paid

Non-‐Current Liabilities are obligations or debts of the business that will be due and
payable beyond one year or 12 months.
Examples of Non-‐current liabilities are:

1. Notes Payable are issued promissory notes payable beyond one year
2. Mortgage Payable is a long term liability account that refers to debt secured
by a mortgage on real estate.
3. Loan Payable is an amount borrowed to the bank by the company payable
beyond one year.
4. Bonds payable is an amount obtain substantial sums of money from lenders
to finance the acquisition of equipment and other needed assets, this obtain
by issuing bonds.

3. EQUITY

Equity is the owner’s capital in the business. It is the remaining amount or residual
interest after deducting liabilities from the assets. It takes into account the contributions
of the owner to capital and the withdrawals and net losses of the business.
Owner’s Equity is a term that refers to the vested interest of the owner in the business.
The difference between the assets and the liabilities of the business is called the
owner’s equity or owner’s capita.
For sole proprietorship, equity refers to the owner’s capital; for partnerships, it is the
partner’s capital. For corporations it is the stockholder’s equity.

1. Capital – This is the account use to record the original and addition
investment of the ownerof the business entity.
2. Withdrawal – When the owner of a business entity withdraws cash or other
assets, such as recorded in the drawing
3. Income Summary – It is a temporary account used at the end of the
accounting period to close income and expenses. This account shows the
profit or loss for the period before closing to the capital account.

4. INCOME
Income is the revenue or earnings from the business operations such as sales of
products or payments for services. Income should increase the owner’s equity while
loss should decrease the equity. Income may come from the following:

1. Sales of goods – the amount of goods or inventory sold to customer

2. Sale of other assets – the amount of assets sold other than inventory
3. Professional fees – income received by an individual from his specific fields
of arts and sciences, doctor, the accountant, lawyers and architects.
4. Service income – this is the income received from rendering services
5. Interest income – this is the income received from interest
6. Rent income – income from rental

1. EXPENSES

Expenses are the costs of operating the business. Expenses of a business will include
the following:

1. Cost of sales – This is the cost incurred to purchase or to produce the

products sold to customers during the period; also called the cost of goods
sold.
2. Cost of supplies used – This is the expense when the supplies already used.
3. Salaries and wages – This is the payment to employer-employee
relationship such as salaries or wages, 13th month pay, cost of living
allowances and other related benefits.
4. Insurance – This portion of premiums paid on insurance coverage which has
expired.
5. Depreciation – This is the portion of the cost of tangible assets allocated or
charged as expense during accounting period.
6. Taxes – The cost in paying taxes
7. Bad debts – this the portion of the cost of accounts receivable allocated or
charge as an expense.

Expenses can reduce the assets of the business entity or increase its liabilities.
Eventually it can decrease the equity of the owner.

CHART OF ACCOUNTS
This list of accounts is a record of account titles and control numbers used the
bookkeeper as a guide in recording business transactions.
Account title is the name of accounts to prepare the financial statement. Control
number is the number that represent the account title, this is different in every
company.
Assets, Liability, owner’s equity, income and expense are listed down to help the
bookkeeper in recording a particular transaction. No other account titles can be used
other than those found in the chart of accounts by a company.
EXAMPLE:

OPO WEDDINGS

CHART OF ACCOUNT

BALANCE SHEET ACCOUNTS INCOME STATEMENT ACCOUNTS

ASSET INCOME

Acct. Acct.
Account Title Account Title
No. No.

110 Cash 410 Consulting Revenues

120 Accounts Receivable 420 Referral Revenues

130 Supplies
140 Prepaid Rent EXPENSES

150 Prepaid Insurance 510 Salaries Expense

160 Service Vehicle 520 Supplies Expense

165 Accumulated Depreciation 530 Rent Expense

170 Office Equipment 540 Insurance Expense

175 Accumulated Depreciation 550 Utilities Expense

560 Depreciation Expense- Service Vehicle

Depreciation Expense – Office

LIABILITIES 570
Equipment

210 Notes Payable 580 Miscellaneous Expense

220 Accounts Payable 590 Interest Expense

230 Salaries Payable

240 Utilities Payable

250 Interest Payable

Unearned Referral
260
Revenues

OWNER’S EQUITY

310 Opo, Capital

320 Opo, Withdrawal

330 Income summary

The account number is different in every company. You can add another
account no. with account title. Remember that the presentation of account titles is based
on liquidity or its ability to convert into cash.

DEFINITION OF TERMS

1. Chart of accounts – a list of the ledger accounts of an accounting entity giving

the titles and, possibly the account number
2. Accounting elements – composed of the assets, liabilities, capital, revenue
and expense accounts
3. Financial position – is also known as the balance sheet
4. Financial performance – is also known as the income statement
5. Account balance –is the final amount at the end of the business cycle found
in the ledger or the t-‐account

LESSON 5

BOOKS OF ACCOUNTS
These are set of books used to record all the transactions or past events occurred in the
business especially those financial in nature and those that have monetary values.
Accountant is the one who is keeping the books for updating day to day activities of the
business. For example, the company recorded Sales amounting to P50,000.00 for a day,
the customer pays P15,000.00 as partial payment for his account in the company, the
company paid P14,500.00 for electricity used for a month, or the company purchased
property, plant and equipment amounting to P250,000.00 for expansion. The company
must record the transaction that happened to the business for fair presentation,
completeness and free from errors. But the question is, on which books to record which
transactions? There were two major types of books of accounts namely,

1. General Journal
2. General Ledger

Books of accounts are the manual instruments use for record keeping all accounting
transactions. This is only prescribed recording device to recognized business
transactions and events. When you have registered the business, the Bureau of Internal
Revenue (BIR) will require you to have books of accounts to update the day-to-day
transactions of the business. The said set of books must be stamped by the BIR upon
its issuance. Illustration below is the sample of books stamped by the Bureau of Internal
Revenue.

Illustration 1.1 Sample general ledger stamped by the BIR

As we go on examining the two major types of books of accounts namely,

General Journal and General Ledger. General Journal or it is commonly called
the books of original entry. General Ledger or is commonly called the books of final
entry. Shown below the sample format of General Journal and General Ledger:
Illustration 1.2 GENERAL JOURNAL
The general journal is called the book of original entry because all the business
transactions are recorded in this book for the first time. After analysing the transactions
of the business, the journal implies that there is a daily recording of current events
because it accounts for the day- to- day quantifiable and measurable business
transactions or activities. The business documents like invoice, vouchers, receipts and
others are the sources of information in recording transaction in the journal. In the
journal, business activities are processed for the first time.
Simultaneously after analysing the accounting elements, the bookkeeper records the
transactions in the book of accounts; first in the Journal and then in the Ledger. The
journal provides a chronological record of transactions with explanations and clear
references to their supporting documents with corresponding debits and credits while
the ledger provides a classified record of accounts with their respective running
balances
Both the journal and ledger are important for business operations. For example, the
general journal can be a source of answer regarding the amount of cash disbursed for a
particular transaction, while the general ledger can determine the amount of cash
balance as of the given date.
The business activities are recorded in the books of accounts and the information
gathered and accumulated in the records are used for the preparation of
financial reports at a given date.
The process of recording transactions in the journal is called “journalizing”. It is
recorded in the chronological order of their actual happening. Earlier dates of
transactions are recorded first before transactions of latest date would be recorded. The
two kinds of journal:

1. General Journal
2. Special Journals
General Journal - In a small business, having only a few business transactions only
one book of original entry has been used to record the transactions and it is called the
General Journal. General Journal is the simplest form of journal. It is a two – column
journal that provides the following information:

• The date of transaction

• The account titles affected, and the brief explanation of transactions
• The post reference or page number of the ledger where the debit or credit value is
posted
• The debit and the credit amount of the entries

The Basic form of Journal

Date Particulars P. R. Debit Credit

2020

October 20 Office Equipment J1 25,000

Accounts Payable J1 25,000

Purchase of computer on account

1. Date Column – shows the date of the occurrence of the transactions. The same
year and month for every entry should not be rewritten unless there will be changes
in the year and month or a new page is needed. Check (√) mark can be used for the
transaction with the same day.
2. Particulars – shows the account debited and credited as well as brief explanation of
the transactions. The account debited is entered at the extreme left of the first line.
The credit account is entered slightly indented on the next line. The brief explanation
of the transaction is entered on the next line slightly indented from the credit
account.
3. Posting Reference (PR) – is used when the entries are posted and the amounts are
transferred to the related ledger account.
4. 4. Debit Column – the first money column wherein the amount of the debit account
is entered.
5. Credit Column – the second money column wherein the amount of the credit
account is entered.

Steps in journalizing a transaction

To affect the recording of economic transactions and events in the general journal, the
following procedures are generally observed:
1. Enter the date
2. Enter the debit account title and its amount
3. Enter the credit account title and its amount
4. Enter the explanation
5. Enter the post reference

Advantages of using a journal

• It reduces potential error such as the omission of a debit or credit which would have
a material effect if directly recorded in the ledger
• If entries are first encoded in the general journal and later on transferred to the
general ledger, any error committed in the ledger can be traced back to the entries
made in the journals
• It provides a complete record of transaction in one place by recording the net
balance of the same account. A good example of this is the use of compound entry.
• It shows all the pertinent facts about the transactions in their chronological order.

Ledger
The journalizing process implies that business activities, regardless of the nature of
transactions, whether it is for realization of income, purchase of merchandise, payment
of expenses or acquisition of assets, are recorded in a chronological order and journal is
a mixture of several types of transactions
Journal does not reflect information like the account balance of the total balance of an
account. And it only gives importance to the value received and value given
out. Posting basically is a sorting process. It groups similar accounts according to its
nature and type. Posting is the method of shifting the recorded transaction in the
general journal to the general ledger. The grouping of transactions follows the
accounting elements –assets, liabilities, capital, income and expenses.
Transactions involving cash are grouped together, so with the same manner in
transactions involving purchases on accounts and payment of payables. Information
found in the general journal are transferred to the ledger.
The following guidelines should be observed in transferring the information from the
general journal to the ledger

• No changes should be made in the accounts used and the amount entered.
• Debit entries in the journal should be transferred on the debit side of the ledger.
• Credit entries in the journal should be transferred on the credit side of the ledger.

Ledger is a book of final entry. It accumulated all data necessary prior to the preparation
of financial statements. All similar transactions in the journal are grouped together in the
ledger. While the journal records the transactions in their chronological order, the ledger
organizes the information by account. The ledger compliments the journal by providing
the running balance of an account. The T- account is the basic form of a ledger. On the
right side of the T account is the debit column and the left side is the credit column. The
arrangement of ledger is in accordance with the chart of accounts. The ledger has the
following major parts:

1. The account title and account number

2. The debit side
3. The credit side

Account title and Account Number

The account title – defines the nature of the ledger. For example, a ledger with an
account title Accounts Receivable is a summary of all transactions involving sales in
accounts only during the period. This means that transactions affecting accounts
payables should not be transferred to this account. The account title is usually written at
the center of the ledger
The Account Number indicates the account number of the account titles listed in the
chart of accounts. It is very important and necessary in cross- referencing of recorded
transactions. The Account Number is written in the rightmost corner of the ledger in line
with the account title.

Debit and Credit Side of the Ledger

The body of the ledger is divided into debit and credit sides. Both the debit and credit
sides have the following sections:

1. Date column
2. Particular column
3. Folio or post reference
4. Amount column

Figure 2 – The Different Columns of the Ledger SPECIAL JOURNALS

Special journals are also book of original entry where transactions are recorded for the
first time. The special journals are designed to record special types of business
transactions or activities. The design of the special journals will depend on the need of
the business. Special journals are used by business enterprises which has various
business transactions.
Kinds of Special Journals are:

1. Sales Journal
2. Purchase Journal
3. Cash Receipts Journal
4. Cash Payment Journal
5. General Journal

As a rule, special journals are usually used for buying, selling, cash receipts and cash
payments. Transactions that cannot be recorded in the special journals are recorded in
the ordinary journal called general journal.

Transactions Journals Contents Described

Summary of
Journals: PURCHASES
All purchases of merchandise on account
JOURNAL
1. Buying

2. Cash CASH PAYMENTS

All payments, but only cash payments
Payments JOURNAL

All sales of
3. Selling SALES JOURNAL merchandise on
account

CASH RECEIPT All

4. Cash Receipts receipts, but only cash
JOURNAL receipts

GENERAL Miscellaneous transactions that cannot be

5. Miscellaneous
JOURNAL recorded in the four special journals.

If the special journals are used, the general journal shall only be used for entries of
other transactions not recorded in the special journals, including adjusting, closing, and
reversing entries.

Sales Journal
Sales Journal is also known as “sales on account journal” because this journal is used
as a book of original entries in recording several sales on account. The sales invoice to
the several customers is the source document. At the end of the day or month, the
money column of sales journal is totalled. This daily or monthly total amount is then
posted to the sales and account receivable general ledgers. If sales are made on cash,
the cash receipts journal shall be used instead of sales journal. The customer’s name
us entered individually in the column to know which subsidiary account is affected by
the sales transactions.
The column with the check mark is similar to Posting Reference column. The check
mark indicates that amount has been posted to the Customer’s Accounts Receivable
Subsidiary Ledger account.
Posting from the sales journal to the general ledger is done monthly.
The amounts in the journal are footed or added together. The totals are transferred to
the General Ledger. The bookkeeper enters the account numbers beneath the totals in
th
the sales journal. The totals are double- ruled
The business with many customers will find it difficult to monitor the account of its
customer, keeping all the customers in the ledger will make it voluminous and will be
inconvenient to the bookkeeper.
To affect a systematic recording of customer’s account, a subsidiary ledger is
maintained.

SALES JOURNAL

Accounts
Sales
Name of Invoice Receivables
Date Terms P
Customers No.
Debit Credit

Oct-01 Sha Sia 2/10, n/30 101 ₱1,000.00 ₱1,000.00

Oct-04 Benj Ines 2/10, n/30 102 ₱5,000.00 ₱5,000.00

Dyan
Oct-06 n/30 103 ₱6,000.00 ₱6,000.00
Demines

₱12,000.00 ₱12,000.00
Sha Sia

Oct-01 ₱1,000.00

Accounts Receivable (102)

Oct-30 ₱ 12,000.00

Sales (401)

₱ 12,000.00 Oct-30

Benj Ines

Oct-01 ₱5,000.00

Dyan Demines

Oct-01 ₱6,000.00
Bostonian Ledger (Account Receivable Subsidiary Ledger)
Name: Sha Sia
Address: Quiapo, Manila

Date Explanation F Dr. Cr. Balance

June 4 SJ- 1 ₱ 1,000 ₱ 1,000

Name: Benj Ines

Address: 145 Lardizabal St. Sampaloc, Manila

Date Explanation F Dr. Cr. Balance

June 10 SJ- 1 ₱ 5,000 ₱ 5,000

Name: Dyan Demines

Address: 678 Rizal Avenue, Manila

Date Explanation F Dr. Cr. Balance

June 16 SJ- 1 ₱ 6,000 ₱ 6,000

Purchase Journal
The posting of the columns, purchases account and accounts payable account of the
Purchase Journal is done monthly. These are transferred to the General Ledger. The
columns are footed and ruled. The bookkeeper enters the account number beneath the
totals. The check mark column indicates the posting to the subsidiary ledger.
The Cash Receipts Journal is used to record receipts of cash from all sources. The
receipts of cash usually come from the following transactions

1. Collection of accounts
2. Initial and additional investment of the owner
3. Sales in cash
4. Loans from financing
Cash Payment Journal
Records all payments whether in cash or by check. Cash purchases are recorded
here, the following transactions are recorded in the Cash Payment Journal:

1. Payments of accounts
2. Cash withdrawals by the owner
3. Other payments
4. Costs and expenses payments made

5.

At the end of the month all the columns, Cash on Hand, Cash in Bank, Purchases
Discount, Accounts Payable, Purchases and the Sundry accounts are totalled, footed
and ruled. Check the equality of the debits and the credits total. Then the totals of each
column are transferred to the General Ledger and the account number is placed
beneath the column total. Post the sundry accounts individually filling up the folio
column with the account numbers. To indicate that posting has been completed,
checkmarks are placed beneath the totals of each column.

LESSON 6

FORMS OF BUSINESS ORGANIZATIONS

Business Organizations are customarily organized according to its ownership as:

1. Sole Proprietorship
2. Partnership
3. Corporation

Sole Proprietorship
The sole or single proprietorship is the simplest form of business organizations,
owned by one person known as the proprietor or entrepreneur. The sole proprietorship
enjoys the ease of formation compared with the other two types of organizations. The
government requirements for the sole proprietorship are minimal. Decisions can easily
be made in as much as they are made by the owner himself, and do not require any
consent from other persons, and profits from operations are not shared with anybody
but belong only to the owner. Management can solely be done by the sole proprietor by
himself. Operations are not complicated because this type of organizations is generally
for small-scale business.
This form of business organization is limited with the ability to raise capital. The
business depends only on the financial resources that can be provided by the sole
owner, hence, a limited ability to expand. The owner has unlimited liability, and that the
business’ creditors can go after the personal assets of the owner to satisfy their claims.

Partnership
The partnership form of business organization is governed by the provisions of
the Civil Code, Articles 1767 to 1867. It is defined as an association of two or more
persons who bind themselves to contribute money, property, or industry to a common
fund with the intention of dividing the profits among themselves. It begins to exist from
the moment of the execution of the partnership contract, unless it is otherwise stipulated.
The partnership enjoys also the ease of formation. It may be formed by mere
consent or in writing by a group of persons who are willing to contribute money, property,
or industry to a common fund with the intention of dividing profits among themselves.
However, this form of organization can be easily dissolved by mere disagreement
among the partners. Partnership is grounded on common trust, and confidence, thus if
the original relationships of the partner is changed, the partnership is dissolved.

Corporation
The corporation is an entity held by five or more individuals whose ownership is
evidence by shares of stocks. The corporation, on the other hand, enjoys the benefit of
accumulating big amount of capital contributed by millions of owners called stockholders.
This form of organization is difficult to organize as compared with the other two types of
organization. Corporations require compliance with different government requirements
such as registration to the Securities and Exchange Commission, National Internal
Revenue, and often times, compliance with the requirements of the Bangko Sentral ng
Pilipinas.
Section 2 of the Corporation Code defines corporation as an artificial being
created by the operation of law having the rights of succession and the powers,
attributes and properties expressly authorized by law or incident to its existence (BP no.
68, section 2)

Advantages and Disadvantages of each form of Business Organization

SOLE PROPRIETORSHIP

Advantages Disadvantages

Easiest to start and set-up only minimal requirement set by the

Unlimited liability
government
Only one (owner) decides for business Limited capital or source of capital

Loss are solely shouldered by the

All profits are for the owner
owner

The, not the business, is taxed Limited life

Easy to dissolved

PARTNERSHIP

Advantages Disadvantages

Easy to form; mere agreement unless

stipulated can organize and form one Unlimited liability
partnership

Combined resources of partnership All partners may be held liable for the action of
(capital, skill and industry) one partner (Agent of Partnership)

Restricted transfer of ownership. Requires the

Lesser government requirement and
consent of all partners before transfer of
supervision
interest be enforceable

Tax- exempt if professional partnership

but taxed as a corporation if Limited life
commercial corporation

CORPORATION

Advantages Disadvantages
Limited Liability- Shareholders are not legally liable for the Most costly and difficult to organize
corporate unpaid outside and within liabilities (higher cost of incorporation)

Ease of transfer of interest in case of incapacity of one More government requirement and
shareholder regulations of supervision to follow.

Power of succession- unlike the other types of business

organization can still exist and continue in spite of incapacity of Taxed at flat 30%
one shareholder

Unlimited life- may renew its life every 50 years

Greater source resources

TYPES OF BUSINESS ACCORDING TO ACTIVITIES

Primary Activities of Business
A business may be classified based on its primary activities done. The most
common types of business as their nature or main activities are as follows:

Service Business
To earn revenue, this business renders services to clients in exchange for a fee.
The primary means it offers its client is intangible one- “service”
Example: Barber shop and travel agency

Merchandising Business
This business engages in buying and selling of goods. This type of business
buys goods and sells it at its present condition not subject to any convention. The
primary means it offers its client is tangible one- “product”.
Example: Hardware

Manufacturing Business
This business type converts raw materials into finished goods before be offered
to certain customers. This type of business activities incurred certain cost of primary
(cost of materials and labor) and conversion cost (cost of labor and factory overhead).
The primary means it offers its client is tangible one- “product”
Example: Candy Shop

DEBIT AND CREDIT

GENERAL JOURNAL

Date Particulars P.R. Debit Credit

2020

Oct-20 Office Equipment J1 P25,000

Accounts Payable J1 P25,000

Date Column
It shows the date of the occurrence of the transactions. The same year and
month for every entry should not be rewritten unless there will be changes in the year
and month or a new page is needed.

Particulars
It shows the account debited and credited as well as brief explanation of the
transactions. The account debited is entered as the extreme left of the first line; the
credit account is entered slightly indented on the next line. The brief explanation of the
transaction is entered on the next line slightly indented from the credit account.

Posting Reference (P.R.)

It is used when the entries are posted and the amounts are transferred to the
related ledger account.

Debit Column
The first money column wherein the amount of the debit account is entered.
Credit Column
The second money column wherein the amount of the credit account is
entered.
Illustration: Business Transactions
Given the following transactions and Journal entry in General Journal. Prepare
T-Account (Debit and Credit).

ABC Company

2020

Jan-
05

Tan invested P500,000 cash in the business

6 Purchased supplies on cash, P5,000

8 Purchased office equipment on account, P10,000

10 Performed services amounting to P20,000

11 Paid salaries to employees amounting to P10,000

12 Paid purchased office equipment

15 Withdrew cash, P1,000

Journal Entry: General Journal

GENERAL JOURNAL
Date Particulars P.R. Debit Credit

2020

Jan-05 Cash J1 P500,000

Tan, Capital J1 P500,000

To record investment of the business

GENERAL JOURNAL

Date Particulars P.R. Debit Credit

2020

6 Supplies J1 P5,000

Cash J1 P5,000

To record purchased of supplies

GENERAL JOURNAL

Date Particulars P.R. Debit Credit

2020

8 Office Equipment J1 P10,000

Accounts Payable J1 P10,000

To record purchased of Office equipment on
account

GENERAL JOURNAL

Date Particulars P.R. Debit Credit

2020

10 Cash J1 P20,000

Service Revenue J1 P20,000

To record revenue

GENERAL JOURNAL

Date Particulars P.R. Debit Credit

2020

11 Salaries Expense J1 P10,000

Cash J1 P10,000

To record payment of salaries

GENERAL JOURNAL
Date Particulars P.R. Debit Credit

2020

12 Accounts Payable J1 P10,000

Cash J1 P10,000

To record payment of office equipment

GENERAL JOURNAL

Date Particulars P.R. Debit Credit

2020

12 Tan, Withdrawals J1 P1,000

Cash J1 P1,000

To record payment of office equipment

T-Account: General Ledger

Cash

Jan-05 P500,000 P5,000 Jan-06

10 20,000 10,000 11

10,000 12

1,000 15
P520,000 P26,000

P494,000

Supplies

Jan-06 P5,000

Office Equipment

Jan-08 P10,000

Accounts Payable

P10,000 Jan-08
Tan, Capital

P500,000 Jan-05

Tan, Withdrawals

Jan 15 P10,000

Service Revenue

P10,000 Jan-10

Salaries Expense
Jan-11 P10,000

LESSON 7

NATURE AND CONCEPT

The definition of accounting period by the Committee on Accounting Terminology
of the American Institute of Certified Public Accountant (AICPA) identifies the basic
phases of accounting as follows:

• Recording
• Classifying
• Summarizing
• Interpreting

The three phases are considered the mechanical phase of accounting and the
last phase is the analytical phase. These phases of accounting are done during the
accounting period of a business organization. To complete the accounting period, the
business organization must follow a cycle or a process in order to generate the purpose
of accounting that is to accounting users the information needed in making a managerial
decision. These cycle is considered the phases of accounting.

SIMPLE JOURNAL ENTRY

January 2- Seo Jung Hu invested P500, 000 in the business Healer Catering
Service.

GENERAL JOURNAL

Date Account Title / Explanation P.R. Debit Credit

2020

Jan-02 Cash J1 P500,000

Seo Jung Hu J1 P500,000

To record initial investment in the business

Analysis: What is increased in the business? Cash, if cash is increased, on what side
are you going to record it, debit or credit? Debit, who increased the cash account of the
business? The owner gave P100, 000 to the business. What account represents the
owner’s investment? Owner’s capital account, what happened to the owner’s capital
account, increased or decreased? Increase, where is the original side of the capital
account? Credit, therefore, debit cash and credit Seo Jung Hu, Capital.

January 3- Seo Jung Hu paid business permit to legally operate the business P5,
000.

GENERAL JOURNAL

Date Account Title / Explanation P.R. Debit Credit

2020

Jan-03 Taxes and License Expense J1 P5,000

Cash J1 P5,000

To record payment of business permit

Analysis: What happened to the Cash, if the business paid? Decreased, where is the
opposite side of cash? Credit, why did the business’ cash decrease? Because, the
business paid its taxes and license. What account is taxes and license expense? These
are deduction to the business revenue and therefore, decrease the capital account.
What side is the decrease in the capital account? Debit side. Therefore, Debit taxes and
license expense and credit cash.

January 5- Bought kitchen equipment for cash, P75,000.

GENERAL JOURNAL

Date Account Title / Explanation P.R. Debit Credit

2020

Jan-05 Kitchen Equipment J1 P75,000

Cash J1 P75,000

To record purchased of kitchen equipment

Analysis: What account is increased in the business? Kitchen Equipment, what

element is kitchen equipment, is it asset, liability, capital? Asset, so asset is increased.
What side will the business record kitchen equipment if this is an asset and increased?
Debit side, how did the business acquire the kitchen equipment? In cash, therefore,
debit kitchen equipment and credit cash.

January 6- Purchased catering supplies for cash, P20, 000.

GENERAL JOURNAL

Date Account Title / Explanation P.R. Debit Credit

2020

Jan-06 Catering Supplies J1 P20,000

Cash J1 P20,000

To record purchased of catering supplies

Analysis: What account is increased in the business? Catering Supplies, what element
is catering supplies, is it asset, liability, capital? Asset, so asset is increased. What side
will the business record catering supplies if this is an asset and increased? Debit side,
how did the business acquire the catering supplies? In cash, therefore, debit catering
supplies and credit cash.
January 10- Performed Services to a wedding reception, P100, 000.

GENERAL JOURNAL

Date Account Title / Explanation P.R. Debit Credit

2020

Jan-10 Cash J1 P100,000

Catering Revenue J1 P100,000

To record performance of services

Analysis: What did the company do? Performed catering service to a wedding
reception for cash. When the company performed services, what happened to the
capital account of the business? Increased, where will the business record the account
catering revenue? Credit, why because it increases capital account. When the business
performed services, what did the company received in return? Cash, therefore, debit
cash and credit catering revenue.
January 11- Paid the food supplies used in catering business, P30, 000.

GENERAL JOURNAL

Date Account Title / Explanation P.R. Debit Credit

2020

Jan-11 Food Supplies Expense J1 P30,000

Cash J1 P30,000

To record payment of food supplies

Analysis: What happened to cash? It was decreased so it must be on the credit side.
Why is it credited? Because the business paid for food supplies used during the
occasion. Therefore, debit food supplies expense and credit cash.
January 15- Paid salaries of waiters and helpers, P20, 000.

GENERAL JOURNAL

Date Account Title / Explanation P.R. Debit Credit

2020

Jan-15 Salaries Expense J1 P20,000

Cash J1 P20,000

To record payment of salaries

Analysis: What happened to cash? It was decreased because the business paid
salaries to employees of the business. Therefore, debit salaries expense and credit
cash.

January 20- Performed services amounting P75, 000. Business received P50, 000
cash and the balance on account.

GENERAL JOURNAL

Date Account Title / Explanation P.R. Debit Credit

2020

Jan-20 Cash J1 P50,000

Accounts Receivable J1 25,000

Catering Revenue J1 P75,000

To record performance of
services

Analysis: Why did the business received cash? Because the business performed
catering services and in turn the business received cash partially and a promise of
payment in the future from the guest, there will be two debits and one credit. Therefore,
debit cash and account receivables, and credit catering revenue.

January 25- Received meralco bill, maynilad bill, and telephone bill, P17, 000.

GENERAL JOURNAL

Date Account Title / Explanation P.R. Debit Credit

2020

Jan-25 Utilities Expense J1 P17,000

Utilities Payable J1 P17,000

To record expenses for

light, water, and telephone bill.

Analysis: Did the business paid the Meralco bill, Maynilad bill, and telephone bill? No,
but the business already incurred those expenses which are aggregated into utilities
and must be paid in the future, hence the expense and the liabilities must be recognized.
Therefore, debit utilities expense and credit utilities payable.

January 27- Purchased food supplies on account, P30, 000

GENERAL JOURNAL

Date Account Title / Explanation P.R. Debit Credit

2020
Jan-27 Food Supplies J1 P30,000

Accounts Payable J1 P30,000

To record purchased of
food supplies on account

Analysis: How did the business created a liability? The business purchased food
supplies to be used in the business but did not pay them yet and in return will pay them
in the future. Therefore, debit food supplies and credit accounts payable.

January 28- Collected the balance of the January 20, transaction.

GENERAL JOURNAL

Date Account Title / Explanation P.R. Debit Credit

2020

Jan-28 Cash J1 P25,000

Accounts Receivable J1 P25,000

To record collection from

customers on account

Analysis: Why did the business received cash? Business’ cash is increased because
the business collected the balance on customers on account who promised to pay the
business in the future on services performed on January 20. Therefore, debit cash and
credit account receivable.

January 29- Paid Meralco, Maynilad and telephone bill incurred in the period.

GENERAL JOURNAL
Date Account Title / Explanation P.R. Debit Credit

2020

Jan-29 Utilities Payable J1 P17,000

Cash J1 P17,000

To record payment of
utilities for the period.

Analysis: What happened to cash? Decreased, thus, it is recorded on the credit side.
Why is it decreased? Because the business paid the bills was billed earlier. Therefore,
debit Utilities payable credit cash.

January 30- Paid the food supplies on January 27.

GENERAL JOURNAL

Date Account Title / Explanation P.R. Debit Credit

2020

Jan-30 Accounts Payable J1 P30,000

Cash J1 P30,000

To record payment of food

supplies on account

Analysis: What happened to cash? Decreased, because the business paid the food
supplies used in the period. Therefore, debit accounts payable and credit cash.
January 31- Withdrew cash for personal use, P20, 000.

GENERAL JOURNAL

Date Account Title / Explanation P.R. Debit Credit

2020

Jan-31 Seo Jung Hu, Withdrawals J1 P20,000

Cash J1 P20,000

To record withdrawals for

the period

Analysis: What happened to the capital of the owner? The owner withdrew cash from
the business for personal use, hence, the cash account is decreased and the capital
account also decreased through its contra account. Therefore, debit Seo Jung Hu,
withdrawals and credit cash.

SIMPLE POSTING IN THE T-ACCOUNT (GENERAL LEDGER) continuation of

Journal Entry where in the accounts used in the business transactions are being
classify.

Cash 110

Jan-02 P500,000 P5,000 Jan-03

10 100,000 75,000 5

20 50,000 20,000 6

28 25,000 30,000 11

20,000 15
17,000 29

30,000 30

20,000 31

P675,000 P217,000

P458,000

Accounts Receivable 120

Jan-20 P25,000 P25,000 Jan-28

Catering Supplies 130

Jan-06 P20,000

Food Supplies 140

Jan-27 P30,000
Kitchen Equipment 150

Jan-05 P75,000

Accounts Payable 210

Jan-30 P30,000 P30,000 Jan-27

Utilities Payable 220

Jan-29 P17,000 P17,000 Jan-25

Seo Jung Hu, capital 310

P500,000 Jan-02

Seo Jung Hu, withdrawals 320

Jan-31 P20,000

Catering Revenue 410

P100,000 Jan-10

75,000 20

P175,000

Taxes and License Expense

510
Jan-3 P5,000

Food Supplies Expense 520

Jan-11 P30,000

Salaries Expense 530

Jan-30 P20,000

Utilities Expense 540

Jan-25 P17,000
THE TRIAL BALANCE
A trial balance is a list of accounts with open balances in the general ledger
which are arranged according to liquidity. This usually prepared at the end of each
month. The total of the accounts with debit balances must equal to the total of the
accounts with credit balances.
A trial balance is prepared to examine the fairness of the debits and the credits
of the accounts. If these balances did not equal then it signals that there was or were
error in the recording and in the posting of the business transactions. Also, trial balance
helps in the preparation of the financial statements.

HEALER COMPANY

Unadjusted Trial Balance

January 31, 2020

Account Number Account Title Debit Credit

110 Cash P458,000

130 Catering Supplies 20,000

140 Food Supplies 30,000

150 Kitchen Equipment 75,000

310 Seo Jung Hu, Capital P500,000

320 Seo Jung Hu, Withdrawals 20,000

410 Catering Revenue 175,000

510 Taxes and License Expense 5,000

520 Food Supplies Expense 30,000

530 Salaries Expense 20,000

540 Utilities Expense 17,000

TOTAL P675,000 P675,000

ADJUSTING ENTRIES
Accounting is the “language of business”, hence there is a need to prepare a
correct, accurate, timely, and relevant financial statements which will used by the users
of accounting information in making decisions in the future. However, there are some
accounts recorded and posted in the books that need to be corrected or in other words
need to be adjusted to conform to the correct balance at a given period of time. These
accounts included the unrecorded income and expense and the undervaluation or
overvaluation of assets and liabilities. The adjusting entries are recorded also in the
general journal. The following are the usual adjustments made at the closing stages of
the business cycle a servicing business prior to the preparation of the financial
statements:

1. Unused supplies
2. Prepaid expenses
3. Accrued expenses
4. Unearned income
5. Accrued income
6. Bad debts
7. Depreciation

Unused Supplies
These are supplies that remain unused at the end of the business cycle. At the
time they are bought they can be recorded as an asset.

Prepaid Expenses
Occasionally called deferred expense are expenses already paid in advance but
not yet incurred.

Accrued Expenses
These are expenses already incurred but not yet paid.

Unearned Income
It is an income collected in advance but not yet performed.

Accrued Income
It is an income which has been already performed but not yet collected.\

Bad debts
It is uncollectible accounts or doubtful accounts are contra account to accounts
receivable. Companies which provide services on account to generate more revenues
would seldom collect the one hundred percent of their receivables. Hence, an allowance
for uncollectible account is allowed for receivables. When the allowance for bad debts is
deducted from account receivable, the net realizable value is computed.

Depreciation
It is estimated allocated amount for the gradual usage of a fixed asset during the
accounting period. Proper accounting requires the allocation of the cost of the asset
over its useful life. Depreciation is computed by deducting the salvage value of the
property from its cost, then divide it by its useful estimated life.

The adjustments for the period were as follows:

1. A count of the catering supplies shows only P7, 000 worth still on hand.

ADJUSTING ENTRY

Date Account Title / Explanation P.R. Debit Credit

2020

Catering Supplies Expense P13,000

Catering Supplies P13,000

1. The food supplies used for the period was P8,000

ADJUSTING ENTRY

Date Account Title / Explanation P.R. Debit Credit

2020

Food Supplies Expense P8,000

Food Supplies P8,000

1. Kitchen Equipment has a ten year life with no salvage value.

ADJUSTING ENTRY

Date Account Title / Explanation P.R. Debit Credit

2020

Depreciation Expense- Kitchen Equipment P625

Accumulated Depreciation- Kitchen Equipment P625

COMPUTATION FOR DEPRECTAION

Cost of the Asset - Salvage Value

Estimated Useful Life

COMPUTATION FOR DEPRECTAION

P75,000 – 0

10 years

1. Salaries of helper at the end of the period which was not yet recorded
was P6, 000

ADJUSTING ENTRY

Date Account Title / Explanation P.R. Debit Credit

2020
Salaries Expense P6,000

Salaries Payable P6,000

Illustration of Unadjusted Trial balance, Adjustments, and Adjusted Trial balance

Unadjusted Trial Adjusted Trial

Adjustments
Balance Balance

Account Title Debit Credit Debit Credit Debit Credit

Cash P458,000 P458,000

Catering Supplies 20,000 P13,000 7,000

Food Supplies 30,000 8,000 22,000

Kitchen Equipment 75,000 75,000

Seo Jung Hu, Capital P500,000 P500,000

Seo Jung Hu,

20,000 20,000
Withdrawals

Catering Revenue 175,000 175,000

Taxes and License

5,000 5,000
Expense
Food Supplies Expense 30,000 P8,000 38,000

Salaries Expense 20,000 6,000 26,000

Utilities Expense 17,000 17,000

TOTAL P675,000 P675,000 P675,000 P675,000

Depreciation Expense-
625 625
Kitchen Equipment

Catering Supplies
13,000 13,000
Expense

Accumulated
Depreciation- Kitchen 625 625
Equipment

Salaries Payable 6,000 6,000

TOTAL P27,625 P27,625 P681,625 P681,625

HEALER COMPANY

Adjusted Trial Balance

January 31, 2020

Account Title Debit Credit

Cash P458,000

Catering Supplies 7,000

Food Supplies 22,000

Kitchen Equipment 75,000

Seo Jung Hu, Capital P500,000

Seo Jung Hu, Withdrawals 20,000

Catering Revenue 175,000

Taxes and License Expense 5,000

Food Supplies Expense 38,000

Salaries Expense 26,000

Utilities Expense 17,000

TOTAL P675,000 P675,000

Depreciation Expense- Kitchen Equipment 625

Catering Supplies Expense 13,000

Accumulated Depreciation- Kitchen Equipment 625

Salaries Payable 6,000

TOTAL P681,625 P681,625

Sample of Income Statement

HEALER COMPANY

Income Statement

For the Month Ended January 31, 2020

Catering Revenue P175,000

Less: Expenses

Taxes and Licenses Expense 5,000

Food Supplies Expense 38,000

Salaries Expense 26,000

Utilities Expense 17,000

Catering Supplies Expense 13,000

Depreciation Expense- Kitchen Equipment 625

Total Expenses 99,625

Net Profit P75,375*

Sample of Capital Statement

HEALER COMPANY

Capital Statement

For the Month Ended January 31,

2020
Beginning Capital P500,000

Add: Net Income P75,375*

Total 575,375

Less: Drawings 20,000

Ending Capital P555,375

Sample of Cash Flow Statement

HEALER COMPANY

Cash Flow Statement

For the Month Ended January 31, 2020

Cash Flow from Operating Activities

Performance of services P150,000

Collection of Accounts Receivable 25,000

Payment of Accounts Payable (P30,000)

Payment of Business permit (P5,000)

Payment of catering supplies (P20,000)

Payment of food supplies (P30,000)

Payment of salaries (P20,000)

Payment of utilities (P17,000)

Net Cash Flow from Operating Activities P53,000

Cash Flow from Investing Activity

Payment for the Purchased of Kitchen Equipment (P75,000)

Net Cash Flow from Investing Activities (P75,000)

Cash Flow from Financing Activities

Investment of the owner P500,000

Withdrawal of the owner (P20,000)

Net Cash Flow from Financing Activities P480,000

NET CASH FLOWS P458,000*

Sample of Balance Sheet

Balance Sheet

January 31, 2020

ASSETS

Current Assets

Cash P458,000*

Catering Supplies 7,000

Food Supplies 22,000

Total Current Asset P487,000

Non-Current Assets

Kitchen Equipment P75,000

Less: Accumulated Depreciation 625

Total Non-Current Asset P74,375

TOTAL ASSETS P561,375

LIABILITIES AND EQUITY

Current Liability

Salaries Payable P6,000

Total Liability P6,000

Beginning Capital P500,000

Add: Net Income P75,375

Total 575,375

Less: Drawings 20,000

Total Equity P555,375

TOTAL LIABILITY AND EQUITY P561,375

HEALER COMPANY

WORK SHEET

JANUARY 31, 2020

Unadjusted Trial Adjusted Trial

Adjustments Income Statement Balance
Balance Balance

Account
Debit Credit Debit Credit Debit Credit Debit Credit Debit
Title

Cash P458,000 P458,000 P458,00

Catering
20,000 P13,000 7,000 7,000
Supplies

Food
30,000 8,000 22,000 22,000
Supplies

Kitchen
75,000 75,000 75,000
Equipment

Seo Jung
P500,000 P500,000
Hu, Capital

Seo Jung
Hu, 20,000 20,000 20,000
Withdrawals

Catering
175,000 175,000 175,000
Revenue

Taxes and 5,000 5,000 5,000

License
Expense

Food
Supplies 30,000 P8,000 38,000 38,000
Expense

Salaries
20,000 6,000 26,000 26,000
Expense

Utilities
17,000 17,000 17,000
Expense

TOTAL P675,000 P675,000 P675,000 P675,000

Depreciation
Expense-
625 625 625
Kitchen
Equipment

Catering
Supplies 13,000 13,000 13,000
Expense

Accumulated
Depreciation-
625 625
Kitchen
Equipment

Salaries
6,000 6,000
Payable

TOTAL P27,625 P27,625 P681,625 P681,625 P99,625 P175,000 P582,00

Net Income 75,275

GRAND
P175,000 P175,000 P582,00
TOTAL