Definition of Accounting:

Accounting was defined in various ways by various organizations. Those definitions are as follows:

A. Accounting Standards Council ( ASC)

“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 decision”.

B. Committee on Accounting Terminology of the American Institute of Certified Public Accountants (CAT-
AICPA)

“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”.

C. American Accounting Association (AAA)

“Accounting is the process of identifying , measuring and communicating economic information to permit
informed judgement and decision by users of the information”.

With the three 3 definitions, we can conclude that:

 Accounting is a user- based discipline

 Accounting is quantitative in nature

 Accounting is subject to interpretation.

Four (4) phases of accounting

1. Recording - this is the phase (stage) 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.

2. Classifying - this is the phase/ stage of accounting which involves sorting or grouping of similar transactions
and events into their respective kind and classes.

3. Summarizing -this is the phase / stage of accounting which involves the completion of the financial
statements and the accounting requirements as well.
 4. Interpreting - this is the phase/ stage of accounting which involves the “ analytical and interpretative works”.
it is then, that when financial statements are analyzed, interpreted and are communicated to those interested
parties where could be of great help to management as a basis for making a sound decision.

Business transactions and events:

2 Types of accountable events

Exchange ( reciprocal transfer) - an event wherein there is a reciprocal giving and receiving of
economic resources or extinguisment of obligations.

Examples: sale, purchase , payment of liabilities.

Non- reciprocal transfer - is a one way transaction wherein the entity giving does not receive anything
in return.

Examples: donation or gifts, payment of taxes and fines, theft, provision of capital

External event other than transfer - an event that changes an entity’s economic resources or obligations
caused by an external party or event but does not involve transfer or resources or obligations:

Examples: changes in fair value, vandalism, obsolescence.

B. Internal Events - are events that do not involve outside party or event. These are transactions or events that
happened or take place within the business entity only.

 Production - conversion of raw materials into finished product.

 Casualty- unanticipated loss from fire and flood.

Analysis of business transactions

Business transactions are analyzed from the view point of the business. If the transaction is “ purchased” or “
bought”, it is the business that is buying, if the transaction is “ sold”, it is the business that is selling, if the
transactions is “ collected” it is the business that is collecting, if the transaction is “rendered services” it is the
business that is rendering services, etc.

don’t forget this, “ always consider yourself as the business” when making the analysis.

Rules of DEBIT and CREDIT.

The value received or debit should first be determined before the value parted with or credit.

For example:

“ if I’ll give you a piece of paper and you will give me a pen in return as an exchange, can you determine the
value received and the value parted with?
 Debit, a piece of paper (value received)

Credit, pen (value parted with)

The term debit means “left” and credit means “ right”. this refers to an equation where the left side is equal to the
right side. If the left side is equal to 100p, correspondingly the right side also equal to 100p. there could be
no instance that the left side is not equal to the right side.

Final rule is that the “ left side will always equal to the right’.

Example:

“ bought a car for cash, P650,000”.

Car P650,000

Cash P650,000

“ left side will always equal to the right’.

Account titles:

Balance sheet accounts: (permanent accounts)

Assets

Current asset - that are expected to be realized, sold or consumed within the entity’s normal operating
cycle.

 Cash - account title to describe money, either in paper or in coins and money substitutes like check,
postal money orders, bank drafts and treasury warrants.
 Petty cash fund - account title for money and set aside for petty or small expenses.
 Cash equivalents - short term highly liquid instruments that are readily converted into cash.
 Notes receivable - promissory note that is received by the business from the customer arising from
rendering of services, sale of merchandise.
 Accounts receivable- account title for amounts collectible arising services rendered to a customer or
client on credit or sale of goods to customers. On accounts. (oral or verbal promise to pay)
 Allowance for bad debts - “ contra- asset account”. possible losses from uncollected accounts.
 Accrued interest income - amount of interest earned on a notes receivable which is not yet
collected.
 Advances to employees - the account title for amounts collectible from employees for allowing
them to make cash advances which are deductible against their salaries or wages.
 Inventories - assets which are held for sale in the ordinary course of business, in the process of
production for such sale, in the form of materials or supplies to be consumed in the production
process.
 Prepaid expenses - paid in advance but are not yet incurred or have not yet expired.
 Unused supplies - cost of stationery and other supplies purchased for use but are left on hand and
still unused.

Non - current asset -

 Property and equipment (PPE) - tangible assets which are held by an enterprise for use in
production or supply of goods and services.
 Land - an account title for the site where the building used as office or store is constructed.
 Building - account title for finished construction owned by the business where operations and
transactions took place.
 Equipment - includes calculators, typewriters, adding machines, computers, and the like. If these
are used in the office, the account title is “ office equpment”, if used in store, “ store equipment”,
trucks, jeeps, vans, automobiles and other kinds of motor vehicles are used exclusively for delivering
goods, the account title is “ Delivery equipment”
 Furniture and fixtures - includes chairs, tables, counters, display cases and the like. If these are used
in the office, the account title is “ office furniture & fixtures”, if used in store, “ store furniture and
fixtures”.
 Accumulated depreciation - “ contra- asset”. this is called a “ valuation account” which is shown as a
deduction from property and equipment.
 Intangible asset- these are identifiable non- monetary assets without physically substance. Patents,
copyrights, franchises, trademark, goodwill and others.

Liabilities:

Current liabilities - are financial obligations of the enterprise which are expected to be settled in the
normal course of the operating cycle. Due to be settled within one year from the balance sheet date.

 Accounts payable - account title for financial obligation of an enterprise that constitutes an
oral or verbal promise to pay.
 Notes payable (short term)- same as accounts payable In nature but only the obligation is
evidenced by a promissory note. The enterprise/ entity is the one who issued the note.
 Accrued expenses- expenses incurred by the entity but are not yet paid.
 SSS premiums - amount due and payable by the entity to the Social Security System.
 Philhealth premium payable - amount due and payable by the enterprise to the Philippine
Health Insurance Corporation.
 Pag- ibig premium payable - amount due and payable by the entity to the Home Development
Mutual Fund.
 Withholding tax payable - amount due and payable by the entity to the BIR for the tax
withheld from employees.
 Unearned income - income collected or received in advance and is not yet considered as “
earned”

Non current liabilities - are financial long term obligations of the entity which are due and
payable for more than one year.

 Notes payable (long term) - same with Notes payable (short term) but only, this requires
payment for more than a year.
 Mortgage payable - a financial obligation of the enterprise which requires a fixed or tangible
property to be pledge as a collateral to ensure payment.

Owner’s equity

Capital -this is the center of the owner’s concern because this may increase or decrease at
anytime as a result of business operation. In the normal course of of operation, owner’s equity will
be increased by “ income” and decrease by “ expenses”.

Withdrawal - the owner’s withdrawal is likewise indicated by the use of the owner’s name with
the word “ drawing” or “personal” written after the name which is separated by a “comma”. thus, if
the owner is Robert Jaworski who made withdrawal, the title for his drawing account is,

Income statement accounts

Income or revenue

Sales - in general, this represents revenue derived from the sale of merchandise.

Service income -in general, this is the account title used for all types of income derived from
rendering of services. Sometimes the account title used is “ service revenue”.

other specific income account titles used are:

Rental income -for income earned on buildings, space or other properties owned and rented
out by the business as the main line of its activity.
Interest income - for income received by the business arising from an amount of money
borrowed by a customer and is usually covered by a promissory note.
Miscellaneous income - for income earned by the business which is not the main line of its
activity and could not be clearly classified.

Expenses

Cost of sales or cost of goods sold - cost to produce and sell the goods
Interest expense - an expense incurred from borrowed money .
Rent expense - for the amount paid or incurred for use of property.
Repairs and maintenance - for expenses incurred in repairing or servicing the buildings,
machineries, vehicles, equipment, etc., which are owned by the business.
Office supplies expense - supplies used. If use in office, “ office supplies expense”,in the store, “
store supplies expense”.
Salaries expense - for compensation given to employees of a business.
Bad debts - for the anticipated loss that the business may incur arising uncollectible accounts.
Depreciation expense - for the allocated portion of the cost of property and equipment.
Taxes and licenses- for the amount paid for business permits, licenses and other government dues.
Insurance expense - account title for the expired portion of the insurance premium paid.
Utilities expense -the account title for telephone, light and water bills. Also included is gasoline,
lubricants and oil.
SSS contribution - account title for the employer’s share on SSS contribution.
Philhealth contribution - account title used for the employer’s share on philhealth contribution.
Pag- ibig contribution - account title used for the amployer’s share on pag- ibig contribution.
Miscellaneous expense - any amount paid as expense which is not significant enough to warrant a
particular classification.