NATURE OF BUSINESS AND

ACCOUNTING
Forms of Business Entity
• Sole Proprietorship – owned by one individual
• Partnership – owned by two or more individuals
• Corporation – created by operation of law rather than a contract
• Limited Liability Company – combines the attributes of partnership
and corporation
Types of Business
• Service – services rather than products
• Merchandising – products purchased from other businesses
• Manufacturing – selling finished products converted from raw materials
What is Accounting?
• Accounting is the process of:
• Identifying – analyze events to determine whether they will be recognized
• Recording (Measuring) – assigning numbers (monetary terms) to economic
transactions and events
• Communicating economic information to permit informed judgments and
decisions by the users of the information.
• Role of Accounting in Business – To provide information
• Accounting is the Language of Business
Users of Accounting Data
• Internal Users – management (plan, organize, and run the business)
• Marketing Managers
• Production Supervisors
• Finance Directors
• Company Officers
• External Users – individuals and organizations outside a company
• Investors
• Creditors
• Taxing Authorities
Elements of Financial Statements
• Assets
• Liabilities
• Owner’s Equity
• Revenues (Income)
• Expenses
Assets
• Present economic resource controlled by the entity as a result of past
events. An economic resource is a right that has the potential to
produce economic benefits.
• Accounts:
• Cash
• Equipment
• Receivables
• Etc.
Liabilities
• Present obligation of the entity to transfer economic resource as a
result of past events.

• Accounts:
• Payables (Accounts, Notes, Wages, etc.)
• Unearned Revenue
• Etc.
Owner’s Equity
• Residual interest in the assets of the entity after deducting all its
liabilities.
• Owner’s Equity = Assets – Liabilities
• Accounts:
• Owner’s Capital
• Owner’s Drawings
• Revenues
• Expenses
Revenues (Income)
• Increases in assets, or decreases in liabilities
• Resulting in increases in equity
• Excludes contribution from the entity’s owners
Expenses
• Decreases in assets or increases in liabilities
• Resulting in decrease in equity
• Excludes distributions to the entity’s owners
 Assets = Liabilities + Owner’s Equity
BASIC EQUATION:

EXPANDED EQUATION: Assets = Liabilities + Owner’s Capital – Owner’s drawings

+ Revenues - Expenses
 Normal Balance

DEBIT CREDIT

ASSETS LIABILITIES
OWNER’S DRAWINGS OWNER’S EQUITY
EXPENSES REVENUES
BUSINESS TRANSACTIONS
 Transaction A
• Julia Salas deposited P 1,000,000 in a bank account in the name of
PitchPerfect.
• This transaction increases the asset cash (left side of the equation) by
P1,000,000. To balance the equation, the owner’s equity (right side of
the equation) increases by the same amount.
ASSETS = OWNER’S EQUITY JOURNAL ENTRY
Cash = Salas, Capital Cash 1,000,000
a . 1,000,000.00 a. 1,000,000.00 Salas, Capital 1,000,000
Transaction B
• PitchPerfect purchased Land for P 120,000.00. The purchase of the
land changes the makeup of the assets, but it does not change the
total assets.

JOURNAL ENTRY
Land 120,000
Cash 120,000
Transaction C
• PitchPerfect purchased supplies for P 3,000.00 and agreed to pay
supplier the near future. The liability created by purchase on account
is called accounts payable.

JOURNAL ENTRY
Supplies 3,000
Accounts Payable 3,000
Transaction D
• PitchPerfect received cash of 1,500.00 for providing facial services to
customers. The receipt of cash increases PogiSolutions’ assets and
also increases Alvarez’s equity in business.

JOURNAL ENTRY
Cash 1,500
Service Revenue 1,500
Transaction E
• PitchPerfect receives a bill for $250 from PerfectPitch for advertising
but postpones payment until a later date

JOURNAL ENTRY
Advertising Expense 250
Accounts Payable 250
Transaction F
• PitchPerfect performs $3500 of programming services for customers.
The company receives cash of $1500 from customers, and it bills the
balance of $2000 on account.

JOURNAL ENTRY
Cash 1,500
Accounts Receivable 2,000
Service Revenue 3,500
Transaction G
• PitchPerfect pays store rent $600 and utilities $200 in cash.

JOURNAL ENTRY
Rent Expense 600
Utilities Expense 200
Cash 800
Transaction H
• PitchPerfect pays the supplier $250 in cash for supplies bought previously.

JOURNAL ENTRY
Accounts Payable 250
Cash 250
Transaction I
• PitchPerfect receives $600 in cash from customers who had been
billed for services

JOURNAL ENTRY
Cash 600
Accounts Receivable 600
Transaction J
• Julia Salas withdraws $ 1000 in cash from the business for her
personal use.

JOURNAL ENTRY
Salas, Drawings 1,000
Cash 1,000
ANY QUESTIONS?
Financial Statements
• Written records that convey the business activities and financial
performance of the entity
• Financial Statements:
• Statement of Comprehensive Income
• Statement of Changes in Owner’s Equity
• Statement of Financial Position
• Statement of Cash Flows
• Interrelationships among financial statements
Statement of Comprehensive Income
• Presents the revenues and expenses
• Resulting net income or net loss for a specific period of time.
 Statement of Changes in Owner’s Equity
• Summarizes changes in the owner’s equity for a specific period of time
 Statement of Financial Position
• Reports assets, liabilities, and owner’s equity at a specific date.
 Statement of Cash Flows
• Summarizes information about:
• Cash inflows (receipts) and
• Outflows (payments), for a specific period of time.
 Interrelationships among financial
statements
• Financial Statements are prepared in the order of:
1. Statement of Comprehensive Income
2. Statement of Changes in Equity
3. Statement of Financial Position
4. Statement of Cash Flows
• This order is important because the financial statements are
interrelated.
• Information in one’s financial statement is necessary for the other.
ANY QUESTIONS?
Generally-Accepted Accounting Principles
• GAAP – common set of standards generally accepted and universally
practiced
a) Historical Cost Principle (Cost Principle)
b) Fair Value Principle
c) Revenue Recognition Principle
d) Expense Recognition Principle (Matching Principle)
e) Full Disclosure Principle
Historical Cost Principle (Cost Principle)
• Record assets at their costs.
• Value of asset is determined on the basis of acquisition cost.
Fair Value Principle
• Assets and Liabilities should be reported at fair value
• Fair Value – price received to sell an asset or paid to settle a liability in
an or
• Usually used in situations where assets are actively traded
Revenue Recognition Principle
• Recognize revenue in the accounting period when performance
obligation is satisfied.
Expense Recognition Principle (Matching
Principle)
• Efforts (Expenses) should be matched with results (revenues)
Full Disclosure Principle
• Disclose circumstances and events that matter to financial statement
users.
• Nature and amount of information included in the financial statement
reflect a series of judgmental trade-offs
Accounting Assumptions
• Provides the foundation for the accounting process
a) Monetary Unit Assumption
b) Economic Entity Assumption (Business Entity Concept)
c) Time Period Assumption
d) Going Concern Assumption
Monetary Unit Assumption
• Assets, liabilities, equity, income, and expenses are stabled in terms of
a common unit of measure (peso in the Philippines)
• Accounting records should only have transaction data that can be
expressed in money terms.
Economic Entity Assumption (Business Entity Concept)

• Activities of the entity be kept separate and distinct from the

activities of its owner and all other economic entities
• Entity is viewed separately from its owners
Time Period Assumption
• Economic life of a business can be divided into artificial time periods
• Meaningful accounting reports can be prepared for each period
• Usually 12 months and may either be:
• Fiscal Year Period (12 months but can start other than Jan. 1)
• Calendar Year Period (Jan. 1 – Dec. 31)
Going Concern Assumption
• Entity will continue in operation long enough to carry out its existing
objectives and commitments
• Entity is assumed to carry on its operations for an indefinite period of
time.
• Not expected to end its operations in the foreseeable future.
Any Questions?
THANK YOU FRESHIES!!
Puso ang dipensa
Dilaw ang bandera
ARIBA AAO!