ENTREPRENEURSHIP

2 QUARTER
ND

APRIL ANGELIE TIONGCO-ONLOS

ACCOUNTING
 OBJECTIVES:

A. IDENTIFY THE MEANING OF ACCOUNTING AND

THE ELEMENTS OF FINANCIAL STATEMENT.
B. DISCUSS ACCOUNT TITLE AND DEBIT/CREDIT.
C. PERFORM ACCOUNTING FOR BUSINESS
TRANSACTIONS.
DEFINITION OF ACCOUNTING

A. Accounting is a service activity, Its function to

provide quantitative (measurable) information
primarily financial in nature, about economic
entities that is intended to be useful in making
economic decisions.
DEFINITION OF ACCOUNTING

B. Accounting is an information system that

measures, processes and communicates financial
information about economic entity.
DEFINITION OF ACCOUNTING

C. Accounting is an art of recording, classifying and

summarizing in a significant manner and in terms of
money, transactions and events which are, in part of
least, of a financial character, and interpreting the
result.
WHAT IS THE PURPOSE OF
ACCOUNTING?
PURPOSE OF ACCOUNTING

 The accounting function is part of broader business system, and does not
operate in isolation. It handles the financial operations of the business but
also provides information and advice to other departments. Business
transactions are the economic (financial) activities of the business.
Recording these historical events is a significant function of accounting.
Accounts are produced to aid management in planning, control and
decision-making and to comply with regulations.
ELEMENTS OF FINANCIAL STATEMENTS

 ASSET is a resource controlled by the enterprise as a result of

past events and from which future economic benefits are
expected to flow to the enterprise.
 ASSET include cash, cash equivalents, notes receivable, accounts
receivable, inventories, prepaid expenses, property, plant and
equipment, investments, intangible assets and other assets.
ELEMENTS OF FINANCIAL STATEMENTS

 LIABILITIES are obligations of the entity to outside parties who have furnished
resources.
 LIABILITIES is a present obligations of the enterprise arising from the past events,
the settlement of which is expected to result in an outflow from the enterprise of the
resources embodying economic benefits.
 LIABILITIES includes notes payable, accounts payable, accrued liabilities, unearned
revenues, mortgage payable, bonds payable and other debts (obligations) of the
enterprise.
ELEMENTS OF FINANCIAL STATEMENTS

 EQUITY is a residual interest in the assets of the enterprise after

deducting all its liabilities. Equity may pertain to any of the
following depending on the form of the business.
a. In Sole proprietorship, there is only one owner’s equity account
because there is only one owner.
ELEMENTS OF FINANCIAL STATEMENTS

b. In partnership, an owner’s equity account exist for each partner.

c. In a corporation, owner’s equity or stockholders’ equity consists
of share capital, retained earnings and reserves representing
appropriations of retained earnings among others.
ELEMENTS OF FINANCIAL STATEMENTS

 INCOME is increase in economic benefits during the accounting period in the form of
inflows or enhancement of assets or decreases of liabilities that result in increases in
equity.
a. Revenue arises in the course of the ordinary activities of an enterprise and is
referred to by a variety of names including sales, fees, interest, dividends, royalties,
and rent.
b. Gains represent other items that meet the definition of income and may, or may not,
arise in the course of the ordinary activities of an enterprise. It represent increase in
economic benefits and as such are no different in nature form revenue.
ELEMENTS OF FINANCIAL STATEMENTS

 EXPENSES are the decreases in economic benefits during the accounting

period in the form of outflows or depletion of assets or incurrences of
liabilities that result in decrease in equity, other than those relating to
disturbance to equity participants.
 LOSSES represent other items that meet the definition of expense and may
or may not, arise in the course of the ordinary activities of an enterprise.
Losses represent decrease in economic benefits and as such are no difference
in nature from other expenses.
 THE ACCOUNT

 The basic summary device of accounting is the ACCOUNT. A separate account is

maintained for each element that appears in the balance sheet (asset, liabilities and
equity) and in the income statement (income and expenses). Thus, an account may
be defined as a detailed record of the increases, decreases and balance of each
element that appears in an entity’s financial statements. The simplest form of the
account is known as the “T” account because of its similarity to the letter “T”. The
account has thee parts as shown in the next slide.
 ACCOUNT TITLE/
“T” ACCOUNT

LEFT SIDE OR RIGHT

SIDE OR
DEBIT SIDE CREDIT SIDE
ACCOUNTING EQUATION

THE BASIC ACCOUNTING MODE IS:

ASSET = LIABILITIES + OWNER’S
EQUITY
 ACCOUNTING EQUATION

ASSET LIABILITIES OWNER’S EQUITY

= +
 DEBITS AND CREDITS

 An account is DEBITED when an amount is entered on the left side of the

account and CREDITED when an amount is entered on the right side.
 The account type determines how increases or decreases in it are recorded.
Increase in assets are recorded as debits (on the left side of the account) while
decreases in assets are recorded as credits (on the right side of the account).
Conversely, increase in liabilities and owner’s equity are recorded by credits and
decreases are entered as debits.
 DEBITS AND CREDITS

 The rules of debit and credit for income and expenses accounts are based
on the relationship of these accounts to owner’s equity. Income increases
owner’s equity and expense decreases owner’s equity. Hence, increases in
income are recorded as credits and decreases as debits. Increases in
expenses are recorded as debits and decreases as credits. These are the rules
of debit and credit. The following are the summarize rules:
 BALANCE SHEET ACCOUNTS

ASSET LIABILITIES AND OWNER’S EQUITY

Debit Credit Debit Credit
(+) (-) (-) (+)
Increases Decreases Decreases Increases

Normal Balance Normal Balance

 INCOME STATEMENT ACCOUNTS

Debit for decrease of Credit for increases in

Owner’s Equity Owner’s Equity
EXPENSES INCOME
Debit Credit Debit Credit
(+) (-) (-) (+)
Increases Decreases Decreases Increases

Normal Balance
Normal Balance
NORMAL BALANCE OF AN ACCOUNT
 The normal balance of any account refers to the side of the
account-debit or credit-where increases are recorded. Asset,
owner’s withdrawal and expense accounts normally have debit
balance; liability, owner’s equity and income accounts normally
credit balance. This result occurs because increase in an account
are usually greater than or equal to decreases.
 LETS IDENTIFY!🤓 👧👱

Increases Recorded by Normal Balance

Account Category Debit Credit Debit Credit
ASSET
LIABILITIES
OWNER’S EQUITY
Owner’s Capital
Withdrawal
Income
Expenses
 TYPES AND EFFECTS OF TRANSACTIONS
1. Source of Assets (SA). An asset account increases and a corresponding claims
(liabilities or owner’s equity) account increases. Example: Purchase of supplies on
account.
2. Exchange of Assets (EA). One asset account increases and another asset account
decreases. Example: Acquired equipment for cash.
3. Use of Assets (UA). An asset account decreases and a corresponding claims (liability or
equity) account decreases. Example: Settled accounts payable, Paid salaries of
employee.
4. Exchange of Claims (EC). One claims (liabilities or owner’s equity) account increases
and another claims (liabilities or owner’s equity) account decreases. Example:
Received utilities bill but did not pay.
 LETS IDENTIFY!💁

1. Increase in Assets = Increase in Liabilities Source of Assets

2. Increase in Assets = Increase in Owner’s Equity Source of Asset
3. Increase in one Assets = Decrease in another Asset Exchange of Assets
4. Decrease in Assets = Decrease in Liabilities Use of Assets
5. Decrease in Assets = Decrease in Owner’s Equity Use of Assets
6. Increase in Liabilities = Decrease in Owner’s Equity Exchange of
Claims
7. Increase in Owner’s Equity = Decrease in Liabilities
Exchange of
8. Increase in one Liabilities = Decrease in another Liabilities Claims
9. Increase in Owner’s Equity = Decrease in another Owner’s Equity
Exchange of
Claims
Exchange of
 TYPICAL ACCOUNT TITLE USED
1. ASSET is classified only into two: current assets and non current assets. An entity shall
classify assets as current when:
a. It expects to realize the asset, or intends to sell or consume it, in its normal operating cycle.
b. It holds the asset primarily for the purpose of trading.
c. It expects to realize the asset within twelve months after the reporting period.
d. The asset is cash or a cash equivalent unless the asset is restricted form being exchanged or
used to settle a liability for at least twelve months after the reporting period.
 TYPICAL ACCOUNT TITLE
 All other assets should USED
be classified as non-current assets. –
 CURRENT ASSETS
a. Cash is any medium of exchange that a bank will accept for deposit. It includes coins, currency,
checks, money orders, bank deposit and drafts.
b. Cash equivalents these are short-term , highly liquid investment that are readily convertible
to known amounts of cash.
c. Notes Receivable is a written pledge that the customer will pay the business fixed amount of
money on a certain date.
d. Accounts Receivable these are claims against customers arising from sale of services or
goods on credit.
 TYPICAL ACCOUNT TITLE USED

e. Inventories these are assets which are held for sale in 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 or in the rendering of
services.
d. Prepaid Expenses are expenses paid for the business in advance. Its is an
asset because the business avoids having to pay cash in the future for a specific
expense. These includes insurance and rent.
 TYPICAL ACCOUNT TITLE USED
 NON-CURRENT ASSETS
A. Property, Plant and Equipment these are tangible assets that are held by an
enterprise for use in the production or supply of goods or services.
B. Accumulated Depreciation
C. Intangible Assets these are identifiable, nonmonetary assets without physical
substance held use in the production or supply of goods or services, for rental to
others, or for administrative purposes. These includes goodwill, patents, copyrights,
licenses, franchise, trademark, brand names, secret processes, subscription list and
non-competition agreement.
 LIABILITIES
 CURRENT LIABILITIES
A. ACCOUNTS PAYABLE account represents the reverse relationship of the accounts receivable.
B. NOTES PAYABLE a note payable is like a note receivable but in reverse sense.
C. ACCRUED LIABILITIES amount owed to others for unpaid expenses. This account includes salaries
payable, utilities payable, interest payable and taxes payable.
D. UNEARNED REVENUES when the business entity receives payment before providing its customers
with goods or services, the amounts received are recorded in the unearned revenue account (liability
mode). When the goods or services are provided to the customer, the unearned revenue is reduced and
income is recognized
E. CURRENT PORTION OF LONG-TERM DEBT these are portion of mortgage notes, bonds and
other long term indebtedness which are to be paid within one year from the balance sheet date.
LIABILITIES
 NON-CURRENT LIABILITIES
A. MORTGAGE PAYABLE this account records long term debt of the
business entity for which the business entity has pledged certain assets
as security to the creditor.
B. BONDS PAYABLE a business organization often obtain substantial
sums of money from lenders to finance the acquisition of equipment
and other needed assets..
 OWNER’S EQUITY

A. CAPITAL this account is used to record the original and additional

investments of the owner of the business entity.
B. WITHDRAWALS when the owner of the entity withdraws cash or other
assets, such are recorded in the drawing or withdrawal accounts rather than
directly reducing the owner’s equity account.
C. INCOME SUMMARY a temporary account used at the end of the
accounting period to close income and expenses.
INCOME STATEMENT
A. INCOME revenues earned by performing services for a customer or client.
B. SALES revenues earned as a result of sale of merchandise.
EXPENSES
A . COST OF SALES cost incurred to purchase or to produce the products sold to
customers during the period; also called cost of goods sold.
B. SALARIES AND WAGES includes all payments as a result of employer-employee
relationship.
C. TELECOMMUNICATIONS, ELECTRICITY, FUEL AND WATER EXPENSES
D. RENT EXPENSE rentals of space, equipment and other assets
 INCOME STATEMENT
E. SUPPLIES EXPENSE using supplies in the conduct of daily business.
F. INSURANCE EXPENSE portion of premiums paid on insurance coverage.
G. INTEREST EXPENSE an expense related to use of borrowed funds.
H. DEPRECIATION EXPENSE the portion of the cost of a tangible asset (e.g.
buildings and equipment) allocated or charged as expense during an accounting
period.
I. INTEREST EXPENSE an expense related to borrowed funds
J. UNCOLLECTIBLE ACCOUNT EXPENSE the amount of receivables estimated to
be doubtful of collection and charged as expense during an account period.
ACCOUNTING FOR BUSINESS TRANSACTION
 BUSINESS TRANSACTION is the occurrence of an event or a
condition that affects financial position and can be reliably recorded.
 ILLUSTRATION

 Leopoldo Medina decided to establish a sole proprietorship

business and named it as Medina Graphics Design. Medina is a
graphic designer who has extensive experience in drawing,
layout, typography, lettering, diagramming and photography. He
possesses the talent to visually communicates a target audience
with the right combination of words, images and ideas.
ILLUSTRATION

 The owner, Leopoldo Medina, makes the business decisions.

The assets of the company belong to Medina and all
obligations of the business are his responsibility. Any income
the entity earns belong solely to Medina.
ACCOUNTING FOR BUSINESS TRANSACTION
 March 1 Medina started his new business by depositing P 350,000 in a bank account in
the name of Medina Graphics Design at BPI Poblacion Branch.
 March 5 Computer equipment costing P 145,000 is acquired on cash basis.
 March 9 Computer supplies in the amount of P 25,000 are purchase on account.
 March 11 Medina Graphics Design collected P 88,000 in cash for designing interactive
web sites for two exporters based inside the Davao Ecozone.
 March 16 Medina paid P 18, 000 to Bills Express, a one stop bills payment service company
for the semi-monthly utilities.
ACCOUNTING FOR BUSINESS TRANSACTION
 March 17 The entity has service agreements with several entrepreneurs to
maintain and update their web sites weekly. Medina billed these clients
P 35,000 for the services already rendered during the month.
 March 19 Medina made a partial payment of P 17,000 for the Mar 9 purchase on
account.
 March 20 Checks totalling P 25,000 were received from clients for billings dated
Mar. 17.
 March 21 Medina withdrew P 20,000 from the business for his personal use.
ACCOUNTING FOR BUSINESS TRANSACTION
 March 27 Loqueloque Publishing submitted a bill to Medina for P 8,000 worth of
newspaper advertisements for this month. Medina will pay this bill next.
 March 31 Medina paid his assistant designer salaries of P 15,000 for the month.
 LETS PRACTICE!
A. Create a journal entry for each business transaction.
B. Identify the types and effect of each transactions (SA, EA, UA, EC).
C. Make a T Account for each entry.
D. Do the Accounting equation to check if the transaction is balance
(A=L+O.E.).
 J. Dela Cruz Graphics Design
a. Mar. 1 Dela Cruz started his new business by depositing P 350,000 in a bank
account in the name of Dela Cruz Graphics Design at Phil Taks Bank.
b. Mar. 2 Computer equipment is acquired by issuing a P 50,000 notes payable
to Phil Taks Office Systems. The note is due in six months.
c. Mar. 3 Dela Cruz paid P 15,000 to Phil Taks Building for the rent on the
office studio for for the months of October, November and December.
d. Mar. 4 Received advance payment of P 18,000 from Phi Taks Hotel for
website updating for the next three months.
e. Marc. 5 Computer equipment is purchased on cash basis amounting to P
145,000.
 J. Dela Cruz Graphics Design
f. Mar. 9 Computer Supplies in the amount of P 25,000 are purchased on account.
g. Mar. 11 J. Dela Cruz Graphics Design collected P 88,000 for designing web sites.
h. Mar. 16 Dela Cruz paid P 18,000 for the monthly utilities.
i. Mar. 17 Dela Cruz billed clients P 35,000 for services already rendered during the month.
j. Mar. 19 Dela Cruz partially paid P 17,000 for the Mar. 9 purchase of computer supplies.
k. Mar. 20 Received checks totalling P 25,000 from clients for billing dated Mar. 17.
l. Mar. 21 Dela Cruz withdrew P 20,000 of cash from the business for his personal use.
m. Mar. 27 Phil Taks Advertising billed Dela Cruz for P 8,000 ads. Dela Cruz will pay next
month.