THE ACCOUNTING PRINCIPLES

Basic Concepts and Procedures

Noel Garcia Tubice
Instructor
 LEARNING OUTCOMES
• Describe the role of accounting in your personal life.
• Describe the role of accounting in business.
• Understand the history of accounting.
• Define business, and explain its motive and role in society.
• Describe the forms of business, types of business
operations and types of business activities.
 INTRODUCTION of KEY TERMS
▪ REVENUES - the total amount of money that a person or
business earns from its normal business activities, such as sales
of products or services.

▪ EXPENSES - the costs incurred by a business in order to

generate revenue.

▪ PROFIT/LOSS/BREAK-EVEN - the amount of money a business

has left over after all expenses have been deducted from revenue.
 INTRODUCTION of KEY TERMS
▪ ASSETS - is about the wealth in the form of properties such as
cash, cars, equipment, jewelries, and real estate (land and
building) that you own. ***If you do not owe anybody, that means
no obligations to be paid, then this wealth is your NET WORTH.

▪ LIABILITIES – claims over your properties.

▪ NET WORTH - the total assets of an individual minus its total

liabilities.
 HISTORY OF ACCOUNTING
• Accounting records can be traced back to the ancient civilizations of
China, Babylonia, Greece and Egypt.

• 1458. The first accounting book “The Book of the Art of Trade” was
written by Benedetto Cotrugli in Naples.

• 1494. The modern double entry bookkeeping system could be traced

from the book prepared by an Italian Mathematician, Fr. Luca Pacioli,
entitled Summa de Arithmetica, Geometria, Proportioni et
Proportionalita (Everything About Arithmetic, Geometry, and Proportion).

• In the Philippines, bookkeeping was introduced by the Spaniards and

the bookkeeper was called Tenedor de Libro.
BUSINESS, ITS MOTIVE AND ROLE IN SOCIETY

A business is an economic unit that engages in buying and selling of

goods or services.

When a person wants to put up his own business, the primary

reason is to earn profit.

Money received by the government from the business through

payment of taxes help fund projects.
 FORMS OF BUSINESS
SOLE PARTNERSHIP CORPORATION
PROPRIETORSHIP
Who owns the Sole Proprietor Partners Shareholders
business?
Are managers and No No Usually
owners separate?
What is the Unlimited Unlimited Limited
owner’s liability?
Are the owner and No No Yes
business taxed
separately?
 LEARNING OUTCOMES
• Describe the forms of business, types of business
operations and types of business activities.
• Differentiate Bookkeeping and Accounting
• Understand the important steps in Accounting Process
• Understand the Scope of Accounting in Business
Organization
• Describe the Users of Financial Information
 TYPES OF BUSINESS OPERATIONS
SERVICE BUSINESS MERCHANDISING MANUFACTURING
BUSINESS BUSINESS
- One which provides - One which buys - Uses raw materials,
service, for a fee, to and sells goods or labor, and
clients or merchandise. machinery to
customers. assemble or create
finished goods.

- Examples are - Examples are - Examples are Apple

banks, supermarkets, (electronics), Nestle
maintenance or grocery stores and and PepsiCo
repair services and clothing
theaters departments
 TYPES OF BUSINESS ACTIVITIES
TYPE OF CHARACTERISTICS OF THE ACTIVITY
ACTIVITY
OPERATING Includes the cash effects of transactions that create
revenues and expenses. They thus enter into the
determination of net income.
INVESTING Includes (a) acquiring and disposing of investments and
property, plant, and equipment, and (b) lending money
and collecting the loans.
FINANCING Includes (a) obtaining cash from issuing debt and
repaying the amounts borrowed, and (b) obtaining cash
from shareholders and paying dividends.
 Business Activities under SOLE
PROPRIETORSHIP
TYPE OF SOURCES OF CASH USES OF CASH CHANGES IN
ACTIVITY CASH BALANCE
OPERATING Sales of products and Paid bills for supplies, SOURCES less USES
services utilities, salaries, etc. from Operating

INVESTING Sale of equipment that no Purchased new SOURCES less USES

longer serves the business equipment that serves from Investing
well the customers better

FINANCING Borrowed from the bank Made principal SOURCES less USES
payments on term loans from Financing

NET CHANGE IN
CASH BALANCE
 BOOKKEEPING vs ACCOUNTING
Bookkeeping may be defined as "the art of recording the business
transactions in the books of accounts in a systematic manner.“

Accounting is primarily concerned with the recording, classifying,

summarizing, interpreting the financial data and communicating the
information disclosed by the accounting records to those persons
interested in the accounting information relating to the business.
IMPORTANT STEPS IN ACCOUNTING PROCESS

1. Recording

5.
2. Classifying
Communicating

4. Interpreting 3. Summarizing
SCOPE OF ACCOUNTING IN THE BUSINESS ORGANIZATION
BUSINESS/COMPANY
accumulates financial data through its various activities

ACCOUNTING
processes the financial data and prepares financial reports

STAKEHOLDERS or USERS
read the reports and make decisions

Accounting is often called the language of business. The main objectives of Accounting is to safeguard
the interests of the business, its proprietors and others connected with the business transactions. This is
done by providing suitable information to the owners, creditors, shareholders, Government, financial
institutions and other related agencies.
USERS OF FINANCIAL INFORMATION
USERS OF FINANCIAL INFORMATION

INTERNAL USERS EXTERNAL USERS

INVESTORS CREDITORS/LENDERS

OWNERS SUPPLIERS

EMPLOYEES GOVERNMENT

CUSTOMERS
 LEARNING OUTCOMES
• Differentiate the types of Accounting and describe the
reports being prepared.
• Describe Accounting Information System
• Understand the Overview of Financial Reports
 TYPES OF ACCOUNTING
• Cost Accounting. It can be most beneficial as a tool for
management/business in budgeting and in setting up cost control
programs, which can improve the profit for the business in the future.

• Financial Accounting. The main source of information of stakeholders or

users are the financial reports or the so-called general purpose financial
statements. These reports are audited by a Certified Public Accountant
who attests to its fair presentation and validity making it reliable and
acceptable by the users.
 TYPES OF ACCOUNTING
• Management Accounting. Internal reports called managerial reports are
prepared for management use. Although management receives the other
reports, they also require additional information such as product cost,
estimate of profit to be earned for a planned project, comparison of two
alternative courses of solving problem, budgets, among others.

• Tax Accounting. All firms are required to pay taxes to the Bureau of
Internal Revenue (BIR). Tax accounting specializes in the determination
of taxes and preparation of various tax returns required to be filled up by
taxpayers such as Income Tax, VAT, and Percentage Tax.
TYPES OF ACCOUNTING AND THE REPORTS
PREPARED

Channels of Accounting Information Flow

 ACCOUNTING INFORMATION SYSTEM
Processing of transactions or activities to produce information
must be done in an orderly and efficient manner. Accounting
Information System (AIS) can be classified into two: measurement
system (processing phase) and the communication system
(reporting and communicating phase). The processing phase involves
analyzing, measuring, recording, classifying, and summarizing, while
the reporting phase involves the presentation of formal reports
which are communicated to decision makers.
ACCOUNTING INFORMATION SYSTEM
 OVERVIEW OF THE FINANCIAL REPORTS
FOUR (4) TYPES OF FINANCIAL STATEMENTS
1. Income statement: Revenues, expenses, and resulting net income or
loss.
2. Statement of Changes in Owner’s Equity: Changes in the ownership
interest of a business.
3. Statement of Cash Flow: The inflow and outflow of cash.
4. Statement of Financial Position or Balance sheet: Assets, liabilities,
and equity.
 OVERVIEW OF THE FINANCIAL REPORTS
ILLUSTRATION:
The financial reports will be illustrated using the business set up by
Ms. Doria who opened a Photocopying Service Center by investing on
June 1, 2024 P200,000 out of her P400,000 pension. She borrowed from
UCPB another P200,000. With this she bought a copying machine for
P350,000, and supplies for P20,000. The remaining P30,000 she set
aside for operating needs of the business. For June, she received
P48,000 from the customers for reproduction work and paid P5,000 for
rent and P3,000 for power and water. Of the supplies bought, 40% were
used up:
Question:
Show the four (4) Financial Reports of the Xerox Service Center:
a. Income Statement
b. Statement of Owner’s Equity
c. Statement of Cash Flows
d. Statement of Financial Position`
 OVERVIEW OF THE FINANCIAL REPORTS
Income Statement: shows how wealth is produced by listing the revenues earned
and expenses incurred by the business.

a.
Revenue P 48,000
Supplies Used (20,000 x 40%) ( 8,000)
Rent ( 5,000)
Power and Water ( 3,000)
Profit for the month ending June 30, 2022 P 32,000
 OVERVIEW OF THE FINANCIAL REPORTS
Statement of Owner’s Equity: shows why the net worth (individual) or equity
(business) changed by listing the activities that caused it to increase or decrease.

b.
Doria Capital, June 1, 2024 P 200,000
Profit for the month 32,000
Doria Capital, June 30, 2024 P 232,000
 OVERVIEW OF THE FINANCIAL REPORTS
Statement of Cash Flows: shows what happened to the cash by enumerating the
activities of cash received and cash used by the business.

c.
Cash investment, June 1, 2024 P 200,000
Cash borrowed from bank 200,000
Cash receipts from service revenue 48,000
Cash paid for copying machine ( 350,000)
Cash paid for supplies ( 20,000)
Cash paid for rent ( 5,000)
Cash paid for power and water ( 3,000)
Cash balance, June 30, 2024 P 70,000
 OVERVIEW OF THE FINANCIAL REPORTS
Statement of Financial Position: shows how the wealth of the business stands by
enumerating the assets, liabilities and net worth of an individual or equity of the
business.

d. Cash P 70,000
Supplies 12,000
Copying Machine 350,000
Total Assets P 432,000

Loan Payable P 200,000

Doria Capital, June 30, 2024 232,000
Total Liabilities and Owner’s Equity P 432,000