Basic Accounting Module
Basic Accounting Module
Basic Accounting Module
MEANING OF BUSINESS
Business is an undertaking whereby one sells goods or services in exchange
for money or its equivalent.
From this definition one would understand that basically the motive of
business is to earn profit. The profit of the business is the measure of its success
in its operations. As profit increases, the business is able to survive in the industry,
as a consequence it could expand its operations, raise the standards of living of the
owner or owners and even the labor force, and it could contribute to the country's
economic state through payment of taxes.
1
Art. 1767, New Civil Code of the Philippines
2
Sec.2 B.P. 68 or Corporation Code of the Philippines
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entity, i.e., created by virtue of law, separate from the owners who are called
the stockholders. Hence, it is the corporation which enters into a contract,
sue and being sued, responsible to all its obligations and earns profits or
suffers losses.
Example: San Miguel Corporation, RFM Corporation, and Sara Lee Philippines,
Inc. Unilever Philippines, Inc.
BUSINESS
ORGANIZATION OR PERFORMS OR
RENDERS SERVICES FEE
ENTITY
BUSINESS SELL
BUY GOODS/ GOODS/
ORGANIZATION PROFIT
OR ENTITY MERCHANDISE MDSE.
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BUSINESS SELL
ORGANIZATION BUY RAW FINISHED FINISHED
OR ENTITY MATERIALS PRODUCTS GOODS
DEFINITIONS OF ACCOUNTING
Accounting is a service activity. Its function is to provide quantitative
information, primarily financial in nature, about economic entities that is intended
to be useful in making economic decisions. (Financial Reporting Standard Council)
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 a financial nature, and interpreting the result thereof. (American Institute of
Certified Public Accountants)
Accounting is the art of measuring, communicating, and interpreting the
financial activity of a business.
From the above definitions of accounting the student must understand that
accounting is both a process and an art. Its ultimate objective is to provide the
users of financial information that may be used in their decision making.
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BUSINESS TRANSACTIONS
Business transaction refers to activity or event taking place in business,
which is expressed in terms of money. The business transactions are economic
activities that are measured and finally reported by accountants through financial
reports or statements.
ELEMENTS OF ACCOUNTING4
1. Assets
2. Liabilities
3. Equity
4. Income
5. Expenses
3
PAS 1 Presentation of Financial Statement, Philippine Financial Reporting Standards.
4
Ibid.
5
The Framework-Elements of Financial Position, Philippine Financial Reporting Standards.
4
Examples of Assets: Cash, Accounts Receivables, Office Supplies, Tools and
Equipment, Vehicle, Land and Building
6
The Framework-Elements of Financial Position, Philippine Financial Reporting Standards.
7
Ibid.
8
The Framework-Elements of Financial Position, Philippine Financial Reporting Standards.
5
term "Professional Fees" to denote income received from rendering
professional services to a client.
Net Income (Net Loss) - the excess (deficit) of revenue over expenses for an
accounting period.
9
Ibid.
6
complements the balance sheet by showing the changes in financial position,
and the income statement by describing the total changes in owner's equity
during the period.
The Statement of Changes in Equity serves as a proof of the amount of
equity appearing in the Balance Sheet.
Investing activities are the acquisition and disposal of long-term assets and
other investments that are not considered to be cash equivalents.
Financing activities are activities that alter the equity capital and
borrowing structure of the enterprise.
10
PAS 7, Cash Flow Statement-Fundamental Principles, Philippine Financial Reporting Standards.
11
The Framework-Notes and Supplementary Schedule, Philippine Financial Reporting Standards.
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DOUBLE-ENTRY BOOKKEEPING
In accounting each transaction affects at least two items in the financial
accounting records. The double entry system of recording is based on this
principle of duality.
1. = no effect + no effect
2. = + no effect
3. = no effect +
4. = no effect +
5. no effect = + no effect
6. no effect = +
7. no effect = +
8. no effect = no effect +
Note that each transaction affects at least two items in the equation (all
items may be affected) and the combination varies. These notwithstanding, the
equality of the equation must be maintained always. In accounting, when the
"equality" is maintained it is said to be in "balance".
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3.) nonreciprocal transfers of assets to an enterprise by other than owners,
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DECREASES IN LIABILITIES ARISE FROM
1.) exchanges in which liabilities are reduced,
2.) transfers between an enterprise and its owners (e.g., debt converted into capital
stock),
3.) nonreciprocal transfers with other than owners in which liabilities are reduced
(e.g., forgiveness of indebtedness)
In exchanges, liability decreases may be accompanied by increases in other
liabilities (e.g., a note given on an account payable), or revenue (e.g., goods
delivered or services rendered to satisfy a customer prepayment).
ASSETS
Current Assets - are cash; cash equivalent; assets held for collection, sale, or
consumption within the enterprise's normal operating cycle; or assets held for
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trading within the next 12 months12. All other assets are noncurrent. The current
assets are presented in the order of "liquidity". Liquidity means the characteristic
of an asset to be easily converted into cash.
1. Cash on Hand - refers to coins, currencies, bank drafts, and customer's
checks awaiting deposits that are kept in a safe deposit box or in a cash box
within the enterprise. These cash items must be available for use in the
current operations.
2. Cash in Bank - money deposited in a bank which may be a savings or
demand deposits.
3. Accounts Receivable - consist of open accounts with customers for
uncollected revenues, unbilled services already rendered or accrued as long
as the revenue has been earned.
4. Allowance for Bad debts - also termed as "Allowance for Doubtful
Accounts". This is a contra-asset account that is deducted from a principal
asset account which is accounts receivable. All the outstanding accounts
from the customers are not certain to be collected fully, hence the business
usually provide for uncollectible portion of the accounts receivable as bad
debts or doubtful accounts.
Accounts Receivable P xxx
Less: Allowance for Bad Debts (xxx)
Net Realizable Value P xxx
5. Notes Receivables - are collectible amounts from the customer that are
supported by written formal promises to pay a certain amount on demand
or at a certain future time.
6. Office Supplies Unused - refers to the portion of office supplies purchased
that are still capable of utilization by the enterprise in the immediately
succeeding accounting period. This is classified as "prepayments" or
"prepaid expense" because the cost has already been paid and has future
benefits.
7. Prepaid Rent - refers to advance rental payment/s that will benefit the
business.
12
PAS 1, Presentation of Financial Statements-Balance Sheet, Philippine Financial Reporting Standard.
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1. Office Equipment - refers to tangible assets that are to be used by the
business in the office like computers, typewriters, facsimile, and the like.
These assets must be for use by the business for a period of time beyond
one year.
2. Accumulated Depreciation - Office Equipment - refers to the accumulated
portion of the cost of the equipment that has already of service to the
company. All property, plant and equipment accounts except land are
subject to depreciation.
Depreciation is the systematic allocation of the cost of the depreciable asset over its
useful life. Accumulated depreciation account is a contra-asset account because it
is deducted from the cost of Depreciable asset in order to get the Net Book Value.
Office Equipment P xxx
Less: Accumulated Depreciation-
Office Equipment ( xxx)
NET BOOK VALUE P xxx
3. Office Furniture - refers to tangible assets that are necessary furnishings of
an office such as office tables, chairs, counters, and cabinets.
4. Accumulated Depreciation - Office Furniture - is a contra - asset account
that is deducted from the cost of Office Furniture. It represents the expired
allocated cost that already served the enterprise.
LIABILITIES
CURRENT LIABILITIES are those to be settled within the enterprise's normal
operating cycle or due within 12 months, or those held for trading, or those for
which the entity does not have an unconditional right to defer payment beyond 12
months. Other liabilities are noncurrent13.
1. Accounts Payable - liability representing the amount owed to a creditor
usually arising from the purchase of goods, materials or supplies.
2. Notes Payable - a liability evidenced by a formal promise to pay written in
a note.
3. Unearned Service Fees - payments for services that are received in advance
from the client's but the enterprise or business has not yet rendered the
services.
4. Salaries Payable - obligation of the enterprise to pay its employees for their
services already rendered to the business.
13
PAS 1, Presentation of Financial Statements-Balance Sheet, Philippine Financial Reporting Standard.
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5. SSS, PHILHEALTH, Withholding taxes Payable - these are obligations due
to different agencies or institutions of the government such as the Social
Security System and Bureau of Internal Revenue.
6. Rent Payable - obligation of the enterprise as the lessee (the one paying the
rent) of the premises to pay the lessor (the owner of the place being rented.)
7. Other Payables - other obligations of the business that must be settled
within one year.
OWNER'S EQUITY
1. Owner's Equity - is the account used to reflect the equity of the proprietor
in the business. It refers to the owner's investment in the enterprise.
2. Owner's Drawings - this account is used to refer to withdrawals by the
proprietor of some earnings of the business for personal use.
3. Income and Expense Summary - is a temporary account used to summarize
the effects of revenues/income and expenses to the equity accounts of the
proprietor.
REVENUES
1. Service Income - refers to revenue account in a service-type business
organization. It reflects the gross earnings of the enterprise before all
expenses of operations are deducted.
2. Other Income - other income earned by the business which is not directly
related with its main operations such as interest income, rental income, and
commission income.
EXPENSES
The caption "Operating Expenses" is often used. The operating expenses for
service-type business operations include all costs of services that are used or
consumed in the operations of the business.
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1. Salaries Expense - refers to the cost of service rendered by the employees of
the business. It may include the cost of living allowances, 13th month pay,
and other employee fringe benefits.
2. Rent Expense - refers to the cost of renting office space used by the business
in its operations.
3. Supplies Expense - refers to the cost of office stationery, coupon bond,
envelopes, ball pens and other office supplies that are already used by the
business.
4. Utilities Expense - refers to the cost of light and water and telephone
services consumed in the business operations.
5. Taxes and Licenses - refers to payments that are required by the Bureau of
Internal Revenue and the local Municipality or City where the business is
located. Payments to different government instrumentality as regards the
proper registration of the business are also included in this account.
6. Transportation Expenses - refers to cost incurred by officers and employees
for transportation in line with the operations, e.g., meeting with the clients.
7. Representation and Entertainment - costs incurred in accommodating the
customers or clients. Also included are the costs when officers or employees
represent the business in official transactions.
8. Depreciation Expense - refers to the portion of the cost of depreciable
property that is charged against current operations.
9. Doubtful Accounts Expense - refers to the amount of account receivables
that is estimated to be uncollectible and is charged against current year's
operations.
10. Insurance Expense - refers to the premium chargeable to current year's
operation on fire insurance coverage, motor vehicles insurance coverage
and other insurance plans.
11. SSS, PHILHEALTH, EC Expenses - refers to the contribution of the
enterprise as the employer of the employees in the Social Security System,
PHILHEALTH and Employees Compensation.
12. Miscellaneous Expenses - refers to other costs in relation to the conduct of
the business operations that are normally incurred but each of the amounts
is not significant enough to be given accounting recognition individually.
These amounts are grouped together and are called "miscellaneous
expenses".
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CLASSIFICATION OF ACCOUNTS
A. According to Financial Statement Presentation
1. REAL ACCOUNTS - Balance Sheet accounts
a. assets
b. liabilities
c. capital
2. NOMINAL ACCOUNTS - Income Statement accounts
a. revenues/income
b. expenses
B. Whether Principal or Auxiliary
1. PRINCIPAL ACCOUNTS - accounts that can stand alone
e.g., cash, accounts receivable, service income, sales
2. AUXILIARY ACCOUNTS - accounts that are aids or subsidiary to the
main or principal accounts.
a. adjunct account - added to the principal account
b. contra account - deducted from the principal account
e.g., allowance for doubtful accounts, accumulated depreciation
C. Whether Permanent or Temporary
1. PERMANENT - accounts that are not closed at the end of the
accounting period
2. TEMPORARY - accounts that are closed at the end of the accounting
period.
BUSINESS PAPERS
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The bases of recording transactions in books of accounts are documents
called business papers. Some common business papers are the official receipts,
invoices, cash vouchers, checks, statements of accounts, and promissory notes.
1.) OFFICIAL RECEIPTS - An official receipt is a document which gives evidence
to a transaction involving a receipt of cash. The document gives information on
the amount of cash received, the person from cash was received, the date of receipt
and the reason for such receipt.
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their own funds, then they should also staple the relevant receipt from the original
purchase transaction to the cash voucher. The vouchers are then stored as
accounting records.
ACCOUNTING CYCLE
The accounting cycle refers to a series of sequential steps or procedures
performed to accomplish the accounting process. It is referred to as a "cycle"
because this is repeated each accounting period.
The accounting period may be any of the following:
1. Calendar-period - the accounting period starts on January 1 and ends
December 31 of the same year.
2. Fiscal year - the accounting period starts at any date except the first
calendar date and end one year thereafter.
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Balance Sheet, Income Statement and Statement of Changes in Capital and other
Financial Report.
6. PREPARING THE FINANCIAL STATEMENTS. From the data recorded,
classified, and summarized in the above steps, the financial reports are prepared
to include a balance sheet, an income statement, and a statement of changes in
financial position.
7. JOURNALIZATION AND POSTINGS OF ADJUSTING JOURNAL ENTRIES.
This involves a review of all ledger accounts and the recording of journal entries
and postings of adjustments in order to bring all accounts to correct balances.
8. CLOSING THE BOOKS. This the process of bringing all income and expense
accounts to a zero balance at the end of the year by transferring their balances to
summary account called the income and expense summary.
9. PREPARING A POST-CLOSING TRIAL BALANCE. This is a trial balance
prepared after the income and expense accounts have been closed. Therefore, the
post- closing trial balance is a listing only of the balances of assets, liabilities, and
capital accounts.
10. REVERSING ENTRIES. This is the process of reversing certain adjusting entries
made so that accounting methods used in the previous years will be maintained
in the next year. These reversing entries are recorded at the beginning of the next
accounting period and are optional.
JOURNALIZATION
The first step in the bookkeeping process is journalization. Bookkeeping
refers to the systematic recording of transactions in the books of the enterprise.
JOURNALIZATION is the process of recording transactions and events in
a chronological order in the book of original entry called the journal.
A general journal is a two-column journal with the following columnar
headings: date, particular, F, debit and credit. These columnar headings are used
to provide the following information about the transaction:
1. Date - This refers to the date when the transaction occurred.
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2. Particulars - This refers to the names or titles of accounts where
changes have been caused by the transaction. A brief explanation of the
event is also recorded.
3. F - F stands for 'folio' and is used as a reference guide to indicate the
ledger account to which an entry has been posted.
4. Debit - This is a money column used to record the debit amount of the
entry.
5. Credit - This is also a money column used to record the credit amount
of the entry.
GUIDELINES ON JOURNALIZATION
The following guidelines will be useful in recording transactions in a two-
column general journal.
1. A complete journal entry includes the following data: the date, debit and credit
accounts, debit and credit amounts, and a brief explanation of the transaction.
When an entry has two or more debits or credits, the entry is a compound journal
entry.
2. The date in a general journal includes the year, month, and day when the
transaction occurred. These complete data are recorded on the first entry of every
journal page. Unless there is a new- year or month on the journal page, it is
sufficient to record only the day for subsequent entries.
3. The debit account is recorded at the extreme left of the particulars column. If
there are two or more debit accounts, these are all placed alongside the extreme
left margin.
4. The credit account is recorded with a half-inch indention from the extreme left
margin of the particulars column to distinguish it from the debit account. All credit
accounts are similarly placed. It is important to note that all debit accounts are
recorded before the credit accounts.
5. The explanation of the transaction must be brief and concise. This is also placed
with an indention of one inch from the extreme left margin of the particulars
column.
6. Usually a line is left free between journal entries.
7. When recording the peso amounts in the money columns no commas or period
need to be used. The journal money columns are designed with specific boxes for
each amount. To illustrate P 1,234,567.89 will be recorded in the money column as:
P1 2 3 4 5 6 7 .89
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8. A peso sign may be placed before the first amount in a money column. No other
peso sign in necessary as all numbers in money columns are presumed to be in
pesos.
9. When transactions do not include centavos, the centavo column may be left in
blank. Dashes (-) or ciphers (00) may also be used.
POSTING PROCEDURES
1. Based on the first debit entry in the journal, look for the account in the general
ledger.
2. On the debit side date column, copy the date.
3. Copy the amount in the debit column.
4. Insert the journal page number in the folio column of the ledger.
5. Insert the ledger account number in the folio column of the journal.
6. Repeat steps 1 to 5 until all the accounts have been posted or transferred from
the journal to the ledger.
Steps number 4 and 5 is called cross reference. It facilitates the tracing of an
entry to and from the journal and ledger. Also, if the F columns are both filled up,
it signifies that an entry has already been posted. The folio column in the journal
will be gradually filled up as the postings are made.
TRIAL BALANCE
At this point we should test the accuracy of our journalizing and posting
process by preparing a trial balance. A trial balance is a list of accounts with ledger
balances. The following are the steps in determining the balances of the ledgers:
1. Total the debit column and record it in small figures in pencil directly
underneath the last debit amount. This is called pencil footing. It is done in pencil
and the figure is small to distinguish it from the regular entry and to permit
erasures if the figure is not correct.
2. Total the credit column and record it in small pencil figures directly under the
last credit column amount.
3. Extract the balance: if a debit balance, place it in the explanation column debit
side in line with the last debit posting in small pencil figure (see cash ledger); and
if a credit balance, place it in the explanation column credit side in line with the
last credit posting.
4. You may not pencil foot if there is a single debit or credit amount only.
The trial balance gives the data needed in preparing the financial
statements.
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OBSERVE THE FOLLOWING RULES IN PREPARING THE TRIAL
BALANCE:
1. Heading consists of three lines:
First line - Name of the business
Second line - Title of the report
Third line - Date
2. Account titles are arranged in the following order: Assets, Liabilities, Capital,
Revenues and Expenses.
3. Only accounts with balances appear in the trial balance.
4. The peso sign is placed only in the first debit amount, first credit amount and
on the totals.
5. The totals are ruled (one horizontal line drawn under the last amounts of the
debit and credit columns) and double ruled (two horizontal lines are drawn under
the total figures).
6. If the total debits do not equal the total credits, then errors must have been
committed. These should be located before ruling and double ruling the totals. It
is therefore advisable that the totals should be in pencil figures first and if correct
then write over in ink.
See to it that the debit totals is equal to the credit totals. If it is not so, then
errors like transferring from the journal to the ledger on the wrong side (cash debit
was posted to the cash credit) or wrong amount (cash debit 40,000 was posted to
the debit of the cash ledger 400,000) or wrong footings or wrong balances were
copied in the trial balance.
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about the entity's ability to continue as a going concern, the uncertainties
must be disclosed.
2.) ACCRUAL BASIS OF ACCOUNTING - revenue is recognized when they
are earned regardless of the time when cash was received, and expenses are
recognized when they are incurred regardless of the time when cash was
paid.
3.) REPORTING PERIOD - there is a presumption that financial statements
will be prepared at least annually.
4.) REVENUE RECOGNITION PRINCIPLE - revenues must be recognized
when earned. Revenues are earned in the accounting period when
the services are rendered or goods sold are delivered.
5.) EXPENSE RECOGNITION PRINCIPLE - the principle governing the
recording of expenses. All the expenses incurred during the accounting
period must be recorded.
6.) MATCHING PRINCIPLE - the expenses of the period must be associated
directly or indirectly with the revenue of the period.
THE WORKSHEET
Worksheet is a tool that facilitates the preparation of the financial
statements. It is the device that efficiently summarizes the data in the unadjusted
trial balance and the adjustments to come up with the financial statements on time.
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Income Statement; and ninth and tenth money columns, Balance Sheet. Each
money column for each heading is identified as debit or credit.
3.) Enter the account balances in the unadjusted trial balance columns and total the
amounts. Total debits must equal total credits.
4.) Enter the adjusting entries in the adjustments columns and total the amounts.
As each adjustment is entered, a letter or a number is used to identify the debit
entry and the corresponding credit entry. Note that the adjustments are not
journalized until after the worksheet is completed and the financial statements are
prepared.
5.) Compute each account's adjusted balance by combining the unadjusted trial
balance and the adjustment figures. Enter the adjusted amounts in the adjusted
trial balance columns.
This procedure of combining horizontally, line by line, the amount of each
account in the unadjusted trial balance columns with the corresponding amount
in the adjustments columns is called cross footing.
a.) ADD - when the unadjusted balance is the same as the adjustment
(debit and debit, or credit and credit).
b.) SUBTRACT - when the unadjusted balance is not the same as the
adjustment (debit and credit, or credit and debit)
6.) Extend the asset, liability and owner's equity amounts from the adjusted
balance columns to the balance sheet columns. Extend the revenue and expense
amounts to the income statement columns. Total the balance sheet and income
statement columns.
7.) Note that the initial totals of the income statement and balance sheet columns
are not equal. The difference between the total credits and the total debits in the
income statement is the net income or net loss of the period.
a.) NET INCOME - total credits is greater than total debits. (Revenues >
Expenses)
b.) NET LOSS - total debits is greater than total credits. (Revenues <
Expenses)
Enter the net income in the DEBIT column of the income statement and
compute the final column totals. The income statement now has an equal total
debits and credits.
Enter the net loss in the CREDIT column of the income statement and
compute the final column totals. The income statement now has an equal total
debits and credits.
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8.) Enter the net income in the credit column of the balance sheet and compute the
final column totals. The balance sheet must now have equal total debits and
credits. If the result is net loss, enter the amount of net loss in the debit column of
the balance sheet and get the final column totals.
9.) Double rule the column totals.
CLOSING ENTRIES
Closing entries are done at the end of the accounting period in order to
bring the temporary accounts into zero balances. TEMPORARY accounts are the
nominal accounts or the income statement accounts. These are cleared of all
outstanding balances in the general ledger so that at the start of the next
accounting period the revenue and expense accounts will be opened for recording
of new transactions covering the new accounting period.
Aside from income statement accounts other temporary accounts are: (1)
owner's drawing account, (2) Income and Expense Summary account.
Permanent accounts or the balance sheet accounts are not closed because
their balances will be carried over to the next accounting period.
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3.) All debit accounts must be credited and use "Income and Expense Summary"
account as debit.
4.) All the income statement accounts are now closed. Get the balance of the
"Income and Expense Summary" account.
a.) DEBIT balance = Net Loss
b.) CREDIT balance = Net Income
5.) Close the "Income and Expense Summary" account to "Owner's, capital"
account.
a.) Net Loss = Debit Owner's, capital
b.) Net Income = Credit Owner's, capital
6.) Close the "Owner's, drawing" account to "Owner's, capital" account. Credit
owner's, drawing and debit owner's, capital.
REVERSING ENTRIES
This is the last step in the accounting cycle. On the first day of the next
accounting period, some adjusting entries need to be reversed. This is called
reversing entries simply because the debit entries are credited while the credit
entries are debited.
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