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Basic Accounting

This document provides an overview of basic accounting concepts. It defines accounting as recording, classifying, and summarizing financial transactions and events. It discusses the importance of accounting for record keeping, policy formulation, and reporting. It also outlines the key functions of accounting including communicating business information, providing data for managers, and allowing businesses to assess efficiency. The document concludes by describing the accounting cycle and key accounting principles.

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Baby Pink
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114 views

Basic Accounting

This document provides an overview of basic accounting concepts. It defines accounting as recording, classifying, and summarizing financial transactions and events. It discusses the importance of accounting for record keeping, policy formulation, and reporting. It also outlines the key functions of accounting including communicating business information, providing data for managers, and allowing businesses to assess efficiency. The document concludes by describing the accounting cycle and key accounting principles.

Uploaded by

Baby Pink
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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BASIC

ACCOUNTING
(IC-BAA)

Instructor: Prof. Miles Lachica

Pinky C. Condes
BSBA- Financial Management
2022
What is Accounting?

Accounting is an art of recording, classifying and


summarizing in a significant manner and in terms of money, transaction
and events which are in part, atleast, of financial character and
interpreting the results thereof.

The Importance of Accounting

1. To have a complete records of day to day transactions and events that


have transpired within the organization for future reference;

2. To serve as guide in the formulation of policies and activities;

3. Accounting records serve as a source of information necessary for the


directors to properly manage the cooperative;

4. Records are the basis of reports to members; and

5. The government requires the periodic submission of financial


statements.

Function of Accounting

1. Means by which business information is communicated to business


owner and stakeholders.

2. Provide information for managers and owners to use in operating the


business.

3. Allows business to access the efficiency and effectiveness of their


business operations.

ACCOUNTING is the language of business.

Activities associated with accounting:


 IDENTIFIES - involves selecting economic events relevant to a
particular business transactions.

 RECORDING - keeping a sequence list of events.

 COMMUNICATING - the preparation and distribution of financial and


other accounting reports.

Who uses Accounting Data?

INTERNAL USERS
- are managers who plan, organize and run the
business. These includes marketing managers, production, supervisors,
finance directors and company officers.

EXTERNAL USERS
- are individuals and organization outside a
company who want financial information about the company.

1. Investors - use accounting information to decide whether


to buy, hold or sell ownership shares of a
company.

2. Creditors - use accounting information to evaluate the risk


granting credit or lending money.

3. Taxing Authories - such as B.I.R., want to know whether


the company complies with taxlaws.

4. Customers - are interested in whether the company will


continue to supply.

5. Labor Unions - want to know whether companies have the ability to


pay increased wages and benefits to union members.

ACCOUNTING STANDARDS
- In order to ensure high-quality financial reporting accountants
present financial statements in conformity with accounting standards
that are issued by standard - setting bodies. Presently, there are two
primary accounting standards - setting bodies:

 International Accounting Standards Board (IASB)


 Financial Accounting Standards Board (FASB)

Most of the companies in US follow the standard issued by FASB,


referred to as “ GENERALLY ACCEPTED ACCOUNTING PRINCIPLES “
(GAAP).

HISTORICAL COST PRINCIPLE

- it dictates that companies record assets at their cost.


This is true not only at the time asset is purchased, but also over the
time the asset is held.

EXAMPLE:
If ABC Company purchase machine for P300 000. The
Company initially reports it in its accounting records at P300 000. But
what does ABC Company do if by the end of the next year, the fair value
of the machine has increased to P400 000?

Under this principle, it continues to report the machine at P300 000.

FAIR VALUE PRINCIPAL

-It states that assets and liabilities should be reported at


fair value (the price received to sell an asset or settle a liability). Fair
value information may be more useful that historical certain types of
assets and liabilities.

EXAMPLE:
Certain investment securities bare reported at fair value
because market value information is usually readily available for these
types of assets.
ACCOUNTING EQUATION,AND DEFINE ITS COMPONENTS
The two basic elements of a business are what it owns and what
it owes.

ASSET - are the resources a business owns.


LIABILITIES - are claims against assets.
EQUITY - are ownership claim on total assets.

Thus, accounting equation is,

ASSET = LIABILITIES + EQUITY

 This relationship is the basic accounting equation.

* Assets must equal the sum of liabilities and owner’s equity.

* Liabilities appear before equity in the basic accounting equation,


Because they are paid first if a business is liquidated.

* Equity is often referred to as residual equity.

INCREASES IN EQUITY

 Investment by owner - are the assets that the owner puts into the
business. These investments increase equity. They recorded in a
category called “owner’s capital”.

 Revenues - are the gross increase in owner’s equity. Generally,


revenues from selling merchandise, performing services, renting
property, and lending money.

DECREASES IN EQUITY

 Drawings - an owner may withdraw cash or other assets for personal


use. Drawings decreases owner’s equity. They are recorded in a
category called “OWNER’S DRAWING”.

 Expenses - cost of assets consumed used in earning revenue.


ACCOUNTING CYCLE
- refers to nine steps, repeated in each reporting period, to verify
transactions and prepare financial statements for internal and external
users.

1. Collection of data 2. JOURNALIZING 3. Recording the


and analysis of journals into the ledger
transaction. accounts.

4. Creating unadjusted 5. Performing 6. Creating adjusted


trial balance. adjusting entries. trial balance.

7. Creating financial 8. Closing the books. 9. Creating the post-


statements from the closing trial balance.
trial balance.

1. COLLECTION OF DATA AND ANALAYSIS OF TRANSACTION


-The first step in accounting cycle. Companies will have many
transactions throughout the accounting cycle.Each one needs to be
properly recorded on the company’s books.

2. RECORD TRANSACTIONS IN A JOURNAL


- With the transactions set in place, the next step is to record
these entries in the company’s journal in chronological order. In debiting,
one or more accounts and crediting one or more accounts, the debits and
credits must always balance.

3. RECORDING JOURNALS INTO LEDGER ACCOUNTS


- The journal entries are then posted to the general ledger
where a summary of all transactions to individual accounts can be seen.

4. CREATING UNADJUSTED TRIAL BALANCE


- Thisprovides the balances of all the accounts that require
adjustment in the next step.

5. ADJUSTING ENTRIES
- are changes to journal entries you’ve already recorded.
Specifically, they make sure that the number you have recorded match
up to the correct accounting periods.

 Accrued Revenues
 Accrued Expenses
 Deferred Revenues
 Deferred Expenses
 Depreciation Expenses

6. ADJUSTING TRIAL BALANCE


- is prepared to show updated balances after adjusting entries
have been made.

7. FINANCIAL STATEMENTS
- the balance sheet, income statement and cash flow
statement can be prepared using the correct balances.

8. CLOSING ENTRIES
- once completed, all revenue, expense, withdraw and income
summary should be zero.

9. POST-CLOSING TRIAL BALANCE (PCTB)


- it helps verify that permanents accounts balance, with equal
debit and credit sums, and that all temporary accounts were closed
properly.

ACCOUNTING INFORMATION SYSTEM

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