INTRODUCTION TO BASIC ACCOUNTING

 Republic Act No. 9298 is the law regulating the practice of accountancy in the  Communicating is the process of preparing and distributing accounting reports to
Philippines. This law is known as the “Philippine Accountancy Act of 2004.” potential users of accounting information.
 CPA-Certified Public Accountant
 Accountancy has developed as a profession attaining a status equivalent to that of  Accounting Assumptions
law and medicine. In the Philippines, in order to qualify to practice the accountancy These are the basic notions or fundamental premises on which the accounting
profession, a person must finish a degree in Bachelor of Science in Accountancy and process is based. Accounting assumptions are the “givens” and they exist without
pass a very difficult government examination given by the Board of Accountancy. saying.
Like a building structure that requires a solid foundation to avoid or prevent future
 Definition of Accounting: collapse and provide room for expansion, and so with accounting.

J Accounting is a service activity. Its function is to provide quantitative information,  Going Concern assumption
primarily financial in nature, about economic entities, that is intended to be useful in - The accounting entity (the business) is viewed as continuing in operation
making economic decision. (Accounting Standards Council) indefinitely in the absence of evidence to the contrary.
- Also known as the continuity assumption.
 Basic objective of Accounting: To supply financial information to statement
users so that they could make informed judgment and better decision.  Accounting Entity assumption
- It is the specific enterprise which may be a proprietorship, partnership or
J Accounting is the art of recording, classifying and summarizing in a significant manner corporation.
and in terms of money, transactions and events which are in part at least of a financial - The entity is separate from the owners, managers and employees who
character and interpreting the results thereof. (Committee on Accounting Terminology constitute the entity.
of the American Institute of Certified Public Accountants) - “The transactions of the entity should not be merged with the transactions of
 Recording-the process of systematically maintaining a record of all economic the owners.”
business transactions after they have been identified and measured. (Journalizing- - The reason for this assumption is to have a fair presentation of financial
Journal) statements.
 Classifying-the sorting or grouping of similar and interrelated economic transactions
 Time Period assumption
into their respective class. (Posting-Ledger)
- The indefinite life of an entity is subdivided into time periods or accounting
 Summarizing-the preparation of financial statements
periods which are usually of equal length for the purpose of preparing financial
J Accounting is the process of identifying, measuring and communicating economic reports.
information to permit informed judgment and decision by users of the information. - By convention, the accounting period or fiscal period is one year or a period of
twelve months.
 Identifying means the recognition or nonrecognition of “accountable” events. An  Calendar year-a twelve-month period that ends on December 31.
event is accountable or quantifiable when it has an effect on assets, liabilities, and  Fiscal year-a twelve-month period that ends on any date except December
equity. 31.
 Measuring is the process of determining the monetary amounts at which the  Natural business year-a twelve-month period that ends on any month
elements of the financial statements are to be recognized and carried in the when the business is at the lowest or experiencing slack season.
financial statements.
 Monetary Unit assumption  The elements directly related to the measurement of financial position are:
 This assumption has two aspects:
1. ASSETS (What you have…..)
 Quantifiability aspect- the assets, liabilities, equity, income and expenses
Defined as resources controlled by the entity as a result of past transactions or events
should be stated in terms of a unit of measure (Peso in the Philippines).
and from which future economic benefits are expected to flow to the entity.
 Stability of the peso-the purchasing power of the peso is stable or
2. LIABILITIES (…..comes from what you owe……)
constant and that its instability is insignificant and therefore may be
Present obligations of the entity arising from past transactions or events the settlement
ignored.
of which is expected to result in an outflow from the entity of resources embodying
 Classification of users of financial information: economic benefits.
 Primary users 3. EQUITY (……and what you own.)
The residual interest in the assets of the entity after deducting all of its liabilities. It is
 Existing and potential investors
affected by Income, Expenses, Withdrawal and Investment. [PROFIT=INCOME – EXPENSE]
- They are concerned with the risk inherent in and return provided by their
investments.  The elements directly related to the measurement of financial performance are:
- They need information to help them determine whether they should buy,
hold, or sell. 4. INCOME
 Lenders and other creditors The increase in economic benefit during the accounting period in the form of an inflow
- They are interested in information which enables them to determine or increase of asset or decrease of liability that results in increase in equity, other than
whether their loans, interest thereon and other amounts owing to them contribution from equity participants.
will be paid when due. 5. EXPENSE
 Other users The decrease in economic benefit during the accounting period in the form of an
 Employees outflow or decrease of asset or increase of liability that results in decrease in equity, other
- Interested in information about the stability and profitability of the entity. than distribution to equity participants.
 Customers  Financial Statements (in sequence of preparation)
- Have interest in information about the continuance of an entity when they 1. Income Statement (Statement of Comprehensive Income)
have long-tem involvement with or are dependent on the entity. 2. Statement of Changes in Owner’s Equity
 Government 3. Balance Sheet (Statement of Financial Position)
- Interested in the allocation of resources and therefore the activities of the 4. Statement of Cash Flows
entity. 5. Notes to Financial Statements
 Public
 Fundamental Accounting Equation:
- The most basic tool of accounting
 The elements of financial statements
 Refer to the quantitative information shown in the statement of financial position ASSETS = LIABILITIES + EQUITY
(balance sheet) and statement of comprehensive income (income statement).
o Account- the basic summary device of accounting
SAMPLE CASE-FINANCIAL TRANSACTION WORKSHEET

The assets, liabilities and owner’s equity of Deogracia Corpuz who operates a repair are expressed in equation form below. On each of the numbered rows, show by addition or
subtraction the effect of each of the transactions on the equation. For each transaction, identify the changes in owner’s equity by placing the letter I (income), E (expense), W (withdrawal) or INV
(investment) at the column “factors affecting equity”. On the rows labeled “Balance”, show the equation resulting from the transaction.

TRANSACTIONS ASSETS LIABILITIES OWNER’S EQUITY FACTORS AFFECTING

CASH SUPPLIES LAND ACCOUNTS PAYABLE CORPUZ, CAPITAL EQUITY
1. Organized a repair shop and deposited
P400,000 cash in bank for use by the
business
2. Purchased P20,000 of supplies on
account.
Balance
3. Purchased land for future repair site
for P140,000 cash.
Balance
4. Paid P18,000 to creditors.
Balance
5. Withdrew P20,000 for personal use
Balance
6. Paid P28,000 for site and equipment
rent for the month
Balance
7. During the month, P9,000 expenses
were incurred on account by the
business.
Balance
8. During the month, Corpuz invested
another P100,000 of personal funds in
the business.
Balance
9. Received P5,000 for a cash service call.
Balance
10. Corpuz used P6,000 worth of supplies.
Balance
ACCOUNTING EQUATION ASSETS = LIABILITIES + EQUITY
t-Account
- the simplest form of the account.  Simply stated, the normal balance of an account indicates what side of the
account increases occurs. Thus, a debit does not necessarily mean an increase
ACCOUNT TITLE and a credit does not necessarily mean a decrease. The normal balance of an
account CANNOT be a negative amount.

DEBIT (dr.) CREDIT (cr.)

– THE RULE OF DEBIT AND CREDIT –

The term ”debit” refers to the left side of an account and “credit” refers to the right
side of an account.
When both sides of an account are each totaled (referred to as “footing”), and the
smaller sum is deducted from the larger sum, the difference is called the balance of the
account (or simply “balance”).

Cash
P 15,000 P10,000
20,000 4,000
P 35,000 P 14,000
P 21,000

Every account has a normal balance, which is simply the balance ordinarily found in
an account.
The normal balance may be either a debit or credit, depending on the type of
account (on what element does the account belongs).
If an account has a normal debit balance, it is increased when “debited” and
decreased when “credited”.
If an account has a normal credit balance, it is increased when “credited” and
decreased when “debited”.
 Proper analysis of transactions requires understanding of the types of accounts with
their normal balances. These accounts are summarized below:

Type of Account Normal Balance Balance increased by Balance decreased by ACCOUNTING IS A NOUN. BUT WITH YOU, IT MUST BE A VERB.
ASSET DEBIT DEBIT CREDIT
LIABILITY CREDIT CREDIT DEBIT
EQUITY CREDIT CREDIT DEBIT
INCOME CREDIT CREDIT DEBIT
EXPENSE DEBIT DEBIT CREDIT

 FOR EACH OF THE FOLLOWING ACCOUNT TITLES, IDENTIFY WHAT TYPE OF ACCOUNT IT
IS AND INDICATE ITS NORMAL BALANCE.

ACCOUNT TITLE TYPE OF ACCOUNT NORMAL BALANCE

1. Cash
2. Accounts Receivable
3. Supplies
4. Prepaid Rent
5. Service Vehicle
6. Referral Revenues
7. Interest Expense
8. Unearned Referral Revenues
9. Utilities Payable
10. Furniture and Fixtures
11. Office Equipment
12. Salaries Expense
13. Salaries Payable
14. Notes Payable
15. Yacapin, Withdrawal
16. Yacapin, Capital
17. Supplies Expense
18. Miscellaneous Expense
19. Depreciation Expense-Service Vehicle
20. Notes Receivable