Basic Accounting Ppt 3

8/4/2019 Basic Accounting Ppt 3

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ACCOUNTINGACCOUNTING

FUNDAMENTALFUNDAMENTALBY:BY:

Bayani D. EdlaganBayani D. Edlagan

Ma. Cecilia S. MercadoMa. Cecilia S. Mercado


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INTRODUCTIONINTRODUCTION

This presentation covers the concepts and practice ofThis presentation covers the concepts and practice ofaccounting fundamental. From the concepts and informationaccounting fundamental. From the concepts and informationabout accounting up to the accounting cycle, which includesabout accounting up to the accounting cycle, which includes

journalizing, reversing and closing entries. Accounting is ajournalizing, reversing and closing entries. Accounting is aprofession similar to medicine and law. Such professionprofession similar to medicine and law. Such profession

continually evolve and change as society and the needs ofcontinually evolve and change as society and the needs ofsociety change.society change.

The objective of this presentation is to make people awareThe objective of this presentation is to make people awareof how accounting works in relation to business and also howof how accounting works in relation to business and also howcan it be helpful even in a simple way of living. This alsocan it be helpful even in a simple way of living. This also

emphasized the importance of accounting in any types ofemphasized the importance of accounting in any types ofbusiness. Little by little, you will be able to understand howbusiness. Little by little, you will be able to understand howaccounting works and you will realize its significance to ouraccounting works and you will realize its significance to ourdaily living.daily living.

This presentation is based on the book of Bayani D.This presentation is based on the book of Bayani D.Edlagan and Ma. Cecilia S. Mercado, AccountingEdlagan and Ma. Cecilia S. Mercado, AccountingFundamental.Fundamental.


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CHAPTER 1CHAPTER 1Introduction to AccountingIntroduction to Accounting

Concepts and PracticeConcepts and Practice


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CHARACTERISTICS OF ACCOUNTINGCHARACTERISTICS OF ACCOUNTING

INFORMATIONINFORMATION

Accounting information is composed principallyAccounting information is composed principallyof financial data about business transactions,of financial data about business transactions,expressed in terms of money. The mere recordsexpressed in terms of money. The mere recordsof transactions are of little use in makingof transactions are of little use in making

informed judgments and decisions. Theinformed judgments and decisions. Therecorded data must be sorted and summarizedrecorded data must be sorted and summarized

before significant reports and analyses can bebefore significant reports and analyses can beprepared.prepared.

The basic raw materials of accounting areThe basic raw materials of accounting arecomposed of business transaction data. Itscomposed of business transaction data. Itsprimary end products are composed of variousprimary end products are composed of various

summaries, analyses, and reports.summaries, analyses, and reports.


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USERS OF ACCOUNTING INFORMATIONUSERS OF ACCOUNTING INFORMATION

Accounting provides the techniques for accumulatingAccounting provides the techniques for accumulatingand the language for communicating economic data toand the language for communicating economic data tovarious categories of individuals and institutions.various categories of individuals and institutions.Investors in a business enterprise need informationInvestors in a business enterprise need information

about its financial status and its future prospects. Theabout its financial status and its future prospects. Thegovernment agencies are concerned with the financialgovernment agencies are concerned with the financialactivities of business organizations for purposes ofactivities of business organizations for purposes oftaxation and regulation.taxation and regulation.

The individuals most dependent upon and mostThe individuals most dependent upon and mostinvolved with the end products of accounting are thoseinvolved with the end products of accounting are thosecharged with the responsibility for directing thecharged with the responsibility for directing theoperations of enterprises.operations of enterprises.


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USERS OF ACCOUNTING INFORMATIONUSERS OF ACCOUNTING INFORMATION

For example, in the conduct of day-to-day operations,For example, in the conduct of day-to-day operations,management relies upon accounting to provide themanagement relies upon accounting to provide theamount owed to each creditor and by each customeramount owed to each creditor and by each customerand the date each payment is due.and the date each payment is due.

The relevant information for one category of usersThe relevant information for one category of usersmay differ markedly from that needed by other users.may differ markedly from that needed by other users.Once the user groups are identified, however, and theOnce the user groups are identified, however, and the

nature of the relevant data determined, the accountantnature of the relevant data determined, the accountantis able to establish an information network to assistis able to establish an information network to assisteach group in forming judgments and makingeach group in forming judgments and makingdecisions regarding future actions.decisions regarding future actions.


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RELATIONSHIP OF ACCOUNTING TORELATIONSHIP OF ACCOUNTING TO

OTHER FIELDSOTHER FIELDS

Everyone engaged in business activities, from theEveryone engaged in business activities, from theyoungest employee to the manager and owner, comesyoungest employee to the manager and owner, comesinto contact with accounting. The higher the level ofinto contact with accounting. The higher the level ofauthority and responsibility, the greater is the need forauthority and responsibility, the greater is the need foran understanding of accounting concepts andan understanding of accounting concepts andterminology.terminology.

The importance of understanding accounting is notThe importance of understanding accounting is notlimited to the business world. Many employees withlimited to the business world. Many employees withspecialized training in non-business areas also makespecialized training in non-business areas also makeuse of accounting data and should understanduse of accounting data and should understandaccounting principles and terminology.accounting principles and terminology.


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PROFESSION OF ACCOUNTANCYPROFESSION OF ACCOUNTANCY

Accountancy is a profession with stature comparable to that ofAccountancy is a profession with stature comparable to that ofengineering or law. The rapid development of accountingengineering or law. The rapid development of accountingtheory and technique during the current century has beentheory and technique during the current century has beenaccompanied by an expansion of the career opportunities inaccompanied by an expansion of the career opportunities in

accounting and an increasing number of professionally trainedaccounting and an increasing number of professionally trainedaccountants.accountants. Accountants who render accounting services on a fee basis, andAccountants who render accounting services on a fee basis, and

staff accountants employed by them, are said to be engaged instaff accountants employed by them, are said to be engaged inpublic accountingpublic accounting. Accountants employed by a particular. Accountants employed by a particular

business enterprise or not-for-profit organization, as chiefbusiness enterprise or not-for-profit organization, as chiefaccountant, controller, or financial vice-president, are said to beaccountant, controller, or financial vice-president, are said to beengaged inengaged in private accounting.private accounting.


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PUBLIC ACCOUNTINGPUBLIC ACCOUNTING

The practice of public accounting is generally restricted toThe practice of public accounting is generally restricted tolicensed CPAs. Recognizing the need for reliable professionallicensed CPAs. Recognizing the need for reliable professionalaccounting service, the Philippine Legislature passed theaccounting service, the Philippine Legislature passed theAccountancy Act in March 1923. This act created the Board ofAccountancy Act in March 1923. This act created the Board of

Accountancy which was given the power among other, to issueAccountancy which was given the power among other, to issuethe certificate of Certified Public Accountant, abbreviated asthe certificate of Certified Public Accountant, abbreviated asCPA. In May 1975, The revised Accountancy Law was releasedCPA. In May 1975, The revised Accountancy Law was releasedwhich define the practice of accountancy to include not onlywhich define the practice of accountancy to include not onlyCPAs in public practice, but also those in private accounting, inCPAs in public practice, but also those in private accounting, in

government services and in education, and increased thegovernment services and in education, and increased thecontents and coverage of subjects in the CPA examinations.contents and coverage of subjects in the CPA examinations.


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PUBLIC ACCOUNTINGPUBLIC ACCOUNTING

In Section 10 of the Law, it is provided that: an applicant for theIn Section 10 of the Law, it is provided that: an applicant for theCPA certificate must be a Filipino citizen (or a citizen ofCPA certificate must be a Filipino citizen (or a citizen offoreign country granting reciprocal privileges, by law, toforeign country granting reciprocal privileges, by law, toFilipino with respect to the practice of accountancy), of goodFilipino with respect to the practice of accountancy), of goodmoral character and at least twenty one year of age. He/shemoral character and at least twenty one year of age. He/shemust be a holder of a degree of Bachelor of Science inmust be a holder of a degree of Bachelor of Science in

Commerce or its equivalent from any college or universityCommerce or its equivalent from any college or universityrecognized by the government.recognized by the government.

The CPA candidate is required to successfully pass a writtenThe CPA candidate is required to successfully pass a writtenexamination, given by the Board of Accountancy, coveringexamination, given by the Board of Accountancy, coveringtheory of accounts, business law, taxation, managementtheory of accounts, business law, taxation, management

advisory services, auditing theory, auditing theory, auditingadvisory services, auditing theory, auditing theory, auditingproblems, practical accounting problem1, problem 2. Toproblems, practical accounting problem1, problem 2. Topractice public accountancy, CPAs and firms or partnerships,practice public accountancy, CPAs and firms or partnerships,including partners and staff members must register with theincluding partners and staff members must register with theProfessional Regulation Commission, such registration to beProfessional Regulation Commission, such registration to bemade annually.made annually.


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PRIVATE ACCOUNTINGPRIVATE ACCOUNTING

The scope of activities and duties of privateThe scope of activities and duties of privateaccountants varies widely. Private accountants areaccountants varies widely. Private accountants arefrequently called management accountants. If they arefrequently called management accountants. If they areemployed by a manufacturing concern, they may beemployed by a manufacturing concern, they may be

call industrial or cost accountants. The chiefcall industrial or cost accountants. The chiefaccountant in a business may be call controller.accountant in a business may be call controller.Various governmental units and other not-for-profitVarious governmental units and other not-for-profitorganizations also employ accountants.organizations also employ accountants.

Internal auditors are accountants who review theInternal auditors are accountants who review theaccounting and operating procedures prescribed byaccounting and operating procedures prescribed bytheir companies. Accountants who specialize intheir companies. Accountants who specialize ininternal auditing may be granted theinternal auditing may be granted the CertifiedCertifiedInternal Auditor (CIA)Internal Auditor (CIA) certificate.certificate.


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For example, an engineer responsible for selecting theFor example, an engineer responsible for selecting themost desirable solution to a technical manufacturingmost desirable solution to a technical manufacturing

problem may consider cost accounting data to be theproblem may consider cost accounting data to be thedecisive factor. Lawyers use accounting data in taxdecisive factor. Lawyers use accounting data in tax

cases and in lawsuits involving property ownershipcases and in lawsuits involving property ownershipand damages from breach of contract. Governmentaland damages from breach of contract. Governmentalagencies rely on accounting data in evaluating theagencies rely on accounting data in evaluating theefficiency of government operations and for appraisingefficiency of government operations and for appraisingthe feasibility of proposed taxation and spendingthe feasibility of proposed taxation and spending

programs. Accounting plays an important role inprograms. Accounting plays an important role inmodern society and, broadly speaking, all citizens aremodern society and, broadly speaking, all citizens areaffected by accounting in some way.affected by accounting in some way.

RELATIONSHIP OF ACCOUNTING TORELATIONSHIP OF ACCOUNTING TO

OTHER FIELDSOTHER FIELDS


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SPECIALIZED ACCOUNTING FIELDSPECIALIZED ACCOUNTING FIELD

FINANCIAL ACCOUNTINGFINANCIAL ACCOUNTING

It is concerned with the recording ofIt is concerned with the recording oftransactions for a business enterprise or othertransactions for a business enterprise or other

economic unit and the periodic preparation ofeconomic unit and the periodic preparation ofvarious reports from such records. Corporatevarious reports from such records. Corporateenterprise must employ such principles inenterprise must employ such principles in

preparing their annual reports on profitabilitypreparing their annual reports on profitabilityand financial status for their stockholders andand financial status for their stockholders andthe investing public.the investing public.


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AUDITINGAUDITING

It is a field of activity involving an independent review ofIt is a field of activity involving an independent review ofthe accounting records. In conducting an audit, publicthe accounting records. In conducting an audit, publicaccountants examine the records supporting financial reports ofaccountants examine the records supporting financial reports ofan enterprise and express an opinion regarding their fairnessan enterprise and express an opinion regarding their fairnessand reliability.and reliability.

COST ACCOUNTINGCOST ACCOUNTING

It emphasizes the determination and control of costs. It isIt emphasizes the determination and control of costs. It isconcerned primarily with the costs of manufacturing processesconcerned primarily with the costs of manufacturing processesand of manufactured products, but increasing attention is beingand of manufactured products, but increasing attention is beinggiven to distribution costs. In addition, one of the principalgiven to distribution costs. In addition, one of the principalfunctions of cost accountants is to assemble and interpret costfunctions of cost accountants is to assemble and interpret costdata, both actual and prospective for the use of management indata, both actual and prospective for the use of management incontrolling current operations and in planning for the future.controlling current operations and in planning for the future.


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MANAGEMENT ACCOUNTINGMANAGEMENT ACCOUNTINGIt employs both historical and estimated data in assistingIt employs both historical and estimated data in assistingmanagement in daily operations and in planning futuremanagement in daily operations and in planning futureoperations. It deals with the specific problems that confrontoperations. It deals with the specific problems that confrontenterprise managers at various organizational levels. Theenterprise managers at various organizational levels. Themanagement accountant is frequently concerned withmanagement accountant is frequently concerned withidentifying alternative courses of action and in helping to selectidentifying alternative courses of action and in helping to selectthe best one.the best one.

TAX ACCOUNTINGTAX ACCOUNTING

It encompasses the preparation of tax returns and theIt encompasses the preparation of tax returns and theconsideration of the tax consequences of proposed businessconsideration of the tax consequences of proposed businesstransactions or administrative courses of action. Accountantstransactions or administrative courses of action. Accountantsspecializing in this field, particularly in the area of tax planning,specializing in this field, particularly in the area of tax planning,must be familiar with tax statutes affecting their employer ormust be familiar with tax statutes affecting their employer orclients and also must keep up to date on administrativeclients and also must keep up to date on administrativeregulations and court decisions on tax cases.regulations and court decisions on tax cases.


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ACCOUNTING SYSTEMACCOUNTING SYSTEM

It is the special field concerned with the design andIt is the special field concerned with the design andimplementation of procedures for the accumulation andimplementation of procedures for the accumulation andreporting of financial data. The systems accountant must devisereporting of financial data. The systems accountant must deviseappropriate checks and balances to safeguard business assetsappropriate checks and balances to safeguard business assetsand provide for information flow that will be efficient andand provide for information flow that will be efficient andhelpful to management.helpful to management.

BUDGETARY ACCOUNTINGBUDGETARY ACCOUNTING

It presents the plan of financial operations for a period and,It presents the plan of financial operations for a period and,through records and summaries provides comparisons of actualthrough records and summaries provides comparisons of actualoperations with the predetermined plans. A combination ofoperations with the predetermined plans. A combination of

planning and controlling future operations, it is sometimesplanning and controlling future operations, it is sometimesconcerned to be a part of management accounting.concerned to be a part of management accounting.


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INTERNATIONAL ACCOUNTINGINTERNATIONAL ACCOUNTING

It is concerned with the special problems associated withIt is concerned with the special problems associated withthe international trade of multinational business organizations.the international trade of multinational business organizations.Accountants specialized in this area must be familiar with theAccountants specialized in this area must be familiar with theinfluences of customs law, and taxation of various countriesinfluences of customs law, and taxation of various countries

bear on international operations and accounting principles.bear on international operations and accounting principles. NOT-FOR-PROFIT ACCOUNTINGNOT-FOR-PROFIT ACCOUNTING

It specializes in recording and reporting the transactions ofIt specializes in recording and reporting the transactions ofvarious governmental units and other not-for-profitvarious governmental units and other not-for-profitorganizations such as church, charities, and educationalorganizations such as church, charities, and educationalinstitutions. An essential element in an accounting system thatinstitutions. An essential element in an accounting system thatwill insure strict adherence on the part of management towill insure strict adherence on the part of management torestrictions and other requirements imposed by law, by otherrestrictions and other requirements imposed by law, by otherinstitutions, or by individual donors.institutions, or by individual donors.


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SOCIAL ACCOUNTINGSOCIAL ACCOUNTING

It is the newest field of accounting and is the mostIt is the newest field of accounting and is the most

difficult to describe concisely. One of the engagementdifficult to describe concisely. One of the engagement

in this field involved measurement of traffic patterns inin this field involved measurement of traffic patterns ina densely populated section of the nation (like Metroa densely populated section of the nation (like Metro

Manila) as part of a government study to determine theManila) as part of a government study to determine the

most efficient use of transportation funds, not only inmost efficient use of transportation funds, not only in

terms of facilitating trade but also of assuring a goodterms of facilitating trade but also of assuring a good

environment for the areas residents.environment for the areas residents.


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BOOKKEEPING AND ACCOUNTINGBOOKKEEPING AND ACCOUNTING

BOOKKEEPING is the recording of business data in aBOOKKEEPING is the recording of business data in aprescribed manner. A bookkeeper may be responsible forprescribed manner. A bookkeeper may be responsible forkeeping all the records of a business or only a minor segment,keeping all the records of a business or only a minor segment,such portion of customer accounts in department store. Much ofsuch portion of customer accounts in department store. Much ofthe work of the bookkeeper is critical in nature and increasinglythe work of the bookkeeper is critical in nature and increasingly

being accomplished through the use of mechanical andbeing accomplished through the use of mechanical andelectronic equipment.electronic equipment.

ACCOUNTING is primarily concerned with the design of theACCOUNTING is primarily concerned with the design of thesystem of records, the preparation of reports based on thesystem of records, the preparation of reports based on the

recorded data, and the interpretation of the reports. Accountantsrecorded data, and the interpretation of the reports. Accountantsoften direct and review the work of bookkeeper. In event, theoften direct and review the work of bookkeeper. In event, theaccountant must possess a much higher level of knowledge,accountant must possess a much higher level of knowledge,conceptual understanding, and analytical skill than is requiredconceptual understanding, and analytical skill than is requiredof the bookkeeper.of the bookkeeper.


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BUSINESS ENTITY CONCEPTBUSINESS ENTITY CONCEPT

TheThe business entity conceptbusiness entity concept is based on identifying theis based on identifying theindividual economic units for which economic data areindividual economic units for which economic data areneeded. Once the entity is identified, the accountant canneeded. Once the entity is identified, the accountant candetermine which economic data and activities should bedetermine which economic data and activities should beanalyzed, recorded, and summarized in reports. Theanalyzed, recorded, and summarized in reports. The

business entity concept is based on the applicability ofbusiness entity concept is based on the applicability ofaccounting to individual economic units in society. Theseaccounting to individual economic units in society. Theseindividual economic units include all business enterprisesindividual economic units include all business enterprisesorganized for profit, numerous governmental units, such asorganized for profit, numerous governmental units, such asprovinces, cities, and towns, other bit-for-profit units likeprovinces, cities, and towns, other bit-for-profit units like

church and clubs, and individual persons and family units.church and clubs, and individual persons and family units.The basic economic data for a unit must first be recorded,The basic economic data for a unit must first be recorded,followed by analysis and summarization, and finally byfollowed by analysis and summarization, and finally byperiodic reporting. Thus, accounting applies to eachperiodic reporting. Thus, accounting applies to eachseparate economic unit.separate economic unit.


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BUSINESS ENTITY CONCEPTBUSINESS ENTITY CONCEPT

This subject is concerned primarily with theThis subject is concerned primarily with the

accounting principles and techniques applicable toaccounting principles and techniques applicable to

profit making businesses. Such businesses areprofit making businesses. Such businesses are

customarily organized as a sole proprietorship,customarily organized as a sole proprietorship,partnerships, or corporations. Apartnerships, or corporations. A sole proprietorshipsole proprietorship

is owned by one individual. And is owned by two oris owned by one individual. And is owned by two or

more individual in accordance with a contractualmore individual in accordance with a contractual

agreement. Aagreement. A corporation,corporation, organized in accordanceorganized in accordancewith the Corporation Law, is a separate legal entity inwith the Corporation Law, is a separate legal entity in

which ownership is divided into shares of stock.which ownership is divided into shares of stock.


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ACTIVITIES PERFORMED BY BUSINESSACTIVITIES PERFORMED BY BUSINESS

ORGANIZATIONORGANIZATION

SERVICESERVICE

Companies perform services for a fee.Companies perform services for a fee.

Example: Accounting firms, law firms, and other serviceExample: Accounting firms, law firms, and other serviceestablishmentsestablishments

MERCHANDISINGMERCHANDISING

Companies purchase goods that are ready for sale and thenCompanies purchase goods that are ready for sale and thensell these goods to customers.sell these goods to customers.

MANUFACTURINGMANUFACTURING

Companies buy raw materials, convert them into anotherCompanies buy raw materials, convert them into anotherform of products and the sell the products to other companies orform of products and the sell the products to other companies orto final consumers.to final consumers.


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BUSINESS TRANSACTIONSBUSINESS TRANSACTIONS

AA business transactionbusiness transaction is the occurrence ofis the occurrence of

an event or of a condition that must bean event or of a condition that must be

recorded. A particular business transactionrecorded. A particular business transaction

may lead to an event or condition thatmay lead to an event or condition that

constitutes another transaction.constitutes another transaction.


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ASSETS, LIABILITIES, AND CAPITALASSETS, LIABILITIES, AND CAPITAL

The properties owned by a business enterprise areThe properties owned by a business enterprise are

referred to as assets and the rights or claims to thereferred to as assets and the rights or claims to the

properties are referred to as equities. If the assetsproperties are referred to as equities. If the assets

owned by the business amount to P1,000,000, theowned by the business amount to P1,000,000, theequities on the assets must also amount to P1,000,000.equities on the assets must also amount to P1,000,000.

The relation between the two may be stated in the formThe relation between the two may be stated in the form

of an equation, as follows:of an equation, as follows:

Assets = EquitiesAssets = Equities


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Equities may be subdivided into two types: theEquities may be subdivided into two types: the

right of creditors and the rights of owner. The equitiesright of creditors and the rights of owner. The equities

of creditors represents debts of the business and areof creditors represents debts of the business and are

calledcalled liabilities.liabilities. The equity of the owners is calledThe equity of the owners is calledcapital or owners equity.capital or owners equity. Expansion of the equationExpansion of the equation

to give recognition to the two basic types of equitiesto give recognition to the two basic types of equities

yields the following, which is known as theyields the following, which is known as the

accounting equation:accounting equation:

Assets = Liabilities + Capital (or Owners Equity)Assets = Liabilities + Capital (or Owners Equity)


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It is customary to place Liabilities before Capital inIt is customary to place Liabilities before Capital inthe accounting equation because creditors have preferentialthe accounting equation because creditors have preferentialrights to the assets. The residual claim of the owner or ownersrights to the assets. The residual claim of the owner or ownersis sometimes given greater emphasis by transposing liabilitiesis sometimes given greater emphasis by transposing liabilities

to the other side of the equation, yielding:to the other side of the equation, yielding:

Asset - Liabilities = CapitalAsset - Liabilities = Capital

Every business transaction affects the assets, liabilitiesEvery business transaction affects the assets, liabilitiesand/or capital of the business. However, the changes in theseand/or capital of the business. However, the changes in theseitems are such that the equality of two sides of the accountingitems are such that the equality of two sides of the accountingequation is always maintained.equation is always maintained.


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RULES OF DEBIT AND CREDITRULES OF DEBIT AND CREDIT

Based on the positions of increases andBased on the positions of increases anddecreases in an account for an asset, liability,decreases in an account for an asset, liability,or capital item, the rules of debit and creditor capital item, the rules of debit and credit

may be stated as follows:may be stated as follows:
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ee

TABLE 1.1TABLE 1.1

DEBIT CREDIT

1. Increase in Assets 1. Decrease in Assets

2. Decrease in Liabilities 2. Increase in Liabilities

3. Decrease in Capital 3. Increase in Capital

a. Withdrawal by the

Owner

a. Investment by the Owner

b. Increase in Expenses b. Decrease in Expenses

c. Decrease in Revenue c. Increase in Revenue
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TRANSACTIONS AND THE ACCOUNTINGTRANSACTIONS AND THE ACCOUNTING

EQUATIONEQUATION

All business transactions, from the simplest to the mostAll business transactions, from the simplest to the mostcomplex, can be stated in terms of the resulting change in thecomplex, can be stated in terms of the resulting change in thethree basic elements of the accounting equation. Before athree basic elements of the accounting equation. Before atransaction can be recorded in the book of accounts, it must betransaction can be recorded in the book of accounts, it must beanalyzed into its debit and credit elements. The followinganalyzed into its debit and credit elements. The following

questions will be helpful in analyzing a business transaction;questions will be helpful in analyzing a business transaction;

Which item (items) is/are affected Assets, Liabilities, Capital?Which item (items) is/are affected Assets, Liabilities, Capital? How is each item affected it is increased or decreased?How is each item affected it is increased or decreased?

According to the rules of debit and credit, is the increase or theAccording to the rules of debit and credit, is the increase or thedecrease in the item to be debited or credited?decrease in the item to be debited or credited? What account titles should be used to record the debit or creditWhat account titles should be used to record the debit or credit

item?item?


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DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

Every business transaction has two-fold effect onEvery business transaction has two-fold effect onthe assets, liabilities, and/or capital of the business. Forthe assets, liabilities, and/or capital of the business. Forevery debit element, there is a corresponding creditevery debit element, there is a corresponding creditelement. The money values of these two elements areelement. The money values of these two elements are

equal. The manner of recording both the debit andequal. The manner of recording both the debit andcredit elements of each transaction is referred to ascredit elements of each transaction is referred to asdouble-entry bookkeeping. The double-entrydouble-entry bookkeeping. The double-entry

bookkeeping is preferred because it generally result inbookkeeping is preferred because it generally result inmore accurate accounting records and statements.more accurate accounting records and statements.

Moreover, it affords numerous checks and safeguardMoreover, it affords numerous checks and safeguardwhich reduce to a minimum the chances of losswhich reduce to a minimum the chances of lossthrough intentional r unintentional errors committed bythrough intentional r unintentional errors committed by

personnel.personnel.


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The effect of these changes on theThe effect of these changes on the

accounting equation can be demonstrated byaccounting equation can be demonstrated by

studying some typical transactions using thestudying some typical transactions using the

analysis sheet as follows:analysis sheet as follows:


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Table 1.2Table 1.2

ASSETS LIABILITIES CAPITAL


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As the basis of this illustration, assume thatAs the basis of this illustration, assume thaton September 1, 19xx Nick Requijoon September 1, 19xx Nick Requijoestablishes a sole proprietorship to be knownestablishes a sole proprietorship to be known

as Requijo Taxi. Each transaction or group ofas Requijo Taxi. Each transaction or group ofsimilar transactions during the first month ofsimilar transactions during the first month ofoperations is described followed by anoperations is described followed by anillustration of its effect(s) on the accountingillustration of its effect(s) on the accounting

equation and the corresponding two-columnequation and the corresponding two-columnjournal entry and explanation of entry for eachjournal entry and explanation of entry for eachgive transaction.give transaction.



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TRANSACTION ONETRANSACTION ONE

Nick Requijo deposited P500,000 in a bankNick Requijo deposited P500,000 in a bankaccount in the name of Requijo Taxi. Theaccount in the name of Requijo Taxi. The

effect of this transaction is to increase the asseteffect of this transaction is to increase the assetcash by P500,000 and to increase capital, oncash by P500,000 and to increase capital, onthe other side of the equation, by the samethe other side of the equation, by the sameamount. After the transaction, the equation foramount. After the transaction, the equation forRequijo Taxi will appear as follows:Requijo Taxi will appear as follows:

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DD Table 1.3Table 1.3


1 + CashP500,000

+Requijo,Capital

P500,000


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It should be noted that the equation relatesIt should be noted that the equation relatesonly to the business enterprise. Nick Requijosonly to the business enterprise. Nick Requijospersonal assets, such as his home, car, hispersonal assets, such as his home, car, his

personal bank account, and his personalpersonal bank account, and his personalliabilities are excluded from consideration.liabilities are excluded from consideration.The business is treated as a distinct entity, withThe business is treated as a distinct entity, withcash of P500,000 and the owners equity ofcash of P500,000 and the owners equity of

P500,000.P500,000.


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Table 1.4Table 1.4

Date DESCRIPTION PostRef.

Debit Credit

Sept. 1 Cash 500,000

Nick Requijo, Capital 500,00

0

To record investmentof the owner


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The explanation of each debit or creditThe explanation of each debit or credit

entry on the journal is based on the rules ofentry on the journal is based on the rules of

debit and credit. Cash was debited because ofdebit and credit. Cash was debited because of

increase in asset while Capital was creditedincrease in asset while Capital was creditedbecause of increase in capital due tobecause of increase in capital due to

investment of the owner.investment of the owner.



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TRANSACTION TWOTRANSACTION TWO

Requijos next transaction on September 5 is toRequijos next transaction on September 5 is topurchase land as a future building site, for whichpurchase land as a future building site, for which

P100,000 cash is paid. This transaction changes theP100,000 cash is paid. This transaction changes thecomposition of the assets but does not change the totalcomposition of the assets but does not change the totalamount. The items in the equation prior to thisamount. The items in the equation prior to thistransaction, the effects of this transaction, and the newtransaction, the effects of this transaction, and the new

balance after the transaction are as follow:balance after the transaction are as follow:


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Table 1.5Table 1.5


1. + CashP500,000

+ Requijo, CapitalP500,000

2. - CashP100,000

+ LandP100,000


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After the transaction, there is a land costingAfter the transaction, there is a land costing

P100, 000 but the balance is reduced to P400,P100, 000 but the balance is reduced to P400,

000. The total assets composed of cash and000. The total assets composed of cash and

land total to P500, 000. Notice that there is noland total to P500, 000. Notice that there is nochange in the liability and capital items.change in the liability and capital items.



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Table 1.6Table 1.6


Debit Credit

Sept. 5 Land 100,000

Cash 100,000

To record purchaseof land for cash


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In the transaction recorded, there was aIn the transaction recorded, there was a

change in the asset element. Land was debitedchange in the asset element. Land was debited

because of increase in assets while Cash wasbecause of increase in assets while Cash was

credited because of decrease in assets. Thecredited because of decrease in assets. Thereason for the debit and credit comes from thereason for the debit and credit comes from the

rules of debit and credit.rules of debit and credit.


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TRANSACTION THREETRANSACTION THREE

Requijos current plans are to lease cars and otherRequijos current plans are to lease cars and otherequipment from California Bus Company for several monthsequipment from California Bus Company for several monthsuntil he can arrange financing for the purchase of cars and otheruntil he can arrange financing for the purchase of cars and otherequipment and for the construction of garage and storageequipment and for the construction of garage and storage

facilities.facilities.On September 7 Requijo purchases P60, 000 of parts andOn September 7 Requijo purchases P60, 000 of parts and

other supplies from various suppliers, agreeing to pay in theother supplies from various suppliers, agreeing to pay in thenear future. This type of transaction is callednear future. This type of transaction is calledpurchase ofpurchase ofsupplies on accountsupplies on accountand the liability created is termedand the liability created is termed accountsaccounts

payablepayable. Consumable commodities acquired, such as supplies,. Consumable commodities acquired, such as supplies,are considered to be prepaid expenses.are considered to be prepaid expenses. Prepaid expenses arePrepaid expenses areexpenses paid in advance and are classified as asset.expenses paid in advance and are classified as asset.


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In actual practice, each purchase would beIn actual practice, each purchase would beconsidered and recorded as it occurred and aconsidered and recorded as it occurred and aseparated record would be maintained for eachseparated record would be maintained for each

creditor. In this illustration, however, thecreditor. In this illustration, however, thepurchases are recorded as a group. The effectpurchases are recorded as a group. The effectis to increase the assets and liabilities by P600,is to increase the assets and liabilities by P600,000, as indicated below:000, as indicated below:

T bl 1 7


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Table 1.7Table 1.7


1. + CashP500,000


2. - CashP100,000

+ LandP100,000

3. + Supplies P60,000

+ Account PayableP60,000


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After this transaction, the total assets amount toAfter this transaction, the total assets amount toP560, 000 composed of Cash P400, 000, Land P100,P560, 000 composed of Cash P400, 000, Land P100,000, and Supplies P60, 000. The total equity is also000, and Supplies P60, 000. The total equity is alsoP560, 000 composed of Accounts Payable P60, 000P560, 000 composed of Accounts Payable P60, 000

and Capital of P500, 000. The total of the two column,and Capital of P500, 000. The total of the two column,debit and credit, still balance.debit and credit, still balance.


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Table 1.8Table 1.8


Debit Credit

Sept. 7 Supplies 60,000

Accounts Payable 60,000

To record purchase ofsupplies on account


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In the transaction recorded, Supplies (unused) wasdebited because of increase in assets while

Accounts Payable is credited because of increase

in liability.


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TRANSACTION FOURTRANSACTION FOUR

On September 9, P10,000 is paid toOn September 9, P10,000 is paid to

creditors on account, thereby reducing bothcreditors on account, thereby reducing both

assets and liabilities. The effect on theassets and liabilities. The effect on the

equation is as follows:equation is as follows:

T bl 1 9T bl 1 9


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Table 1.9Table 1.9


1. + CashP500,000


2. - CashP100,000

+ LandP100,000


+Account PayableP60,000

4. - Cash P10,000

- Account PayableP10,000


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After this transaction, the total assets amount toAfter this transaction, the total assets amount toP550, 000 composed of Cash P390, 000, Land P100,P550, 000 composed of Cash P390, 000, Land P100,000, and Supplies P60, 000. The total equity is also000, and Supplies P60, 000. The total equity is alsoP550, 000 composed of Accounts Payable P50, 000P550, 000 composed of Accounts Payable P50, 000

and Capital P500, 000. The equation is still balance.and Capital P500, 000. The equation is still balance.


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Table 1.10Table 1.10


Debit Credit

Sept. 9 Accounts Payable 10,

000

Cash 10,000

To record payment ofaccount


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In the transaction recorded, Accounts Payable

was debited because of decrease in liability

while cash was credited because of decrease

in assets.


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TRANSACTION FIVETRANSACTION FIVEThe principal objective of the owner of a businessThe principal objective of the owner of a business

enterprise is to increase capital through earnings. For Nickenterprise is to increase capital through earnings. For NickRequijo, this means that the cash and other assets acquiredRequijo, this means that the cash and other assets acquiredthrough the sale of taxi services must be greater than the cost ofthrough the sale of taxi services must be greater than the cost of

the gasoline and other supplies used, the wages of drivers, thethe gasoline and other supplies used, the wages of drivers, therent, and all of the other expenses of operating the business.rent, and all of the other expenses of operating the business.

In general, the amount charged to customers for goods orIn general, the amount charged to customers for goods orservices sold to them is calledservices sold to them is called revenue.revenue. Alternative terms mayAlternative terms may

be used for particular types of revenue, such asbe used for particular types of revenue, such as salessales for the salefor the sale

of merchandise or business services,of merchandise or business services, fees earnedfees earned for charges byfor charges bya physician to patients,a physician to patients, rent revenuerent revenue for the use of real estate orfor the use of real estate orother property, andother property, and fares earnedfares earned for Requijo Taxi.for Requijo Taxi.


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In a broad sense, the amount of assets consumed orIn a broad sense, the amount of assets consumed orservices used in the process of earning revenue is calledservices used in the process of earning revenue is calledexpense. Expenses would include supplies used, salaries andexpense. Expenses would include supplies used, salaries andwages of employees, and other assets and services used inwages of employees, and other assets and services used inoperating the business.operating the business.

The excess of the revenue over the expenses incurred inThe excess of the revenue over the expenses incurred inearning the revenue is called net income or net profit. If theearning the revenue is called net income or net profit. If theexpenses of the enterprise exceed the revenue, the excess is aexpenses of the enterprise exceed the revenue, the excess is anet loss. Since it is ordinarily impossible to determine the exactnet loss. Since it is ordinarily impossible to determine the exact

amount of expense incurred in connection with each revenueamount of expense incurred in connection with each revenuetransactions, it is considered satisfactory to determine the nettransactions, it is considered satisfactory to determine the netincome or the net loss for a specified period of time, such as aincome or the net loss for a specified period of time, such as amonth, or a quarter, a semester, or a year, rather than each ofmonth, or a quarter, a semester, or a year, rather than each ofsmall group of sales.small group of sales.


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During the first month of operations Requijo TaxiDuring the first month of operations Requijo Taxiearned fares of P150, 000, receiving the amount inearned fares of P150, 000, receiving the amount incash. The total effect of these transactions is tocash. The total effect of these transactions is toincrease cash by P150, 000 and to yield revenue in theincrease cash by P150, 000 and to yield revenue in the

same amount. The revenue can be viewed as though itsame amount. The revenue can be viewed as though itaffected a P150, 000 increases in capital.affected a P150, 000 increases in capital.

At the time expenses of the business are incurred,At the time expenses of the business are incurred,they are treated as offsets against revenue and hence asthey are treated as offsets against revenue and hence asreduction in capital. In terms of the accountingreduction in capital. In terms of the accounting

equation, the effect of the receipt of cash for servicesequation, the effect of the receipt of cash for servicesperformed follows:performed follows:

Table 1 11Table 1 11


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Table 1.11Table 1.11 ASSETS LIABILITIES CAPITAL

1. + CashP500,000


2. - CashP100,000

+ LandP100,000


+Account PayableP60,000

4. - Cash P10,000

- Account PayableP10,000

5. + CashP150,000

+ Fares EarnedP150,000


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After this transaction, the total assets amount to P700, 000 composedAfter this transaction, the total assets amount to P700, 000 composedof Cash P540, 000, Land P100, 000, and Supplies P60, 000. The totalof Cash P540, 000, Land P100, 000, and Supplies P60, 000. The totalequities are also P700, 000 composed of Accounts Payable P50, 000 andequities are also P700, 000 composed of Accounts Payable P50, 000 andCapital of P650, 000 (including the fare earned).Capital of P650, 000 (including the fare earned).

Instead of requiring payment of cash at the time goods or services areInstead of requiring payment of cash at the time goods or services aresold or rendered, a business may make salessold or rendered, a business may make sales of goods or services onof goods or services on

account,account, allowing customer to pay later. In such cases, the businessallowing customer to pay later. In such cases, the businessacquires a claim against the customer, called an account receivable. Anacquires a claim against the customer, called an account receivable. Anaccount receivable is as much an asset as cash, and the revenue is realizedaccount receivable is as much an asset as cash, and the revenue is realizedin exactly the same manner as if cash had been immediately received. At ain exactly the same manner as if cash had been immediately received. At alater date, when the money is collected, there is only an exchange of onelater date, when the money is collected, there is only an exchange of oneasset for another, with cash increasing and accounts receivable decreasing.asset for another, with cash increasing and accounts receivable decreasing.

In the transaction recorded, Cash was debited because of increase in assetsIn the transaction recorded, Cash was debited because of increase in assetswhile Fares Earned was credited because of increase in capital due towhile Fares Earned was credited because of increase in capital due toincrease in revenue.increase in revenue.

T bl 1 12Table 1 12


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Date DESCRIPTION Post

Ref.

Debit Credit

Sept. 30 Cash 150,000

Fares Earned 150,000

To record receipt of revenuefrom various customer.


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TRANSACTION SIXTRANSACTION SIX

Various business expenses incurred and paidVarious business expenses incurred and paid

during the month were as follow: wages, P40, 000;during the month were as follow: wages, P40, 000;

rent, P20, 000; gas and oil, P50, 000; miscellaneousrent, P20, 000; gas and oil, P50, 000; miscellaneousexpenses, P10, 000. The effect of this group ofexpenses, P10, 000. The effect of this group of

transaction is to reduce cash and to reduce capital, astransaction is to reduce cash and to reduce capital, as

indicated in the following manner in the equation:indicated in the following manner in the equation:



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1. + Cash P500,000 + Requijo, CapitalP500,000

2. - Cash P100,000

+ Land P100,000

3. + Supplies P 60,000 +Account PayableP60,000

4. - Cash P 10,000 - Account PayableP10,000

5. + Cash P150,000 + Fares EarnedP150,000

6. - Cash P120,000 - Wages Expense P

40,000- Rent Expense P20,000

- Gas & Oil P50,000

- Misc. Expense P10,000


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After this transaction, the total assetAfter this transaction, the total assetamount to P580, 000 composed of Cash P420,amount to P580, 000 composed of Cash P420,000, Land P100, 000, and Supplies of P60,000, Land P100, 000, and Supplies of P60,

000. The total equities are also P580, 000000. The total equities are also P580, 000composed of Accounts Payable P50, 000 andcomposed of Accounts Payable P50, 000 andCapital of P530, 000. It should be rememberedCapital of P530, 000. It should be rememberedthatthat revenuerevenue andand expenseexpense accounts areaccounts are

temporary capital accounts;temporary capital accounts; these items arethese items areclosed to capital at the end of the accountingclosed to capital at the end of the accountingperiod.period.

Table 1 14Table 1 14
http://var/www/apps/conversion/current/tmp/scratch793/TABLES/table%201.14.dochttp://var/www/apps/conversion/current/tmp/scratch793/TABLES/table%201.14.dochttp://var/www/apps/conversion/current/tmp/scratch793/TABLES/table%201.14.doc


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Date DESCRIPTION Post

Ref.

Debit Credit

Sept. 30 Wages Expense 40,000

Rent Expense 20,000

Gas and Oil Expense 50,000

Miscellaneous Expense 10,000

Cash 120,000

To record payment ofexpenses.


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In the transaction recorded,In the transaction recorded, WagesWages

Expense, Rent Expense, Gas and OilExpense, Rent Expense, Gas and Oil

Expense, Miscellaneous Expense wereExpense, Miscellaneous Expense were

debited because of decrease in capital due todebited because of decrease in capital due to

increase in expenses while cash was creditedincrease in expenses while cash was credited

because of decrease in assets.because of decrease in assets.


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TRANSACTION SEVENTRANSACTION SEVENAt the end of the month it is determined that the cost ofAt the end of the month it is determined that the cost of

supplies on hand is P40, 000, the remainder of P20, 000 (P60,supplies on hand is P40, 000, the remainder of P20, 000 (P60,000- P40, 000) have been used in the operations of the business.000- P40, 000) have been used in the operations of the business.This deduction of P20, 000 in supplies and capital may beThis deduction of P20, 000 in supplies and capital may be

shown as follows:shown as follows:

After this transaction, the total assets amount to P560, 000After this transaction, the total assets amount to P560, 000composed of Cash P420, 000, Land P100, 000, and Supplies ofcomposed of Cash P420, 000, Land P100, 000, and Supplies ofonly P40, 000. The total equities are also P560, 000 composedonly P40, 000. The total equities are also P560, 000 composedof Accounts Payable of P50, 000 and Capital of P510, 000.of Accounts Payable of P50, 000 and Capital of P510, 000.



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1. + Cash P500,000 + Requijo, Capital P500,000

2. - Cash P100,000

+ Land P100,000

3. + Supplies P 60,000 +Account Payable P60,000

4. - Cash P 10,000 - Account Payable P10,000

5. + Cash P150,000 + Fares Earned P150,000

6. - Cash P120,000 -Wages Expense P 40,000

-Rent Expense P 20,000

-Gas & Oil P 50,000

-Misc. Expense P 10,000

7. - Supplies P20,000 -Supplies Expense P20,000



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Date Particulars Debit Credit

Supplies Expense P20,000

Supplies P20,000

To record part of thesupplies used in theoperation of the business


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Debit Credit

Sept. 30 Supplies Expense 20,000

Supplies 20,000

To record part ofsupplies in the operation ofthe business


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In the transaction recorded, Supplies Expense was

debited because of decrease in capital due to increasein expenses while Supplies (Unused) was creditedbecause of decrease in assets. Note to Students Theterms unused, unexpired, inventory, andprepaid denote asset.


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TRANSACTION EIGHTTRANSACTION EIGHTAt the end of the month, Nick Requijo withdraws from the businessAt the end of the month, Nick Requijo withdraws from the business

P20, 000 in cash for his personnel use. This transaction, which affects aP20, 000 in cash for his personnel use. This transaction, which affects adecrease in cash and a decrease in capital, is the exact opposite of andecrease in cash and a decrease in capital, is the exact opposite of aninvestment in the business by the owner.investment in the business by the owner. The withdrawal is not aThe withdrawal is not abusiness expense, and it should be excluded from consideration inbusiness expense, and it should be excluded from consideration in

determining the net income from operations of the enterprise.determining the net income from operations of the enterprise. TheTheeffect of the P20, 000 withdrawals on the equation is as follows:effect of the P20, 000 withdrawals on the equation is as follows:

After this transaction, the total assets amount to P540, 000 composedAfter this transaction, the total assets amount to P540, 000 composed

of Cash P400, 000, Land P100, 000, and Supplies of P40, 000. The totalof Cash P400, 000, Land P100, 000, and Supplies of P40, 000. The totalequities are also P540, 000 composed of Accounts Payable P50, 000 andequities are also P540, 000 composed of Accounts Payable P50, 000 andCapital P490, 000.Capital P490, 000.

Table 1 17Table 1.17


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1. + Cash P500,000 + Requijo, Capital P500,000

2. - Cash P100,000

+ Land P100,000

3. + Supplies P 60,000 +Account Payable P60,000

4. - Cash P 10,000 - Account Payable P10,000

5. + Cash P150,000 + Fares Earned P150,000

6. - Cash P120,000 -Wages Expense P 40,000

-Rent Expense P 20,000

-Gas & Oil P 50,000

-Misc. Expense P 10,000

7. - Supplies P20,000 -Supplies Expense P20,000

8. - Cash P20,000 -Requijo, Drawing P20,000



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..Date DESCRIPTION Post

Ref.Debit Credit

Sept. 30 Requijo, Drawing 20,000

Cash 20,000

To record withdrawal ofowner.


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In the transaction recorded, Requijo, Drawing was

debited because of decrease of capital due to

withdrawal and cash was credited because of

decreases in assets


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SUMMARYSUMMARY

The business transactions of Requijo Taxi are summarized inThe business transactions of Requijo Taxi are summarized intabular form below. The transactions are identified bytabular form below. The transactions are identified bytransaction numbers and the balance of each item is shown aftertransaction numbers and the balance of each item is shown aftereach transaction. The following observations, which apply to alleach transaction. The following observations, which apply to alltypes of businesses, should be noted:types of businesses, should be noted:

The effect of every transaction can be stated in terms ofThe effect of every transaction can be stated in terms ofincreases and/or decreases in one or more of the accountingincreases and/or decreases in one or more of the accountingelements.elements.

The equality of the two sides o the accounting equation isThe equality of the two sides o the accounting equation is

always maintained.always maintained.


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ACCOUNTING STATEMENTSACCOUNTING STATEMENTS

BALANCE SHEETBALANCE SHEETA kind of financial statement that list the assets, liabilities, andA kind of financial statement that list the assets, liabilities, and

capital of a business entity as of a specific dated, usually at the close of thecapital of a business entity as of a specific dated, usually at the close of thelast day of a month or of a year.last day of a month or of a year. It is a kind of financial statement thatIt is a kind of financial statement thatshows the financial position of the business entity as of a given date,shows the financial position of the business entity as of a given date,usually the end of the year.usually the end of the year.

The amount of Requio Taxis assets, liabilities, and capital at the endThe amount of Requio Taxis assets, liabilities, and capital at the endof the first month of operation appears on the last line of the summary inof the first month of operation appears on the last line of the summary inthe preceding page. Minor arrangements of these data and the addition of athe preceding page. Minor arrangements of these data and the addition of aheading yield the balance sheet illustrated below. This form of balanceheading yield the balance sheet illustrated below. This form of balancesheet, with the liability and capital section presented below the assetsheet, with the liability and capital section presented below the asset

section, is called thesection, is called the report form.report form. Another arrangement in common useAnother arrangement in common uselists the assets on the left and the liabilities and capital on the right.lists the assets on the left and the liabilities and capital on the right.Because of its similarity to the account, a basic accounting deviceBecause of its similarity to the account, a basic accounting devicedescribed earlier in the chapter, it is referred to as thedescribed earlier in the chapter, it is referred to as the account formaccount form of theof the

balance sheet.balance sheet.

Requijo TaxiRequijo TaxiBalance SheetBalance Sheet


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Balance SheetBalance Sheet

September 30, 19xxSeptember 30, 19xx

AssetsAssetsCashCash P400, 000P400, 000

SuppliesSupplies 40, 00040, 000

LandLand 100, 000100, 000

Total AssetsTotal Assets P540, 000P540, 000

LiabilitiesLiabilities

Accounts PayableAccounts Payable P 50, 000P 50, 000

CapitalCapitalCapitalCapital 490, 000490, 000

Total Liabilities and CapitalTotal Liabilities and Capital P540, 000P540, 000


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It is customary to begin the asset section with cash, whichIt is customary to begin the asset section with cash, whichis followed by receivables, inventory (for trading business),is followed by receivables, inventory (for trading business),supplies, prepaid expense items, and other assets that will besupplies, prepaid expense items, and other assets that will beconverted into cash or consumed in the near future. The assetsconverted into cash or consumed in the near future. The assets

of a relatively permanent nature, such as land, buildings, andof a relatively permanent nature, such as land, buildings, andequipment, follow in that order. Note that in the balance sheetequipment, follow in that order. Note that in the balance sheetpresented the total assets and the total of liability and capital arepresented the total assets and the total of liability and capital areequal.equal.

The balance sheet shows the liquidity (solvency) andThe balance sheet shows the liquidity (solvency) and

stability of as enterprise. Solvency refers to the ability of thestability of as enterprise. Solvency refers to the ability of thebusiness to pay currently maturing liabilities while stabilitybusiness to pay currently maturing liabilities while stabilityrefers to the ability of the enterprise to pay maturing obligationsrefers to the ability of the enterprise to pay maturing obligationsand give return on the investment of the owner(s).and give return on the investment of the owner(s).


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In the liabilities and capital section of theIn the liabilities and capital section of the

balance sheet, it is customary to present thebalance sheet, it is customary to present the

liabilities first followed by capital. In theliabilities first followed by capital. In the

illustration for Requijo Taxi the liabilities areillustration for Requijo Taxi the liabilities arecomposed entirely of accounts payable. Whencomposed entirely of accounts payable. When

there are two or more categories of liabilities,there are two or more categories of liabilities,

each should be listed and the total amount ofeach should be listed and the total amount ofliabilities presented in the following manner:liabilities presented in the following manner:


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LiabilitiesLiabilities

Accounts PayableAccounts Payable P150, 000P150, 000

Notes PayableNotes Payable 50, 00050, 000

Salaries PayableSalaries Payable 6, 0006, 000

Total LiabilitiesTotal Liabilities P206, 000P206, 000


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INCOME STATEMENTINCOME STATEMENT

A kind of financial statement that shows the summary ofA kind of financial statement that shows the summary ofthe revenue and the expenses of a business entity for a specificthe revenue and the expenses of a business entity for a specific

period of time, such as a month or a year.period of time, such as a month or a year.It is a kind ofIt is a kind of

financial statement that shows result of business operations forfinancial statement that shows result of business operations fora period of time, usually a year.a period of time, usually a year.

Revenue earned and expenses incurred during the monthRevenue earned and expenses incurred during the monthwere recorded in the equation as increases and decreases inwere recorded in the equation as increases and decreases in

capital, respectively. The details together with net income in thecapital, respectively. The details together with net income in theamount of P10, 000, are reported in the income statementamount of P10, 000, are reported in the income statement

presented below.presented below.

Requio TaxiRequio Taxi


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Income StatementIncome Statement

For the Month Ended September 30, 19xxFor the Month Ended September 30, 19xx

Fares EarnedFares Earned P150, 000P150, 000

Operating ExpensesOperating Expenses

Gas & Oil ExpenseGas & Oil Expense P 50, 000P 50, 000

Wages ExpenseWages Expense 40, 00040, 000

Rent ExpenseRent Expense 20, 00020, 000

Supplies ExpenseSupplies Expense 20, 00020, 000

Miscellaneous ExpenseMiscellaneous Expense 10, 00010, 000

Total Operating ExpensesTotal Operating Expenses 140,000140,000

Net IncomeNet Income P 10, 000P 10, 000


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The order in which the operating expenses are presented inThe order in which the operating expenses are presented inthe income statement varies among businesses. One of thethe income statement varies among businesses. One of thearrangements commonly followed is to list them in the order ofarrangements commonly followed is to list them in the order ofsize, beginning with the larger items. Miscellaneous expenses issize, beginning with the larger items. Miscellaneous expenses isusually shown as the last item regardless of the amount.usually shown as the last item regardless of the amount.

In the income statement, users will know if the operationIn the income statement, users will know if the operationof the business is profitable.of the business is profitable. ProfitabilityProfitability refers to the ability ofrefers to the ability ofthe business to increase owners capital. If the total net assetthe business to increase owners capital. If the total net assetinflow is more than the net asset outflow, the resulting effect isinflow is more than the net asset outflow, the resulting effect is

net income. If the net asset outflow is more than the net assetnet income. If the net asset outflow is more than the net assetinflow, it is a net loss.inflow, it is a net loss.


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CAPITAL STATEMENT (Statement of Owners Equity)CAPITAL STATEMENT (Statement of Owners Equity)

It is a statement that shows the summary of the changes inIt is a statement that shows the summary of the changes incapital of a business entity that have occurred during a specificcapital of a business entity that have occurred during a specificperiod of time, such a month or a year.period of time, such a month or a year.

Comparison of the original investment of P500, 000 at theComparison of the original investment of P500, 000 at thebeginning of the month with the P490, 000 of capital reportedbeginning of the month with the P490, 000 of capital reportedin the balance sheet at the end of the month reveals a decreasein the balance sheet at the end of the month reveals a decreaseof P10, 000. This net decrease is composed of two significantof P10, 000. This net decrease is composed of two significantchanges in capital that occurred during the period: (1) the netchanges in capital that occurred during the period: (1) the net

income of P10, 000, and (2) a withdrawal of P20, 000 by theincome of P10, 000, and (2) a withdrawal of P20, 000 by theowner. This information is presented in the capital statement,owner. This information is presented in the capital statement,which serves as a connecting link between the balance sheetwhich serves as a connecting link between the balance sheetand the income statement.and the income statement.

Requijo TaxiRequijo Taxi


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Capital StatementCapital Statement


Capital, September 1, 19xxCapital, September 1, 19xx P500, 000P500, 000

Net IncomeNet Income P10, 000P10, 000WithdrawalWithdrawal 20, 00020, 000

Decrease in CapitalDecrease in Capital 10, 00010, 000

Capital, September 30, 19xxCapital, September 30, 19xx P490, 000P490, 000


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Basically, there are two accounting period,Basically, there are two accounting period,the calendar year and the fiscal year. Athe calendar year and the fiscal year. Acalendar yearcalendar year is a twelve-month period thatis a twelve-month period that

ends on December 31 while theends on December 31 while the fiscal yearfiscal year is ais atwelve-month period that ends at the end oftwelve-month period that ends at the end ofany month other than December. In theany month other than December. In thePhilippines, only partnership and corporationPhilippines, only partnership and corporation

are allowed to use fiscal year,are allowed to use fiscal year, singlesingleproprietorshiproprietorship is allowed only to usep is allowed only to usecalendar yearcalendar year..


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STATEMENT OF CASH FLOWSSTATEMENT OF CASH FLOWSThe statement of cash flows consists of three sections: (1)The statement of cash flows consists of three sections: (1)

operating activities, (2) financing activities, and (3) investingoperating activities, (2) financing activities, and (3) investingactivities. Each of these sections is described below:activities. Each of these sections is described below:

Cash Flows form Operating ActivitiesCash Flows form Operating Activities

This section reports a summary of cash receipts and cashThis section reports a summary of cash receipts and cashpayments from operations. The net cash flow from operatingpayments from operations. The net cash flow from operatingactivities will normally differ from the amount of net incomeactivities will normally differ from the amount of net income

for the period. This difference occurs because revenues andfor the period. This difference occurs because revenues andexpenses may not be recorded at the same time that cash isexpenses may not be recorded at the same time that cash isreceived from customers and cash is paid to creditors.received from customers and cash is paid to creditors.

ACCO G S A S


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Cash Flows from Financing ActivitiesCash Flows from Financing ActivitiesThis section reports the cash transactions related to cashThis section reports the cash transactions related to cash

investments by the owner, borrowing, and cash withdrawals by theinvestments by the owner, borrowing, and cash withdrawals by theowner.owner.

Cash Flow from Investing ActivitiesCash Flow from Investing Activities

This section reports the cash transactions for the acquisitionThis section reports the cash transactions for the acquisitionand sale of relatively long-term or permanent-type assets.and sale of relatively long-term or permanent-type assets.

The preparation of the statement of cash flow is required byThe preparation of the statement of cash flow is required bypronouncement, every year that the income statement is presented.pronouncement, every year that the income statement is presented.Preparing the statement of cash flows requires an understanding ofPreparing the statement of cash flows requires an understanding ofconcepts that we will not discuss in the chapter. But a simpleconcepts that we will not discuss in the chapter. But a simpleillustration will be given to be able to illustrate how statement ofillustration will be given to be able to illustrate how statement of

cash flow is prepared.cash flow is prepared.

Requijo TaxiRequijo Taxi

S f C h Fl


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Statement of Cash FlowsStatement of Cash Flows


Cash Flows from Operating Activities:Cash Flows from Operating Activities:Net IncomeNet Income P10, 000P10, 000

Add: Increase in SuppliesAdd: Increase in Supplies 40, 00040, 000

TotalTotal P50, 000P50, 000

Less: Increase in Accounts PayableLess: Increase in Accounts Payable 50, 00050, 000

Cash from Operating ActivitiesCash from Operating Activities PP 00

Cash Flows from financing ActivitiesCash Flows from financing Activities

Investment of OwnerInvestment of Owner 500, 000500, 000

Cash Flows from Investing ActivitiesCash Flows from Investing Activities

Acquisition of LandAcquisition of Land (100, 000)(100, 000)

Increase in CashIncrease in Cash P400, 000P400, 000


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CHAPTER 2CHAPTER 2The Accounting CycleThe Accounting Cycle

THE ACCOUNTING CYCLETHE ACCOUNTING CYCLE


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The double entry accounting system provides aThe double entry accounting system provides abasic framework for the analysis of businessbasic framework for the analysis of businessactivities. Now we wish to go into greater detailactivities. Now we wish to go into greater detailabout the accounting procedures used to accountabout the accounting procedures used to account

for the operations of a business during a specificfor the operations of a business during a specificperiod. The accounting procedures of mostperiod. The accounting procedures of mostbusinesses involve certain basic steps that arebusinesses involve certain basic steps that areaccomplished in a given order. This sequence ofaccomplished in a given order. This sequence ofoperations is known as theoperations is known as the accounting cycleaccounting cycle..



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TheThe stepssteps of theof the accounting cycleaccounting cycle are listed below:are listed below:

1. Gather documents and analyze transactions from source1. Gather documents and analyze transactions from sourcedocuments.documents.

2. Record transactions in journals.2. Record transactions in journals.

3. Post journal entries to general ledger accounts.3. Post journal entries to general ledger accounts.

4. Prepare a trial balance.4. Prepare a trial balance.

5. Prepare adjusting entries and adjust the general ledger accounts.5. Prepare adjusting entries and adjust the general ledger accounts.

6. Prepare financial statements.6. Prepare financial statements.

7. Journalize closing entries.7. Journalize closing entries.8. Prepare post-closing trial balance.8. Prepare post-closing trial balance.

9. Journalize reversing entries.9. Journalize reversing entries.


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The annual period adopted by a businessThe annual period adopted by a business

enterprise is known asenterprise is known as fiscal year.fiscal year. BusinessBusiness

enterprises whose fiscal year ends inenterprises whose fiscal year ends in

December are said to be on aDecember are said to be on a calendar-yearcalendar-year

basis. Many enterprises prefer to have theirbasis. Many enterprises prefer to have theiraccounting year coincide with theiraccounting year coincide with theirnaturalnatural

business yearbusiness year; that is, the fiscal year ends; that is, the fiscal year ends

when business is slow and inventory quantitieswhen business is slow and inventory quantitiesare small and easy to count.are small and easy to count.

STEP 1STEP 1

ANALYZING TRANSACTIONS FROM SOURCEANALYZING TRANSACTIONS FROM SOURCE


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ANALYZING TRANSACTIONS FROM SOURCEANALYZING TRANSACTIONS FROM SOURCE

DOCUMENTSDOCUMENTS

Source documents are printed or written forms thatSource documents are printed or written forms thatgenerate when the enterprise engages in businessgenerate when the enterprise engages in businesstransactions. Even a brief source document usuallytransactions. Even a brief source document usuallyspecifies the peso amount involved, the date ofspecifies the peso amount involved, the date of

transaction, and possibly the party dealing with thetransaction, and possibly the party dealing with theenterprise. Some examples of source documents areenterprise. Some examples of source documents are(1) a purchase or sellers invoice showing evidence of(1) a purchase or sellers invoice showing evidence ofa purchase of merchandise (or supplies) on account,a purchase of merchandise (or supplies) on account,(2) a bank check indicating the payment of obligation,(2) a bank check indicating the payment of obligation,

(3) a deposit slip showing the amount of funds turned(3) a deposit slip showing the amount of funds turnedover to the bank, (4) a cash receipt indicating fundsover to the bank, (4) a cash receipt indicating fundsreceived from a customer, and (5) a cash register tapereceived from a customer, and (5) a cash register tapelisting a days over-the-counter sales to customers.listing a days over-the-counter sales to customers.

BUSINESS PAPERSBUSINESS PAPERS


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All business transactions are evidencedAll business transactions are evidenced

supported by printed forms or documents,supported by printed forms or documents,

calledcalled business papers.business papers. These business papersThese business papers

furnish the information needed in recordingfurnish the information needed in recordingbusiness transactions. Without businessbusiness transactions. Without business

papers, it would be difficult to keep accuratepapers, it would be difficult to keep accurate

record of business transactions. The followingrecord of business transactions. The followingare good example of business papersare good example of business papers

commonly used in a business:commonly used in a business:



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1.1.Sales or Service InvoiceSales or Service Invoice after the sale of goods of service after the sale of goods of servicehas taken place, a business form calledhas taken place, a business form called invoiceinvoice is prepared. Theis prepared. Theinvoice shows the date of sale/service rendered, list of theinvoice shows the date of sale/service rendered, list of thearticles sold or list of services rendered, and other information.articles sold or list of services rendered, and other information.Invoices are prenumbered and usually made out in triplicate orInvoices are prenumbered and usually made out in triplicate or

quadruplicate depending upon the need of the business. Thequadruplicate depending upon the need of the business. Theoriginal of the invoice is given to the buyer of goods ororiginal of the invoice is given to the buyer of goods orservices.services.

In a merchandising business, from the point of vies of the seller,In a merchandising business, from the point of vies of the seller,the invoice is calledthe invoice is calledsales invoicesales invoice; from the point of view of the; from the point of view of the

buyer, it is abuyer, it is apurchase invoicepurchase invoice. The sample of an invoice is. The sample of an invoice isgiven below.given below.

Table 2 1Table 2 1


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Table 2.1Table 2.1



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2.2. Official ReceiptOfficial Receipt official receipt are issued every time official receipt are issued every timethe business receives cash. The receipt shows the datethe business receives cash. The receipt shows the date

on which the cash is received, the party from whomon which the cash is received, the party from whom

the cash is received, the amount of cash received, thethe cash is received, the amount of cash received, the

explanation of the transaction, and the signature of theexplanation of the transaction, and the signature of the

personnel who issued the receipt.personnel who issued the receipt.

Table 2 2Table 2 2


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Table 2.2Table 2.2



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3.3.Sta

Basic Accounting Ppt 3

Documents

Transcript of Basic Accounting Ppt 3