Basic

Accounting for
Non-
Accountants
 Learning Objective
1. Describe the nature of a business and the
role and purpose of accounting in business
2. Describe the accounting concepts and
principles and constraints
3. State the accounting equation and define
each element of the equation.
4. Introduction to debit and credits
5. Introduction to the accounting process
 What is a Business?
• A business is an organization in which
basic resources (inputs), such as materials
and labor, are assembled and processed to
provide goods or services (outputs) to
customers.
• The objective of most businesses is to
earn a profit.
• Profit is the difference between the
amounts received from customers for
goods or services and the amounts
paid for the inputs used to provide
the goods or services.
 The Role of Accounting in
Business
• Accounting can be defined as an
information system that provides
reports to users about the economic
activities and condition of a business.
What is ACCOUNTING?
• is a service activity.
• Its function is to provide
quantitative information,
primarily financial in nature,
about economic entities, that
is intended to be useful in
making economic decision.
• Accounting Standards Council
• Accounting is the
process of
Measuring
Interpreting
Communicating financial
information to support
internal and external
business decision making.
Purpose of Accounting
• It gives you an excellent gauge of how well
your business is doing
• Accounting also provides financial
information throughout the year so you
can test the success of your business
strategies and make course corrections to
ensure that you reach your year-end profit
goals.
• Acccounting can become your best system
for managing your financial assets and
testing your business strategies
 The Need for
Accounting
Managers, investors, and other internal groups
want the answers to two important questions:

How well did

the organization
perform? Where does
the organization
stand?
Accountants answer these questions
with three major financial statements:

Income Balance
statement sheet

Statement of
cash flows
Users of Financial
Information
Accounting
Concepts and
Terminologies
 Accounting Concepts: Underlying
Assumptions
ACCRUA  Income is recognized when earned
L regardless of when received
 Expense is recognized when incurred
regardless of when paid
 The effects of transactions are recognized
when they occur
GOING  The business will continue in operational
existence for the foreseeable future
CONCER  Financial statements should be prepared on
N a going concern basis unless management
CONCEP either intends to liquidate the enterprise or
to cease trading,
BUSINES
T  The business and its owner(s) are two
S ENTITY separate entities
CONCEP Any private and personal incomes and
expenses of the owner(s) should not be
T treated as the incomes and expenses of
the business
 Accounting Concepts: Underlying
Assumptions
TIME The life of an entity is subdivided into
PERIOD time periods which are of equal length
for the purpose of making financial
reports
Usually twelve months
MONETARYAssets, liabilities, capital, income and
UNIT expenses should be stated in terms of a
unit of measure (Philippine Peso)
The purchasing power of the Peso is
stable/constant
 Accounting Concepts: Business
Entities
Sole
Proprietorship • A proprietorship is owned by one
individual.
• They are easy and cheap to
organize and resources are limited
Partnership • Ato those of the
partnership owner. to a
is similar
proprietorship except that it is owned
by two or more individuals.
• Combines the skills and resources of
more than one person.
Corporation
• A corporation is organized under
state statutes as a separate legal
taxable entity.
Accounting Concepts: Qualitative
Characteristics
Relevance • The capacity of information to
influence a decision
Reliability • The degree of confidence users place
upon the truthfulness of the
representations in the financial
statements
• The quality of information that assures
users that the information is free from
Faithful •bias
Theand error
actual and faithfully
effects of the represents
Representat what it purports
transaction to represent
should be properly
accounted for and reported in the
ion financial statements
Substance • Transactions should be accounted
over Form in accordance with their
substance in reality and not
Accounting Concepts: Qualitative
Characteristics
Neutrality • Information in the Financial
Statements must be free from
bias
• “fairness”
Conservatis• Care and caution must be
m or exercised when dealing with
uncertainties in the measurement
Prudence process
• The Revenues and profits are not
anticipated. Only realized profits
with reasonable certainty are
Completene • recognized in the profit
Relevant information andbe
must loss
account
presented in a way that facilitates
ss
understanding and avoids
erroneous implication
Accounting Concepts: Qualitative
Characteristics
Understandab • Financial information must be
ility comprehensible or intelligible if it
is to be useful

Comparabil • Information must be comparable

ity with similar information of
previous periods or with
information of another entity
 Accounting Concepts: Accounting
Constraints
TIMELINES • Information must be available or
S communicated early enough when a
decision is to be made

COST- • The benefit derived from the information

BENEFIT should exceed the cost incurred in
obtaining the information

MATERIALI • An item is material if knowledge of it

would affect or influence the decision of
TY the informed users of the financial
statements
RELEVANCE • There is a tradeoff between relevance
vs (reporting information in a relevant
RELIABILITY manner) and reliability (ensuring that the
information is reliable)
 THE ACCOUNTING EQUATION

Assets = Liabilities + Equity

The resources The rights of The rights of the

owned by a creditors are the owners
business debts of the
business
 Accounting Terminologies

TRANSACTI • a business event having a monetary

impact on the financial statements of a
ON business
• It is recorded in the accounting records
of the business

ACCOUN • A record in the general ledger

that is used to collect and store
T similar information
 Types of
Accounts
ASSET are valuable resources that
ACCOUN are owned by a firm.
T

LIABILIT present obligations of the

Y firm.

ACCOUN
T EQUITY  represents the owners'
ACCOU residual interest in the assets
of the business.
NT Residual interest is another
name for owners' equity.
 INCOME the payment you receive for your
time, services you provide, or the
ACCOUN use of your money
Examples include commissions, tips,
T dividend income from stocks, and
interest income from bank accounts.

EXPENSE money you spend to

ACCOUNT purchase goods or
services provided by
someone else
Examples include rent,
electricity, and light
expenses
 CHART a listing of the names of the
accounts that a company has
OF identified and made available for
recording transactions in its general
ACCOUN ledger

TS

T-  An informal term for a set of financial records that

use double-entry bookkeeping.

ACCOUNTS
 If a large letter T were drawn on the page, the
account title would appear just above the T, debits
would be listed under the top line of the T on the left
side and the credits would be listed under the top
line of the T on the right side
NORMA  The sum of the increases in an
account is usually equal to or
L greater than the sum of the
decreases in the account. Thus,
BALANC the normal balance of an account
is either a debit or a credit
E depending on whether increases
in the account are recorded as
debits or credits.
DEBI  An accounting entry that
results in either an increase in
T assets or a decrease in equity
or liabilities on a company's
balance sheet or in your bank
CREDI account.
 An accounting entry that either
decreases assets or increases
T liabilities and equity on the
company's balance sheet.
Debits and Credits
• You just need to understand that debit and credit are
two actions that are opposite in nature.
• An element (account) that is effected by an accounting
transaction is either debited or credited (with an
amount that is reflected in the transaction) depending
on the nature of the account and the rule applicable to
it.
• Entries to the left side of the an account are debits
(DR), and accounts with left sided balances (asset
accounts and expense accounts) are debit accounts.
Entries to the right side of the an account are credits
(CR), and accounts with right sided balances (liability
accounts, owners' equity accounts, and revenue and
profit accounts) are credit accounts. Understanding
debit and credit is essential for bookkeeping and
analysis of balance sheets.
 Debit and Credit Rules

DEBIT CREDIT

• An accounting • An accounting
entry that: entry that:
 Increases an asset  Decreases an
account asset account
 Increases an  Decreases an
expense account expense account
 Decreases a  Increases a
liability account liability account
 Decreases a  Increases a
revenue account revenue account
Summary of Debits and
Credits
The Accounting
Process
The Accounting Process
• Systematic recording of the
financial operations of a
business or of an individual
• Before an accounting system
can be started, the owner of a
business must find:
• What the business owns (assets)
• What the business owes (liabilities)
• What the business is worth (equity)
Single-entry vs Double-entry
Single – One account entry for each
transaction
Double – Two account entries for
each transaction
• One debit and one credit

Hybrid systems
• May not match income with expenses
• May not distinguish cash, check, or credit
 Double-entry Accounting
• A process by which accounting transactions are
entered
• each individual transaction always has an offsetting
transaction.
• double-entry bookkeeping gets its name because
you enter all transactions twice
• One account will receive a "debit" entry, meaning
the amount will be entered on the left side of that
account. Another account will receive a "credit"
entry, meaning the amount will be entered on the
right side of that account. The initial challenge with
double-entry is to know which account should be
debited and which account should be credited.
Rules of Debit and Credit – Normal Balances of
Accounts
 Accounting Methods
• Accounting methods dictate how the
company's transactions are recorded in the
company's financial books
• Cash-basis accounting  companies record
expenses in financial accounts when the cash is
actually laid out, and they book revenue when they
actually hold the cash
• Accrual accounting  companies record revenue
when the actual transaction is completed (such as
the completion of work specified in a contract
agreement between the company and its customer),
not when they receive the cash. Companies record
any expenses when they're incurred, even if they
have not paid for the supplies yet
Accounting Process