Fundamentals of Accounting - can raise more capital than sole proprietorship

1st Semester – A.Y. 2015-2016 - may result to disagreements

- may be dissolved by agreement, withdrawal,
Business- is an organization engaged in the trade of goods, death, incapacity of partner
services, or both to consumers. - unlimited personal liability
 Main goal is to earn profit.  Corporation
Two kinds: - most complex form
 Profit-oriented - Corporation Coded defines this as an artificial
 Non-profit business- uses surplus revenues to achieve being created by law
its goals rather than to distribute them as dividends to - Greatest capacity to raise capital
owners - May exist for a period not longer than 50 years,
Forms of Business Enterprises: subject to renewal
 Service Business- offers services and generates a profit - Limited liability
by charging fees - Cost forming and managing a corporation is
 Merchandising Business- trading business; buys goods high
and sells them in their original form - Subject to greater scrutiny, regulation, control
 Manufacturing Business- buys raw materials and and supervision by the gov’t
converts these into finished products - Management is more complex
Types of Business Ownership: - Higher income tax rate
 Sole Proprietorship - Corporation Code of the Philippines and
- has one owner called proprietor Articles of Incorporation
- most basic legal form of business  Stockholder/shareholder- owner of corporation
- less complex business transactions  Incorporators- originally formed the business
- easiest to form - needs to have 5-15 owners
- minimal regulatory requirements  Corporators- after the establishment
- decision can be made and implemented  Dividends- income that will be divided among
faster owners
- proprietor enjoys all the profits earned  Board of Directors- decision making committee
- limited ability to raise capital - elected from stockholders
- can only expand in proportion - 1 vote = 1 share
- proprietor doesn’t receive the benefit of
second opinion Financial Information- summary of all the transactions of the
- one bears the risks and losses business over a period of time
- unlimited personal liability Accounting- processes raw data and converts them into
 Partnership meaningful information that will be useful for decision-making
- association of two or more persons - it is where the most important financial
- governed by the Civil Code of the Philippines statement comes from
- easier to organize than corporation * Basic purpose of accounting is to supply financial information
- burden of managing the operations is shared to users to help them make informed judgments and better
- more ideas are exchanged and brainstormed decisions; to provide quantitative financial information.
Accounting provides the ff. information:  Management Consulting Services- providing
 resources and obligations of business advisory/consulting services to clients on matters
 interest being paid of accounting
 cash inflows and outflows  Commerce and Industry- accountants are
 Management sees if the company has other resources that employed in positions like vp for finance, chief
has no value accountant
 Management analyzes the existing debts of the business to  Controller or comptroller is the highest accounting
check if it could handle additional debt officer in a business org
 Cash inflows and outflows are analyzed to see other possible  Education- accountants are employed as
sources of financing professors, reviewer or researchers
 Government- hired as staff, auditor, budget
Accounting- is the language used to communicate financial officer, or consultants in government units
information to interested parties
- includes interpretation of information recorder Friar Luca Pacioli- Father of Double-Entry Bookkeeping
under bookkeeping - wrote a book containing double-entry bookkeeping
- can only be done by certified public system
accountants Summa de Arithmetica, Geometria, Proportioni et
Bookkeeping- is the procedural or mechanical aspect of Proportionalita (Everything about Arithmetic, Geometry,
accounting Proportions and Proportionality)- summary of existing
- it involves the set-up, update and mathematical knowledge during that time
maintenance of accounting records
- may done by properly trained non- Fields of Accounting:
accountants  Financial Accounting- presentation and
Philippine Accountancy Act of 2004 or Republic Act No. 9298 presentation of general-purpose financial
 R.A. 9298 created the Professional Regulatory statements with the aim of meeting most of the
Board of Accountancy to enforce the needs of external users
provisions of the Phil. Accountancy Act.  Management Accounting- financial reporting
 The board is composed of 7 members which for internal users
are appointed by the Phil. President  Cost Accounting- measure’s a business’s costs
Sectors of Accounting Practice: to help management in controlling expenses
 Public Practice  Tax Accounting- compliance with the tax laws
- includes individual practitioners, small and minimizing the company’s tax bill through
accounting firms, medium sized and legal means
multinational accounting firms  Government Accounting- proper custody,
Services provided: disposition and accounting for public funds
 Auditing- most common service
- independent examination of financial Generally Accepted Accounting Principles
statements GAAP- comprises the conventions, rules, processes, principles,
 Tax Services- preparation of tax returns to standards, and underlying assumptions that are used in
various clients preparing financial statements.
* Accounting principles continue to evolve as a response to the  Periodicity
changes in the financial information needs of business - operating life of an enterprise may be
stakeholders. conveniently divided into time periods of equal
Financial Reporting Standards Council (FRSC)- official length called accounting periods
accounting standard setting body in the Philippines - Accounting Period- time interval by which the
- has a Chairman and 14 representatives; 15 company summarizes results of operation and
members makes the financial statements
Philippine Financial Reporting Standards (PFRS) is based on - Calendar Period- form Jan to Dec
International Financial Reporting Standards (IFRS) issued by - Fiscal Period- any moth to one year thereafter
International Accounting Standards (IASB) Board. - Interim Financial Statements- less than one
year
Basic Accounting Concepts:  Going Concern
 Business entity principle - Enterprise is a going concern and will continue
- business is considered distinct and separate in operation for the foreseeable future
from the owners of the business  General Purpose
- Accounting entity is an organization that is - For the purpose of common interests of all users
accounted for as a separate economic unit.
 Dual-Effect of Business Transactions Conceptual Framework- is a statement generally accepted
- for every value received, there must be a theoretical principles which form the frame of reference for a
value given up particular field of study
- Every transaction os recorded by entries to two - emphasizes existing and potential investors,
or more accounts and the total amount of the lenders, and other creditors as the primary
left side of the accounting equation is always users
equal to the total amount of the right side of Primary Users:
the equation.  Investors- providers of risk capital
 Matching Principle  Lenders
- Transactions affecting both revenues and  Creditors
expenses should be recognized in the same Secondary Users:
accounting period  Public
 Accrual Basis  Employees
- Revenue and expenses are recorded when  Gov’t and their agencies
they occur and not when the cash is received  Customers
or paid out
- Cash Basis- income is recognized when the Economic resources- entity’s assets
cash is received, and expenses are recognized Economic claims- entity’s liabilities
when cash is paid
 Stable Monetary Unit Financial Statements- are the means by which the information
- it must be expressed in terms of a uniform accumulated in and processed by the financial accounting is
means of measurement communicated to users on a periodic basis
 - aim to provide information about the financial Qualitative Characteristics of Financial Information:
position, financial performance and cash flows  Relevance- influences the economic decisions
of an entity of users
- are the end-product of the financial  Predictive Value- if it can be used as an input to
accounting process processes employed by users to predict future
Five Basic Financial Statements: outcomes
 Statement of Comprehensive Income  Confirmatory- if it confirms or changes previous
 Statement of Financial Position evaluations or earlier expectations of a financial
 Statement of Cash Flows statement user
 Statement of Equity or Capital Materiality- if omitting or misstating it could influence the
 Notes to the Financial Statements decisions of users of financial information about specific
entity
Liquidity- is the availability of cash in the near future to cover
currently maturing liabilities  Faithful Representation- the actual effects of
Solvency- is the availability of cash over the long term to meet transactions should be properly accounted for
obligations when they fall due and reflected in the financial statements
Capacity for Adaptation- is the ability of the enterprise to use its  Complete- all information is being depicted
available cash for unexpected requirements and investment  Neutral- without bias
opportunities  Free form error
 Comparability- enables users to identify and
Performance or profitability- whether a company is able to understand similarities and differences of items
generate profit or incur a loss  Verifiability- means that different and
knowledgeable and independent observers
 Statement of Comprehensive Income/ Income Statement could reach a consensus that the depiction of
- measures a company’s financial performance a particular event is faithfully represented
over a specific accounting period  Timeliness- information is available to decision-
- revenues minus expense makers in time to be capable of influencing
- may contain ‘extraordinary’ items their decisions
 Statement of Financial Position/ Balance Sheet  Understandability- made understandable by
 Statement of Cash Flows classifying, characterizing and presenting it
- inflows and outflows in business clearly and concisely
- changes in cash balance  Cost Constraint- the cost of producing
 Statement of Equity information must be justified by the benefits
- Changes in capital that it provides
 Notes to the Financial Statement  Underlying Assumption- assumption that the
- narrative form reporting entity Is a going concern and will
- contains information that cannot be presented continue in operation for the foreseeable
in other fin. Statements future
- explanation of other items
- breakdown of aggregated amounts
Elements of Financial Statements:  Sales Invoice- to evidence a sale for cash
 Assets- resources controlled by the enterprise  Charge/Sales Invoice- to evidence a sale
 Cash where goods are sold on credit
 Accounts Receivable  Delivery Receipt- to evidence
 Supplies on hand acceptance/receipt of goods delivered to
 Merchandise inventory customer
 Property, Plant, and Equipment  Official Receipt- to evidence receipt of cash
 Liabilities- present obligations of the entity  Vendor’s invoice- a bill for goods purchased
 Accounts Payable  Purchase Requisition Forms- employee’s
 Salaries Payable request for the purchase of needed
 Utilities Payable goods/supplies
 Advances form Customers  IOUs- note acknowledging indebtedness in an
 Loans Payable enterprise
 Equity- claims of the business  Promissory Notes- unconditional promise in
 Income- increases in the economic benefits during writing
the accounting period in the form of inflows  Bank Statements- a summary of all financial
 Revenue- arises in the course of the ordinary transactions occurring over a certain period on
activities of an enterprise a bank account
 Gain- other items that do not meet the  Minutes of Meetings- written record of meeting
definition of income  Business Letters- business correspondence
 Expenses- decreases in economic benefits in the form  Job time tickets- time spent working at a
of outflows certain job
 Losses- other items that do not meet the  Certificate of Stocks- evidencing ownership of
definition of expenses shares
Measurement- is the process of determining the monetary  Time records/ timesheets- detailed record
amounts showing time in and out of employees
 Historical Cost- amount paid at the time purchased  Check voucher- to facilitate the authorization
 Current Cost- amount you will pay if you are going to of cash disbursement transactions
purchase now  Journal voucher- transactions and journal
 Realizable Value- amount recoverable entries for which there is no other source
 Present Value- amount of discounted value; future to present document

Business Transaction- an economic activity that causes changes Accounting equation- mathematical expression showing the
in the elements of the financial statements relationship between and among the elements of the financial
Internal Transactions- manufacture of goods for sale and statements.
incurrence of casualty losses - it emphasizes the double-entry bookkeeping
External Transactions- sale of goods to customers system in accounting

Business/ Source Documents- original record of business

transactions
Basic accounting equation: Simple Journal Entry- 1 debit and 1 credit
ASSETS = LIABILITIES + EQUITY or Compound Journal Entry- otherwise
ASSETS = LIABILITIES + [EQUITY + REVENUE – EXPENSE]
Chart of Accounts- list of all accounts of the business and their
Accounts- basic summary device of accounting respective account numbers
T-Account- a simple representation of the account that
resembles like letter T Posting- process of transferring date from journal to ledger
Ledger- book of final entry
Rules of Debit and Credit: General Ledger- basic form
 For every debit there is corresponding credit
 Each transaction affects at least 2 accounts Contra asset account- deducted; “a”
 Total debits should equal total credits
 Debit is left: Credit is right Trial balance- list of all accounts and their balances
- commonly taken every month-end for
Account Balance- difference between the total debits and checking purpose
total credits Trial balance- open account
Normal Balance- balance on which side increases are recorded Close account- zero balance

ACCOUNTING CYCLE: Trial balance errors- makes the trial balance not equal
1. Analyzing business transactions through source Accounting errors- not detected in trial balance
documents.
2. Journalizing or the recording of transactions in a journal. Types of Errors:
3. Posting or transferring of the entries from the journal to  Transposition- figures are interchanged
the ledger.  Transplacement- error in placing the decimal point or
4. Preparing the trial balance. zero
5. Preparing a 10-column worksheet and making the  Error of omission- transaction is not recorded
necessary adjusting journal entries. (Optional Step)
6. Preparing financial statements based on adjusted Adjusting Journal Entries
account balances.
7. Recording adjusting entries to the journal and posting the Accrued Expenses- already incurred but not yet paid
same to the ledger. -unrecorded expenses
8. Recording and posting of closing entries. ??? Expense xxx
9. Ruling and balancing real and nominal accounts. ??? Payable xxx
10. Preparing a post-closing trial balance.
11. Preparing reversing entries. (Optional Step) Accrued Income- income already earned but not yet received
- unrecorded income
Journalizing- process of systematically and chronologically ??? receivable xxx
recording transactions in the journal ??? income xxx
Journal- book of original entry
General Journal- most basic form of journal
Unearned/Deferred Income- income received but not yet Allowance Method- updated yearly
earned Bad Debts Expense xxx
- a liability Allowance for bad debts xxx
Liability Method:
Unearned Income xxx Accrued Interest- for interest-bearing notes
??? Income xxx
Accrued interest= principal X rate X time/days or months
Income Method:
??? Income xxx Accrued Income (creditor)- notes receivable
Unearned Income xxx Interest Receivable xxx
Interest Income xxx
Prepaid expense- already paid but not yet earned
Asset Method: Accrued Expense (debtor)- notes payable
??? Expense xxx Interest Expense xxx
Prepaid ??? xxx Interest Payable xxx

Expense Method:
Prepaid ??? xxx Worksheet- columnar device to facilitate the preparation of the
??? Expense xxx financial statements by making it easier to transfer date from
the trial balance to the financial statements
Depreciation- value of asset is considered used up (expense) for
the year Cross-footing- adding figures for the same account balance
- unrecorded expense and subtracting figures for the different account balance
Straight-line method:
𝐶𝑜𝑠𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 Nominal Account- expenses and revenues
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒 - temporary account because zero balance in
or the end of the period
- includes Drawing
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = (𝐶𝑜𝑠𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒) × 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 Real Account- Assets, liabilities, and capital

Depreciation Expense xxx Income Statement:

Accumulated Dep xxx Dr > Cr Net loss
Dr < Cr Net Income
Bad Debts/Uncollectible/Doubtful
- accounts receivable that is uncollectible Balance Sheet:
- expense Dr > Cr Net Income
Direct write-off method- if the company is sure that customer Cr < Cr Net Loss
will not pay
Bad Debts Expense xxx
Accounts Receivable xxx