CHAPTER 2 This “no profit, no loss” situation of the business is being referred as “breakeven”

or “breakeven point” of sales. Also breakeven is where the cost or expenses are
ACCOUNTING AND BUSINESS
equal to the sales.
What is the MSME’s?
ROLE AS “ACCOUNTANT” IN BUSINESS
MSME’s is the acronym for Micro, Small, Medium, Enterprises.
Accountant is the term for a person who accounts the business transaction.
There is asset threshold of the MSME’s as follow: Basically, it is the traditional works of an accountant to determine how much is
the business profit and the corresponding correct amount of taxes due and
a.) Micro Enterprises are those with asset, before financing of P3M or less payable to the government.
and employ not more than 9 workers;
b.) Small Enterprises are those with assets, before financing of above P3M to CRITERIA FOR A PRINCIPLE TO BECOME GENERALLY ACCEPTABLE
P15M and employ 10 to 99 workers;
The general acceptance of an accounting principles usually, depends on how well
c.) Medium Enterprises are those with assets, before financing of above
it meets the following requirements:
P15M to P100M and employ 100 to 199 workers.
1.) Principle of Relevance
WHY DO WE STUDY ACCOUNTING?
2.) Principle of Objectivity
Accounting is like recording history of transactions. In business and society, 3.) Principle of Feasibility
accountants make a difference. They prepare and review the financial information
GENERALLY ACCEPTED ACCOUNTING PRINCIPLE (GAAP)
relied upon by investors, lenders, businesses and other organizations throughout
the world. This principle is uniform set of accounting rules, procedures, practices, and
standards that are followed in preparing the financial statement.
WHAT KNOWLEDGEABLE ID REQUIRED IN THE STUDY OF ACCOUNTING?
GAAP that are still applicable for use are:
Firstly, is the analytical ability to analyze transactions and situational problem
requirements. Secondly, is your stocked knowledge in arithmetic and not Cost Principle – asset should be recorded at original or acquisition cost.
mathematics. Thirdly, there is psychological factor behind. Lastly, ids your study
Objective Principle – this principle requires that accounting records should be
habit.
based on reliable and verifiable data as evidence of transaction.
DECISION MAKING IN BUSINESS
Materiality Principle – it dictates practibility to rule over theory in determining the
For business to continue operation, the primary motive of a person engaged in valuation of an item.
business is profit. In a business setting, especially to the business owners or
Matching Principle – this combined concept of Revenue Recognition and Expense
managers, and the officers in company they do decision making. In accounting you
Recognition Principle.
cannot decide if you don’t have basis, so accounting helps the proprietor to know
how much profit that his business makes. Consistency Principle – it requires that accounting methods and procedures
should be applied on a uniform basis form period to period.
Adequate Disclosure Principle – this requires that financial statements should be BALANCE SHEET – is a financial statement which shows the financial position of an
free from any material misstatement. enterprise as of a particular date. It consists of 3 section which are Asset, liabilities
and owner’s equity section.
The 5 Basic Accounting Assumptions are as follows:
BASIC ACCOUNTING EQUATION
Accounting Entity – assumes that from the accounting point of view, the business
is considered as “an entity that is separate and distinct from the owner or
ASSET = LIABILITIES + OWNER’S EQUITY
management”.

Going-Concern – means the business is assumed to operate for an infinite period.

OWNER’S EQUITY = ASSET – LIABILITIES
Time-period Assumption – the company will adapt accounting period. states that
businesses should report their financial position, results of operations, and cash
flows at regular intervals. These intervals are typically monthly, quarterly, or
yearly. LIABILITIES = ASSET – OWNER’S EQUITY

Unit of Measure – when you record transactions there should be a currency.

INCOME STATEMENT a financial statement which shows the performance of the
Accrual Basis Assumption - the amount of revenue or expense recognized in a enterprise for a given period of time.
period should equal the amount of revenue or cost incurred during that period.
EXPANDED ACCOUNTING EQUATION
FINANCIAL STATEMENTS are prepared on a basis that is design to provide useful
information to a wide range of users who are not in position to demand reports ASSETS = LIABILITIES + OWNER’S EQUITY (+REVENUE – EXPENSES)
tailored to meet their particular needs are called general purpose financial
statements.
STATEMENT OF CHANGES IN OWNER’S EQUITY that summarizes the changes in
6 basic financial statement: equity for a given period of the time.
1.) A Statement of financial position as at the end of the period; (balance ELEMENTS OF FINANCIAL STATEMENTS AND ACCOUNT TITLES USED
sheet)
2.) A Statement of comprehensive income for the period; (income statement) Are directly related to measurement of financial condition in the balance sheet
3.) A Statement of changes in equity for the period; are asset, liabilities and owner’s equity while the elements that are directly
4.) A Statement of cash flows for the period; related to measurement of performance in the income statement are income and
5.) Notes, comprising a summary of significant accounting policies and other expenses.
explanatory information; and ASSET
6.) A Statement of financial position as at the beginning of the earliest
comparative period when an entity applies an accounting policy CURRENT ASSET – asset that expected to be realized, sold or consumed within the
retrospectively or makes a retrospective restatement of item on its enterprise’s normal operating cycle.
financial statements when it reclassifies items in tis financial statement.
Cash
Cash equivalent Notes Payable (long term) and mortgage payable
Petty cash fund
Notes receivable OWNER’S EQUITY OR CAPITAL - is the residual interest then asset of the enterprise
Accounts receivable and the related estimated uncollectible accounts is called after deducting all its liabilities.
estimated realizable value.
Estimated uncollectible accounts asset offset or contra asset account. WITHDROWAL – use of the owner’s name with the word Drawing or Personal
Accrued income written after the name which is separated by a comma.
Advances to employees
Inventories INCOME & EXPENSE SUMMARY – this is a temporary account created at the end
Prepaid expenses of the accounting period where income and expenses are temporarily closed to
Unused supplies this account.

NON – CURRENT ASSET – asset that not classified as current should classified as INCOME & REVENUE – gross inflow of economic benefits during the period arising
non-current. in the cause of ordinary activities of on enterprise when those inflows result in
increase in equity, other than relating to contributions from owner’s
Property and equipment
Land Service Income
Building Professional Income
Equipment Rental Income
Furniture & Fixtures Interest Income
Accumulated depreciation
Intangible asset EXPENSES – gross outflow of economic benefits during the period arising in the
course of ordinary activities of an enterprise when those outflow result in
LIABILITIES – defined as present obligations of an enterprise arising from past decrease in equity, other than those relating to distribution to owners.
transactions or events, the settlement of which is expected to result in an outflow
from the enterprise of resources embodying economic benefits. Liabilities denote Profit (Loss) – the excess of revenues over expenses is called Profit. If expenses
financial obligations of the business to its creditors. exceed the revenues, it is called a Loss.
CURRENT LIABILITIES expected to be settled in the normal course of the operating
Interest Expenses
cycle; due to be settled within one year from the balance sheet date.
Rent Expenses
Repairs and Maintenance
Accounts payable
Stationery and Office Supplies Expenses
Notes payable (short-term)
Salaries Expenses
Accrued expenses
Uncollectible Accounts
Pre-collected or unearned income
Depreciation Expenses
Amortization Expenses
NON – CURRENT LIABILITIES – are financial long-term obligations of the enterprise
Taxes and Licenses
which are due and payable for more than one year
Insurance expenses
Utilities Expenses, Gas & Oil and Miscellaneous Expenses