Notesale: Turn your study into money

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BASICS
OF
ACCOUNTING

ACCOUNTING
According to Accounting Standards Council (ASC)
“Accounting is a service activity
...
”

According to American Institute of Certified Public Accountant (AICPA)
“Accounting is the art of recording, classifying and summarizing in a significant manner and in terms
of money, transactions and events which are in part of at least of a financial character and interpreting the
results thereof
...
”
Service Business
BUSINESS

Merchandising Business
Manufacturing Business

ROLE OF ACCOUNTING IN BUSINESS:

Accounting is the “language of business”
...
Accounting is an information system
that provides reports to users about economic performance
and condition of a business
...
Documenting Transactions
2
...
Posting to Ledger
4
...
Journalizing and posting of Adjusting journal entries
6
...
Preparation of Financial Statements
8
...
Preparation of Post Closing Trial Balance
10
...
”

RECORDING
PHASE

SUMMARIZING
PHASE

USERS OF ACCOUNTING

1
...
External Users
(main users of Financial Statement)
(e
...

Non-accountable events are not recognized but
disclosed in the notes to Financial Statements
...
The equality of debits and credits for each transaction is
built into the accounting equation (Asset = Liabilities + Equity)
...


General
Journal
Special

Sales Journal
Cash Receipt Journal
Purchase Journal
Cash Disbursement

THE ELEMENTS OF FINANCIAL STATEMENT
The international Accounting Standards Board (IASB) has published its revised ‘Conceptual Framework for Financial Reporting’
...


BALANCE SHEET

ASSET

A present economic resource controlled by the
entity as a result of past events
...

LIABILITY

A present obligation of the entity to transfer an
economic resource as a result of past events
...


INCOME STATEMENT

INCOME

Increases in assets or decreases in liabilities that
result in increase in equity, other than those
relating to contributions from holders of equity
claims
...

The expression “economic resource” instead of simply “resource” stresses that
IASB no longer thinks of assets as physical objects but as sets of rights
...
Instead, the definition of an economic resource refers to the potential of
an asset / liability to produce / to require a transfer of economic benefits
...
Such a
proof, called a TRIAL BALANCE
...
It indicates only that the
debits and the credits are equal
...


EXAMPLE OF UNADJUSTED TRIAL BALANCE:

Adjusting Journal Entries
Whenever accountants prepare Financial Statements, they
use the accounting period concept to determine in which period
the revenues and expenses should be reported
...

When using the accrual basis of accounting, some
accounts in the ledger require updating of balances
...
It would be better if we debit the total amount of
asset and at the end of period, we credit the expired portion to
reduce the amount of asset and make it up to date
...
By matching revenues and
expenses, net income or loss for the period will be properly reported
in the income statement
...
These intervals are typically monthly,
quarterly, or yearly
...
Record
expenses when a transaction for the purchase of goods or
services occurs
...

Prepaid Expense

An expense that is paid for in advance
...
Thus, an adjusting entry will always
involve revenue or an expense account and an
asset or a liability account
...
This is because transactions are recorded only when cash is received or paid
...
The cash basis concept states that revenues and expenses are reported in the income statement in the period in which
cash is received or paid
...

PREPAID EXPENSE
BAD DEBT EXPENSE
Bad Debt Expense
Allowance for Bad Debts

Debit
XX

ASSET METHOD
Credit
XX

Expense Account
Payable Account

ORIGINAL JOURNAL ENTRY:

Credit
XX

Receivable Account
Income Account

Credit

XX

Insurance Expense
Cash

Debit
XX

Credit
XX

ADJUSTING JOURNAL ENTRY:
Debit
XX

Insurance Expense
Prepaid Insurance

Credit
XX

Prepaid Insurance
Insurance Expense

Debit
XX

Credit
XX

Credit
XX

INCOME METHOD

LIABILITY METHOD
ORIGINAL JOURNAL ENTRY:
Cash
Unearned Income

DEPRECIATION EXPENSE
Depreciation Expense
Accumulated Depreciation

Credit

UNEARNED INCOME

XX

Debit
XX

Debit
XX

Prepaid Insurance
Cash

ACCRUED INCOME
Debit
XX

ORIGINAL JOURNAL ENTRY:

ADJUSTING JOURNAL ENTRY:

ACCRUED EXPENSE
Debit
XX

EXPENSE METHOD

ORIGINAL JOURNAL ENTRY:
Debit
XX

Credit
XX

ADJUSTING JOURNAL ENTRY:
Unearned Income
Income account

Cash
Income account

Debit
XX

Credit
XX

ADJUSTING JOURNAL ENTRY:
Debit
XX

Credit
XX

Income account
Liability account

Debit
XX

Credit
XX

Preparation of Adjusted Trial Balance
After posting the adjusting entries, the total debit balance and total credit
balance should be equal as verified by an adjusted trial balance then the
accountant proceeds to the preparation of Financial Statements
...
On the other hand, Statement
of Financial Performance is also the Income
Statement

Statement of Cash Flows
Statement of Owner’s Equity

Notes to Financial Statements

Statement of Financial Position

Statement of Financial Position is also known as the
Balance Sheet
...
Under the Accounting equation,
Assets should be equal to the sum of Liabilities and Owner’s
Equity
...

Notice that the Statement of Financial Position title date is
“As of” because Balance sheet accounts are permanent accounts
wherein Asset, Liabilities and Equity accumulates (carried over
to next period)
...


Statement of Financial Performance
Statement of Financial Performance is also known as
the Income Statement
...

Like the example, the Income (Service Fee) is 263,000
and the Total Expenses is 207,650
...
Suppose
Total Expenses is greater than the Income, the excess is
called Net loss
...

Users of Financial Performance identifies how well a
company generates revenues and manages its assets,
liabilities, and financial interests of shareholders
...
On the other
hand, Statement of Owner’s Equity should be prepared after
the Statement of Financial Performance because we need the
amount of Net Income or Net Loss that is also reported in the
Statement of Owner’s Equity
...


Statement of Cash Flow
Statement of Cash flows consists of
1
...
Cash flows from Investing Activities
3
...
It is a financial statement
that shows how changes in balance sheet accounts and
income affect cash
...
Account balances of temporary account should
be transferred to a Real (Permanent) Account
...
In other words, the amount of Net income or Net
loss is transferred to the Equity section of the Statement of
Financial Position
...
We need to close it at the end of
the current year so that we can track again the
performance of the company next year by
reviewing the Revenues and Expense of that
year
...

CLOSING THE REVENUE ACCOUNTS

CLOSING THE EXPENSE ACCOUNTS

Note that the normal balance of Revenue is
Credit, to reduce its amount means we must
Debit it and then Credit Income Summary
account

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