Lesson 1 - Accounting as an Information System

Accounting - art of analyzing financial transactions and economic events, recording them,
classifying them into accounts, summarizing them, reporting, and interpreting the results.
Accounting Process Diagram
1. Analyzing - looking at transactions and economic events that have taken place and
determining their effects on the business.
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2. Recording - writing the effects of the transactions and events that have been analyzed;
inputting of information in accounting books called journals:
(1) Cash Receipts Book
(2) Cash Disbursements Book
(3) Sales Book
(4) Purchases Book
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3. Classifying - sorting or grouping of similar transactions and events into specific account
titles; classified in ledgers; subsidiary ledgers show details of transactions and events
classified in the general ledger.
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4. Summarizing - grouping of the various accounts referred to in the classifying process;
taken from accounts in the general ledger; accounts grouped into:
(1) Assets - any resource owned or controlled by a business or an economic entity;
represent value of ownership that can be converted into cash.
(2) Liabilities - future sacrifices of economic benefits that the entity is obliged to make to
other entities as a result of past transactions or other past events. (eg. bank loans,
mortgages, unpaid bills, etc.)
(3) Owner’s Equity - total assets minus liabilities; ownership of assets that may have
debts or other liabilities attached to them.
(4) Revenue - total amount of income generated by the sale of goods and services related
to the primary operations of the business; may also be referred to as sales.
(5) Cost and Expenses - cost refers to the cost of production and operations; expenses
refer to fixed monthly expenses such as rent, utilities, and other fixed expenses.
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5. Reporting - preparation of financial summaries called financial statements:
(1) Income Statement - results of the operation; shows the company's revenues and
expenses during a particular period.
(2) Balance Sheet - summary of the financial balances of an individual or organization.
(3) Cash Flow Statement - summarizes cash flow; the total amount of money being
transferred into and out of a business.
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6. Interpreting - computation of relationships of figures from the financial reports.
Fig 1.1 Balance Sheet Sample
Fig 1.2 Income Statement Sample
The objective of accounting is to provide quantitative financial information about a business that
is useful to users of financial statements.

Users of financial statements include.., for the following reasons:

1. Investors - to determine whether to buy, hold, or sell their investments; to assess
investee’s ability to pay dividends or to pay returns to investors.
2. Employees - to determine the ability of the employer to pay salaries and fringe benefits.
3. Lenders - to determine the ability of borrowers to be on time in paying loans granted by
creditors.
4. Suppliers - to determine the ability of the customer to pay debts and ability to remain as a
continuing buyer.
5. Customers - to determine the ability of the enterprise to continue being a source of supply
and exist over a long period of time.
6. Government Agencies - to determine the enterprise’s capacity to pay and comply with
taxes.
7. Public - to determine the activities of the enterprise and contribution to the economy in
the form of:
(a) Number of Employees
(b) Ownership of Assets
(c) Prices of their Products
(d) Patronage of Local Suppliers
(e) Patronage by Customers
8. Management - to determine the activities of the enterprise for planning, organizing,
leading, and controlling.
Business Entity Concept - separation of transactions and events that are for the entity and those
that are personal to the owner.

TERMS:
Balance Sheet - the financial statement that reports assets, liabilities, and owner’s equity.
Income Statement - the financial statement that reports the net income or net loss for a period
of time.
Assets - things owned.
Liabilities - things owed.
Transaction - an exchange of value.
Accounting Period - a period of time at the end of which financial statements are prepared.
Supporting Documents - a document that supports an activity to be recorded in the accounting
books.
Calendar Period - an accounting period that ends on December 31.
Fiscal Period - an accounting period that ends on a date other than December 31.
Bookkeeper - the person who records transactions.
Accountant - supervises the bookkeeper.
Lesson 2 - Qualitative Characteristics of Information in Financial Statement
1. Understandability
- presenting information in a clear and concise way.
2. Relevance
- information has relevance when it influences the economic decisions of users.
- ingredients include predictive value and confirmatory value.
2020 (Past) 2021 (Past) 2022 (Present) 2023 (Future)

800K 1M 1.2M 1.4M

3. Materiality
- information is material if stating it incorrectly could influence the economic
decisions of users.
4. Reliability
- information has reliability when it is free from material error.
5. Faithful Representation
- “Numbers and descriptions should match what really happened.”
6. Neutrality
- information in a financial statement should be free from bias.
7. Completeness
- omission can cause information to be false or misleading.
8. Comparability
- ability to bring together information for the purpose of noting similarities and
differences.

TERMS:
Predictive Value - assumed accumulated value after a given period of time based on present
day sales.
Confirmatory Value - information provides feedback on previous evaluations.
Lesson 3 - Normal Balances of Accounts
Formula: Assets = Liabilities + Capital

ACCOUNT TYPE DEBIT CREDIT

Assets Increase Decrease

Liabilities Decrease Increase

Owner's Equity / Capital Decrease Increase

Income / Revenue Decrease Increase

Expenses Increase Decrease

● Current Assets
- Cash and Cash Equivalents ● Current Liabilities
- Accounts Receivable - Accounts Payable
- Inventory - Loans / Notes Payable
- Prepaid Expenses - Taxes Payable
- Marketable Securities (Bonds - Salaries Payable
/ Stocks) - Interests Payable
● Non - Current Assets - Unearned Revenue
- Furniture ● Non - Current Liabilities
- General Equipment - Long Term Loans
- Intangible Assets (Goodwill / - Deferred Revenue
Trademark / Patents) - Deferred Tax Liabilities
- Investment Property (Land / ● Expenses
Buildings) - Utilities
- Accumulated Depreciation - - Rental Fees
Credited - Insurance
● Income / Revenue - Employee Wages
- Sales - Advertising
- Service Revenue - Bad Debt
- Depreciation
On January 5, 2017, Mr. Scotie invested P250,000 into the business.

Date Account Ref# Debit Credit

01/05/17 Cash JV1 P250,000

Scotie, Capital P250,000

On January 10, the parlor bought small equipment on account from Mr. Japeth for P30,000.

Date Account Ref# Debit Credit

01/10/17 Equipment JV2 P30,000

Accounts Payable P30,000

On January 12, the salon bought office furniture worth P10,000.

Date Account Ref# Debit Credit

01/12/17 Office Furniture JV3 P10,000

Cash P10,000

On February 25, the parlor paid 50% of its account to Mr. Japeth

Date Account Ref# Debit Credit

02/25/17 Accounts Payable JV4 P15,000

Cash P15,000

On February 25, sold merchandise on account for P50,000

Date Account Ref# Debit Credit

02/25/17 Accounts Receivable JV5 P50,000

Sales P50,000

On March 5, paid the salaries of the staff amount to P30,000

Date Account Ref# Debit Credit

03/05/17 Salaries Expense JV6 P30,000

Cash P30,000
Lesson 4 - Analysis of Business Transactions
Chart of Accounts - a listing of titles used for accounting transactions and periods.
Account Title Description

ASSETS-DEBITED

Cash - account balance, currency, coins, checks received 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 has yet to be sold.

Supplies - cost of supplies that have yet to be used.

Prepaid Insurance - cost of insurance paid in advance.

Land - cost of land being used by the company.

Buildings - cost of the building being used by the company.

Equipment - cost of equipment used by the company.

ASSETS-CREDITED

Accumulated Depreciation - - amount of the building’s cost that depreciated since the time
Buildings it was acquired.

Accumulated Depreciation - - amount of the equipment’s cost that depreciated since the
Equipment time it was acquired.

LIABILITIES

Loans / Notes Payable - amount due on a formal written promise to pay; includes
loan from banks.

Accounts Payable - amount owed to suppliers who provided goods and services
to the company but has yet to be paid.

Wages / Salaries Payable - amount owed to employees of the company that has yet to
be paid.

Interest Payable - amount owed from interest on Notes Payable.

Unearned Revenues - amounts received in advance of delivering goods or

providing services.

Mortgage Loan Payable - a formal loan that involves a real estate mortgage.
O W N E R ‘ S E Q U I TY / CAPI TAL- C R E D I T E D

Smith, Capital - amount the owner invested in the company plus the earnings
of the company not drawn by the owner.

O W N E R ‘ S E Q U I TY / CAPI TAL- D E B I T E D

Smith, Drawing - amount that the owner of the investment had withdrawn.

INCOME / REVENUE

Sales - company's revenue earned from the sales of products.

Service Revenue - company's revenue earned from providing services.

EXPENSES

Employee Wages - expenses for the work incurred by non-salaried employees.

Employee Salaries - expenses for the work incurred by salaried employees.

Supplies - cost of supplies used up during the accounting period.

Rental Fees - cost of occupying rented facilities.

Utilities - cost of electricity, water, heat, and sewer.

Advertising Expense - expenses incurred by the company for ads/promotions.

Depreciation - cost of long-term assets allocated to expenses.