 Note that financial statements should be done

UNIT 1: INTRODUCTION TO ACCOUNTING

after following the financial process.

What is accounting? Nature of Accounting

• Accounting is a service activity. Its function is to provide • Accounting is

quantitative information, primarily financial in nature,  Art – it has a designed process that provides an
about economic entities that is intended to be useful in outcome.
making economic decisions and making reasoned  Science – involves systematic and scientific

choices among alternative courses of actions. methods of collecting, recording, and presenting
• Accounting is… financial data.

 It is a service entity that pertains to accounting  Financial – provides quantitative information.

services, tax, and management accounting services.  Process – has an accounting process.
 The function is to provide quantitative information,  Information system – provides relevant
primarily financial in nature. information that helps with decision-making.
 About economic entities dealing with businesses,
non-profit organizations, and churches for financial Functions of Accounting
reports intended for record-keeping. • Maintenance of systematic records – easy access of
 Intended to be useful in making informed decisions. records.
 Making reasoned choices among alternative courses • The financial results of an entity can be communicated
of action.
– provides information that is useful for the business.
• The art of recording, classifying and summarizing in a
• Meeting legal requirements – accounting ensures that
significant manner and in terms of money, transactions,
the documents are compliance to the laws,
and events which are, in part at least of financial
regulations, and standards.
character, and interpreting the results thereof.
1. Recording (Journal) - transactions must be • Protecting assets of a business – keeping track of the
analyzed first before they are recorded. acquired assets through records.
2. Classifying (Ledger) - Entries from the journal are • Assistance to management – helps managers make
transferred to the ledger account per account. strategic decisions.
3. Summarizing (Trial Balance) - Accounts from the
Branches of Accounting
ledger are presented in an organized fashion
together with their corresponding amounts. 1. Financial Accounting– deals with recording,
4. Interpreting the results (Financial Statements) - This classifying, and summarizing all business
deals with the use of financial statements. transactions. Focuses on making financial
statements for external users.
Accounting Process 2. Management Accounting (for internal users) –
collects information for the management which is
used for decision-making.
3. Cost Accounting –captures the total cost of the
production. The output of the cost accounted would
be used by F.A and M.A.
4. Government Accounting – deals with the receipts
and dispositions of public funds.
5. Auditing – examination and evaluation of financial
statements of the business.
 Internal Auditing – ensures that the financial
statements are in compliance with the policies
of the business.
 External Auditing – independent evaluation of
Accounting Process
financial statements conducted by a third
1. Statement of Financial Position (Balance Sheet) – shows party to confirm that it does not contain errors
Income and expense transactions. and fraudulent activity.
2. Statement of Comprehensive Income (Income 6. Tax Accounting – deals with the taxes to make sure
Statement) – shows the income generated by the that the business is in compliance with the tax
business. authorities.
3. Statement of Changes in Equity (Equity) – shows the 7. Accounting Education – deals with accounting as an
changes in capital. academic endeavor.
4. Statement of Cash Flows (Cash Flows) – in and out of 8. Accounting Research – the creation of knowledge
cash in the business that can benefit the profession.
5. Notes to Financial Statement – additional information &  Education research – improves the academic
explanations. side.

BAACEN: FUNDAMENTALS OF ACCOUNTING

CREATED BY: JAZMINE GO
  Industrial research – information will be used to intended to be useful in making economic decisions.
improve the accounting information. FALSE
3. Accounting is solely the process of recording financial
Accounting vs bookkeeping transactions. FALSE
4. Accounting is considered both a science and an art.
• Accounting – analysis and interpretation of financial TRUE
statements. 5. One of the primary functions of accounting is to provide
• Bookkeeping – routine of recording of economic activity. information that is useful for making economic
decisions. TRUE

Users of accounting information

UNIT 2: FORMS OF BUSINESS ORGANIZATIONS AND
Internal users THEIR ACTIVITIES

1. Owners- may provide capital to the business and

Business forms
assess if needs funding.
2. Managers- they need financial information because 1. Sole Proprietorship
they plan and organize the firm.  These businesses are owned by one person,
usually, the individual who has day-to-day
External users responsibility for running the business. Sole
1. Investors – the information they need is related to proprietors can be independent contractors,
deciding whether they should buy, sell, or hold their freelancers, or home-based businesses.
shareholdings or ownership in a business. - Simplest form of business where the capital
2. Creditors- they are the people from whom the company is owned by the owner called the proprietor.
borrows funds for business use. It is in their interest to - Does not file income tax, rather it is included
know if the company is in good shape and can pay back in the personal income tax of the owner.
the loans. - Capital account is the Owner’s Equity
3. Government- certain information is required by the account.
government from the businesses for activity regulation, Advantages Disadvantages
taxation policies, etc. Easy to form Small size
4. Employees- these people seek employment Effort-reward relationship Limited life
Full control Lacks pro skill and talent
opportunities, benefits, and security. They want to
Quick decisions Unlimited liability
assess the company’s profitability and stability. Economic & efficient decisions Limitations in capital
5. Suppliers- suppliers provide businesses with the items Personal touch Risk of wrong decisions
required to run the actual business. They include Keep business simple, dynamic
and flexible.
suppliers of raw materials or other services that help
businesses produce goods or provide services to their
customers. True/False activity
6. Tax Authorities- these bodies use business information
1. The simplest form of business organization where
to determine whether the amount of declared tax in the
capital is owned by one person is called sole
tax return is correct.
proprietorship. TRUE
7. Customers- over time, people (customers) may become
2. As there is one owner in a sole proprietor’s business,
highly involved or dependent upon an enterprise. With
the capital account is called partner’s equity.FALSE
this, this group of users would like to know about the
3. Profit by any business cannot be measured if business
company’s continuance.
and personal assets are combined. TRUE
8. General Public- The general public normally would look
4. Personal affairs of the owner are not recorded in the
into the business trends and recent progress of an
book of the business. TRUE
enterprise including the coverage of its activities.
5. A proprietor takes full control of his business. He
operates without interference from anybody. TRUE
History of accounting
6. In a sole proprietorship, the owner may be entitled to a
salary for himself. FALSE
• Luca Pacioli is the father of accounting.
7. A proprietor can make withdrawals in cash but not in
• He was born on 1447 in Sanselpolcro, Italy
kind from his business. FALSE
• Double-entry in journalizing.
8. One disadvantage of a proprietorship is when the
True/False activity business incurs losses, he has to bear it all. TRUE
9. One advantage of proprietorship is when the business
1. The primary objective of management accounting is to
provide information to external stakeholders. FALSE makes profit because it shares with nobody. TRUE
10. From the legal point of view, the owner and his business
2. Accounting provides qualitative information, primarily
financial in nature, about economic entities that are are inseparable. They are one. TRUE

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11. In a proprietorship, the business itself does not pay - A share certificate is a legal document that
income tax. TRUE verifies that a person owns shares in a
12. The income tax of a proprietor is reported as personal corporation.
income tax. TRUE - All incorporators are shareholders, but not all
shareholders are incorporators.
Business forms
Advantages Disadvantages
2. Partnership Limited liability Double taxation
 A contract whereby two or more person bind Many sources of capital Legal restrictions
themselves to contribute money, property, or Ownership transfer Forming a corporation
industry to a common fund to divide the profits costs more
among themselves.
- This contract or legal agreement between True/False activity
partners is called a partnership agreement.
- Like proprietorships, the law does not 1. A corporation may be formed by at least five (5) but not
distinguish between the business and its more than fifteen (15) persons called incorporators
owners. except one-person corporation. TRUE
- Partnership is regulated by the Security and 2. The corporate charter of a corporation which is called
Exchange Commission (SEC) and BIR. Articles of Incorporation” is registered with the

Advantages Disadvantages Securities and Exchange Commission (SEC) together

Bridging the gap in expertise Loss of autonomy - can't with the by-laws. TRUE
and knowledge decide on your own. 3. Incorporators are the persons who originally formed the
More cash and properties Sharing of profit corporation and signed the Articles of Incorporations.
More business opportunities Future selling complications
TRUE
Sharing decisions Unlimited Liabilities
Easy to organize
4. The owners of the shares of the stocks are called
Personal touch Shareholders. TRUE
5. A Share Certificate is evidence of ownership in a
corporation. TRUE
True/False activity
6. Like a partnership, a shareholder cannot sell or transfer
1. A partnership business is always formed by two people his shares to another person without informing the
only called partners. FALSE other shareholders. FALSE
2. Because a partnership is a mere contract, it can be 7. The capital account of a corporation is called
terminated when the partners so desire. TRUE Shareholder’s Equity. TRUE
3. Two or more persons may form a partnership for the
Business forms
exercise of profession. TRUE
4. One cannot be admitted to an existing partnership 4. Cooperative
without the consent of the partners. TRUE  Autonomous and duly registered association of
5. When there are two partners in a partnership, if one persons with common bind of interest, who
sells his interest to the other partner, the partnership have voluntarily joined together to achieve
will be converted into a sole proprietorship. TRUE their social, economic, and cultural needs and
6. A contract partnership may be oral or written. FALSE aspirations by making equitable contributions
7. A partner may contribute his services to the to the capital required.
partnership. TRUE - Formed by 15 or more people
- Regulated by the Cooperative
Business forms Development Authority (CDA).
- Articles of Cooperative is the certificate
3. Corporation of formation.
 A corporation is considered by law to be a unique Advantages Disadvantages
entity, separate from those who own it. A Lower cost Big investors don't get
corporation can be taxed, sued, and enter into Tax exemptions attracted.
contractual agreements. The corporation has a life Limited liability Slow decision
of its own and does not dissolve when ownership Limited distribution of
surplus
changes.
Education of members
- Largest and most complicated form of
business organization.
- At least 5 but not exceeding 15 people can True/False activity
organize a corporation.
1. Cooperative is formed by fifteen (15) or more natural
- Articles of incorporation is the certificate of
persons, who are Filipino citizens, of legal ages and with
formation in a corporation.
common bond and interest. TRUE

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CREATED BY: JAZMINE GO
2. Their charter which is called Articles of Cooperations is 3. Going Concern Assumption – thinking that the business
registered with the Cooperative Development Authority will live forever.
(CDA). TRUE 4. Monetary Unit Assumption – Philippine peso is used in
3. As requirements, a member should reside or work in the measuring and reporting the economic activities of a
intended area of operation. TRUE Philippine entity.
4. A cooperative has its own Board of Directors who are 5. Time-period Assumption - requires a business entity to
elected among themselves. TRUE complete the whole accounting process over a specific
5. The Voting share of a cooperative is a one-man, one- operating time period.
vote. TRUE
6. The general assembly shall be the highest policy- Conceptual framework of accounting
making body of the cooperative. TRUE
• System of ideas and objectives that lead to the creation
UNIT 3: ACCOUNTING CONCEPTS AND PRINCIPLE of a consistent set of rules and standards.
 Promotes uniformity of financial statements.
• Concept – ideas
• Principles – basic and standard rules of financial
statements.

Accounting principle
• The Generally Accepted Accounting Principle (GAAP)
 A collection of commonly used standards in
making financial statements.
 Considered as the bible for accountants.
 The Philippines adopted two types which are 1. Fundamentals
PHILIPPINE ACCOUNTING STANDARD (PAS) & a. Relevance - Financial information is relevant if it
PHILIPPINE FINANCIAL REPORTING STANDARD can affect the user’s decision.
(PFRS) which were derived from IAS and IFRS (1) Predictive value – predicts possible future
respectively. events.
(2) Confirmatory value – provides information
GAAP
on past events.
1. Cost Principle – acquired assets should be recorded at b. Faithful Representation - financial information is
their original price and not at fair market value. said to be faithfully represented if the actual
 Kung magkano mo nabili, yun ang ire-record mo. transaction was presented as it is.
2. Full Disclosure Principle – all information that can affect (1) Complete - financial statements should not
the user’s judgment should be disclosed. exclude any transaction.
 All business transactions should be disclosed in (2) Neutral - information is free from bias.
the financial statements. (3) Free from error - information is free from
3. Revenue Recognition Principle – we recognize revenue errors.
regardless if cash is received. 2. Enhancing
4. Matching Principle – every revenue recorded should a. Comparability – consistency to make it
have matching expenses incurred. comparable (using the same method).
 We match expenses that are used to generate (1) Intra-comparability – same entity but
revenue. different period.
5. Objectivity Principle – unbiased judgment and financial (2) Inter-comparability – different entities but
statements should be supported with supporting same period.
documents. b. Verifiability - accounting information should be
6. Conservatism or Prudence – anticipating possible supported by evidence so it can be verified.
losses rather than future gains. c. Timeliness - information must be available to
7. Materiality – allows an accountant to violate another decision-makers at the time it is needed.
accounting principle if an amount is insignificant. d. Understandability - users can comprehend the
data presented in the Financial Statement.
Accounting Assumptions
1. Economic Entity Assumption – separation of business
activity
transactions from personal affairs of the owner. 1. ABC Corp. recognizes revenue when a customer
2. Accrual Business Assumption – revenue is recognized places an order, even if the product has not yet been
when it is earned regardless of it is received and delivered. REVENUE RECOGNITION PRINCIPLE
expenses are recognized when it is incurred regardless 2. A company defers the recognition of marketing
of payment. expenses until the next fiscal year to show higher

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CREATED BY: JAZMINE GO
 profits in the current year. MATCHING Current Liabilities Non-Current Liabilities
PRINCIPLE/ACCRUAL BUSINESS PRINCIPLE Accounts Payable Long-term Notes Payable
3. A company does not record any allowance for Short-term Notes Payable Bonds Payable
doubtful accounts despite a history of significant Unearned Revenue Deferred Tax Liabilities
uncollectible receivables. CONSERVATISM OR Accruals Other term liabilities
PRUDENCE Other short-term liabilities
4. A company uses an accelerated depreciation
method for tax reporting but does not apply the 3. Equity – the residual interest in the assets after
same method for financial reporting. deducting liabilities.
COMPARABILITY Sole Proprietorship Partnership Corporation
5. JKL Enterprises has a pending lawsuit that could Owners Equity Partners Equity Share Capital
result in a significant loss, but it does not disclose Owners Drawings Partners Share Premium
this in the financial statements. FULL DISCLOSURE Drawings
Net Income Net Income Net Income

UNIT 4: FINANCIAL STATEMENTS OVERVIEW

Income Statement
Financial Statement
REVENUE/INCOME – EXPENSES = NET INCOME
• These are reports made by accountants at the end of
the accounting period. 1. Revenue/Income - increase in economic benefits during
the accounting period in the form of inflows.

Types Financial Statement Service Companies Merchandising &

Manufacturing
Service Revenue Sales Revenue
1. Statement of Financial Position (Balance Sheet) - shows
the company’s financial condition by providing
2. Expenses – decreases in economic benefits during the
information about the company’s assets (resources),
accounting period in the form of outflows.
liabilities (obligations), and capital (equity) from the
Salaries Gas and Oil
start-up to the current accounting period.
Rent Representation
2. Statement of Comprehensive Income (Income
Utilities Transportation
Statement) - results of operations for a given period.
Depreciation Communication
Results of operations refer to the performance of the
Repairs and Maintenance Others…
business.
3. Statement of Changes in Equity - this statement
summarizes the changes in equity or capital for a given UNIT 5: ANALYZING BUSINESS TRANSACTIONS
period.
4. Statement of Cash Flows - this financial statement Business Transaction
focuses on the movement of CASH—its inflows and
• An event that has some effect on the resources of the
outflows.
firm or on the source of the firm’s asset.
 External transaction – takes place between the
Elements of Financial Statement
business and an outside third party.
 Internal transaction - a transaction that does not
ASSET = LIABILITIES + EQUITY
involve an outside organization or any third party.

1. Asset – resources controlled by the enterprises as a

Source documents
result of past transactions and events with economic
benefits. • Evidence that are original records that support the
Current Assets Non-Current Assets financial statements.
Cash Long term receivables Examples: Bills/invoices, official receipts/collection
Accounts Receivables Land receipt, checks, and others.
Store/Office Supplies Building
Inventory Equipment and Machinery
Account Titles
Prepayment covering less Furniture and Fixture
than 1 year
• Unique terms given to account in a system of
Intangible Assets
accounting.
Prepayment covering more
1. Assets
than 1 year
a. Cash – money, checks, money orders, and bank
drafts used by the entity.
2. Liabilities – the present obligation of the entity arising
from past events to result in cash outflow.

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 b. Accounts Receivables - the amount
of money your customers owe you for goods or
services they purchased from you in the past.
c. Notes Receivables – there’s a promissory note
as evidence of debt.
d. Supplies – a title used for items such as
stationary, clips, rubber bands, ink, etc.
e. Merchandise Inventory – used for items
available for sale.
f. Prepaid Expense – items that are paid in
advance.
2. Liabilities
a. Accounts Payable -what you owe to your
creditors or services that the business has not
yet paid.
b. Notes payable – the debt of the business with a
promissory note.
c. Unearned Income – amount received from
clients in advance without rendering services
yet.
3. Capital
a. Owner’s Capital – normally written bearing the
name of the owner like J, Capital.
b. Owner’s Drawing – when owner’s pulls his
investment from the business, J, Drawing
4. Income
a. Service Income/Revenue – used for the income
earned.
b. Sales Revenue – used for income earned from
selling goods/items.
5. Expenses
a. Salaries Expense – used to record salaries for
employees.
b. Utility Expense – used for recording water,
electricity, telephone, and internet.
c. Repairs and Maintenance – used for recording
repair works availed.
d. Interest Expense – recording any interest that
has accrued with your debts.

BAACEN: FUNDAMENTALS OF ACCOUNTING

CREATED BY: JAZMINE GO