College of Accountancy and Entrepreneurship

Junior Philippine Institute of Accountants-DLSP Chapter

Federation Year 2021-2022

BASIC FINANCIAL ACCOUNTING AND REPORTING

WHAT IS YOUR IDEA ABOUT ACCOUNTING? SHARE IT WITH THE CLASS!

DEFINITION OF ACCOUNTING

Here are some definitions of accounting:

Accounting is an information system that measures , processes and communicates financial about an economic
entity.
Statement of Financial Accounting concepts No. 1, “Objectives of Financial Reporting by Business
Enterprises” (Norwalk, Conn.: Financial Accounting Standards Board, 1978), par. 9

Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money,
transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.
American Institute of Certified Public Accountants, “Review and Resume”, Accounting Terminology Bulletin
No. 1 (New York: AICPA 1953) par. 9

BASIC ACCOUNTING EQUATION

Expanded Accounting Equation:

Assets= Liabilities+ Owner’s Equity (+ Revenues- Expenses)

USERS OF FINANCIAL STATEMENTS

 Investors  Customers
 Employees  Government and their agencies
 Lenders  Public
 Suppliers and other trade creditors

NATURE OF BUSINESS
Service concern- the business derived its income from services rendered to clients
 Merchandising- engaged in buying goods or commodities or any form of finished
Manufacturing- engaged in buying of raw materials and supplies to be processed or manufactured.

 Can you site examples of service, merchandising and manufacturing business?

FORMS OF BUSINESS ORGANIZATIONS

Sole proprietorship- Owner’s Equity
Partnership- Partner’s Equity
Corporation or Hybrid company- Stockholder’s Equity or Shareholder’s Equity
Cooperatives- Member’s Equity

ACCOUNTING CONCEPTS AND ASSUMPTIONS

Business Entity- the business is considered as an entity that is separate and distinct from the owner of
the management; To measure the actual performance ofthe business
Money Measurement- all transactions ofthe business are recorded in terms of money; it provides a
common unit of measurement
Historical Cost- assets should be shown in the balance sheet at the cost of purchase instead of current
value
Materiality- immaterial amounts may be aggregated w/ amounts of a similar function and needed not be
presented separately

THREE MAJOR FINANCIAL STATEMENTS

STATEMENT OF FINANCIAL PERFORMANCE

 STATEMENT OF CHANGES IN OWNER’S EQUITY

STATEMENT OF FINANCIAL POSITION

ELEMENTS OF FINANCIAL STATEMENTS AND ACCOUNT TITLES USED

Assets- are economic resources that are expected to benefit future activities of the organization
Liabilities- are the entity’s economic obligations to non-owners
Owner’s equity- is the residual interest in the assets of the enterprise after deducting all its liabilities
Revenues- increase in equity
Expenses- decrease in equity

Accounting – it is art of recording, classifying and 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 result
thereof.

Bookkeeping – is the process of recording “systematically” the business transactions in a chronological

manner.

THREE PARTS OF BOOKKEEPING

1. Recording – is a phase of accounting which involves the routine and mechanical process of writing down
the business transactions and events in the books of accounts in a chronological manner called journalizing.
 Chronological – arranged in order to the date occurrence
 Journalizing – to be recorded in journal

Note: Before recording transactions, each transaction must be identified, analyzed and measured.
2. Classifying – is a phase of accounting which involve sorting of grouping of similar and interrelated transactions
and events.
 Posting -is the process of transferring the entries from the journal to ledger. Example for this is the T-
Account where in the left side is debit while in the right side is credit.

ACCOUNT TITLE

Left side / Debit Right side / Credit

3. Summarizing – is a phase of accounting which involves the completion of the financial statements and the
accounting requirements as well.

Interpreting- is the phase of accounting which involves “analytical and interpretative works”.

Business Transactions- are the business activities that can may affect the assets, liabilities and owner’s equity or
what we called accounting elements.
 In every transaction there is a Value Received, we called it as Debit (Dr)
 While the Valued Parted with, we called it as Credit (Cr)

ACCOUNT BALANCE – the difference between the debit total and credit total of anaccount
DEBIT BALANCE – total of Debit sides exceeds the total of credit side
CREDIT BALANCE - total of Credit sides exceed the total of debit side

The Rules of Debit and Credit

Debit Credit
Asset Normal Balance/ increased Decreased side
side

Liabilities Decreased Normal Balance/

side increased side

Owners’ Decreased Normal Balance/

Equity side increased side

CAUSE TO INCREASE THE OWNERS’ EQUITY

Investment by owner
Revenues

CAUSE TO DECREASE THE OWNERS’ EQUITY

Withdrawal
Expenses

TEMPORARY ACCOUNTS
Income or Revenue - all income earned of the same nature
Expenses - all expenses incurred of the same nature
Income and Expense are the factors that affect Owners Equity. Income increases Owners Equity while
Expense decreases Owners Equity.

SAMPLE PROBLEM

Prepare general journal entries for the following transactions of a business called Pose for Pics in 2021:
Oct. 1: Hashim Khan, the owner, invested 57,500 cash and Rs. 32,500 of photography equipment in the
business.

04: Paid 3,000 cash for an insurance policy covering the next 24 months.

07: Services are performed and clients are billed for 10,000.

13: Purchased office supplies for 1,400. Cash paid 400 and remaining outstanding.

20: Received 2,000 cash in photography fees earned previously.

24: The client immediately pays 15,000 for services to be performed at a later date.

29: The business acquires photography equipment. The purchase price is 100,000, pays 25,000 cash and
signs a note for the balance.

30: Khan withdrew cash for personal use, 2,000.

DATE Account Title and Explanation P.R Debit Credit

Oct. 1 Cash 57,500
Equipment 32,500
Hashim Khan, Capital 90,000
Initial Investment

4 Prepaid Insurance 3,000

Cash 3,000
Purchase two years insurance policy

7 Accounts Receivable 10,000

Service Revenue 10,000
Revenue earned but not received

13 Office Supplies 1,400

Cash 400
Accounts Payable 1,000
Cash and Credit purchases recorded

20 Cash 2,000
Accounts Receivable 2,000
Accounts Receivable are converted into cash

24 Cash 15,000
Unearned Service Revenue 15,00
Liability created

29 Equipment 100,000
Cash 25,000
Note Payable 75,000
Purchase asset by cash and credit
 CASH ACCOUNTS RECEIVABLE PREPAID INSURANCE
10/01 57,500 3,000 10/04 10/07 10,000 2,000 10/20 10/04 3,000
10/20 2,000 400 10/13 8,000 3,000
10/24 15,000 25,000 10/29
2,000 10/30
74,500 30,400
44,100

OFFICE SUPPLIES EQUIPMENT ACCOUNTS PAYABLE

10/13 1,400 10/01 32,500 1,000 10/13
1,400 10/29 100,000 1,000
132,500

UNEARNED SERVICE
NOTES PAYABLE SERVICE REVENUE
REVENUE
15,000 10/24 75,000 10/29 10,000 10/07
15,000 75,000 10,000

HASHIM KHAN'S HASHIM KHAN,

CAPITAL WITHDRAWALS
90,000 10/01 10/30 2,000
90,000 2,000

Post for Pics

Trial Balance
October 30, 2021

Cash 44,100
Account Receivable 8,000
Prepaid Insurance 3,000
Office Supplies 1,400
Equipment 132,500
Account Payable 1,000
Note Payable 75,000
Unearned Service Revenue 15,000
Hashim Khan, Capital 90,000
Hashim Khan, Withdrawal 2,000
Service Revenue 10,000
191,000 191,000