ACCOUNTING PRINCIPLES
Lesson 01
THREE PERSONS OR ENTITIES IN THE WORLD OF COMMERCE //
FORMS OF BUSINESS ORGANIZATION
- Based on the capitalization; where it came from
SOLE PROPRIETORSHIP
- One owner
PARTNERSHIP
- Two or more owner
CORPORATION
- More than 50
- Investment from general public
TYPES OF BUSINESS OR ECONOMIC ACTIVITIES
- Activity of the business
SERVICE
- Provides service to customers and clients
- Service; labor; skill
MERCHANDISING
- Also called a Trading Business
- Buy goods in salable form and sell to the customers in a higher amount
- Buy and sell
MANUFACTURING
- Buys raw material to create a new product before selling to the customer
PROCEDURE OF REGISTERING A BUSINESS
VAT TAXPAYER – more than 3million
NON VAT – less than 3million
Books of account should be approved by BIR
Lesson 02
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
- Governs financial transaction
Manual/Process Flow/Documentation/Recording guidelines
COMMONLY KNOWN PRINCIPLES
BUSINESS ENTITY CONCEPT
- “Entity” - person
- The business is considered as person, separate and distinct from the owner/s.
- Transaction of the owner is separate from the business
GOING CONCERN ASSUMPTION
- Assumption that a business will continue to exist in the near future, in other words, that it
will not liquidate or be forced out of business.
TIME PERIOD ASSUMPTION
- States that a business should report their financial statements appropriate to a specific time
period.
- Monthly; Semi-annually; Annually
UNIT OF MEASUREMENT ASSUMPTION / MONETARY UNIT CONCEPT
- Financial statement should be recorded according to the currency/monetary unit where the
business resides and where the business submits its financial reports.
REVENUE RECOGNITION CONVENTION (RECOGNITIOND OF REVENUE OR INCOME)
- States that revenue should be recognized and recorded when the sale has been made or
earned.
MATCHING PRINCIPLE (RECORDING OF EXPENSES)
- Directs a company to report an expense on its income statement in the period in which the
related revenues are earned.
CONSISTENCY PRINCPLE
- Consistent use of the principle
Lesson 03
DEFINITION OF ACCOUNTING
BASICS IN ACCOUNTING MODULE
ACCOUNTING
- Service activity
- Its function is to provide quantitative information
Factual and data
- About economic entities
Persons doing the business
- Intended to be used in reasoned choices
Lesson 04
OVERVIEW OF THE ACCOUNTING EQUATION
AND ACCOUNTING CYCLE
ACCOUNTING EQUATION
Assets = Liabilities + Capital
where Capital:
Beginning Capital
+Additional Capital
-Drawing
+Revenue Net Income/
-Expenses Net Loss
ACCOUNTING CYCLE
1. Analyzing source documents
2. Journalizing business transactions
3. Posting to ledger
4. Preparation of unadjusted trial balance
5. Gathering of data for adjustments
6. Journalizing adjusting entries
7. Preparation of financial statements
8. Preparation of closing entries
9. Preparation of post-closing trial balance
10. Preparation of reversing entries
Source Documents > Journal > Ledger > Unadjusted Trial Balance > Closing Entries > Financial
Statements > Adjusted Trial Balance > Adjusting Entries > Reversing Entries
STAGES OF ACCOUNTING CYCLE
A. Recording of External Transactions
- Covered by source documents and affecting a third party.
- Source documents are transactions that has an impact on the equation.
- Receipts
- Analyzing and journalizing
Rules of Credit and Debit
Debit Credit
B. Recording of Internal Transactions
- Transactions without source document
- Adjusting Entries
C. Preparation of Financial Statements
D. Recording of Closing Entries
E. Recording of Reversing Entries
Lesson 05
UNDERSTANDING THE BASIC ACCOUNTING EQUATION
Rule of Debit and Credit
Debit (LHS) (RHS) Credit
Increase when Increase when
debited; Decrease credited; Decrease
when credited when debited
ACCOUNTING EQUATION
Assets = Liabilities + Capital
where Capital:
Beginning Capital
+Additional Capital
-Drawing
+Revenue Net Income/
-Expenses Net Loss
EXPANDING THE BASIC EQUATION
Assets = Liabilities + Capital
(Beginning Capital
+Additional Capital
+Net Income
(Revenue – Expenses)
-Drawing)
Legend:
Balance Sheet Accounts
Capital Statement Account
Income Statement Accounts
The financial statements are an expanded form of the basic accounting equation.
Lesson 06
STAGES OF ACCOUNTING CYCLE
STAGES OF ACCOUNTING CYCLE
A. Recording of External Transactions
1. Analyze the Source Document
Source Documents
A source document is an original record which contains the detail that supports or substantiates
a transaction that will be (or has been) entered in an accounting system. In the past, source documents were
printed on paper. Today, source documents may be an electronic record.
A document that contains transaction modifying the equation.
Source Documents – Check Copy or Check Stub
A cheque copy is a document supporting the accounting entry for a payment by cheque.
The cheque copy is THE source document; the cheque is ONLY a document.
Bank Statement
Debit Memo
Credit Memo
Payroll
The Employees Earnings Record Card
The summary of the payroll is the source document.
Business Document
Documents that will lead to the creation of source documents. A contract of rent without
payment and without occupation of the premises yest is a business document. These are documents
proving a commercial transaction THAT HAS NOT YET AFFECTED the Assets, Liabilities and Capital of the
business.
Books of Accounts:
Journal
Ledger
Lesson 07
ANALYZING BUSINESS TRANSACTIONS AND
USE OF ACCOUNT TITLES
(MODULE 4)
WHAT ARE THE TRANSACTIONS INDICATED IN THE SOURCE DOCUMENT?
Investment
Cash Sales
Account Sales
Purchase of Supplies
Purchase of Merchandise
Received bills
Paid bills
Paid rent
Paid expenses
Acquire loans
Transactions
Accounting transactions are events or occurrences which brings changes in assets, liabilities and
owner’s equity of the business, these are business events having monetary impact on the financial
statements of a business. They are recorded in the accounting books of the business.
Examples of Accounting Transactions
Sales in cash to a customer
Sales on credit to a customer
Receive cash in payment of an invoice owed by a customer
Purchase fixed assets from a supplier
Record the depreciation of a fixed asset over time
Purchase consumable supplies from a supplier
Investment in another business
Investment in marketable securities
Engaging in a hedge to mitigate the effects of an unfavorable price change
Borrow funds from a lender
Issue a dividend to investors
Sale of assets to a third party
INTERNAL TRANSACTIONS WITHOUT SOURCE DOCUMENTS
Internal transactions are those transactions with monetary impact but which no outside person
or organization is involved, it does not relate with two parties nor does it involve any other second
party.
Examples:
Use of supplies
Expired prepayments
Depreciation expenses
Bad debts on accounts receivable
Setting up of petty cash fund
Accrual of expenses and income
EXTERNAL TRANSACTIONS WITH SOURCE DOCUMENTS
The transactions that occur between two persons or two organizations or between a person and
organization in terms of money are called external transactions or business transactions.
Account Titles
Are names or titles used to sort, record and store transactions.
ACCOUNT TITLES
Color Coding:
Black – Service; Merchandising; Manufacturing
Red – Merchandising
Blue - Manufacturing
ACCOUNT TITLE DESCRIPTION/EXPLANATION OF ACCOUNT TITLE
ASSET
Cash Checking account balance (as shown in company
records) currency, coins, checks received from
customers but not yet deposited.
Accounts Receivable Amounts owed to the company for services
performed or products sold but not yet paid for.
Merchandise Inventory Cost of merchandise purchased but not yet been
sold.
Work In Process Inventory This refers to the raw materials, labor and
overhead costs incurred for products that are at
various stages of the production process. WIP is a
component of inventory asset account on the
balance sheet. These costs are subsequently
transferred to the finished good account and
eventually to cost of sales.
Finished Goods Inventory The products in the manufacturer’s inventory
that are completed and are awaiting to be sold.
Supplies Cost of supplies that have not yet been used.
Supplies that have been used are recorded in
Supplies Expense
Prepaid Insurance Cost of insurance that is paid in advance and
includes a future accounting period.
Equipment Cost to acquire and prepare equipment for use
by the company.
Accumulated Depreciation – Equipment Amount of equipment’s cost that has been
allocated to Depreciation Expense since the time
the equipment was acquired.
Buildings Cost to purchase or construct buildings for use by
the company.
Accumulated Depreciation – Buildings Amount of building’s cost that has been allocated
to Depreciation Expense since the time the
building was acquired.
Land Cost to acquire and prepare land for use by the
company.
ACCOUNT TITLE DESCRIPTION/EXPLANATION OF ACCOUNT
LIABILITIES
Notes Payable The amount of principal due on a formal written
promise to pay. Loans from banks are included in
this account.
Accounts Payable Amounts owed to suppliers who provided goods
and services to the company but did not require
immediate payment in cash.
Wages Payable Amount owed to employees for hours worked
but not yet paid.
Interest Payable Amount owed for interest on Notes Payable up
until the date of the balance sheet. This is
computed by multiplying the amount of the note
times the effective interest rate times the time
period.
Mortgage Loan Payable A formal loan that involves a lien on real estate
until the loan is repaid.
Unearned Revenues Amounts received in advance of delivering goods
or providing services When the goods are
delivered or services are provided, this liability
amount decreases.
ACCOUNT TITLE DESCRIPTION/EXPLANATION OF ACCOUNT
REVENUE
REVENUE FOR SERVICE BUSINESS
Service Revenue Amounts earned from providing services to
clients, either for cash or on credit. When a
service is provided on credit, both this account
and Accounts Receivable will increase.
REVENUE ACCOUNTS FOR MERCHANDISING AND MANUFACTURING BUSINESSES
Sales It contains the record of all sales transactions.
This includes both cash and credit sales. The
account total is then paid with sales return and
allowances account to derive the net sales figure
that is listed in the income statement.
Sales Return and Allowances A contra revenue account that reports
1 merchandise returned by the customer, and
2 the allowances granted to a customer because
the seller shipped improper or defective
merchandise.
Sales return occur when customers agree to keep
merchandise in return for a reduction in the
selling price. These reduce the seller’s account
receivable and is subtracted from sales (along
with sales discounts) to arrive at net sales.
Sales Discount A sales discount is a reduction in the price of a
product or service that is offered by the seller, in
exchange for early payment by the buyer.
ACCOUNT TITLE DESCRIPTION/EXPLANATION OF ACCOUNT
EXPENSES
Salaries Expense Expenses incurred for the work performed by
salaried employees during the accounting period.
These employees normally receive a fixed
amount on a weekly, monthly or annual basis.
Wages Expense Expenses incurred for the work performed by
non-salaried employees during the accounting
period. These employees receive an hourly rate
of pay.
Rent Expense Cost of occupying rented facilities during the
accounting period.
Utilities Expense Costs for electricity, heat, water, and sewer that
were used during the accounting period.
Telephone Expense Cost of telephone used for the accounting period.
Advertising Expense Costs incurred by the company during the
accounting period for ads, promotions, and other
selling and expenses (other than salaries).
Depreciation Expense Cost of long term assets allocated to expense
during the current accounting period.
EXPENSE ACCOUNTS FOR MERCHANDISING AND MANUFACTURING BUSINESSES
Purchases A temporary account used in the periodic
inventory system to record the purchases of
merchandise for resale. (Purchases of equipment
or supplier are not recorded in the purchase
account). This account reports the gross amount
of purchases of merchandise. Net purchase is the
amount of purchases minus purchases returns,
purchases allowance and purchases discounts.
Cost of Goods Sold It refers to the direct costs attributable to the
procurement or production of the goods sold by
the business. The costs of goods sold is the cost
of the products that a retailer, distributor, or
manufacturer has sold. This account is used in
perpetual inventory system of accounting
Purchase Returns and Allowances The temporary contra purchases account used in
a periodic inventory system which represents the
amounts of merchandise that were returned to
suppliers and the amounts allowed as deductions
by suppliers for goods not returned.
Purchase Discounts It is a deduction that a company may receive if
the supplier offers it and the company pays the
supplier’s invoice within a specified period of
time. The purchase discount is also known as the
cash discount or early payment discount.
Freight-in The shipping cost to be paid by the buyer of
merchandise purchased when the terms are FOB
shipping point. Freight-in is considered to be part
of the cost of the merchandise and should be
included in inventory if the merchandise has
been sold.
ACCOUNT TITLE DESCRIPTION/EXPLANATION OF ACCOUNT
NON OPERATING REVENUE AND EXPENSES ACCOUNTS
Interest Revenues Interest and dividends earned on bank accounts,
investments or notes receivable. This account is
increased when the interest is earned and either
Cash or Interest Receivable is also increased.
Gain on Sale of Assets Occurs when the company sells one of its assets
(other than inventory) for more than the asset’s
book value.
Loss on Sale of Assets Occurs when the company sells one of its assets
(other than inventory) for less than the asset’s
book value.
ACCOUNT TITLE DESCRIPTION/EXPLANATION OF ACCOUNT
CAPITAL for Sole Proprietorship
SERRANO, Capital Amount the owner invested in the company
(through cash or other assets) plus earnings of
the company not withdrawn by the owner.
SERRANO, Drawing Amount that the owner of the sole proprietorship
has withdrawn for personal use during the
accounting year. At the end of the year, the
amount in this account will be transferred into
SERRANO, Capital.
CAPITAL for Partnership
SERRANO, Capital Amount the owner invested in the company
YU VEGA, Capital (through cash or other assets) plus earnings of
the company not withdrawn by the owner.
SERRANO, Drawing Amount that the owner of the sole proprietorship
YU VEGA, Drawing has withdrawn for personal use during the
accounting year. At the end of the year, the
amount in this account will be transferred into
SERRANO and YU VEGA Capital.
CAPITAL for Corporation The names of the owners are no longer indicated
in the account but in the certificates of the stocks
they purchased.
Capital Stock Capital Stock is the number of common and
preferred shares that a company is authorized to
issue, according to its corporate charter. The
amount received by the corporation when it
issued shares of its capital stock is reported in the
shareholder’s equity section of the balance sheet.
Treasury Stock Treasury Stock is the number of shares a
company holds in its treasury. Treasury stock is
essentially capital stock that has been bought
back or was never issued to the public
Additional Paid In Capital (APIC) is the value of share capital above its
stated par value and is an accounting item under
Shareholders’ Equity on the balance sheet. APIC
can be created whenever a company issues new
shares and can be reduced when a company
repurchases its shares.
Dividends The distribution of reward from a portion of the
company’s earnings and is paid to a class of its
shareholders. Dividends are decided and
managed by the company’s board of directors,
though they must be approved by the
shareholders through their voting rights.
Retained Earnings
ACCOUNT TITLES COMMONLY USED IN BUSINESS
By a SOLE PROPRIETORSHIP OR PARTNERSHIP
Lesson 08
OPERATING CYCLE OF MERCHANDISING BUSINESS
Types of Sales:
Sales for Cash
Sales on Account
Sales on Account with Discount
Sales on Account without Discount
INCOME STATEMENT
