Junior Philippine Institute of Accountants(c) Junior Philippine Institute of Accountants - University of St.

Lasalle 1

BASIC ACCOUNTING TUTORIAL

PART I

Prepared by:

Gianni C. Catacho
JPIA Academics Committee Chairperson
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 decisions.

- Accounting Standards Council

© Junior Philippine Institute of Accountants - University of St. Lasalle 2

 ELEMENTS OF FINANCIAL STATEMENTS
FINANCIAL POSITION FINANCIAL PERFORMANCE
(BALANCE SHEET) (INCOME STATEMENT)

Accounts: Accounts:
• Assets – resources controlled by • Income – an increase in economic
the entity as a result of past benefits during the accounting
events. period in the form of inflows of
• Liabilities – a present obligation of assets, a decrease of liabilities or
the entity arising from past events increase in equity.
and settlement of such obligation • Expenses– are decreases in
will result in an outflow of economic benefits during the
resources. accounting period in the form of
• Owner’s Equity – the residual outflow of assets, increase of
interest in the assets of the entity liabilities or decrease in equity.
after deducting all its liabilities
(net assets).

© Junior Philippine Institute of Accountants - University of St. Lasalle 3

Assets and Liabilities can be classified into two (2) : Current and Non-current
CURRENT NON-CURRENT

- It expects to realize, sell or consume the asset within

ASSETS its normal *operating cycle (usually 12 months.) All other assets not
- Holds asset for the purpose of trading classified as current
- Cash and cash equivalents that are not restricted to
settle a liability.
- Expected to be settled in its normal operating cycle.
LIABILITIES - Holds the liability primarily for the purpose of
trading All other liabilities not
- Liability is due to be settled within twelve months classified as current
- The entity does not have an unconditional right to
defer the settlement of the liability for at least 12
months after the reporting period.

*Operating Cycle – the time between the acquisition of assets and their realization in cash or cash
equivalents. When an entity’s normal operating cycle is not identifiable, it is assumed to be 12 months.
© Junior Philippine Institute of Accountants - University of St. Lasalle 4
 TYPICAL ACCOUNT TITLES USED
IN THE BALANCE SHEET
ASSETS LIABILITIES OWNER’S EQUITY
Current: Current:
• Cash • Accounts Payable • Capital – used to record
• Accounts Receivables • Notes Payable investments
• Notes Receivables • Accrued Liabilities • Withdrawals
• Inventories • Unearned Revenues • Income Summary – a
• Prepaid Expenses • Current Portion of temporary account used to
Long term Debt close the income statement
Non-current: accounts.
• Property, Plant and Non-current:
Equipment • Bonds Payable
• Accumulated Depreciation • Mortgage Payable
(contra)
• Intangible Assets
© Junior Philippine Institute of Accountants - University of St. Lasalle 5
 TYPICAL ACCOUNT TITLES USED
IN THE INCOME STATEMENT

INCOME EXPENSES

• Sales – from sale of goods • Cost of Sales

• Service Income – from rendering • Salaries Expense
services • Rent Expense
• Depreciation Expense
• Bad Debts Expense
• Interest Expense
• Utilities Expense

© Junior Philippine Institute of Accountants - University of St. Lasalle 6

 THE ACCOUNTING EQUATION

Assets = Liability + Owner’s Equity

THE DOUBLE ENTRY SYSTEM Account Title

-the dual effects of a business

transaction is recorded. Debit Credit

- A debit entry must have a

corresponding credit entry.

© Junior Philippine Institute of Accountants - University of St. Lasalle 7

 Assets Liabilities
Debit Credit Debit Credit

Increase Decrease Decrease Increase

(+) (-) (-) (+)

Expenses Income
Debit Credit Debit Credit

Increase Decrease Decrease Increase

(+) (-) (-) (+)

* Normal Balance – refers to the side of the account where increases are recorded
8
© Junior Philippine Institute of Accountants - University of St. Lasalle
A transaction is a particular kind of event that involves the transfer of
something of value between two entities.
Transactions can be classified into four (4) types:
Transaction Asset Liability or Owner’s Equity

Source of Assets Increase Increase

One asset account
Exchange of Assets increases while No Effect
another asset account
decreases
Use of Assets Decrease Decrease
One liability or equity
Exchange of Claims account increases
while another liability No Effect
or equity account
decreases
9
© Junior Philippine Institute of Accountants - University of St. Lasalle
Examples of transactions:

SOURCE OF ASSETS
Burgos Graphics Design acquired supplies on account.
Debit: Supplies (A) Credit: Accounts Payable (L)

EXCHANGE OF ASSETS
Brando Laundry Services purchased a delivery van.
Debit: Delivery Van (A) Credit: Cash (A)

© Junior Philippine Institute of Accountants - University of St. Lasalle 10

Examples of transactions:
USE OF ASSETS
Burgos Graphics Design paid for the supplies purchased on
account.
Debit: Accounts Payable (L) Credit: Cash (A)

EXCHANGE OF CLAIMS
Brando Laundry Services received its electricity bill for the
month of May.
Debit: Utilities Expense (OE) Credit: Accounts Payable (L)

© Junior Philippine Institute of Accountants - University of St. Lasalle 11

EXERCISE:
Determine the effects of the following transactions using T-accounts
and solve for the correct balance of the assets, liability and equity
accounts.
1. Aria invested P50,000 cash in Aria Eye Clinic.
2. Acquired Office Supplies worth P5,000 in cash.
3. Acquired Equipment worth P20,000 on account.
4. Rendered services for P8,000 cash.
5. Paid salaries to employees, P10,000.

© Junior Philippine Institute of Accountants - University of St. Lasalle 12

SOLUTION:
1. Aria invested P50,000 cash in Aria Eye Clinic.
2. Acquired Office Supplies worth P5,000 in cash.
3. Acquired Equipment worth P20,000 on account.
4. Rendered services for P8,000 cash.
5. Paid salaries to employees, P10,000.

Cash Office Supplies Equipment

P 50,000 P5,000 P5,000 P20,000
8,000 10,000

P43,000 P5,000 P20,000

Accounts Payable Aria, Capital
P20,000 *P10,000 P 50,000
**8,000

P20,000 P48,000 * Salaries Expense

** Service Revenue
13
© Junior Philippine Institute of Accountants - University of St. Lasalle
ANOTHER APPROACH ( Financial Transaction Worksheet)
OWNER’S
ASSETS = LIABILITIES + EQUITY
Office Accounts Aria,
Cash Supplies Equipment Payable Capital

#1 50,000 50,000
#2 (5,000) 5,000
#3 20,000 20,000
#4 8,000 8,000
#5 (10,000) (10,000)

Total 43,000 5,000 20,000 20,000 48,000

68,000 68,000

© Junior Philippine Institute of Accountants - University of St. Lasalle 14

 Aria Eye Clinic
Statement of Financial Position
December 31, 2017

Assets Liability
Cash P43,000 Accounts Payable P20,000
Office Supplies 5,000 Owner’s Equity
Equipment 20,000
Total Assets P68,000 Aria, Capital P48,000

Total Liabilities and

Owner’s Equity P68,000

© Junior Philippine Institute of Accountants - University of St. Lasalle 15

 THE ACCOUNTING CYCLE
This refers to a series of sequential steps or procedures
performed to accomplish the accounting process.

Step 1 Step 2 Step 3

Step 4
Identification of Transactions are Journal Entries are
Preparation of Trial
Events to be Recorded in the posted to the
Balance
Recorded Journal Ledger

Step 8
Step 7 Step 6 Step 5
Closing Journal
Adjusting Entries Preparation of Preparation of
Entries are
are Journalized and Financial Worksheet including
Journalized and
Posted Statements Adjusting Entries
Posted

Step 10
Step 9
Reversing Journal
Preparation of Post-
Entries are
Closing Trial
Journalized and
Balance
Posted
16
© Junior Philippine Institute of Accountants - University of St. Lasalle
 The General Journal Journalize
Recording all the
(the book of original entry)
effects of a transaction
in terms of debits and Trial Balance
credits A listing of all ledger accounts, in
Office Equipment xx
order, with their respective debit
Cash xx or credit balances

Assets
Posting Liabilities
Transferring the amounts from Owner’s Equity
the general journal to the Revenue
appropriate accounts in the Cash
Expenses
ledger.
Office
The Ledger Equipment
A grouping of accounts. Used
to classify and summarize
transactions and prepare
data for basic financial
statements
© Junior Philippine Institute of Accountants - University of St. Lasalle 17
THE JOURNAL JOURNAL ENTRY
- Shows all the effects of a business transaction in terms of
- Is a chronological record of the entity’s
debit or credits.
transactions.

Debit xxx
Indented Credit xxx
Example:
Chris invested cash in his new business Chris Printing Services, P50,000.
Debit: Cash (A) Credit: Chris, Capital (OE)

JOURNAL ENTRY:

Cash P50,000
Chris, Capital P50,000

© Junior Philippine Institute of Accountants - University of St. Lasalle 18

 JOURNAL ENTRY
SOURCE OF ASSETS
Burgos Graphics Design acquired Supplies xxx
supplies on account.
Debit: Supplies (A)
Accounts Payable xxx
Credit: Accounts Payable (L)

EXCHANGE OF ASSETS Delivery van xxx

Brando Laundry Services purchased
Cash xxx
a delivery van.
Debit: Delivery Van (A)
Credit: Cash (A)

© Junior Philippine Institute of Accountants - University of St. Lasalle 19

 JOURNAL ENTRY
USE OF ASSETS
Burgos Graphics Design paid for the Accounts Payable xxx
supplies purchased on account.
Cash xxx
Debit: Accounts Payable (L)
Credit: Cash (A)

EXCHANGE OF CLAIMS
Brando Laundry Services received its Utilities Expense xxx
electricity bill for the month of May. Utilities Payable xxx
Debit: Utilities Expense (OE)
Credit: Utilities Payable (L)

© Junior Philippine Institute of Accountants - University of St. Lasalle 20

EXERCISE:
Journalize the following transactions.
Jan. 1 Aria invested P50,000 cash in Aria Eye Clinic.
Jan. 5 Acquired Office Supplies worth P5,000 in cash.
Jan.8 Acquired Equipment worth P20,000 on account.
Jan.10 Rendered services for P8,000 cash.
Jan.13 Paid salaries to employees, P10,000.

© Junior Philippine Institute of Accountants - University of St. Lasalle 21

SOLUTION
Jan. 1 Cash P50,000
Aria, Capital P50,000

Jan. 5 Office Supplies 5,000

Cash 5,000

Jan.8 Equipment 20,000

Accounts Payable 20,000

Jan.10 Cash 8,000

Aria, Capital/Revenue 8,000

Jan.13 Aria, Capital/ Salaries Expense 10,000

Cash 10,000
© Junior Philippine Institute of Accountants - University of St. Lasalle 22
THE LEDGER
- Is the “reference book” of the accounting system and is used to classify and
summarize transactions and prepare data for basic financial statements.

The accounts in the general ledger are classified into two:

• Balance sheet or Permanent accounts (asset, liability, equity)
• Income statement or Temporary accounts or Nominal accounts (income
and expense)
Temporary or nominal accounts are used to gather information for a particular
accounting period. At the end of the period, the balances of these accounts are
transferred to the permanent owner’s equity account through the Income
Summary account.

© Junior Philippine Institute of Accountants - University of St. Lasalle 23

 EXAMPLE:
Jan. 1 Aria invested P50,000 cash in Aria Eye Clinic.
Jan. 5 Acquired Office Supplies worth P5,000 in cash.
Jan.8 Acquired Equipment worth P20,000 on account.
Jan.10 Rendered services for P8,000 cash.
Jan.13 Paid salaries to employees, P10,000.
CASH
Date Description Debit Credit Balance

1-Jan-18 Invested cash in the business 50,000 50,000

5-Jan-18 Acquired office supplies for cash 5,000 45,000

10-Jan-18 Received cash from customers for services rendered 8,000 53,000

13-Jan-18 Paid salaries to employees 10,000 43,000

© Junior Philippine Institute of Accountants - University of St. Lasalle 24

TRIAL BALANCE
- Is a list of all accounts with their respective debit or credit
balances. It is prepared to verify the equality of debits and
credits in the ledger at the end of each accounting period or at
any time the postings are updated.

- The trial balance is a control device that helps minimize

accounting errors.

© Junior Philippine Institute of Accountants - University of St. Lasalle 25

 Aria Eye Clinic
Trial Balance
January 31, 2018

Cash P 43,000
Office Supplies 5,000
Equipment 20,000
Accounts Payable P 20,000
Aria, Capital 50,000
Revenue 8,000
Salaries Expense 10,000
P 78,000 P 78,000

© Junior Philippine Institute of Accountants - University of St. Lasalle 26

LOCATING ERRORS
- Aninequality in the totals of the debits and credits would
automatically signal the presence of an error.

These errors include:

• An erroneous amount posted to the account
• A debit entry was posted as credit or vice versa
• A debit posting was omitted
• A balance was incorrectly computed
• A balance was entered in the wrong balance column
• Incorrect footing of the trial balance
• Incorrect recording of amount in the trial balance

© Junior Philippine Institute of Accountants - University of St. Lasalle 27

STEPS TO LOCATE ERRORS
1. Prove the addition of the trial balance by adding them again in the
opposite direction.
2. Determine the exact amount which the trial balance is out of balance.
- If the discrepancy is divisible by 9, this suggests either a transposition
error (reversing the order of numbers) or a sliding error (moving of the
decimal point)
3. Compare the accounts and amounts in the trial balance with that of the
ledger.
4. Recompute the balance of each ledger account.
5. Trace all postings from the journal to the ledger accounts.

© Junior Philippine Institute of Accountants - University of St. Lasalle 28

ACCRUAL AND CASH BASIS ACCOUNTING
Note: The financial statements, except for the cash flow statement, are prepared on
the accrual basis of accounting.
Under the accrual basis of accounting, the effects of the transactions and
other events are recognized when they occur not when cash is received or
paid. This means:
- Revenues are recognized when earned
- Expenses are recognized when incurred

While in the cash basis of accounting, the effects of transactions are

recognized only when cash is received or paid.
- Revenues are recognized when cash is received
- Expenses are recognized when cash is paid

© Junior Philippine Institute of Accountants - University of St. Lasalle 29

ADJUSTING ENTRIES
Accountants make adjusting entries to reflect in the accounts information on
economic activities that have occurred but not yet recorded.

Adjusting entries assign revenues to the period which they are earned and
expenses to the period which they are incurred.

There are two general types of adjustments made at the end of the
accounting period:
• Deferrals
• Accruals

Note: Each adjusting entry affects a balance sheet account (asset, liability,
equity) and an income statement account (income or expense)
© Junior Philippine Institute of Accountants - University of St. Lasalle 30
DEFERRALS AND ACCRUALS
Deferral is the postponement of the recognition of an expense already paid
but not yet incurred or of a revenue already collected but not yet earned.
Example:
- Rent paid in advance for the next six months (Prepaid Rent)
- Cash already received from a customer without delivering the goods yet.
(Unearned Revenues)
Accrual is the recognition of an expense already incurred but not yet paid or
a revenue already earned but not yet collected.
Example:
- Receiving the electricity bill for the month (Accrued Expense)
- Billing customers for services rendered (Accrued Revenue)

© Junior Philippine Institute of Accountants - University of St. Lasalle 31

EXAMPLE: Making adjustments for deferrals

In the beginning of the first year of operations, Barbara Barber Shop paid
P288,000 which is the rent for two years (P12,000 monthly). At year-end
during the preparation of financial statements, the business have already
incurred one year worth of rent.

Entry to record deferral:

Prepaid Rent P 288,000
Cash P 288,000

Adjusting entry at year-end:

Rent Expense P 144,000
Prepaid Rent P 144,000

© Junior Philippine Institute of Accountants - University of St. Lasalle 32

EXAMPLE: Making adjustments for accruals

Brandy Bake Shop baked and delivered a cake worth P2,000 to its
customer on June 3 which is yet to be paid by the customer.

Initial entry:
Accounts Receivable P 2,000
Revenue P 2,000

Adjustment on June 3:
Cash P 2,000
Accounts Receivable P 2,000

© Junior Philippine Institute of Accountants - University of St. Lasalle 33

CLOSING ENTRIES
Income statement accounts or temporary accounts are closed to the capital
account at the end of the accounting period.

The income and expense account are closed through the Income Summary
account which is then closed to the capital account to reflect any net income
or net loss and arrive at the correct balance of the capital account at year-
end.

The effect of closing entries is to zero out the balances of the temporary
accounts.

Note: Balance sheet accounts or permanent accounts are not closed, only
temporary accounts are closed.

© Junior Philippine Institute of Accountants - University of St. Lasalle 34

 Debit Credit
Rent Expense P 96,000
Salaries Expense 24,000
Utilities Expense 10,000
Miscellaneous Expense 2,500
Service Revenue P 150,000

CLOSING ENTRY:
Service Revenue P150,000
Income Summary P150,000

Income Summary P132,500

Rent Expense P96,000
Salaries Expense 24,000
Utilities Expense 10,000
Miscellaneous Expense 2,500

Income Summary P17,500

Capital P17,500

35
© Junior Philippine Institute of Accountants - University of St. Lasalle