Accounting

Notes
Fundamental Ideas and Essential Concepts
Accounting
Notes
Fundamental Ideas and Essential Concepts

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Created by Joshua Corcuera.
Contribution started on May 26, 2019.
For purpose of information and possible future reference for reviews.

What is accounting?

Source Definition

American Accounting Association Process of identifying, measuring,

and communicating economic
information to permit informed
judgment and decisions by users of
the information.

American Institute of Certified Art of recording, classifying, and

Public Accountants 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.

Accounting Standards Council Service activity that provides

quantitative information, primarily
financial in nature, about economic
entities, that is intended to be useful
in making economic decisions.

Business Transactions

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1. Must be expressed monetarily or measurable in money
2. Involves two parties
3. Have a dual effect on the accounting elements

Financial Statements

1. Balance Sheet (Statement of Financial Position)

2. Income Statement
3. Capital Statement (Statement of Changes in Equity)
4. Cash Flow Statement (Statement of Cash Flows)
5. Notes to Financial Statement

Financial statements aim to provide information about the financial

position, financial performance, and cash flows of a business that is useful
to key personalities who are making economic decisions.

Financial statements are the outputs of the accounting process.

Accounting Process

Service Business Merchandising Business

1. Analyze business transactions Analyze business transactions

2. Journalize business transactions Journalize business transactions

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3. Post journal entries into ledger Post journal entries into ledger

4. Prepare trial balance Prepare trial balance

5. Journalize and post adjusting Gather adjustments and prepare

entries worksheet

6. Prepare adjusting trial balance Prepare financial statements

7. Prepare financial statements Journalize and post adjusting entries

8. Journalize and post closing Journalize and post closing entries

entries

9. Prepare post-closing trial balance Prepare post-closing trial balance

10. Journalize and post reversing Journalize and post reversing entries
entries
Highlighted in yellow the difference of the accounting process in the two distinct
forms of business (according to activities)

GAAP, Assumptions, and Principles

GAAP - Generally Accepted Accounting Principles

- developed by accounting professionals as a guide for preparing

financial statements

Assumptions

1. Economic Entity Assumption

- business transactions are separate from owner’s personal

transactions unless it involves investment or withdrawal of resources
from the business.

- for instance, the accounting records of the business must not

include the personal assets and liabilities of the owner.

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2. Accrual Basis Assumption

- assumes that revenue is recorded when earned regardless when

cash is received and that expense is recorded when incurred
regardless when cash is paid.

3. Going Concern Assumption

- in the absence of contrary information, a business is assumed to

operate indefinitely.

4. Monetary Unit Assumption

- Philippine entities must report economic activities in Philippine Peso.

- more importantly, only transactions expressed in money are to be

recorded.
- disregards any inflation in the economy.

5. Time Period Assumption

- life of an economic entity can be divided into artificial time periods

such as monthly or quarterly.

Principles

1. Cost Principle

- assets acquired should be valued and recorded based on actual

cash equivalent or original cost of acquisition, not the prevailing
market value or future value.

2. Full Disclosure Principle

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 - accountants should include sufficient information to permit users to
make an informed judgment.

3. Matching Principle
- expenses must be matched with revenues.

4. Revenue Recognition Principle

- revenue is recognized when earned regardless when cash is paid,

expense is recognized when incurred regardless when cash is
received.

5. Materiality Principle

- allows accountant to violate the matching principle if something is

judged as immaterial.

- for example, the purchase of a P300 calculator with an estimated

life of 5 years by a big company can be recorded entirely as an
expense for that year instead of P60 per year. The justification is that it
is not misleading.

6. Conservatism or Prudence Principle

- accountants can anticipate or disclose losses and can be recorded

when they are probable and can be reasonably estimated. The same
action cannot be done on gains.

7. Objectivity Principle

- states that business transactions must be have some form of

impartial supporting evidence or documentation.
- bookkeeping and financial recorded shall be carried out without
bias and prejudice.

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Accounting Equation

ASSETS = LIABILITIES + CAPITAL

(owner’s equity)

Left side for debit, right side for credit

Rules of Debit and Credit

Normal Balance Increase Decrease

Assets Debit Debit Credit

Liabilities Credit Credit Debit

Capital Credit Credit Debit

Revenue Credit Credit Debit

Expenses Debit Debit Credit

Normal Balance Increase Decrease

Owner, Capital Credit Credit Debit

Owner, Drawing Debit Debit Credit

Contra-asset or Credit Credit Debit

valuation
account

Contra-revenue Debit Debit Credit

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Service Business: Journals and Statements

Journal Entries

Date Particular DR CR

Jan. 1 Cash 300,000

Office Equipment 200,000
Corcuera, Capital 500,000
To record initial investment of the owner

Jan. 2 Furniture and Fixtures 25,000

Accounts Payable 20,000
Cash 5,000

To record purchase of furniture and

fixtures; paid P5,000, balance of P20,000
on account

Jan. 3 Accounts Receivables 50,000

Service Income 50,000
To record services rendered on account

Jan. 4 Cash 15,000

Service Income 15,000

To record cash received from services

rendered

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Jan. 5 Notes Receivables 23,000
Service Income 23,000

To record notes received from services

rendered

Jan. 6 Accounts Payable 10,000

Cash 10,000
To record partial payment of account

Jan. 7 Cash 13,000

Accounts Receivables 13,000
To record cash collected

Jan. 8 Office Equipment 80,000

Notes Payable 60,000
Cash 20,000

To record purchase of office equipment;

paid P20,000, issued notes for balance

Jan. 9 Cash 200,000

Loan Payable 200,000
To record loan secured from bank

Jan. 10 Office Supplies 15,000

Accounts Payable 15,000

To record purchase of office supplies, on

account.

Jan. 11 Salaries Expense 25,000

Cash 25,000

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 To record payment of salaries of workers

Jan. 12 Accounts Payable 2,000

Office Supplies 2,000

To record office supplies returned due to

defects

Jan. 13 Cash 3,000

Notes Receivables 3,000
To record cash collected from notes

Jan. 14 Advertising Expense 18,000

Cash 18,000
To record expenses on advertising

Jan. 15 Accounts Receivables 25,000

Cash 2,000
Service Income 27,000

To record services rendered, P27,000.

Received P2,000, balance on account

Jan. 16 Corcuera, Drawings 28,000

Cash 28,000
To record withdrawal of owner

Jan. 17 Loan Payable 100,000

Cash 100,000

To record partial payment of loan to

bank

Jan. 18 Rent Expenses 35,000

Cash 35,000
To record payment for rent

Jan. 19 Accounts Receivables 9,000

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 Cash 6,000
Service Income 15,000

To record services rendered, P15,000.

Collected P6,000, balance on account

Jan. 20 Supplies Expense 7,000

Office Supplies 7,000
To record office supplies used

Posting into Ledger through T-accounts

CASH

1/1 300,000 1/2 5,000

1/4 15,000 1/6 10,000

1/7 13,000 1/8 20,000

1/9 200,000 1/11 25,000

1/13 3,000 1/14 18,000

1/15 2,000 1/16 28,000

1/19 6,000 1/17 100,000

1/18 35,000

539,000 241,000

DR 298,000

ACCOUNTS RECEIVABLES

1/3 50,000 1/7 13,000

1/15 25,000

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1/19 9,000

84,000 13,000

DR 71,000

NOTES RECEIVABLES

1/5 23,000 1/13 3,000

DR 20,000

OFFICE SUPPLIES

1/10 15,000 1/12 2,000

1/20 7,000

DR 6,000

FURNITURE AND FIXTURES

1/2 25,000

DR 25,000

OFFICE EQUIPMENT

1/1 200,000

1/8 80,000

DR 280,000

ACCOUNTS PAYABLE

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1/6 10,000 1/2 20,000

1/12 2,000 1/10 15,000

12,000 35,000

CR 23,000

NOTES PAYABLE

1/8 60,000

CR 60,000

LOAN PAYABLE

1/17 100,000 1/9 200,000

CR 100,000

SERVICE INCOME

1/3 50,000

1/4 15,000

1/5 23,000

1/15 27,000

1/19 15,000

CR 130,000

SALARIES EXPENSE

1/11 25,000

DR 25,000

ADVERTISEMENT EXPENSE

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1/14 18,000

DR 18,000

RENT EXPENSE

1/18 35,000

DR 35,000

SUPPLIES EXPENSE

1/20 7,000

DR 7,000

CORCUERA, CAPITAL

1/1 500,000

CR 500,000

CORCUERA, DRAWINGS

1/16 28,000

DR 28,000

Unadjusted Trial Balance

CORCUERA & COMPANY CORPORATION

Trial Balance
January 30, 2019

Account Title Debit Credit

Cash 298,000

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Accounts Receivables 71,000

Notes Receivables 20,000

Office Supplies 6,000

Furniture and Fixtures 25,000

Office Equipment 280,000

Accounts Payable 23,000

Notes Payable 60,000

Loan Payable 100,000

Corcuera, Capital 500,000

Corcuera, Drawings 28,000

Service Income 130,000

Salaries Expense 25,000

Advertisement Expense 18,000

Rent Expense 35,000

Supplies Expense 7,000

Totals P 813,000 P 813,000

After this, adjusting entries are journalized and posted to prepare for an adjusted
trial balance. In this case, it will skip those two steps, due to the absence of
adjusting entries, to proceed to the preparation of Financial Statements.

Preparation of Financial Statements

Name of Business (who)

Statement of Comprehensive Income (what)

Period (when)

Service Income P 130,000

Less Operating Expenses:
Salaries Expense P25,000

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 Advertising Expense 18,000
Rent Expense 35,000
Supplies Expense 7,000 85,000
Net Income P 45,000

Name of Business

Statement of Changes in Owner’s Equity

Period

Beginning Capital P 500,000

Add (deduct):
Withdrawals (P 28,000)
Net Income P 45,000 17,000
End Capital P 517,000

Name of Business

Statement of Financial Position

Period

Assets: Liabilities:
Cash P 298,000 Accounts Payable P 23,000
Accounts Receivables 71,000 Notes Payable 60,000
Furnitures and Fixtures 25,000 Loan Payable 100,000
Office Equipment 280,000 Capital:
Notes Receivables 20,000 Corcuera, Capital 517,000
Office Supplies 6,000
Total Assets P 700,000 Total Liabilities & Capital P 700,000

Statement of Financial Position shown above is in account form. Most businesses

use report form, shown below.

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 Name of Business

Statement of Financial Position

Period

Assets:
Cash P 298,000
Accounts Receivables 71,000
Furnitures and Fixtures 25,000
Office Equipment 280,000
Notes Receivables 20,000
Office Supplies 6,000
Total Assets P 700,000

Liabilities and Capital:

Accounts Payable P 23,000
Notes Payable 60,000
Loan Payable 100,000
Corcuera, Capital 517,000
Total Liabilities and Capital P 700,000

Manufacturing Business: Formulas, Schedules, and Statements

Formulas

TMC = DM + DL + FO
PC = DM + DL

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CC = DL + FO

TMC - Total Manufacturing Cost

PC - Prime Cost

CC - Conversion Cost

DM - Direct Materials

DL - Direct Labor

FO - Factory Overhead

Schedules

Name of Business (who)

Schedule of Cost of Goods Sold (what)

Period (when)

Direct Materials P xxx

Direct Labor xxx
Factory Overhead xxx
Total Manufacturing Cost xxx
Add Work-in-Process, beginning xxx
Total Costs Put Into Process xxx
Less Work-in-Process, ending xxx
Cost of Goods Manufactured xxx
Add Finished Goods, beginning xxx
Total Goods Available for Sale xxx
Less Finished Goods, ending xxx
Cost of Goods Sold P xxx

Name of Business

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 Schedule of Direct Materials Used

Period

Direct Materials, beginning P xxx

Add Net Purchases:
Direct Materials Purchases xxx
Freight-in xxx xxx
Materials Available for Use xxx
Less Direct Materials, ending xxx
Direct Materials Used P xxx

Name of Business

Schedule of Net Sales

Period

Gross Sales P xxx

Less:
Sales Return and Allowances xxx
Sales Discount xxx xxx
Net Sales P xxx

Income Statement

Name of Business

Statement of Comprehensive Income

Period

Sales P xxx

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Less Cost of Goods Sold xxx
Gross Profit xxx
Less Operating Expenses
Administrative Expenses xxx
Selling Expenses xxx xxx
Operating Income xxx
Add (deduct) other income (expenses) xxx
Net Income P xxx

Current Assets
Non-Current Assets
Current Liabilities
Non-Current Liabilities

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