Accounting

FUNDAMENTALS OF ACCOUNTANCY,
BUSINESS AND MANAGEMENT 1
Week 1 Session 2

Prepared by:
Ms. Roxan B. Arevalo
Learning Competencies:
Explain the varied accounting concepts and principles
Solve exercises on accounting principles as applied in
various cases
Illustrate the accounting equation
Perform operations involving simple cases with the use
of accounting equation
I DE NT I F Y I NG
M E A S U R I N G
C O MM U N I C A T I N G
R E C O R D I N G
C L A S S I F Y I N G
S U MM A R I Z I N G
M O N E Y
T R AN S A C T I ON
 ACCOUNTING

BUSINESS

ORGANIZATION OPERATIONS

SOLE
PROPRIETORSHIP PARTNERSHIP CORPORATION SERVICE MERCHANDISING MANUFACTURING

ACCOUNTING PRINCIPLES
Accounting Concepts and
Principles
Juan dela Cruz opened his pet shop business called Petness First Petshop. He
opened a bank account for his business and deposited PHP500,000. The business
earned PHP50,000 but he had doubts with the recorded expense of PHP60,000. He
is not sure if he should include the following items as expenses:
Salary expense 20,000
Rent expense 10,000
Utilities expense (at home) 15,000
Utilities expense (at the store) 10,000
Insurance expense 5,000
Withdrawals 10,000
TOTAL 60,000
What do you think should not be included as expenses?
Explain.
Accounting Principles
• Business entity principle – a business enterprise is separate and
distinct from its owner or investor.
Examples :
o If the owner has a barber shop, the cash of
the barber shop should be reported
separately from personal cash.
o The owner had a business meeting with a
prospective client. The expenses that come
with that meeting should be part of the
company’s expenses. If the owner paid for
gas for his personal use, it should not be
included as part of the company’s expenses.
Accounting Principles
• Going concern principle – business is expected to continue
indefinitely.
Examples :
o When preparing financial statements, you
should assume that the entity will continue
indefinitely.
Accounting Principles
• Time period principle – financial statements are to be divided into
specific time intervals.
Examples :
o Philippine companies are required to
report financial statements annually.
o The salary expenses from January to
December 2015 should only be reported in
2015.
Accounting Principles
• Monetary unit principle – amounts are stated into a single
monetary unit
Accounting Principles
• Objectivity principle – financial statements must be presented with
supporting evidence.
Examples :
o When the customer paid Jollibee for their
order, Jollibee should have a copy of the
receipt to represent as evidence.
o When a company incurred a transportation
expense, a voucher should be prepared as
evidence.
Accounting Principles
• Cost principle – accounts should be recorded initially at cost.

Examples :
o When Jollibee buys a cash register, it
should record the cash register at its price
when they bought it.
o When a company purchases a laptop, it
should be recorded at the price it was
purchased.
Accounting Principles
• Accrual Accounting Principle – revenue should be recognized when earned
regardless of collection and expenses should be recognized when incurred
regardless of payment. On the other hand, the cash basis principle in which
revenue is recorded when collected and expenses should be recorded when paid.
Cash basis is not the generally accepted principle today.
Examples :
When a barber finishes performing his
services, he should record it as revenue.
When the barber shop receives an electricity
bill, it should record it as an expense even if
it is unpaid.
Accounting Principles
• Matching principle – cost should be matched with the revenue
generated.

Examples :
When you provide tutorial services to a
customer and there is a transportation cost
incurred related to the tutorial services, it
should be recorded as an expense for that
period.
Accounting Principles
• Disclosure principle – all relevant and material information should
be reported.

Examples :
The company should report all relevant
information.
Accounting Principles
• Conservatism principle – also known as prudence. In case of doubt,
assets and income should not be overstated while liabilities and
expenses should not be understated.

Examples :
In case of doubt, expenses should be
recorded at a higher amount. Revenue
should be recorded at a lower amount.
Accounting Principles
• Materiality principle – in case of assets that are immaterial to make
a difference in the financial statements, the company should instead
record it as an expense.

Examples :
A school purchased an eraser with an
estimated useful life of three years. Since an
eraser is immaterial relative to assets, it
should be recorded as an expense.
Exercises
Indicate which principles are violated.
1. The owner-manager bought a computer for personal use. The invoice was given
to the accountant who recorded it as an asset of the
business.
2. The statement of financial position of a company included an equipment
purchased from Japan for 350,000 yen. It was reported at that amount in the
statement of financial position while all the other assets were reported in
Philippine pesos.
3. No financial statements were prepared by Michael Go for his business. He
explained that he will prepare the statements when he closes the business, which
he predicts to take place after 20 years.
The Accounting Equation
Five Major Types of Accounts
ASSETS are the resources owned and controlled by the firm.
• Current Assets are assets that can be realized (collected, sold, used
up) one year after year-end date. Examples include Cash, Accounts
Receivable, Merchandise Inventory, Prepaid Expense, etc.
• Non-current Assets are assets that cannot be realized (collected,
sold, used up) one year after year-end date. Examples include
Property, Plant and Equipment (equipment, furniture, building, land),
long term investments, etc.
Five Major Types of Accounts
ASSETS are the resources owned and controlled by the firm.
• Tangible Assets are physical assets such as cash, supplies, and
furniture and fixtures.
• Intangible Assets are non-physical assets such as patents and
trademarks.
Five Major Types of Accounts
LIABILITIES are obligations of the firm arising from past events
which are to be settled in the future.
• Current Liabilities. Liabilities that fall due (paid, recognized as
revenue) within one year after year-end date. Examples include
Accounts Payable, Utilities Payable and Unearned Income.
• Non-current Liabilities are liabilities that do not fall due (paid,
recognized as revenue) within one year after year-end date. Examples
include Notes Payable, Loans Payable, Mortgage Payable, etc.
Five Major Types of Accounts
EQUITY or OWNER’S EQUITY are the owner’s claims in the
business. It is the residual interest in the assets of the enterprise after
deducting all its liabilities.
• Capital is the value of cash and other assets invested in the business
by the owner of the business.
• Drawing is an account debited for assets withdrawn by the owner
for personal use from the business.
Five Major Types of Accounts
INCOME is the increase in economic benefits during the accounting
period in the form of inflows of cash or other assets or decreases of
liabilities that result in increase in equity. Income includes revenue
and gains.
EXPENSES are decreases in economic benefits during the accounting
period in the form of outflows of assets or incidences of liabilities that
result in decreases in equity.
The Accounting Equation
Illustration of the effects of the transaction in the accounting
elements
Illustration of the effects of the transaction in the accounting
elements
Illustration of the effects of the transaction in the accounting
elements
Illustration of the effects of the transaction in the accounting
elements
Illustration of the effects of the transaction in the accounting
elements
Illustration of the effects of the transaction in the accounting
elements
Illustration of the effects of the transaction in the accounting
elements
Illustration of the effects of the transaction in the accounting
elements
Illustration of the effects of the transaction in the accounting
elements

( )
Illustration of the effects of the transaction in the accounting
elements
Below is the summary of the J Studio business transactions for the
month of March:

( )
Direction: For each transaction, the learners will tell whether the assets, liabilities
and equity will increase (I), decrease (D) or is not affected (NE).
 End of Week
1 Session 2
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