Key terms in Accounting
A manufacturer is one who buys raw materials,
 Statement of Financial Position – is a progress
report showing a list of assets and liabilities
 Income statement – is a performance report of
revenues against and expenses
 Statement of Cash flows- is a cash report
showing where we got and where we used the
money
 Statement of Owner’s Net Worth – is a
progress report showing changes in wealth
 Bookkeeping – is a basic accounting procedure
that keeps tracking the revenue and expenses as
well as the asset and liabilities.
History of Accounting
 The first accounting book was written by
Cotrugli in Naples
 Summa de Aritmetica – is an book which
contains the modern double entry bookkeeping
system that was prepare in 1494 by an Italian
mathematician Fr. Luca Pacioli .
 In Philippines, bookkeeping was by the Spaniards
and the bookkeeper Tenedor de Libro
Sources of Capital
1. Primary source of capital is the money of
owner and investor
2. Secondary source is the microfinance program
(Tulay sa Pag-unlad Inc., Bangko Kalayaan, BPI
Globe Banko, and Rural Bank of the Philippines)
Forms of Business
1. Sole Proprietorship – A business set up and
managed by one person.
2. Partnership – This is a business owned by two
or more persons called partners who contribute
money property and talent in a common fund for
the purpose of sharing profit among themselves.
3. Corporation – A business organized as a
separate legal entity from the owners. It is
managed by Board of Directors elected by
shareholders from among themselves.
Types of Business Operation
1. A service business is one which provides
service for a fee, to clients or customers.
2. A merchandising business is one which buys
and sells goods.
3.
processes these into finished goods and then sell
to customer.
Accounting Information System (AIS)
It can be classified into two:
1. Measurement System (Processing phase)
which involves analyzing, measuring, recording,
classifying and summarizing.
2. Communication System (Reporting and
communicating phase) which involves
presentation of formal reports which are
communicated to decision makers.
AIS Principle
For AIS to be effective and effective, five principles must
be followed
1. Control Principle – prescribes that AIS of the
firm must have good internal control.
Internal control enumerates the method and
procedures necessary to monitor the activities of
the business and ensure efficient operation.
 Properties of the business are protected
 Records accurate and reliable
 Company policies are complied
 Performances of business units or
divisions are properly evaluated.
2. Cost Benefit Principle – It prescribes the
advantages that enjoyed from installing the
system must outweigh cost. For example,
installing a computerized system maybe costly
but it can reduce the number of employees which
in turn will reduce costs of salaries.
3. Relevance Principle – It prescribes that the
information must be useful to enable statement
users to reach a conclusion and make a decision.
4. Compatibility Principle – prescribes designed to
fit the unique characteristics of the company
5. Flexibility Principle – prescribes that the
company’s system should allow for changes.
Business Papers – These are sources of documents
evidencing transactions of a business.
1. Invoice – is issued when service or merchandise
is given to a customer or client.
2. Official Receipt – is issued when cash is
received by the entity.
3. Cash or Check Vouchers – is a document used
when cash is paid or check is issued.
 Chart of Accounts – is a listing of account titles
which guides the bookkeeper in the recording the
transactions.
 The T Account – The simplest tool used to
analyze the effects of transactions on each
account.
 The Venetian Model – it is also known as
Double Entry Bookkeeping System which was
introduced by Luca Pacioli that the transactions
must always affect two accounts (example cash
and capital) and at least one or two accounting
elements (example: assets only or assets and
owner’s equity)
 Account Balance – the difference between debit
total and credit total
 Debit Balance – if the debit total is higher than
credit total
 Credit Balance – if the credit total is higher than
debit total
 Journal – is also called the book of original
entry
- The simplest form of journal is the two column
general journal
- The process of recording in this book is called
journalization
 General Ledger – is also called the book of final
entry
 Posting - the process called in transferring the
debit and credits from the journal to ledger.
 Tranposition – is one of the common errors of
posting in which digits are interchanged. Say an
amount 29,560 was copied as 29,650
 Transplacement – is one also common error
which the decimal point is misplaced, say an
amount 290,000 was copied as 29,000.
 Payroll represents compensation paid to
employees and workers.
 In investing of an already existing business - the
assets and liabilities must be recorded at the
current market value.
 Incidental expenses – incurred in transporting
the asset to the place of buyer such as taxes,
import duties, storage, insurance while in transit
and freight.
 Additional expenditures – such as installation
cost, expenses to the test runs, salary of hired
expert are also must capitalized.
 Trade discounts, rebates and allowances are
deducted from the purchase price of acquired
property.
 A rebate is a discount granted for paying an
account promptly.
 Assets like machine, equipment can become
obsolete or inadequate.
- Obsolescence occurs when a better a model is
invented or produced than the originally which
was acquired.
- Inadequacy results if the asset can no longer
meet the demand of the business.
- For example, if the production capacity of
machine is 50,000 units whereas the volume
needed is 100,000
 A promissory note is a written promise made by
the maker or debtor promising to pay the payee or
the creditor a sum certain money due at a fixed or
determinable future time.
 Prepaid Expense – represents advance payment
for service
 Accrued Income – income already earned but
were not collected nor recorded
 Accrued Expense – expenses already expired but
were not paid nor recorded
 Unearned income – advance collection recorded
as a liability, but a portion of which has already
been earned.
 Prepaid expenses – advance payment recorded
as an asset but a portion of which was already
expired
 Bad debts – client accounts that may not be
collected anymore or are doubtful of collection.
 Depreciation expense – transfer of asset cost to
expense based on its declining utility value
 DEPRECIATION = Cost – Scrap Value
Useful life stated in No. of years
Currents Assets
 Cash – includes currencies or coins or negotiable
instruments such as bank check or a postal money
order used as a medium of exchange.
 Cash on Hand – for cash items in the custody of
the officer-in-charge or the owner
 Cash in Bank – for cash deposited in the bank
under a current savings account.
 Cash equivalents- are short term, highly liquid
investments such as a three-month time deposit or
a three month-month government Treasury bill.
 Marketable Securities – these are highly traded
in securities such as stocks and bonds purchased
by the enterprise that are to held for a short term
duration.
  Receivables – these are collectibles from
customers, clients and other persons for the
goods, services or money given by business.
1. Accounts Receivables – if only an oral
or an implied promise is received from
the client or customer.
2. Notes Receivable – is evidenced by a
promissory note issued by the debtor.
Other Receivables are:
1. Interest Receivable – when interest is
collectible on promissory notes received
from clients and customers.
2. Rent receivable – for rent collectible
from tenants.
3. Dividends Receivable – is a dividend
collectible by a shareholder from a
corporation.
 Merchandise Inventory – is an account title
used to represent the stock of goods available for
sale by the business.
 Prepaid Expenses – these represent advance
payment
 Deductions from current assets are called contra
asset accounts. One example of this is
Allowance for Bad Debts which represents
customers’ account doubtful of collection.
Non-current Assets
 Land - A lot or real estate owned and used by the
business on which a building could be
constructed.
 Building – structure used to house the office,
store or factory.
 Equipment
1. Office Equipment
2. Store Equipment
3. Delivery Equipment
 Furniture and Fixtures
1. Office Furniture and Fixtures
2. Store Furniture and Fixtures
Current Liabilities
1. Accounts Payable
Notes Payable
2. Loan Payable – liability to pay a bank or a
financing institution for amount of money
borrowed.
3. Utilities Payable – to pay utility companies
like PLDR, Meralco and Manila water.
4. Other Payables
- Interest payable – additional charge
and obligation to pay for interest-
bearing promissory notes issued by
the business.
- Salaries Payable – It is an obligation
to pay employees for service
received from them.
- Taxes payable – obligations due to
government for sales, earnings and
gains.
Non- Current Liabilities
1. Note Payable – which is issued to the
creditor and evidenced by a promissory
note.
2. Mortgage Payable – which is an
obligation secured by the real property of
the business.
3. Bond Payable – which is a long term
promise usually from five to ten or
twenty years supported by formal
contract containing the face value of the
bond, the interest rate, the interest
payment date and the maturity date.
 Profitability – is the ability of the company to
enhance the owner’s equity through profit.
Profit Margin = Net Income / Revenues
 Return on Total Assets = Net Income /
Average Total Assets
Average Total Asset = Total asset of the
previous year plus Total asset of the current
year divided by 2.
 Liquidity – is the ability of business to pay for its
short-term obligations.
 Working Capital = Current Assets minus
Current Liabilities
 Current Ratio = Current Asset is divided by
Current Liabilities
 Quick Ration or Acid Ratio = Quick Assets is
divided by Current Liabilities
 Solvency – is long term liquidity and is measured
based on the ability of business to pay for long
term obligations when they fall due.
 Debt Ratio – Total Liabilities divided by Total
Assets
 Equity Ratio – Total Owner’s Equity divided
by Total Assets

 FOB Shipping Point – the buyer is responsible

for the expense of delivery of goods.
 FOB Destination - the seller is responsible for
the expense of delivery of goods.
 Sales Journal – the specific money columns that
depends on the term of sales being offered by the
merchandiser. It can either be on cash or on
account basis.
 Cash Receipts Journal – this is a book of
original entry where all cash receipt transactions
are recorded such as investments, loans, cash
sales, collection of customers’ account and cash
refund.
 Purchases Journal – purchases of merchandise
are usually on cash or on account.
 Cash Disbursement Journal – all cash
payments are recorded in this journal such as:
1. Cash purchases of merchandise and other
assets.
2. Payments of accounts and other liabilities
3. Payment of expenses.
4. Cash withdrawals of the owner
5. Cash refunds to customers