ACCOUNTING AND

BOOKKEEPING
An Introduction
DEFINITIONS OF BOOKKEEPING
• Bookkeeping is a mechanical task involving the collection of
basic financial data. The data are first entered in the accounting
records or the books of accounts, and then extracted, classified
and summarized in the form of income statement, balance sheet
and cash flows statement.
• BOOKKEEPING is the recording of business data in a
prescribed manner.
DEFINITIONS OF ACCOUNTING
• Accounting is a service entity. Its function is to provide quantitative information,
primarily financial in nature, about economic entities that is intended to be
useful in making economic decisions.
• Accounting is the process of identifying, measuring and communicating
economic information to permit informed judgments and decisions by users of
the information.
• Accounting is an information system that measures, processes and
communicates financial information about an identifiable economic entity.
• ACCOUNTING is the art of recording, classifying, summarizing in a significant
manner and in terms of money, transactions and events, which are in part, at
least, of financial character and interpreting the results thereof.
FOUR PHASES OF ACCOUNTING
• Recording. This is technically called bookkeeping. In this phase, business
transactions are recorded systematically and chronologically in the proper
accounting books.
 Kinds of Bookkeeping
1. Single-entry bookkeeping - does not show the two-fold effects of
business transactions. It shows only the debit or the credit of each
transaction.
2. Double-entry bookkeeping - reflects the two-fold effects of
business transactions. It has a debit and a credit.
FOUR PHASES OF ACCOUNTING
• Classifying. In this phase, items are sorted and grouped. They may be
classified as asset accounts, liability accounts, capital accounts, revenue
accounts and expense accounts.
• Summarizing. After each accounting period, data recorded are
summarized through financial statements.
• Interpreting. Usually, due to the technicality of accounting reports, the
accountant’s interpretation on the financial statement is needed. In this
case, analysis reports are submitted together with the financial statements.
BUSINESS AS AN ACCOUNTING ENTITY

• BUSINESS is an organization – from the largest and

diversified corporation to a small sari-sari store in the
community – which engages in generating revenues
through the manufacture and/or sale of goods or rendering
services with the goal of earning a profit.
 FORMS OF BUSINESS ORGANIZATION
• SOLE PROPRIETORSHIP. This business organization has a single owner called
the proprietor who generally is also the manager.
• PARTNERSHIP. A partnership is a business owned and operated by two or more
persons who bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among themselves.
• CORPORATION. A corporation is a business owned by its stockholders. It is an
artificial being created by operation of law, having the rights of succession and
the powers, attributes and properties expressly authorized by law or incident to
its existence.
PURPOSE OF BUSINESS
ORGANIZATIONS
• Service companies perform services for a fee (e.g. law firms, accounting
and audit firms, stock brokerage, beauty salon and recruitment agencies).
• Merchandising companies purchased goods that are ready for sale and
then sell these to customers (e.g. car dealers, clothing stores and
supermarkets).
• Manufacturing companies buy raw materials, convert them into products
and then sell the products to other companies or to final customers (e.g.
paper mills, steel mills, car manufacturers and drug manufacturers).
ACTIVITIES IN BUSINESS
ORGANIZATIONS
• FINANCING ACTIVITIES. Financing activities are the methods an
organization uses to obtain financial resources from financial markets and
how it manages these resources.
• INVESTING ACTIVITIES. Investing activities involve the selection and
management including disposal and replacement of long-term resources
that will be used to develop, produce, and sell goods and services.
• OPERATING ACTIVITIES. Operating activities involve the use of resources
to design, produce, distribute and market goods and services. Operating
activities include research and development, design and engineering,
purchasing, human resources, production, distribution, marketing and
selling, and servicing.
ACCOUNTING ELEMENTS OR VALUES
• ASSETS – are property or rights on property owned by the business. In
other words, anything of value owned by the business.
 Classification of Assets
a. Current Assets - cash and other assets that are easily converted
into cash or consumed during the accounting period usually one
year.
b. Non-current Assets - company's long-term investments that are
not easily converted to cash or are not expected to become cash
within an accounting year.
CURRENT ASSETS
• Cash on Hand – refers to cash and other cash items which are not yet deposited in the
bank. It includes coins, currencies, check, money orders, and other money equivalents.
• Cash in Bank – is money deposited in the bank. 
• Notes Receivable – Amounts collectible from customers for goods sold and services
rendered on credit or from others for loans granted. Such claims are evidenced by a
promissory note.
• Accounts Receivable – Claims from customers arising from goods sold or services
rendered on credit. It represents the debtor’s oral promises to pay.
• Estimated uncollectible Account – is sometimes called Allowance for Bad Debts. It
refers to a provision for accounts that may not be collected in the future. This is a
contra-asset account and is a deduction from the Accounts Receivable.
CURRENT ASSETS
• Interest Receivable – is interest earned on an interest-bearing note not yet
collected.
• Accrued Interest Income – is a term, synonymous with interest receivable.
• Merchandise Inventory – refers to goods unsold at the end of the accounting
period or on hand at the beginning of the year.
• Prepaid Expenses – are expenses paid in advance or items that are bought which
will be used during the accounting period. Examples are: Supplies, Prepaid
Insurance, Prepaid Rent. Other terms used for supplies are Prepaid Supplies,
Supplies on Hand, Unused Supplies or Supplies Inventory.
NON-CURRENT ASSETS
• Land – Land owned by the business used for building sites and other business purposes.
• Building – Buildings owned and used by the business in its operation.
• Furniture and Fixtures – It includes tables, chairs, showcases, counters, cabinets and other
pieces of furniture owned and used by the business in its operation.
• Equipment – It includes typewriters, calculators, cash registers, and other similar assets.
• Vehicles – includes cars, jeeps, trucks, vans, and other transportation vehicles owned by the
business.
• Accumulated Depreciation – is a contra-asset account. It is a deduction from a particular
fixed asset account. All fixed assets except land are subject to depreciation.
• Intangible Assets – are assets that do not have physical existence owned by the business.
Examples are Goodwill, Patents, and Trademarks.
ACCOUNTING ELEMENTS OR VALUES
• LIABILITIES – are debts of the business. These are obligations owed by the
business. The entity or person to whom the debt is owed is called a
creditor/debtor.
 Classification of Liabilities
a. Current Liabilities - obligations or debts of the business which
will be paid during the accounting period by means of payment of
current assets or a creation of another current liability.
b. Non-current Liabilities - obligations or debts of the business that
will be due and payable beyond one year.
CURRENT LIABILITIES
• Accounts Payable – Amounts due to creditors for the goods or services
bought on credit.
• Notes Payable – Amounts due to the creditors which are supported by a
promissory note. It is a current liability if the note is payable within a year.
• Accrued Liabilities – Amounts owed to others for unpaid expenses. These
are debts that have accumulated because of the passage of time but that
are not yet due for payment as at the balance sheet date.
ACCRUED LIABILITIES
• Interest Payable – is the interest due to an interest bearing note.
• Accrued Interest Expense is a term synonymous with interest payable.
• Salaries Payable – Amounts due to the employees for services they have
rendered.
• Taxes Payable – are taxes due for the government not yet paid by the business. 
• Other examples of expenses not yet paid by the business are Rent Payable,
Utilities Payable, and many others.
• Unearned Revenues – receives payment before providing its customers with
goods or services.
NON-CURRENT LIABILITIES
• Mortgage Payable – is a long-term liability account that refers to debt
secured by a mortgage on real estate.
• Notes Payable - If the note is payable beyond one year, it is classified as a
long-term liability.
ACCOUNTING ELEMENTS OR VALUES
• OWNER’S EQUITY – vested interest of the owner in the business. The
difference between the assets and the liabilities of the business is called
owner’s equity or owner’s capital.
• The owner’s equity is partly contributed and partly earned. The initial
investment of the owner will be increased by the profit earned by the
business.
 THE ACCOUNTING EQUATION
• Assets = Liabilities + Owner’s Equity
 Liabilities have preferential claims over the assets

• Assets = Owner’s Equity

 If there are no liabilities, then all the assets are claimable by the owner.

• Assets – Liabilities = Owner’s Equity

 Residual interest of the owner over the assets of the business especially at the
point of liquidation.
THE EXPANDED ACCOUNTING
EQUATION
THE EXPANDED ACCOUNTING
EQUATION
• CAPITAL – equity or right of the owner for cash or other assets invested or put into the
business. This is used to present the amount of the beginning capital plus any
additional investments made by the owner.
• WITHDRAWALS – The owner may need to withdraw cash or other assets taken from
the business for his personal needs that do not relate to the business. A withdrawal is a
subdivision of owner’s equity that records personal expenses outside the normal
operations of the business, as distinguished from business expenses which relates the
business operations.
• REVENUES – also known as income, consists of assets received by an entity arising
from the sale of goods or the performance of services to the customers.
• EXPENSES – represents costs incurred by a business in the process of generating
revenue.
REVENUES
• Service Income – Amounts of income earned from services rendered of a service
concern business.
• Sales – Total sales of merchandise sold.
• Professional Fee Income – Amounts earned by professionals such as CPAs,
doctors, lawyers, etc. for services they render.
• Rent Income – Amounts of rental earned for the period.
• Commission Income – is an income account to designate earnings received from
selling anything on a commission basis.
• Interest Income – Amounts earned for lending money.
EXPENSES
• Taxes and Licenses Expense – are payments made by the business to the
government for its business operations like privilege taxes, percentage
taxes, mayor’s permit, and others.
• Salaries Expense (or Wages Expense) – refers to the cost of services
rendered by the employees or workers of the business.
• Supplies Expense – Amount of supplies used.
• Bad Debts Expense – refers to that portion of accounts receivable which
may not be collected.
• Insurance Expense – refers to the insurance premium paid by the business.
EXPENSES
• Rent Expense – refers to the space occupied by the business or the
payment for the use of any property by the business.
• Interest Expense – refers to the amount charged for the use of money.
• Advertising Expense – Expenses incurred to promote the product of the
business.
• Utilities Expense – Amount of light and water consumed by the business.
• Repairs and Maintenance Expense – Expenses incurred for repairing the
assets of the business.
• Depreciation Expense – Allocated cost of fixed asset in the current period.
CHART OF ACCOUNTS
• The listing of all accounts is called Chart of
Accounts.
• The account number is assigned to each
account. It is used to facilitate recording,
arranging and referencing the accounts.
• Asset, liabilities and proprietorship
accounts are called real accounts, balance
sheet accounts, or permanent accounts.
• Income and expense accounts are
sometimes called nominal accounts, profit
and loss accounts, or temporary accounts.
TRANSACTION AND ITS EFFECT ON
THE ACCOUNTING EQUATION
• Transaction can be defined as any business activity or events which
involves the exchange of values between two parties.
• The data that we record in the accounting books are called transactions.
Transactions are the economic activities of the firm.
• When there is a transaction there is an exchange of value for value. In every
transaction, there is always a value received and a value parted with.
• A transaction either increases or decreases the assets, liabilities or owner’s
equity but the equation or equilibrium among the elements should always
be maintained.
SOURCE DOCUMENTS
• Source Documents are the forms, evidences or legal/official
papers that serve as supports to the underlying economic
transactions. These evidential matters support the objectivity of
accounting records.
SOURCE DOCUMENTS
• OFFICIAL RECEIPT – is a document • INVOICE – is issued when service or
which evidences receipt of cash. merchandise is given to a customer or
client.
SOURCE DOCUMENTS
• CASH VOUCHER – is a document • CHECK VOUCHER – is a document
used when cash is paid by the that serves to recognize a liability and
business. authorize the disbursement or cash.
SOURCE DOCUMENTS
• CHECK – is issued when payment is • PROMISSORY NOTE – is a written
made from the cash deposited in the promise made by the maker to pay
bank. the payee(creditor) a sum certain in
money at a fixed or determinable
future time.
SOURCE DOCUMENTS
• DEPOSIT SLIP – is a document which
serves as an evidence of an act of
placing money in the custody of a
bank or banker, for safety or
convenience, to be withdrawn at the
will of the depositor or under rules or
regulations agreed upon
SOURCE DOCUMENTS
• PAYROLL SHEET – is a written list of • STATEMENT OF ACCOUNT – is a
salaries to be paid, with the amounts report issued periodically by a bank or
due. The aggregate of these amounts creditor to a customer setting forth
are the money to be disbursed. the amounts billed, credits given and
balance due.
SOURCE DOCUMENTS
• Bank statement. This contains a number of adjustments to a company's
book balance of cash on hand that the company should reference to bring
its records into alignment with those of the bank.
• Cash register tape. This can be used as evidence of cash sales, which
supports the recordation of a sale transaction.
• Credit card receipt. This can be used as evidence for a disbursement of
funds from petty cash.
• Lockbox check images. These images support the recordation of cash
receipts from customers.
SOURCE DOCUMENTS
• Packing slip. This describes the items shipped to a customer, and so
supports the recordation of a sale transaction.
• Sales order. This document, when coupled with a bill of lading and/or
packing list, can be used to invoice a customer, which in turn generates a
sale transaction.
• Supplier invoice. This is a source document that supports the issuance of
a cash, check, or electronic payment to a supplier. A supplier invoice also
supports the recordation of an expense, inventory item, or fixed asset.
• Time card. This supports the issuance of a paycheck or electronic
payment to an employee. If employee hours are being billed to
customers, then it also supports the creation of customer invoices
Analysis of Business Transactions using
the Accounting Equation
Exercise
Transaction Assets Liabilities Equity Transaction Assets Liabilities Equity
Buy
equipment Pay supplier
on credit invoices
Buy
inventory on Sell goods on
credit credit (effect 2)
Buy
inventory on
credit Sell services on
a credit
Pay rent
Withdrawal of
Owner
FINANCIAL STATEMENTS
• Financial statements are written records that convey the business activities and
the financial performance of a company.
• Financial statements which are the end product of an accountant’s work in the
accounting process.
FINANCIAL STATEMENTS
• The Income Statement, sometimes
called the Profit and Loss Statement
or Statement of Financial
Performance, is a formal statement
which shows the revenues generated
and the expenses incurred by the
business covering a specified period
of time.
FINANCIAL STATEMENTS
• Statement of Changes in Owner’s
Equity shows the changes that take
place in the owner’s equity covering a
period of time.
FINANCIAL STATEMENTS
• The Balance Sheet (Statement of
Financial Position) is a listing that
shows the assets owned, the
liabilities owed, and the equity of the
owner of the business.
FINANCIAL STATEMENTS
• Cash Flow Statement - provides
aggregate data regarding all cash
inflows and outflows a company
receives.
FINANCIAL STATEMENTS
• Other Financial Statements
a. Statement of Other Comprehensive Income - includes revenues,
expenses, gains, and losses that have yet to be realized and are
excluded from net income on an income statement.
b. Notes to Financial Statement - disclose the detailed assumptions
made by accountants when preparing a company's: income
statement, balance sheet, statement of changes of financial position
or statement of retained earnings.
DECISION MAKERS (Users and Their
Needs of Accounting Information)
• Investor makes investment in the hope of making profit. Not only must his
money be earning profit, but he also compares the profit earned by his
business against other investment alternatives.
• Manager is responsible for directing the operation of the business. He is
required to plan the activities such as buying, manufacturing, promoting
and distributing.
• Banker or Creditor is concerned with the ability of the buyer to pay not
only the principal debt but also the interest.
• Supplier most often offers his goods for cash or on credit terms depending
on the paying ability of the customer.
DECISION MAKERS (Users and Their
Needs of Accounting Information)
• Government uses the accounting reports in several ways: as a tax collector,
it investigates tax returns as to the correct tax liability of a business; as a
regulatory body it verifies if the business is complying with the
promulgated rules and regulations; and as a customer before it awards the
contract to build bridges or roads or flyovers to a particular construction
business it must first assess the company’s ability to deliver the goods or
services and be assured that there is no over profiteering from the contract,
if awarded.
DECISION MAKERS (Users and Their
Needs of Accounting Information)
• Employees in their desire for higher wages, benefits, good working
conditions and security of tenure must first go over financial reports of the
business in justifying for their demands.
• Customers who have been informed that the price of a certain commodity
has increased would continue patronizing the business only if the price is
fair and the product is worth the money they paid for it. The fairness of the
price could be determined from the financial reports