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Reference No: KLL-FO-ACAD-000 | Effectivity Date: August 3, 2020 | Revisions No.

: 00

VISION MISSION
A center of human development committed to the pursuit of wisdom, truth, Establish and maintain an academic environment promoting the pursuit of
justice, pride, dignity, and local/global competitiveness via a quality but excellence and the total development of its students as human beings,
affordable education for all qualified clients. with fear of God and love of country and fellowmen.

GOALS
Kolehiyo ng Lungsod ng Lipa aims to:
1. foster the spiritual, intellectual, social, moral, and creative life of its client via affordable but quality tertiary education;
2. provide the clients with reach and substantial, relevant, wide range of academic disciplines, expose them to varied curricular and co-curricular
experiences which nurture and enhance their personal dedications and commitments to social, moral, cultural, and economic transformations.
3. work with the government and the community and the pursuit of achieving national developmental goals; and
4. develop deserving and qualified clients with different skills of life existence and prepare them for local and global competitiveness

Nature and Environment of Accounting

Accounting. It is the systematic way or process of recording, classifying, analyzing and summarizing
economic events or business transactions.
Branches of Accounting
1. Financial Accounting. Branch of accounting that involves a process of recording, summarizing
and reporting the myriad of transactions resulting from business operations over a period of time
2. Cost Accounting. Branch of accounting that aims to capture a company’s total cost of production
by assessing the variable costs of each step of production as well as fixed costs.
3. Managerial Accounting. Branch of accounting that identifies, measures, analyze, interpret and
communicate financial information to managers for the pursuit of an organization’s goals.
4. Auditing. Branch of accounting that examines and evaluate objectively the financial and
operational reports of an organization to make sure that the records are a fair and accurate
representation of the transactions they claim to present.
5. Tax Accounting. Branch of accounting that focuses on taxes rather than the appearance of the
financial statements.
6. Government Accounting. Branch of accounting used specifically by government entities to
maintain a tight control over resources while compartmentalizing activities into different funds in
order to clarify how resources are being directed at various programs.
7. Forensic or Legal Accounting. Branch of accounting that utilizes accounting, auditing and
investigative skills to conduct an examination into the finances of an individual or business and
provides an accounting analysis suitable to be used in legal proceedings.
8. Fund Accounting. Branch of accounting specifically used by non-profit entities to track the
amount of cash assigned to different purposes and the usage of that cash and its focus is on
accountability rather than profitability.
9. Fiduciary Accounting. Branch of accounting that involves recording of transactions associated
with a trust or estate entity, and issues periodic report on the status of the entity.
10. Accounting Information System. Branch of accounting that a business uses to collect, store,
manage, process, retrieve and report its financial data so it can be use by accountants,
consultants, business analysts, managers, chief financial officers, auditor, regulators and tax
agencies.
Types of Business Organization
1. Service. Type of business that provides intangible products. This offers skills, expertise, advice
and similar products.
2. Merchandising. Type of business that buys products at wholesale price and sells the same at a
retail price. They are also known as the “buy and sell” business.

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3. Manufacturing. Type of business that buys products with the intention of using them as materials
in making new products, thus, there is a transformation of the products purchased.
4. Hybrid. Type of business that may be classified in more than one type of business.
Forms of Business Organizations
1. Sole Proprietorship. It is a business owned by only one person. It is easy to set-up and is the
least costly among all forms of ownership. The owner faces unlimited liability, meaning, the
creditors of the business may go after the personal assets of the owner if the business cannot pay
them.
2. Partnership. It is a business owned by two or more persons who contribute resources into the
entity. The partners divide the profits of the business among themselves. In general partnership, all
the partners have unlimited liability, while in limited partnerships, creditors cannot go after the
personal assets of the limited partners.
3. Corporation. It is a business organization that has a separate legal personality from its owners.
Ownership is represented by a share of stocks
4. Cooperative. It a business owned by a group of individuals and is operated for their mutual
benefit. The persons making up the group are called members.
Users of Financial Information
1. Internal user
a. Owner
b. Management
c. employees
2. External user
a. Investor
b. Lenders
c. Government
d. Customers
e. Suppliers
Generally Accepted Accounting Principles (GAAP). Encompasses the conventions (rules that became
accepted through tacit agreement), rules and procedures necessary to define what accounting practice is.
It represents the rules and procedures, practice and standards followed in preparation and presentation of
financial statements.

Qualitative Characteristics of Financial Statements


The main purpose of financial statement preparation and presentation is to provide information about the
reporting entity that is useful to decision makers.

Ethical
Accounting
Fundamental Enhancing Financial
Conventions
Reporting

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FUNDAMENTAL
1. Relevance. It is capability of influencing the economic decisions of users by helping them evaluate
the past, present and future events
a. Predictive Value. This helps decision makers predict certain outcome
b. Confirmative Value. This confirms or changes previous evaluations
c. Materiality. It is said to be material if any omission or misstatement could influence the
economic decision of users
2. Faithful Representation. Truthful expression of what really happened or existed in the financial
statement.
a. Completeness. This provides all the information needed for a reliable decision. To be
reliable, the information must be complete within the bounds of materiality and cost.
b. Neutrality. Information is free from bias intended to achieve certain results
c. Free from material error. Information must meet a minimum level of accuracy so it does
not distort what is being reported. It doesn’t. mean being absolutely accurate since FS is
based on estimates and judgements.
ENHANCING
1. Comparability.
 Users must be able to compare the FS of an entity through time to identify its trends
 Users must also be able to compare the FS of different entities to evaluate their
performance
 Hence, the measurement and display of financial affects must be carried out in a consistent
way throughout an entity and over time for that entity and in a consistent way across
entities
 Users must also be informed of the accounting policies employed in the preparation of the
FS and any changes in those policies and its corresponding effects
2. Verifiability
 It is the quality that different knowledgeable and independent observers could reach
consensus, though not necessarily complete agreement, that a particular depiction id
faithfully represented.
3. Timeliness. It involves providing the information within the decision time frame since any undue
delay will result into losing its relevance
4. Understandability. It should be presented in a way that makes it comprehensible by users who
have reasonable knowledge of business and economic activities and accounting and willingness to
study the information with reasonable diligence.
ACCOUNTING CONVENTIONS

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1. Consistency. It requires that once a company has adopted an accounting procedure, it must use it
from one period to another unless a note to FS informs users of a change.
2. Full Disclosure (transparency). It requires that FS present all the information relevant to users. It
must include any explanation needed to keep them away from being misled.
3. Conservatism or prudence. The uncertainties that inevitably surround many events are
acknowledged by disclosure of their nature and extent and by the exercise of prudence in
preparation of FS. It does not permit bias. Prudence is the inclusion of a degree of caution in the
exercise of judgement needed in making the estimates required.

ETHICAL FINANCIAL REPORTING


1. Certification. CEO, CFO and Auditors must certify that FS are accurate, complete and not
misleading

Other Concepts Involving Financial Information


1. Substance Over Form
 Economic substance of transactions and events must be recorded in the FS rather than just
their legal form in order to present a true and fair view of the entity.
 It entails the use of judgement on the part of the preparers of FS in order for them to derive
the business sense from the transactions and events and to present them in a manner that
best reflects their true essence
2. Cost-Benefit Analysis
 The benefits derived from information should exceed the cost of providing it.
 This is substantially a judgement process
Conceptual Framework and Underlying Assumption
1. Conceptual Framework. Summary of terms and concepts that underlies the preparation and
presentation of FS for external users.
2. Accounting Assumption. Basic notions or fundamental premises on which the accounting
process is based
3. Accounting Entity Concept. It is the specific business enterprise. Under this assumption is that
the business is treated as a unit separate and distinct from its owners.
4. Going Concern. The business will continue to operate indefinitely in the future unless there is
evidence to the contrary.
5. Time Period. It requires that the indefinite life of the business entity be divided into time periods.
6. Accrual. In order to meet proper accounting, FS should be prepared on accrual basis, meaning
that income is recognized when earned regardless of when received; expense is recognized when
incurred regardless of when payment is made. It is the reason why adjustments have to be
prepared at the end of every accounting period.
7. Monetary Unit. Transactions and events are quantified in terms of money.

The Accounting Period

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In the Time Period Assumption, we mentioned that a business requires that it has an indefinite life, thus
periodic financial statements must be prepared. The usual reporting period is one year as provided by
PAS 1. It means that transactions undergo a one-year accounting process before financial statements are
prepared. However, interim financial statements, say monthly or quarterly, may also be prepared to track
down the progress of the business. The accounts on the statement of financial position are the real values
while income statement accounts are only temporary or nominal values. Once reported these are
transferred to the capital account at the end of a particular period. The income statement reports revenues
and expenses only for a certain period of time. The capital statement reports changes in equity only for a
certain period of time. The statement of financial position reports assets and liabilities at a point in time.
Using a one-year accounting period, it will appear like this:

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Income Statement
For the year 20x2
Revenue
Expenses
Net Income/(Loss)

Statement of Financial Position


Statement of Financial Position As of December 31, 20x2
As of December 31, 20x1 Assets
Statement of Financial Position
Assets Liabilities
For the year 20x2
Liabilities Owner’s Equity
Capital, Jan 20x2
Owner’s Equity Net Income/(Loss)
Withdrawals
Capital, Dec 20x2

Operating Cycle
This represents the period of time it takes for cash to be converted back into cash. PAS 1 defines it as the
time between the acquisition of assets, their processing and realization in cash or cash equivalent. It
depends upon the type of operation. This information is relevant in classifying assets and liabilities of the
entity into current and non-current and also in planning function of management.

CASH
1

3
SERVICE SERVICE
RENDERED ON
ACCOUNT
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CASH
1

MERCHANDISING ACCOUNT MERCHANDISE


BUSINESS COLLECTED PURCHASED

MERCHANDISE
3 SOLD ON
ACCOUNT

CASH
1
5

RAW MATERIAL
ACCOUNT PURCHASED
COLLECTED

2
4
RAW MATERIAL
FINISHED PROCESSED
GOODS SOLD ON INTO FINISHED
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GOODS
3
MANUFACTURING
BUSINESS

Accounting Equation
1. Assets. Economic resources or things of value owned and controlled by the enterprise from which
future economic benefits are expected to flow. These are derived from borrowing, contributions of
owners and income from business operations
2. Equities. This represents the claim of the creditors and owners over the asset of the business

OWNER'S
ASSET LIABILITIES
EQUITY

OWNER'S
ASSET LIABILITIES
EQUITY

OWNER'S
ASSET
EQUITY LIABILITY

Effects of Common Accounting Transactions


To illustrate the effects of the transactions in the accounting elements, let us assume the following:

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Assets invested by the Owner.
March 1 Mr. Gomez opened a tour and travel service by contributing cash. He has three cars but
contributed only two cars
ANALYSIS: The assets of business will increase in the form of cash with a corresponding
increase in owner’s equity in the form of capital
Cash Borrowed from the bank
March 3 Gomez borrowed cash from PNB for use in his business
ANALYSIS: The assets of the business will increase in the form of cash with a
corresponding increase in liability in the form of payable

Asset purchased for Cash


March 7 Bought tables and chairs from SM and paid cash
ANALYSIS: The assets will increase in form of tables and chairs and assets will also
decrease in form of cash. Total assets will still be the same.
Asset purchased on account
March 15 Various equipment were purchased on account from Handyman
ANALYSIS: The assets will increase in the form of equipment with a corresponding
increase in liability in the form of payable
Cash is withdrawn by owner
March 18 Gomez made cash withdrawal for personal use
ANALYSIS: The asset will decrease in the form of cash with a corresponding decrease in
owner’s equity in the form of withdrawals
Payment of liability
March 20 The account due to Handyman was paid in cash
ANALYSIS: The asset will decrease in form of cash with a corresponding decrease in
liability in the form of payable
Summary of Effects of Common Accounting Transactions
Transaction Asset Liability Owner’s Equity
Investment of asset INCREASE NO EFFECT INCREASE
Investment of asset from INCREASE INCREASE NO EFFECT
borrowing
Purchase of asset INCREASE NO EFFECT NO EFFECT
DECREASE
Purchase of asset on INCREASE INCREASE NO EFFECT
account
Withdrawal of asset DECREASE NO EFFECT DECREASE

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Payment of liability DECREASE DECREASE NO EFFECT

Using the same illustration above, let us now include the amounts and some basic account titles.
March 1 Mr. Gomez opened a tour and travel service by contributing P50,000 cash. He has three
cars worth P1,200,000 but contributed only two cars worth P750,000.
  ASSETS = LIABILITIES + OWNER'S EQUITY
1-Mar Cash 50,000         Gomez, Capital 800,000
  Cars 750,000            
    800,000           800,000

March 3 Gomez borrowed P100,000 cash from PNB for use in his business
  ASSETS = LIABILITIES + OWNER'S EQUITY
3-Mar Cash 150,000   Loans Payable 100,000   Gomez, Capital 800,000
  Cars 750,000            
    900,000     100,000     800,000

March 7 Bought tables and chairs from SM and paid cash, P45,000
  ASSETS = LIABILITIES + OWNER'S EQUITY
7-Mar Cash 105,000   Loans Payable 100,000   Gomez, Capital 800,000
  Cars 750,000            
  Furnitures 45,000            
    900,000     100,000     800,000

March 15 Various equipment were purchased on account from Handyman for P55,000
  ASSETS = LIABILITIES + OWNER'S EQUITY
15-Mar Cash 105,000   Loans Payable 100,000   Gomez, Capital 800,000
  Cars 750,000   Accounts Payable 55,000      
  Furnitures 45,000            
  Equipment 55,000            
    955,000     155,000     800,000

March 18 Gomez made P5,000 cash withdrawal for personal use


  ASSETS = LIABILITIES + OWNER'S EQUITY
18-Mar Cash 100,000   Loans Payable 100,000   Gomez, Capital 800,000
  Cars 750,000   Accounts Payable 55,000   Gomez, Drawing (5,000)
  Furnitures 45,000            
  Equipment 55,000            

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    950,000     155,000     795,000

March 20 The account due to Handyman was paid in cash


  ASSETS = LIABILITIES + OWNER'S EQUITY
20-Mar Cash 45,000   Loans Payable 100,000   Gomez, Capital 800,000
  Cars 750,000         Gomez, Drawing (5,000)
  Furnitures 45,000            
  Equipment 55,000            
    895,000     100,000     795,000

To summarize, let us plot the equation:


DATE ASSETS = LIABILITY + OWNER'S EQUITY
Loans Accounts Gomez, Gomez,
March Cash Cars Equipment Furniture Payable Payable Capital Drawing
50,0 750, 80
1 00 000             0,000  
50,0 750,
Balance 00 000 - -   - -   800,000 -
100,0 100
3 00         ,000        
150,0 750, 100 80
Balance 00 000 - -   ,000 -   0,000 -
(45,0
7 00)     45,000            
105,0 750, 100 80
Balance 00 000 - 45,000   ,000 -   0,000 -
55
15     55,000       ,000      
105,0 750, 100 55 80
Balance 00 000 55,000 45,000   ,000 ,000   0,000 -
(5,0 (5,
18 00)                 000)
100,0 750, 100 55 80 (5,
Balance 00 000 55,000 45,000   ,000 ,000   0,000 000)
(55,0 (55
20 00)           ,000)      
45,0 750, 100 80 (5,
Balance 00 000 55,000 45,000   ,000 -   0,000 000)
100 79
        895,000 = ,000   + 5,000  

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Statement of Financial Position (Balance Sheet)
It is a list of assets, liabilities and owner’s equity of a business. This statement informs users of the wealth
and obligations accumulated by the business and is used to determine liquidity and solvency of the
business. It was formerly called the Balance Sheet (was revised in 2007) because it shows the balances
of each account and the grand total shows a balance between the assets (business resource) on one
hand and the liabilities and owner’s equity (claims over the asset) on the other hand.
Let us prepare a Statement of Financial Position using the above illustration.
Happy Tour and Travel
Statement of Financial Position
March 20, 20xx
ASSETS  
Cash 45,000
Cars 750,000
Equipment 55,000
Furniture & Fixture 45,000
Total Assets 895,000
   
LIABILITIES AND OWNER'S EQUITY  
Loans Payable 100,000
Gomez, Capital 795,000
Total Liabilities & Owner's Equity 895,000

As we can see, the equation Asset = Liabilities + Owner’s Equity is satisfied in the above Statement of
Financial Position.

Let us do another example to practice our knowledge.

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Ms. Alegre established a printing service and named it CopyClear Center or CCC on January 2 and
contributed P200,000 cash and equipment worth P48,000. The following are the additional transactions
made for January.
Jan 5 Bought furniture and fixtures worth P6,000 on account
7 Bought photocopier machines for P20,000. Terms: 50% down, balance on account
10 An emergency prompted Ms. Alegre to withdraw P1,500 for personal use.
15 Bought supplies costing P3,000 and paid cash
20 The account of January 5 is due. Ms. Alegre paid cash
31 The account of January 7 is due. Issued a promissory note for it.

First, let us analyze the effect of each transaction.


DATE ASSET LIABILITY OWNER'S EQUITY
1-Jan INCREASE NO EFFECT INCREASE
5-Jan INCREASE INCREASE NO EFFECT
INCREASE
7-Jan INCREASE NO EFFECT
DECREASE
10-Jan DECREASE NO EFFECT DECREASE
DECREASE
15-Jan NO EFFECT NO EFFECT
INCREASE
20-Jan DECREASE DECREASE NO EFFECT
DECREASE
31-Jan NO EFFECT NO EFFECT
INCREASE

After analyzing the effect of the transactions, let us now include the amounts and some basic account
titles.
  ASSETS = LIABILITIES + OWNER'S EQUITY
2-Jan Cash 200,000         Alegre, Capital 248,000
  Equipment 48,000            
    248,000           248,000
                 
  ASSETS = LIABILITIES + OWNER'S EQUITY
5-Jan Furniture 6,000   Accounts Payable 6,000      
    6,000     6,000      
                 
  ASSETS = LIABILITIES + OWNER'S EQUITY
7-Jan Machines 20,000   Accounts Payable 10,000      
  Cash -10,000            

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    10,000     10,000      
                 
  ASSETS = LIABILITIES + OWNER'S EQUITY
10-Jan Cash -1,500         Alegre, Drawing -1,500
    -1,500           -1,500
                 
  ASSETS = LIABILITIES + OWNER'S EQUITY
15-Jan Supplies 3,000            
  Cash -3,000            
    0            
                 
  ASSETS = LIABILITIES + OWNER'S EQUITY
20-Jan Cash -6,000   Accounts Payable -6,000      
    -6,000     -6,000      
                 
  ASSETS = LIABILITIES + OWNER'S EQUITY
31-Jan       Accounts Payable -10,000      
        Notes Payable 10,000      
          0      

Then, let us now plot the summary of transactions

DATE ASSETS = LIABILITY + OWNER'S EQUITY

January Cash Equipment Furniture Machines Supplies   Accounts Payable Notes Payable   Alegre, Capital Alegre, Drawing

2 200,000 48,000               248,000  

Balance 200,000 48,000 - - -   - -   248,000 -

5     6,000       6,000        

Balance 200,000 48,000 6,000 - -   6,000 -   248,000 -

7 (10,000)     20,000     10,000        

Balance 190,000 48,000 6,000 20,000 -   16,000 -   248,000 -

10 (1,500)                   (1,500)

Balance 188,500 48,000 6,000 20,000 -   16,000 -   248,000 (1,500)

15 (3,000)       3,000            

Balance 185,500 48,000 6,000 20,000 3,000   16,000 -   248,000 (1,500)

20 (6,000)           (6,000)        

Balance

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179,500 48,000 6,000 20,000 3,000 10,000 - 248,000 (1,500)

31             (10,000) 10,000      

Balance 179,500 48,000 6,000 20,000 3,000 - 10,000 248,000 (1,500)

          256,500 = 10,000   + 246,500  

And finally, let us make a Statement of Financial Position

CopyClear Center
Statement of Financial Position
January 31, 20xx
ASSETS  
Cash 179,500
Supplies 3,000
Machine 20,000
Equipment 48,000
Furniture & Fixture 6,000
Total Assets 256,500
   
LIABILITIES AND OWNER'S EQUITY  
Notes Payable 10,000
Alegre, Capital 246,500
Total Liabilities & Owner's Equity 256,500

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