BASIC ACCOUNTING (FUNDAMENTALS OF ACCOUNTING)

By: Win Ballada and Susan Ballada DEBET DARE=DEBET HABERE

INTRODUCTION TO ACCOUNTING FUNDAMENTAL CONCEPTS

1. Entity Concept
Forms of Business Organization 2. Periodicity Concept
1. Sole Proprietorship 3. Stable Monetary Concept
2. Partnership
3. Corporation CRITERIA FOR GEN. ACCEPTANCE OF AN ACCTG
4. Cooperative PRICIPLES
 Principle has RELEVANCE
Purpose of Business Organization  Principle has OBJECTIVITY
1. Service  Principle has FEASIBILITY
2. Merchandising
3. Manufacturing GENERAL ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
-set of guidelines and procedures that constitute acceptable
Miro, Small and Medium Enterprises accounting practice at a given time
1. Objectivity
Micro Enterprises- are those w/ assets, before financing, of P3 2. Historical Cost
million or less and employ not more than nine workers. 3. Revenue and Expense Recognition
4. Adequate Disclosure
Small Enterprise- are those w/ assets, before financing, of above P3 5. Materiality
million to P15 million and employ 10-99 workers. 6. Consistency

Medium Enterprise- are those w/ assets, before financing, of above R.A. No. 9298 ( Phil. Accountancy Act of 2004)
P15 million to P100 million and employ 100 to 199 workers. Under Sec. 4: Practice of Accountancy
 Practice to Public Accountancy
Activities of Business Organization  Practice in Commerce and Industry
 Financing Activities- require financial resources to obtain  Practice in Education/Academe
other resources used to produce goods and services.  Practice in Government
 Investing Activities- resources from one form to a different
form, w/c is more valuable, to meet the needs of the people. ACCOUNTANTS FUNDAMENTAL PRINCIPLES
It include buying land, equipment, buildings and other 1. Integrity
resources that are needed in the operation of the business 2. Objectivity
and selling these when they are no longer needed. 3. Competence and Due Care
 Operating Activities- involve the use of resources to design, 4. Confidentiality
produce, distribute and market of goods and services. 5. Professional behavior

ACCOUNTING BRANCHES OF ACCOUNTING

 Art of recording, classifying and summarizing business  Auditing
financial transaction and interpreting the result thereof.  Bookkeeping
 Process of identifying, measuring and communicating  Cost Bookkeeping and Accounting
economic information to permit informed judgments and
 Financial Accounting
decisions by the users.
 Financial Management
 Information system that measures processes and
communicates financial information about an identifiable  Managerial Accounting
economic entity.  Taxation
 Service activity and its function are to provide quantitative  Government Accounting
information, primarily financial in nature.
USERS OF FINANCIAL INFORMATIONS
Business transaction is the economic activities of the business. Internal Users- individuals that are inside the business entity and
Significant function of accounting is to record transaction in a involved in the day to day operation
historical event. External Users- individuals and others that have current or potential
financial interest and not involved in daily operation
PURPOSE AND PHASES OF ACCOUNTING INTERNAL EXTERNAL
 Handles financial operations of the business Investor Prospect Investor
 Provides information and advices to both internal and Owner Lenders
external users Directors Suppliers/Creditors
 Produce aid to management in planning, control and Head of Offices Customers/Public
decision making and, Employees Government
 Comply with regulation
 Measuring business transaction FINANCIAL REPORTS/STATEMENTS- the objective is to provide
information about the financial position, performance and changes in
FRA LUCA PACIOLI’S BOOK: SUMMA financial position that is useful to users to make an economic
Fra Luca Pacioli is a Franciscan monk who introduces the double- decisions
entry system in accounting and discusses the three important books.
Memorandum- book where all transactions are recorded, in a In preparing the Financial Reports/Statements there are underlying
currency in which they are conducted, at the time they are conducted, assumption to be followed by the bookkeeper or the accountant.
prepared in a chronological order, is a narrative description of the 1. Accrual Basis. Revenues are recorded as they earned and
business’s economic event and no document to support transactions expenses as they incurred. Transactions are recognized
when they occur and not as cash is received or paid.
Journal- merchant’s private book, entries made here in one currency, 2. Cash Basis. Transactions is recorded when the cash is
in chronological order and narrative form receive or paid.
Ledger- alphabetical listing of all the business’s accounts along with 3. Going Concern. FS/FR normally prepared assuming that an
the running balances of each particular account enterprise will continue its operation for the foreseeable
future.
THE ACCOUNTING EQUATION AND DOUBLE ENTRY
Concept of Pacioli’s Double Entry System SYTEM
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Prepared By; M.T. Sacramed
 Every transaction may require addition and subtraction to both
PARTS OF AN INFORMATION SYSTEM sides that makes equal to both side.
Debit (Dr) Credit ( Cr)
1. People- competent end users working to increase their
+ +
productivity. End users use hardware and software to solve - -
information-related or decision-making problems.
2. Procedures- manuals and guidelines that instruct end users *Logic of Debiting and Crediting is related to the Accounting
on how to use the software and hardware. Equation.
3. Software-programs or instructions that tell the computer
how to process the data. Two kind of software are the ff. DEBITS and CREDITS- THE DOUBLE ENTRY SYSTEM (DES)
a) System Software
b) Application Software DES means has a dual effects of the business transaction is recorded.
4. Hardware- consist of the ff. devices
a) Input Devices Rules of Debit and Credit
b) System Unit
c) Secondary Storage Dr Cr
d) Output Devices
e) Communication Devices ASSETS LIABILITIES AND EQUITY
5. Data- raw materials/information/transactions to be process

ACCOUNTING INFORMATION SYSTEM Balance Sheet Accounts

Dr Cr
Assets Liabilities and Equity
+ - - +
Normal Normal
Balance Balance

Income Statement Accounts

Dr Cr
Expenses Income
*Debit for decreases in owner’s equity *Credit for increases in Owner’s Equity
+ - - +
ELEMENTS OF FINANCIAL STATEMENTS and Normal Normal
ACCOUNTING EQUATION Balance Balance

ASSETS= LIABILITIES + CAPITAL

NORMAL BALANCES OF AN ACCOUNT
Assets- resources controlled by the entity as the result of past Normal Balances
events and from which has future benefits are expected to flow. *It means an increase when it
It includes the obligation of the entity and the investment of the Recorded
owner, expenses and income of the business. Acct Category Debit Credit
Assets=Liabilities + Owner’s Equity or Capital ASSETS /
Liability- obligations of the entity to outside parties who have
LIABLITIES /
furnished resources. OWNER’S EQUITY
Liabilities= Assets - Owner’s Equity or Capital Capital /
Equity/capital- residual interest in the assets of the enterprise Withdrawals /
after deducting all the liabilities. Includes here are the
investment, income and expenses in the business operation.
Income /
Owner’s Equity or Capital =Assets - Expenses /
Income- increases in economic benefits during accounting
period in form of inflows or enhancement of assets or decreases Economic/financial occurrence or accounting event and transactions
of liabilities that result in increase the equity. It compasses the may cause changes in entity’s assets, liabilities and/or equity.
revenue and gain deducting the expenses.
TYPES and EFFECTS OF TRANSACTION
Expenses- the form of outflows or depletions of assets or 1. Source of Assets
incurrence of liabilities that result in decreases of equity. 2. Exchange of Assets
Encompasses the loss and outflows arises in the course of 3. Use of Assets
ordinary activities. 4. Exchange of Claims

THE “T” ACCOUNT Expanded effects:

1. (+ in A)= (+ in L)
Ac count Tit le 2. (+ in A) = (+ in E)
Left side or
Right Side 3. (+ in one A) = (+ in another A)
Debit Side or Credit 4. (- in A) = (- in L)
Side
5. ( - in A) = (- in E)
6. (+ in L) = (- in E)
Basic summary device of accounting is the “ACCOUNT”.
7. (+ in E) = (- in L)
Separate account is maintained for each element that appears in
8. (+ in one L) = (- in another L)
the Balance Sheet (Assets, Liabilities and Equity) and in the
Income Statement (Income and Expenses). Account may be 9. (+ in one E) = (- in another E)
defined as detailed record of the increase, decreases and balance
of each element.

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Prepared By; M.T. Sacramed