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
...

o On January 16 ABC Company paid 50% of purchased equipment
...
To reduce the liability
account, we should debit the
amount because liability
account’s normal balance is
Credit side
...
Since cash will depart
from the company, the asset
account should be reduced
...


Posting to ledger
A transaction is first recorded in a journal
...


TRIVIA!
In 1494, Luca Pacioli, a
Franciscan monk, invented
the double entry accounting
system that is still used
today
...


General Ledger
Subsidiary Ledger

Also known as:
JOURNAL

Book of Original Entry

LEDGER

Book of Final Entry

The ledger is a history of transactions by account
...


Income statement accounts are Nominal Accounts which
means they are temporary accounts
...


Represents the record-keeping system for a company’s
financial data, with debit and credit account records
validated by a trial balance
...
The subsidiary
ledger shows detail for part of the accounting records such
as property and equipment, prepaid expense etc
...

• Every transaction affects at least two accounts
...


Posting to Ledger
Ledger accumulates all the effects of the
transactions during a period in specific
accounts
...


JANUARY 4 TRANSACTION

TRANSACTIONS:

o On January 4 ABC Company purchased office equipment on
account from XYZ Company for Php 90,000
...


Posting to Ledger:
When posting to the ledger, we are creating the end balances of the accounts
...
There are no other transactions that
increases or decreases the Office equipment thus the ending balance of Office
Equipment is also 90,000
...
Therefore, Accounts payable is reduced by 45,000 by
debiting it
...
”

Preparation of Unadjusted Trial Balance
Posting to Ledger means accumulating all the effects
of transactions in a specific account
...

After we get the ending balances of each account, we
will then prepare the Unadjusted Trial Balance, which
includes the ending balances of each the accounts
...
This equality should be
proved at the end of each accounting period
...

The trial balance does not provide complete proof of the
accuracy of the ledger
...
If a transaction is
not recorded or omitted, it is possible that the Trial
Balance Debit and Credit will still be equal
...
Accountants use
the Accrual basis of accounting based on GAAP which means
Revenues are reported in the period in which they are earned
(cash may or may not be received during this period)
...
For
example, Prepaid Expense, which we do not journalize on a dayper-day basis because it would be inefficient and require too
many entries
...

In accrual basis, expenses are reported in the same period as
the revenues to which they relate
...


ACCOUNTING PERIOD ASSUMPTION

states that businesses should report their financial
position, results of operations, and cash flows at regular
intervals
...

ACCOUNTING PERIOD ASSUMPTION

Record revenue when a sales transaction occurs
...
Therefore, recognize revenue and
matching expense when they are generated, not when
money actually received or given
...


All adjusting entries affect at least one income
statement account and one balance sheet
account
...


ADJUSTING ENTRIES
Under the cash basis of accounting, accounts do not require adjusting
...
Matching
concept is not used under the cash basis
...
Therefore, when an entity uses Accrual basis of accounting, the entity is required to do adjustment through the adjusting entries
...


Preparation of Financial Statements

Statement of Financial Position
Statement of Financial Performance
FINANCIAL STATEMENTS
NOTE!
Statement of Financial Position is also the
Balance Sheet
...
Under the Balance Sheet, it has the elements of
Asset, Liability and Equity
...

Like the example, the Total Assets is 45,000 and the Total
Liabilities and Equity should also be 45,000
...

Users of Financial Statements use the Statement of
Financial Position to make judgement about a company’s
valuation and creditworthiness, allowing the intended users to
make useful decisions
...
Under the Balance Sheet, it has the
elements of Income and Expenses
...
The 55,550 excess of
the revenue over the expenses is called Net income
...

Notice that the Statement of Financial Performance
title date is “For the Year Ended” because Income Statement
accounts are temporary accounts (also known as
temporary accounts) wherein Income and Expense accounts
are closed at the end of the period using the Closing Journal
Entries
...


Statement of Owner’s Equity
The Statement of Owner’s Equity should be prepared before
the Statement of Financial Position because the amount of
Owner’s Equity is reported in the Balance Sheet
...
(Look at the Net income
presented in Statement of Financial Position above)
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Cash flows from Operating Activities
2
...
Cash flows from Financing Activities
The cash flow statement measures the performance of a
company over a period of time
...
(Look at the Cash account in the
Statement of Financial Position above, it is also 26,525
derived from the Statement of Cash Flows

CLOSING ENTRIES
Closing entries are journal entries that is made at the end of the
accounting period
...
Closing entries is
done to make the balances of Revenue and Expenses zero for the
year-end, therefor the Revenue and Expenses’ beginning balance
next year is zero
...

How to Close the Temporary accounts?

Why is there a need to close the amounts of
Revenues and Expenses to zero at year-end?
The purpose of Statement of Financial
Position is to keep track how well the company
generates revenue and manages the assets
during the year
...


Using the account title “Income Summary” we
can close the Revenue and Expenses
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Note that the normal balance of Expenses is
Debit, to reduce its amount means we must
Credit it and then Debit Income summary
account

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