PRINCIPLES OF ACCOUNTING 1.

Measurable (should be translated in money)

2. It should have economic benefits (inflow & outflow)
Accounting Elements and the Accounting Equation
Journal Entries (Double Entry Accounting)
Introduction To Accounting
 Debit and Credit
What is accounting? How is it different from bookkeeping?
AICPA definition: Classifying

 the art of recording, classifying and summarizing, in a  Enumerate transaction according to assets, liabilities,
significant manner and in terms of money, transactions equity, revenue, and expenses.
and events, which are part at least of a financial character
and interpreting the results thereof. Summarization

Accounting is regarded as the language of the business. Why  Will make a trial balance then after is the FS.
do you think so? How? Interpreting
 language of business since it communicates (financial)  Most important part activity in the accounting cycle
information to various users through the financial  WORTHLESS ang R, C, S if you do not know how to
statements. interpret.
What are financial statements? What kind of interpretation?
 FS are reports that show the results of the operation of the  Either the company is EARNING, LOSING, NEED
business whether there is an income or a loss (revenues - ADDITIONAL FUNDS, or THE COMPANY HAS
expenses). It also shows the financial position of the EXCESS FUNDS
business, how much properties it owned (assets), how
much obligation it owed (liabilities) and how much is the The Accounting Elements
capital of the owners (equities).
 Statements that reflect the current position, performance,  The accounting elements are the components of the
capital structure, cash flows, & necessary disclosures financial statements.
 Gives better information to make better decisions.  They are also called the "accounts".

There are five basic financial statements that all companies The accounts are classified into five major classifications:
are required to prepare at the end of the period. (These (Elements of the Statement of Income)
financial statements are prepared every period.) ASSETS
1. Statement of Income  any property (tangible or intangible) owned by the
2. Statement of Financial Position business and has a value which the company can use to
3. Statement of Equity obtain future economic benefits.
4. Statement of Cash Flows
5. Notes to the Financial Statements Classifications:

Scope Of Accounting Current Assets - assets are those that can be consumed, used,
finished or sold within one year.
Recording Phase
Example: cash, accounts, receivables, inventory, marketable
 Analyze whether the transaction should be recorder or securities, prepaid assets, short-term investments
not.
Non- Current Assets - assets are those that can be used or
Transaction – business events – normal occurrence/activity consumed for more than one year. (does not qualify under
within the entry current assets)
 Make a decision (to record, should involve money if not Example: vehicles, equipment, furniture & fixtures, land,
do not record) buildings, machineries
 Need evidence (supporting documents
- Receipts (official/sales invoice) CONTROL – 1st thing remember when classifying assets is
- Contracts (sales contract/ purchase order contracts) whether the entity can control the resources or the assets
- Cheque or check (based on PAS no. 1 revised).
- Vouchers You have the sole authority to use, dispose, to sell your
- Memorandums resources (anything you control and owned)
2 Rules:
LIABILITIES The Accounting Equation

 amounts due to the creditors for goods or services bought What is an "accounting equation"?
on account or from borrowing of money that will be due
within one year or longer (receivables)  A mathematical expression that shows the relationships
 technical def: are/is a result of fast transactions that between and among the accounting elements.
requires settlement in the future.  The basic accounting equation is expressed as

Current - are those that are required to be paid within one Assets = Liabilities + Equities
year. What is the importance/meaning of the accounting equation?
Non- Current - are those that are required to be paid for more The expanded accounting equation is expressed as:
than one year.
[Left side] Assets = Liabilities + Equities + Revenues -
Example: mortgage payable, sanglang lupa, bahay, car, loans Expenses [Right side]
(long-term liabilities)
How are revenues and expenses affect the accounting
equation?
EQUITIES  Revenues increase the equity while expenses decrease the
 the remaining interest of the owners or the amount that equity (analyze based on their effects to equity)
would remain after the total liabilities has been paid out of
the assets of the business.
 It is considered the net worth (net assets)

Two types of Equities:

Owner’s Capital - the owner’s investment into the business

(cash or noncash assets, decreased by a liability transferred to
the business)

Owner’s Drawing - the owner’s withdrawal of investment

(cash or noncash assets) and/or withdrawal of income from the
business.

What is an entity concept?

 A basic accounting concept which states that the business

is considered separate and distinct from that of the owner.
As such, it can own assets and obtain liabilities; earn
revenues and incur expenses on its own apart from that of What is the use of the accounting equation?
the owner.
 The accounting equation is used to analyze the business
transactions.
INCOME / REVENUES
What are business transactions?
 any increase in ownership interest other than the
additional contribution of the owners. These are benefits  The business transactions are activities or events in the
received from the main operating activities of the business that affect the accounting elements, either
business. increase or decrease.
 includes gains from transactions other than its main  When these effects are recorded, the equality of the
accounting equation must be maintained at all times.
operating activities.

EXPENSES

 any decrease in ownership interest other than the

withdrawal of the owners. These are the values given up
from the operating activities of the business.
 includes losses from transactions other than its main
operating activities.
 2. Indicate the accounts - either assets, liabilities, equity,
income or expenses - affected by transactions.
3. Ascertain whether each account is increased or decreased
by the transaction.
4. Using the rules of debit and credit, determine whether to
The Accounting Cycle debit or credit the account to record its increased or
decreased.
 is a series of steps that we need to we need to know in
order to record business transaction or in order to prepare Double-entry Accounting
our financial statements.
• Information for each transaction recorded in a journal
Identification is called an entry.
• Dual effects of business
- identify whether the transaction is to be recorded or
 transaction is recorded.
not to be recorded.
• The recording of debit and credit parts of a
Identification of Recordable Transactions: transaction is called double-entry accounting.
• Double-Entry Accounting assures that debits equal
1. Measurable (should be translated in money) credits.
2. It should have economic benefits (inflow & outflow)

Recording phase

- Journal entries, journalizing entries and prepare

journal entry
- Double-entry accounting: debit and credit
- Transaction analysis are the basic steps that we
should do in order to record transactions

The analysis of transactions should follow these four basic

steps:

1. Identify the transaction from source documents.

The Journal

 A form for recording transactions in chronological order

is called a journal.
Source Documents
 Recording transactions in a journal is called journalizing.
 A business paper from which information is obtained for a Journal is called the book of original entry.
journal entry is called a source document.  Each business uses the kind of journal that best fits the
 Objective Evidence is applied when a sourced document needs of that business.
is prepared for each transaction.  It shows all the effects of a business transaction in terms
 The amounts must be accurate and true. of debits and credits.

Checks Formats

 A business form ordering a bank to pay cash from a bank The standard contents of the general journal are as follows:
account is called a check. 1. Date - the year and month are not rewritten for every entry
• The source document for cash payments is a check. unless the year or month changes or a new page is needed.
 The checks are prenumbered.
2. Accounts Titles and Explanation - The account to be
Memorandums debited is entered at the extreme left of the first line while the
account to be credited is entered slightly indented on the next
• A form on which a brief message is written describing a
line. A brief description of the transaction is usually made on
transaction is called a memorandum.
the line below the credit. Generally, skip a line after each
 They are prenumbered.
entry.
• A brief note is written on the memorandum to describe the
transaction.
3. P.R.- Posting Reference - This will be used when the
entries are posted, that is, until the amounts are transferred to
the related ledger accounts.

4. Debit - the debit amount for each account is entered in this

column

5. Credit - the credit amount for each account is entered in

this column

Simple and Compound Entry

Simply entry - only two accounts are affected - one account is

debited and the other account is credited

Compound entry - two or more accounts are affected and

required in a journal entry.

Posting

Creation of trial balance

Preparation of adjusting entries

Preparation of the financial statement

Closing journal entries

Post closing trial balance

Reversing of journal entries (Optional)