CHAPTER 1: INTRODUCTION TO ACCOUNTING

AND BUSINESS

A business is an economic unit that engages in buying

and selling of goods or services. A major concern of a business
is how best to use its resources. Success is possible if these
resources will be used efficiently. This success is measured in
terms of profit and increase in funds.

Integrated FORMS OF BUSINESSES

•
•
Service Business – provides service for a fee.
Merchandising Business – buys and sells goods or

Accounting
merchandise.
• Manufacturing Business – buys raw materials, process
it into finished goods to be sold.

Fundamentals TYPES OF BUSINESS ACTIVITIES

• Financing Activities – building up capital [non-current
liabilities and owner’s equity]
First Term – BAINTE1X • Investing Activities – acquisition of long-term resources
[non-current assets]
• Operating Activities – related to earning income
[current assets, current liabilities, revenues, and
expenses]
MANAGING THE BUSINESS [POSDiCon]
• Planning – determining the goals and lining up activities
to accomplish those.
• Organizing and Staffing – creating divisions and
appointing staff with roles and duties.
• Directing – overseeing the daily operation of carrying out
the planned activities. [managers’ role]
 • Controlling – guarding and guiding people to ensure USERS OF FINANCIAL INFORMATION AND THEIR
tasks and activities are done according to plans and MOTIVES
standard performance.
• Internal Users
a. Owner – read financial information to minimize
risk of losing money.
ACCOUNTING AS A BUSINESS LANGUAGE
b. Manager – to evaluate the performance of the
Accounting is … business.
c. Employee – to know if the business has the
“Accounting is a service activity. Its function is ability to compensate for better benefits.
to provide quantitative information, primarily • External Users
financial in nature, about economic entities, a. Investor – to know if the investment is earning
that is intended to be useful in making [return on capital/investment].
economic decision.” b. Lender or Creditor – to assess the paying ability
of the business.
“Accounting is the art of recording, classifying,
c. Supplier – to determine the credit worth of the
and summarizing in a significant manner and in
business.
terms of money, transactions and events which
d. Government – to assess the truthfulness in
are, in part at least, of financial character, and
financial reports and corresponding tax liabilities.
interpreting the results thereof.”
e. Public or Customer - to assess the ability of the
business to continuously supply goods with the
right price and quality.
• Accumulate
Business financial data
Firms through
activities FINANCIAL REPORTS
• Income Statement – reports financial performance of
• process the business [revenues and expenses].
and • Statement of Changes in Owner’s Equity – shows
prepares
Accountants activities that caused changes in owner’s capital [capital,
financial
data and additional investment, net income, and drawings].
reports • Statement of Cash Flows – changes in cash [inflows
• read the and outflows].
reports • Statement of Financial Position – shows the condition
Stakeholders/ of the business through a listing of accumulated
and
Users make resources and obligations [assets, liabilities, and equity].
decisions
CHAPTER 2: BUSINESS AND ACCOUNTING IN THE o Completeness – complete disclosure of
necessary data
21ST CENTURY
o Neutrality – objectivity of data that will not show
any biases.
CONCEPTUAL FRAMEWORK ENHANCED (VCUT)
The structure of theoretical principles, rules and • Verifiability – results can be shown in multiple conducts
procedures used as a reference for financial reporting and for of reports.
standard development. • Comparability and Consistency – uniform treatment or
method in preparing financial reports.
o Comparability – shows changes in line items
OBJECTIVES OF FINANCIAL REPORTING between two industries or companies.
o Consistency – shows changes in line items
Provide financial information to statement users: between two accounting periods.
• Profitability – shows the performance of the business. • Understandability – usage of clear words that can
• Liquidity – the ability of the business to pay its current easily be understood by users.
obligations. • Timeliness – complying with financial reports when
• Solvency – the ability of the business to meet its long- needed using interim statements.
term obligations.

ACCOUNTING ASSUMPTIONS AND PRINCIPLES

QUALITATIVE CHARACTERISTICS RELATED TO • Economic Entity – personal and business transactions
ECONOMIC DECISIONS: should be separated.
FUNDAMENTALS [RFr] • Going Concern – a business will operate indefinitely in
which should be reflected in financial statements.
• Relevance – shows data that can impact decisions. • Periodicity – accounting period usually takes a year, but
o Predictive Value – future predictions of financial financial statements should be prepared by period using
reports according to trend from past performance. interim statements.
o Feedback Value – past data that supports • Stable Monetary Unit – only financial transactions are
predictive value. recorded and in one uniform monetary unit to achieve
o Materiality – shows that changes are large enough consistency.
to affect the decision making. • Cost Principle – an asset purchased shall be recorded
• Faithful Representation – must present factual on its actual acquisition price, not on how much it is in the
information [FreeCoNe] past or future.
o Free from errors – practice prudence or
conservatism
 • Accrual Principle – revenue and expenses should be BUSINESS TRANSACTION
recognized they were related to the operation, regardless
It is the exchange of values between two parties in
of whether the cash was received or paid.
monetary terms. It must be a double entry to consider a
• Objectivity – transactions occur must be verifiable by
transaction.
source documents such as invoices, vouchers, etc.

DOUBLE ENTRY
CHAPTER 3: ANALYZING TRANSACTIONS TO
A transaction must always have a dual effect which
START A BUSINESS
implies “for every value received, there is a value parted,”
which is also known as debit and credit.

FINANCIAL STRUCTURE OF A BUSINESS

[Elements of Financial Statements – SFP] CHAPTER 4: EQUATION EXPANDED TO SHOW
OPERATING PERFORMANCE
• Assets – a present economic resource controlled by the
entity as a result of past events.
• Liabilities – a present obligation of the entity to transfer
an economic resource as a result of past events. ACCRUAL BASIS vs CASH BASIS
• Equity or Net Assets – a residual interest in the net Accrual basis refers to recognition of revenue and
assets, simply means as assets less liabilities. expenses the moment it was earned and incurred regardless of
THE ACCOUNTING EQUATION whether cash was received or paid. On the other hand, cash
basis refers to recognition of revenue and expenses the
ASSETS = LIABILITIES + OWNER’S EQUITY moment cash was received or paid, regardless of whether the
service or goods were provided or incurred.
The accounting equation must be maintained all
throughout the accounting cycle.
FINANCIAL STRUCTURE OF A BUSINESS
[Elements of Financial Statements – INCOME STATEMENT]
THE ACCOUNT
• Revenue – increases in assets, or decreases in
A device used to identify changes in the accounting liabilities, that result in increases in equity, other than
elements. It is also known as the basic unit to record those relating to contributions from holders of equity
transactions. claims.
• Expenses – decreases in assets, or increases in
liabilities, that result in decreases in equity, other than
 those relating to contributions from holders of equity statements which cover period shorter than the normal
claims. accounting period such as monthly, quarterly, etc.

EXPANDED ACCOUNTING EQUATION OPERATING CYCLE

ASSETS = LIABILITIES + EQUITY This represents the period of time it takes for the cash to
be converted back into cash again. It is also defined as the time
between the acquisition of assets, their processing, and
realization in cash or cash equivalents.

Increases due to: Decreases due to:

• Additional • Withdrawals
Investment SERVICE
• Expenses
• Revenue

CLASSIFICATION OF ASSETS AND LIABILITIES

• Current Assets – assets that are expected to be realized
into cash, sold, or consumed within the normal operating
cycle of the business or one year, whichever is longer.
• Non-current Assets – in the form of PPE.
• Current Liabilities – debts or obligations that can be
liquidated within the normal operating cycle of the
business or one year by using the current assets as
payment or creation of another current liabilities.
• Non-current Liabilities – obligations that are payable
for more than a year.

ACCOUNTING PERIOD
Financial statements are to be prepared by the end of the
accounting period which usually takes a year. However, to
comply with the time period or periodicity concept, interim
statements are utilized. Interim statements are financial
MERCHANDISING CHAPTER 5: DOUBLE ENTRY BOOKKEEPING FOR
A SERVICE PROVIDER

ACCOUNTING CYCLE

MANUFACTURING

[1ST STEP] SOURCE DOCUMENTS

• Business Papers
• Invoice
• Official Receipt
• Cash or Check Vouchers
• Check
• Promissory Note

CHART OF ACCOUNTS
It is a listing of accounts which serves as a guide in
recording transactions.
 Code [as per the book, but tends to change depending on [3RD STEP] THE LEDGER
the circumstances]:
It is also known as the “book of final entry.” This is
100 – Current Assets 400 – Non-current where the transactions of each account were organized. The
Liabilities process of recording is called posting.
200 – Non-current
Assets 500 – Revenues
300 – Current Liabilities 600 – Expenses [4TH STEP] TRIAL BALANCE
It is a listing of accounts where the balances of each
account from the ledger are extracted. It establishes the equality
of debit and credit totals.
T ACCOUNT
The simplest tool to analyze the changes in the account.
It has two sides known as the debit, the left side of an account, LOCATING ERRORS
and the credit, the right side of an account. The totals of debit
and credit is called footings. Potential errors after preparing the trial balance:
• Failure to record a transaction
• Failure to post an entry
DEBIT AND CREDIT [DEALER; normal balance] • Wrong account
Debit – DEA Credit – LER • Wrong amount
• Mistakes in addition
Drawings Liabilities • Posted in wrong column
Expenses Equity • Transposition – digits are interchanged (123, posted as
132)
Assets Revenues • Transplacement – wrong placement of decimal point.

SUBSIDIARY LEDGERS AND CONTROL ACCOUNTS

[2ND STEP] THE JOURNAL
Subsidiary Ledger – a collection of transactions solely for a
It is also known as the “book of original entry.” This is certain customer or supplier.
where the transactions are initially recorded in a chronological
manner. The process of recording the transactions is called General Ledger - a collection of transactions generally
journalizing. involving a certain account.
Control Accounts – accounts used to summarize transactions
[accounts receivable and accounts payable].
 CHAPTER 6: PAYROLL ACCOUNTING INCOME TAX
It is the tax paid to the government which is based on the
net taxable income of the employees. It is withheld by the
PAYROLL employer which will be submitted on behalf of the employees.
It represents the compensations for employees and
workers.
NET PAY
• Salary – a monthly or semi-monthly-based
compensation provided for employees. It is the actual cash or amount received by the
• Wages – a much lower rate compensation compared to employees.
salary provided for workers [piece rate, hourly, and daily- = Net Taxable Income – Withholding Tax
based].
--- END OF PAYROLL ---

GROSS PAY
CASH ON HAND AND IN BANK
A total amount of compensation provided for the
employees or workers. [Salary Expense in company’s point of • Cash on Hand – cash that is physically present and used
view.] for minor expenses.
• Cash in Bank – cash collected from operations are
immediately deposited to bank when received.
DEDUCTIONS FROM GROSS PAY
• SSS – 13% of monthly salary credit shared by the Bank Accounts
employee (4.5%) and employer (8.5%).
• PhilHealth – [salary of P10,000 below] fixed P400, • Current or Checking – bank account that is used for
[P10,001 – P79,999.99] progressive 4%, and [P80,000 transactions such as paying for expenses and the
above] fixed P3,200, which is shared equally by the like.
employee and employer. • Savings – bank account used to earn interest and
• HDMF – [salary of P1,500 below] 1% for employee and only spare or idle cash are deposited.
2% for employer, [P1,500 – P5,000] progressive 2% for
both employee and employer, and [P5,000 above] fixed
2% of P5,000 for both employee and employer. INVESTMENTS

TAXABLE INCOME Aside from cash, properties and other existing business
could be an investment to the business. These investments are
= Gross Pay – Contributions [deductions] always recorded at its current market value and might oppose
the cost principle in other’s point of view.
EXAMPLES: value are as follows:
1. On May 1 of the current year, De Leon invested a land
which he bought for P200,000 in 2003 but which current
market value is P500,000.
DATE PARTICULARS DEBIT CREDIT
May-01 Land 500,000

De Leon, Capital 500,000

Initial investment of owner

Though the land was bought for P200,000 in 2003, in the

business’s point of view, the land was acquired at the current
year, thus, recorded at its current market value.

2. Investment with an attached liability. Assumed that

the land De Leon had invested was mortgaged to
Metrobank for P200,000 but P150,000 is still due.

DATE PARTICULARS DEBIT CREDIT

May-01 Land 500,000

Mortgage Payable 150,000

De Leon, Capital 350,000
Initial investment of owner,
net of mortgage.

The land is still recognized at its current market value,

while the liability will be recorded in the book, and investment
will be credited at its net amount.

3. Investment of an existing business. Assume that

Versoza has a store business which De Leon wants to
buy. On May 1, Versoza offered to sell it for P208,000
after agreeing to decrease the value of the merchandise
inventory and the office furniture and equipment. The list
of the assets and liabilities as well as their current market
 • Incidental Expenses – expenses attached to the
Reported Current acquisition of assets such as freight, taxes, etc.
Cost Per Books Market Value • Additional Expenditures – service fee, installation fee,
etc.
• Price Reduction – rebate, discounts, etc.
Accounts Receivable ₱ 100,000 ₱ 100,000
Merchandise Inventory 240,000 138,000
Office Furniture & Equipment 250,000 120,000 RETURN OF ASSET PURCHASED
Total 590,000 358,000
If an asset was defective or delivered wrong, this could
Less: Accounts Payable 150,000 150,000
be returned to the seller in exchange of refund [returning the
Net Assets ₱ 440,000 ₱ 208,000
actual asset] or a decrease on the asset’s amount [allowance].

DATE PARTICULARS DEBIT CREDIT SALE OF PROPERTIES

May-01 Accounts Receivable 100,000
Merchandise Inventory 138,000 Business’s assets could be sold if these could no longer
Furniture & Equipment 120,000 meet its function [inadequate] or have become outdated
Accounts payable 150,000 [obsolete]. To record this, the asset should be sold on its initial
De Leon, Capital 208,000 price.
Owner's Investment

EXAMPLES:
The assets and liabilities are recorded on their current 1. Acquisition of asset. On January 1, De Leon purchased
market value whereas the capital is recorded on the net assets a machine for a P150,000 less a 5% trade discount.
paid. Taxes of P7,250, freight of P5,000, and insurance of
P15,000 were also incurred which were paid through
check. Upon the receipt of the machine, additional cost
DRAWINGS was incurred for installation and testing process
amounting to P20,000 and was paid in cash.
Aside from cash, properties could also be withdrawn by the
owner. The properties withdrawn are recorded on their original
cost or at book value.

ACQUISITION COST OF PROPERTIES

As per Cost Principle Concept, PPE acquired should
be recognized at its actual acquisition price. However, the
following factors should be also considered:
 b. was reported as defective on January 4. The seller
Computations: agrees to decrease the cost at P20,000. [assuming the
Machine Cost 150,000 asset was acquired on account]
Less trade discount (150,000 * 5%) 7,500
Machine Cost, net of discount 142,500 DATE PARTICULARS DEBIT CREDIT
Add Incidental Expenses: Jan-04 Accounts Payable 20,000
Taxes 7,250 Machinery 20,000
Freight 5,000 Allowance for defective part.
Insurance 15,000
Acquisition Cost 169,750 3. Sale of Properties. Based on number 1 given, the
mentioned asset was sold after a year of acquisition
date. The accumulated depreciation was 18,975.
DATE PARTICULARS DEBIT CREDIT
Jan-01 Machinery 169,750 MACHINERY
Cash In Bank 169,750
01/01/22 189,750 18,975 12/31/22
Acquisition of machinery plus
incidental expenses net 170,775

Machinery 20,000
Cash on Hand 20,000
Cash paid for additional
a. Loss on Sale [sold for P150,000]
expenditure
DATE PARTICULARS DEBIT CREDIT
Jan 1, 2023 Cash on Hand 150,000
Loss on Sale* 20,775
Accumulated Depreciation** 18,975
The incidental expenses, additional expenditure, and trade
Machinery 189,750
discounts will be recognized as part of the machinery cost; thus,
machinery’s book value will be P189,750.
Computations:
Net Book Value 170,775
2. Return of Asset. Assume that the machinery purchased Less Cash received from sale 150,000
on January 1: Loss on Sale 20,775
a. was reported as defective on January 4. The defective
part was returned and a cash refund of P10,000 was
received.
* The asset was sold at the price lower than its book value,
DATE PARTICULARS DEBIT CREDIT resulting to a loss.
Jan-04 Cash In Bank 20,000
** The machinery should be closed on its original cost. Along
Machinery 20,000
with this, its accumulated depreciation must be closed as well.
Cash refund for defective part.
 b. Gain on Sale [sold for P175,000] EXAMPLES:

DATE PARTICULARS DEBIT CREDIT De Leon owed Versoza (loan service) an amount of
Jan 1, 2023 Cash on Hand 175,000 P20,000 and promised to pay within 2 months with 5% annual
Accumulated Depreciation 18,975 rate.
Machinery 189,750 ENTRIES (DE LEON)
Gain on Sale 4,225 DATE PARTICULARS DEBIT CREDIT
Jan-01 Cash 20,000

Notes Payable 20,000

Computations:
Net Book Value 170,775 ENTRIES (VERSOZA)
Less Cash received from sale 175,000 DATE PARTICULARS DEBIT CREDIT
Loss on Sale - 4,225 Jan-01 Notes Receivable 20,000
Cash 20,000

4. DRAWINGS. Based on number 1 given, De Leon

Computations:
withdrew the machinery after a year.
Face Value 20,000
Interest (20,000 * 0.05 * 2/12) 166.67
DATE PARTICULARS DEBIT CREDIT
Maturity Value 19,833.33
Jan 1, 2023 De Leon, Personal 170,775
Accumulated Depreciation 18,975
Machinery 189,750 ENTRIES (DE LEON)
DATE PARTICULARS DEBIT CREDIT
Mar-01 Notes Payable 20,000
Interest Expense 166.67
PROMISSORY NOTES Cash 20,166.67

It is a written promise made by the debtor promising to

pay the creditor a certain sum of money due at a fixed or ENTRIES (VERSOZA)
determinable future time. DATE PARTICULARS DEBIT CREDIT
Mar-01 Cash 20,166.67
• NON-INTEREST-BEARING NOTE – face value is the
same as its maturity value. Notes Receivable 20,000
• INTEREST BEARING NOTE – maturity value is higher Interest Income 166.67
than its face value as interest charges were added.

FORMULAS: BUSINESS TAXES, PERMITS, AND LICENSES

Interest = principal * rate * time • Percentage Tax – 3% of annual gross sales [if under
Maturity Value = principal + interest P3,000,000]
• Value Added Tax – 12% of annual gross sales [if under
P3,000,000] CHAPTER 7: COMPLETING THE ACCOUNTING
CYCLE FOR A SERVICE PROVIDER

[5TH – 6TH STEP] PREPARING A WORKSHEET FOR

ADJUSTMENTS AND FINANCIAL STATEMENTS

ADJUSTING ENTRIES
1. Accruals – no cash, advanced goods or services
a. Accrued Income – already earned but payments
have yet to be received. [receivable]
b. Accrued Expenses – already incurred but have
yet to be paid. [payable]
2. Deferrals – advanced payment, no goods or services
a. Prepaid Expenses – assets are paid in advance
for future economic benefits.
INITIALLY
METHOD EFFECTS ADJUSTMENTS
RECORDED AS
debit - expense
ASSET asset expired/used
credit - asset
unexpired/left debit - asset
EXPENSE expense
on hand credit -expense

o Deferred Revenue – advanced payments of

customers for goods or services that have yet to
be delivered.

INITIALLY
METHOD EFFECTS ADJUSTMENTS
RECORDED AS
debit - liability
LIABILITY liability earned/delivered

have yet to be debit - income

INCOME income
delivered credit -liability
 • Bad Debts – uncollectible accounts from accounts CHAPTER 8: FINANCIAL STATEMENT
receivable. PRESENTATION, CLOSING THE BOOKS, AND
METHOD RECORDED AS EFFECTS ADJUSTMENTS FINANCIAL ANALYSIS
debit - bad debts
direct deduction
certainly expense
WRITE OFF from accounts
uncollectible credit - accounts * Financial analysis will be on chapter 12
receivable
receivable
[7TH STEP] PREPARATION OF FINANCIAL STATEMENTS
debit - bad debts
estimated expense • INCOME STATEMENT – shows financial performance or
allowance for profitability.
ALLOWANCE during credit -allowance
bad debts • STATEMENT OF CHANGES IN EQUITY – shows the
the period for bad debts
changes in interest of the owner.
• STATEMENT OF FINANCIAL POSITION – shows
financial condition through economic resources as well
• Depreciation – recognizing a part of an asset as as liquidity and solvency.
expense relating to its operation. • STATEMENT OF CASH FLOWS – shows the ability of
the business to generate and manage cash through cash
𝒄𝒐𝒔𝒕−𝒔𝒂𝒍𝒗𝒂𝒈𝒆 𝒗𝒂𝒍𝒖𝒆 inflows and outflows from business activities.
• 𝟏. 𝒅𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 = 𝒖𝒔𝒆𝒇𝒖𝒍 𝒍𝒊𝒇𝒆 o Direct Method – determining the activities
• 𝟐. 𝒏𝒆𝒕 𝒃𝒐𝒐𝒌 𝒗𝒂𝒍𝒖𝒆 = 𝒄𝒐𝒔𝒕 − through the direct movement of cash such as
𝒂𝒄𝒄𝒖𝒎𝒖𝒍𝒂𝒕𝒆𝒅 𝒅𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 transactions from customers and suppliers.
ACTIVITIES INFLOWS OUTFLOWS

• WORKSHEET OPERATING revenue collections payments for expenses

o It is a columnar paper which illustrates the flow of
the accounts starting from unadjusted trial INVESTING sale of PPE and securities acquisition of PPE and securities
balance up to financial statements. FINANCING loans or contributions loans payment or withdrawals

o Indirect Method – determining the flows of cash

starting from net income, adjusting through the
balances of current assets.
 [10TH STEP] REVERSING ENTRIES
ACTIVITIES ELEMENTS
OPERATING current assets These are prepared on the first day of succeeding
INVESTING non-current assets reporting period. Only adjusting entries originally recorded
FINANCING liabilities and equity under expense or income method are eligible to be reversed.
Reversing the entries is optional based on the policy of
the company. It is only done to keep the consistency of the
[8TH STEP] CLOSING ENTRIES reports and to simplify the bookkeeping entries for the rest of
the period.
Closing the books means bringing the nominal accounts
to zero balance by transferring it to the capital account. After
clearing the nominal accounts, only real accounts will be left
CHAPTER 9: PROCESSING TRANSACTIONS FOR A
which will be used in the next accounting period.
MERCHANDISER
(1) Each Expense Account (2) Each Revenue Account
normal debit credit to debit to normal credit
balance close close balance

IMPORTANT ACCOUNTS

Income Summary • Sales Revenue – receipts coming from goods sold to

(3) total expenses total income (4) customers.
debit to credit to • Merchandise Inventory – tangible assets held for sale
close if close if
net income net loss
in the normal course of business.
• Cost of Goods Sold – goods from merchandise
inventory that are sold and recognized in income
Owner, Drawing Owner, Capital
normal debit credit to normal credit
statement.
• Gross Profit – mark-up [sales less cogs] that indicates
(6) (5.1) net loss
balance close balance
(7) drawings net income (5.2)
adequacy of margin of profit set up by the merchandiser.
• Operating Profit – gross profit less operating expenses
(could also be the net income if without non-operating
activities).
[9TH STEP] POST-CLOSING TRIAL BALANCE • Non-Operating Activities – minor gains and expenses
[from other activities not included in in the normal course
A trial balance containing only the real accounts after of business] to arrive at net profit.
nominal accounts have been closed. The accounts posted in o Other revenues and gains
this trial balance will be the opening entries for next accounting o Other expenses and losses
period.