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FUNDAMENTALS

OF

ACCOUNTING

By:

Jason P. Gregorio
Introduction

Accounting is the language of the business. It is the system of analyzing, summarizing

and recording of financial transactrions of a business. It is the key to the success of every

business. We also uses accounting in our everyday life, e.g. when you are riding in a

public vehicle, when you buy a food or when you go for a haircut. We apply accounting

on some of our activities therefore we should know how it works and know the

importance of it.

In this book you will discover:

 What is accounting

 Accounting Process

 Natures of Accounting

 Functions of Accounting

 Accounting in the Business

 Elements of Accounting

 Accounting concepts and principles

 Journalizing

 T-account and;

 Trial and balance


Accounting

What is Accounting?

Accounting is a process of summarizing, analyzing and recording financial statements


of a company.

The Accounting Process

1. Journal
2. Ledger
3. Trial balance
4. Balance day adjustments
5. Closing entries
6. Income statements + B
7. Reversing of entries

Natures of Accounting

1. Accounting is a process.
Accounting is a process because it follows a step by step procedures on
making financial statements.

2. Accounting is an art.
Accounting is an art because you use your creactive judgement and
perception to perform the accounting well.

3. Accounting is means and not an end.


Accounting is means and not an end because it is continuous and lasts for a
long time.
4. Accounting deals with financial information and transactions.
Accounting deals with financial information and transactions because in
accounting financial information and transactions are needed to know the current
condition of the business, if it is growing or failing.

5. Accounting is an information system.


Accounting is an information system because you need to gather
informations in making financial statements.

Functions of Accounting

1. Keeping systematic record of business transaction.

2. Protecting properties of the business.

3. Communicating results to various parties in or connected with the business.

4. Meeting legal requirments.

Dfferent users of accounting

Customers Countrymen

Creditors Management

Potential Investors Employee

Government Owners and Stakeholders

Academe

General Public

Citizen
Accounting in the Business

What is the role of the Accountant in the business?

The role of accountant in the business is to prepare financial statements. They must

analyze and interpret the financial data accurately and provide to the owner and

stakeholders and should also provide financial plans and guides to attain the goal of the

particular business.

What are the types of business?

1. Service Business
This business provides intangible products or services to the customers.
Banks, carwash, and salons are the few examples of service businesses.

2. Merchandising Business
They are known as the “buy and sell” type of business. They buy new
products and sells them at a higher price.

3. Manufacturing Business
The business are using raw materials and supplies to be processed or
manufactured, converting them into finished products for sale at a profit.

4. Agriculture
The business is engaged in planting of crops and sells its products either raw
or finished to form a profit.

5. Hybrid Business
This type of business uses manufacturing, merchandising and services.
Forms of Business Organization

Sole Proprietorship

This is a business that is owned by only one person or stakeholders.

Advantages:

 Ease of formation

 Full control of the business

 Owner can mix personal and business assets

 Have all the profits for themselves

 Simple taxation

Disadvantages:

 Unlimited Liabilities

 Difficulty in raising capital

 Owner Bias

Partnership

This is a business that is owned by two or more persons.

General Features:

 Separate legal existence

 Mutual agencu

 Unlimited Libalities
 Limited life

 Co-ownership of partnership property

 Partnership agreement

Advantages:

 Easier to create than corporation

 Better ability to acquire additional capital than sole proprietorship

 Larger pool of human capital

Disadvantages:

 Unlimited Liabilities

 Mutual agency

 Limited life

Corporation

This is the biggest business that is owned by more than 5 but less than

15 owners and stakeholders.

General Features:

 Separate legal existence

 Limited Liabilities

 Transferrable ownership rights


 Virtually unlimited life

 Corporation management

 Government regulations

 Double taxation

Advantages:

 Ability to acquire additional capital

 Transferrable ownership rights

 Limited liability of stockholder

 Large pool of human capital

Disadvantages;

 Heavily regulated by the government

 Double taxation

 Not easy to form

 More expensive than sole and partnership


What are the (5) elements of Financial Statements?

1. Assets – are the things that is owned by the business.


Current assets – are assets that can be convertible into cash within a short
period of time usually one year.
Petty cash fund – the account title for money placed and set aside for petty
or small expenses.
Notes receivable – this is a promissory note that is received by a business
from the customer arising from rendering services, sale of merchandise etc.
Accounts receivable – the accounts title for amounts collectible arising
services rendered to a customer or client on credit sales of goods to
customers on account.
Allowance for bad debts – this is a contra assets accounts deductible from
accounts receivable. It provides possible loses from uncollected accounts.
Interest receivable – the amount of interest earned on a notes receivable
which is not yet collected.
Advances to employees – the account title for amounts collectible from
employees for allowing them to make cash advances which are deductible
against their salaries.
Inventories – these are assets which are held for sale in the ordinary course
of business, in the process of production for such sale, or in the form of
materials or supplies to be consumed in the production process,
Prepaid expenses – expenses that are paid in advance but are not yet
incurred or have not yet expired such as prepaid tent, insurance, interest,
advertising, etc.
Supplies – cost of stationery and other supplies purchased for use but are left
on hand.
Plant assets or fixed assets – are assets that are permanent in nature.

Land – an account title for the site were the building used as office or store is
constructed.

Building – a finished construction owned by the business where operations and


transactions took place.

Equipment – includes calculators, typewriters, adding machines, computers, steel filling


cabinets and the like.
Furnitures and fixtures – Includes chairs, tables, counters, display cases, and the likes.

Accumulated depreciation – This is contra assets accounts deductible from fixed assets
except land.

2. Liabilities – Obligations and responsibilities from the past transactions or events.


Current liabilities – are obligations of the business which are expected to be
settled within one year from the balance sheet date.
Accounts payable – an account title for a financial obligation of an
enterprise that constitutes an oral or verbal promise to pay.
Accrued expenses – are expenses incurred by the business but are not yet
paid,
Sss premium payable – refers to the amount dueand payable by the
enterprise to the social security system.
Philhealth premium payable – refers to the amount due and payable by
the enterprise to the Philippine health insurance corporation.
Pag-ibig premium payable – refers to the amount due and payable by the
enterprise to the home development mutual fund.
Withholding tax payable – refers to the amount due and payable by the
enterprise to the bureau of internal revenue for the tax withheld from
employees.
Unearned income – this is an account title for an income collected or
received in advance and are not yet considered earned.
Long term liabilities – are obligations due more than one year.

Notes payable – an obligation by a promissory note usually more that an


year.
Mortgage payable – an obligation that requires a fixed property to be
pledge as a collateral to ensure payment.

3. Owners equity or Capital – is the residual interest in the assets of the enterprise
after deducting all its liabilities. It is the amount of money or value of property put
by the proprietor into the business.
Drawing or personal use – refers to the amount of cash withdrawn by the
owner for his personal use.

4. Income or Revenue – are inflows of economic benefits during the period arising
in the course of ordinary activities of an enterprise.
Sales – in general, this represents revenue derived from the sale of merchandise.
Service income – are all types of income derived from rendering of services.
Professional income – used by professionals for income earned from the
practice of their profession.
Rental income – for income earned on buildings, space or other properties
owned and rented out by the business as the main line of its activity.
Interest income – for income received by the business arising from an
amount of money borrowed by a customer, typically in a lending
institution.

5. Expenses – are the outflows of economic benefit during this period arising in the
course of ordinary activities of an enterprise.
Cost of sales or cost of goods sold – cost to produce and sell the goods.
Rent expenses – for the amount paid or incurred for use of property.
Repairs and maintainance – for expenses incurred in repairing or
servicing the building, machineries, vehicles, equipments, which are owned
by the business.
Supplies expense – used supplies in the office such as clips, bond papers,
envelopes etc.
Salaries expense – for compensation given to employees of a business
Bad debts – for the anticipated loss that the business may incur arising
from uncollectible accounts.
Depreciation expense – a located expired portion of the cause.
Taxes and liscences – it is your amount paid for business permits.
Insurance – it is account titled for expired portion.
Utilities expense – It is the account title for telephone, lights and water
bills.
Miscellaneous expense – amount paid which is not enough.
SSS Contributions
Philhealth Contributions
Pag-ibig Contributions
Accounting Concepts and Principles

Accruals concept – revenue and expenses are recorded when they occur and not
when the cash is received or paid out.
Consistency concept – once an accounting method has been chosen, that method
should be used unless there is a sound reason to do otherwise.
Going concern – the business entity for which accounts are being prepared is in
good condition and will continue to be in business in the foreseeable future,
Prudence concept (also conservation concept) – revenue and profits are
included in the balance sheet only when they are realized but liabilities are
included when there is reasonable ‘possibility’ of incurring them.
Accounting equation – total assets equals total liabilities plus owners equity;
Accounting period – financial records pertaining only to a specific period are to
be considered in preparing accounts for that period;
Cost basis – asset value recorded in the account books should be the actual cost
paid , and noit the asset’s current market value.
Entity – accounting records reflect the financial activities of a specific business
or organization, not of its owners or employees.
Full disclosure – financial statements and their notes should contain all relevant
data;
Money measurement – the accounting process records only activities that can be
expressed in monetary terms (with some exceptions);
Objectivity – financial statements should be based only on verifiable evidence,
including an audit trail;
Realization – any change in the market value of an asset or liability is not
recognized as a profit or loss until the asset is sold or the liability is paid off;
Unit of measurement – financial data should be recorded with a common unit of
measure (dollar, pound sterling, yen, etc.)
Lower of cost or market value: inventory is valued either at cost or the firm has
been restored to its original level, or is maintained at a predetermines level;
Matching: transactions affecting both revenues and expenses should be
recognized in the same accounting period;
Materiality: minor events may be ignored, but the major ones should be fully
disclosed;

Journalizing