1

Accounting- art of recording, classifying,

Government Accounting- checks those

summarising in a significant manner and in terms of

submitted in the government

money, transactions and events, which are in part,

Accounting Education- must be CPA

at least, of financial character and interpreting the

International Accounting- transactions dealing

results. Language of Business

with international trade

Four Phases of Accounting

Social Accounting- measurement of social

1. Recording- bookkeeping; business transactions

costs (e.g. measurement of traffic patterns for

are recorded systematically and chronologically

in the proper accounting books.
Single-entry bookkeeping- shows only the debit

the most efficient use of traffic funds)

Business Organisation
1. Ownership

OR credit of each transaction

Single or sole proprietorship- owned by one

Double-entry bookkeeping- reflects two-fold

person

effects of business transactions. Has debit and

Partnership- two or more persons; partners

credit

agree on capital contributions, management of

2. Classifying- items are sorted and grouped

firm and distribution of profits and losses

3. Summarizing- data recorded are

Corporation- not less than five; organized by

summarized through financial statements

4. Interpreting- interpretation on the financial
statement
Fields of Accounting
1. Public Accounting- professional service of CPA
Auditing- examines, tests and checks the
accuracy of the reports
Management Advisory Services- includes

operation of law
2.

Nature of Business
Service Concern- rendering of services to the
customer
Trading or Merchandising- buying and selling of
goods
Manufacturing Concern- turns raw materials to
finished products

design, installation, and improvements of firms

Business is always assumed to be distinct and

general accounting system

separate from its owner

Tax services- preparation and filing of income

tax returns
2. Private Accounting- accounting job done in
private business enterprise
General Accounting- recording transactions
and preparing financial statements
Cost Accounting- determining, controlling costs

Transaction- data recorded in accounting books

External Transaction- activities involves
enterprise and another enterprise
Internal Transaction- activities within the
enterprise
Generally Accepted Accounting Principles
(GAAP)

particularly those in producing a product or

Assumptions

service

Entity Concept- own being of the company

Budgeting- provides management a plan for

future operations
Internal Auditing- check the records prepared
and maintained in each department or branch

different from the owner

Going Concern- assumption that the business
will run on long-term

2
Measurement and Unit of Measure-

Non-Current Assets

- Tangible Assets- Property, Plant,

measurement- anything that is entered in the

book of the company should be quantified and

Equipment

- Intangible Assets- Long-Term

unit of measure- value on the book of accounts

should have currency
Periodicity- Accounting period should be divided

Investment

Liabilities- debts or obligations of the business

Principles

Current or Short Term- due for

Historical Cost- Record the value of an asset at

payment within a short period of time

- Accounts Payable- indebtedness arising

its acquisition cost (original value of the asset)

Revenue Recognition- you recognise the

from purchase of goods services

- Notes Payable- short-term indebtedness

expense once it is incurred even though not yet

paid

with promissory note

- Accrued Expenses- expenses already

Matching Principle- cost of product should be

recorded in the year it was incurred

incurred but not yet paid

- Unearned Income- payments for

Disclosure- if there are anything highly stackable

to the stockholders; financial statements footnote

undelivered goods or services not yet

Constraints
Estimates/ Judgments- not everything can be

rendered are received

Capital- owners equity or investment

computed (e.g. estimate for allowance of doubtful

Assets = Liabilities + Proprietorship

accounts)

Equity- right, claim or interest of a person over the

Materiality- of high significance (payable 1B to

one company)
Consistency- same accounting policy from year
to year

assets
Liability- claim in the assets
Proprietorship- owners interest in the business
T-Account- simple form of account; simpler form of

Conservatism- you do not overstate your

ledger

receivables and income; you do not understate

Account- accounting devise used to summarize

your payables

the increases and decreases in the liability, asset

Accounting Elements or Values

Assets
Current Assets- regular operation of the
business; can be converted to cash within
a short period of time

- Cash
- Receivables- collectible from customer
- Inventories- items of tangible personal
property

- Prepaid Expense- paid before they are

used or consumed

and proprietorship
Debit To:

Credit To:

1. Increase in Asset

1. Decrease in Asset

2. Decrease in Liabilty

2. Decrease in Liability

3. Decrease in
Proprietorship due to:

Increase in
Proprietorship due to:

a. withdrawal of assets
by owner

a. investment by owner

b. increase in expenses b. decrease in

and losses
expenses and losses
c. decrease in income

c. increase in income

3
Real Accounts- Permanent accounts; accounts

paid

found in balance sheet (balance are carried over to

Salaries Payable- amount due to employees

the next acct. year)

Proprietorship Titles

Nominal Accounts- Temporary accounts;

Owners Capital- amount of capital contribution

accounts found in income statement (closed or put

to zero balance at the end of acct. year)
Chart of Accounts- list of account titles used by

of owner
Owners Drawing- amount withdrawn by owner
from asset

the business

Income Titles

Asset Titles

Sales- total sales

Cash- cash on hand or cash in bank

Professional Fee Income- amount earned by

Receivable- collectible from customer with

promissory note
Accounts Receivable- claims from customers
Allowance for Bad Debts- contra-asset;
deducted from A/R
Merchandise Inventory- Goods purchased to be
sold
Interest Receivable- Interest earned but not yet
received
Unused Supplies- office use supplies but not yet
used.
Prepaid Insurance- already paid insurance
premiums
Furnitures and Fixtures- tables, chairs,
counters and others used by business in its
operations
Equipment- typewriters, calculators and others
Delivery Equipment- used for transporting
merchandise
Accumulated Depreciation- valuation account
that reduces the total cost of a fixed asset;

professional
Rent Income- amount of rental earned
Service Income- amount of income from
services
Interest Income- amount earned from lending
money
Expense Titles
Cost of Sales/ Cost of Goods Sold- cost of
goods when purchased; real value
Advertising Expense- expense incurred to
promote the product
Supplies Expense- Amount of supplies used
Taxes- duties incurred
Utilities Expense- amount of light and water
consumed
Repairs and Maintenance- expenses from
repair
Bad Debts- estimated amount of losses from
uncollectible
Depreciation Expense- allocated cost of fixed
asset in current period

contra-asset; total amount of depreciation

Accounting Period or Fiscal Period- segment of

expense

time which statements are prepared. Length of

Land

acct. period depends on nature of business

Building

(annual, semi-annual, quarterly, monthly)

Liability Titles

Accounting Cycle- successive steps starting with

Notes Payable- amount due to creditors with

the recording of transactions in the books of

promissory note
Accounts Payable- amount due to creditors
Interest Payable- interest incurred but not yet

accounts and ending with post- closing trial balance

4
Steps:

2. Trial Balance of Totals- Total debit and credit

1. Journalizing

Need for Adjusting Entries- recognizes income

2. Posting

and expenses that should be included in the

3. Preparation of Trial Balance

accounting period

4. Adjusting Entries

6 Accounts that should be Adjusted

5. Preparation of Worksheet

Allowance for Bad Debts

6. Preparation of Financial Statement

2 Methods in Recognizing Bad Debt Losses

7. Closing Entries

1. Direct Write-off Method

8. Reversing Entries

Original Entry

Adjusting Entry

Journalizing- first step in accounting cycle;

A/R xxx

Incomexxx

process of recording business transactions in

Incomexxx

A/Rxxx

journal

2. Allowance Method - yearly provision; GAAP

Journal- book of original entry; book of accounts

Accounts Receivable

where business transactions are recorded for the

Less: Allowance for Bad Debts

first time

= Net Realizable Value (NRV)

2 kinds:

Bad Debt Expensexxx

1. Special journals
cash receipts journal

Allowance for Bad Debtsxxx

To record allowance for bad debts

cash payments journal

[Bad Debt Expense- Income Statement; Part of

sales journal

Operating Expense and Allowance of Bad Debts-

purchase journal

Balance Sheet; contra-assets]

2. General Journal- simplest form of journal

Ways to Determine Allowance for Bad Debts

2 types:

1. % of Sales

1. Simple Journal Entry- contains only one

200,000> 5% uncollectible (from past sales)

debit and credit accounts

2. Compound Journal Entry- either one debit
and two or more credits

200,000 X .5 = 10,000
12/31 Bad Debt Expense 10,000
Allowance for Bad Debts 10,000

Posting- Book of Final Entry; Process of

To record allowance for bad debts

transferring records from journal to ledger

based on 5% of sales

Trial Balance- list of accounts with open balances

2. % of Accounts Receivables

in general ledger; proves equality of debit and

1,000,000 > 10% of outstanding A/R

credit

12/31 Bad Debt Expense 100,000

2 Types:
1. Trial Balance of Balances- accounts with
open balances
either:
Debit balance- debit total > credit total
Credit balance- credit total > debit total
Zero balance/ Closed account- credit total = debit
total

Allowance for Bad Debt 100,000

To record allowance for bad debts based
on 10% outstanding A/R

5
Recognition of Prepaid Expenses

3. Aging of Receivables
1- 30
days

31-60
days

1%
500k
5,000

61-90
days

2%
200k

91-180
days

5%
100k

4,000

5,000

10%

1. Asset Method- Debit an asset acct.

20%

50,000 150k
5,000

2 Methods

181
and up

Example: Oct. 1 Paid 10,000 for a 10-month

total:
1M

30,000 total:
49,000

Accumulated Depreciation for Fixed Assets

advertisement fee
Oct. 1, 2014 Dec. 31, 2014
10/1 Prepaid Advertising 10,000
Cash10,000
To record 10 mos. advr. payment

Cost of Asset

10,000/ 10 mos. = 1,000 per month

Less: Accumulated Depreciation

Prepaid Account

= Net Book Value (NBV)

AJE 12/31 Depreciation Expense Bldg xxx

Oct. 1- 10,000

Dec. 31- 3,000 (for 3

mos Oct-Dec)

Accumulated Depreciation bldg xxx

To record depreciation of bldg for
the year 2014

Dec. 31- 7,000

AJE 12/31 Advertising Expense 3,000

[Depreciation Expense- Income Statement; Part of

Prepaid Advertising 3,000

Operating Expense and Acc. Dep.- Balance Sheet;

To record advr. exp. from Oct. to

contra-asset of fixed asset]

Dec.

Computation for Depreciation

2. Expense Method- Debit a credit acct.

1. Straight-line Method

10/1 Advertising Expense 10,000

Depreciation = Cost Salvage or Scrap Value/

Cash10,000

established life in years

To record payment of advertising

Equipment was purchased for 100,000 with an

Advertising Expense

east. useful life of 5 years

Depr.= 100,000/ 5 = 20,000/yr

Oct. 1- 10,000

AJE 12/31 Depreciation Expense Eqpt. 20,000

Dec. 31- 3,000

Accumulated Depreciation 20,000

To record dep. of eqpt. for the year

Dec. 31- 7,000

12/31 Prepaid Advertising 7,000

Advertising Expense 7,000

2014

To record remaining prepaid advertising

year 1

year 2

year 3

Deferred/ Unearned Income

Depr. Exp- 20,000

Acc. Dep- 20,000

Same

Same

Example: Oct. 1 Received rental payment of 7,000

Eqpt (100,000)
Less: Acc. Dep
(20,000)

100,000
40,000

100,000
60,000

NBV= 80,000

NBV= 60,000

NBV= 40,000

for a 9 month rental of your office space

2 Methods
1. Liability Method- income already received but

Year 1 20,000 per yr (6/12) = 10,000 [bought on

June (6) of 12 mos]

not yet earned

10/1 Cash 7,000
Deferred/Unearned Rent 7,000
To record receipt of payment for 9
month rent of office space

6
12/31 Deferred/Unearned Rent 2,333.33
Rent Income 2,333.33
To record used prepaid rent
Deferred Rent Income
Oct. 1- 7,000

Dec.31- 4,666.67

Dec. 31- 2.333.33

2. Income Method
10/31 Cash 7,000
Rent Income 7,000
To record receipt of payment for rent
12/31 Rent Income 4,666.67
Deferred/ Unearned Rent 4,666.6
To record remaining prepaid rent

Accrued Expenses
Oct.1 Issued 120-day promissory note amounting
to 200,000 with 10% interest
12/31 Accrued Interest Expense 5,000
Accrued Interest Payable 5,000
To record accrued interest
[Acc. Int. Expense- Income Statement and Acc. Int.
Payable- Balance Sheet]

Accrued Income
Oct.1 Received a 120-day promissory note
amounting to 200,000 with 10% interest
Oct.1 Jan. 31 (200,000 and interest)
Interest = Prt
= (200,000)(.1)(90/360)
= 5,000
12/31 Interest Receivable 5,000
Accrued Interest Income 5,000
To record accrued interest for a 120-day
promissory note
[Interest Receivable- Balance Sheet and Acc. Int.
Income- Income Statement]