ACCOUNTING TUTORIAL AND BRIDGING PROGRAM

SESSION 1: INTRODUCTION OF ACCOUNTING AND BOOKKEEPING

I. Accounting Equation

The Basic Accounting Equation

All the processes in an accounting system must observe the equality of the accounting equation, which is basically an
algebraic equation. The basic accounting equation is shown below:

ASSETS = LIABILITIES + EQUITY

ASSETS – are the economic resources you control that have resulted from past events and can provide you with economic
benefits.

Control

For an economic resource to be considered an asset, you must control the right over the economic benefits that the resource
may produce. Control means you have the exclusive right to enjoy those benefits and the ability to prevent others from
enjoying those benefits.

Past Events

The control over an economic resource has resulted from a past event or transaction. Therefore, resources for which control
is yet to be obtained in the future do not qualify as assets in the present. Physical possession, however, is not always
necessary for control to exist.

Economic benefits

To be an asset, the economic resource must have the potential to provide you with economic benefits in at least one
circumstance.

LIABILITIES – are your present obligations that have resulted from past events and can require you to give up economic
resources when settling them.

Obligation

Obligation means a duty or responsibility. An obligation is either:

a. Legal obligation – an obligation that results from a contract, legislation, or other operation of law; or

b. Constructive obligation – an obligation that results from your past actions (e.g. past practice or published policies) that
have created a valid expectation in others that your will accept and discharge certain responsibilities.

Giving up of economic resources

Settling the obligation necessarily would require you to pay cash, to transfer other non-cash

assets, or to render a service.

Present obligation as a result of past events

A present obligation exists as a result of past events if:

a. you have already obtained economic benefits or taken an action; and

b. as a consequence, you are required to transfer an economic resource.

PROVIDE AN EXAMPLE

EQUITY – is simply assets minus liabilities. Other terms for equity are “capital”, “net assets”,

and “net worth”.

PROVIDE AN EXAMPLE
The Expanded Accounting Equation

We can expand the basic accounting equation by including two more elements: income and expenses. The expanded
accounting equation shows all the financial statement elements. The expanded accounting equation is as follows:

Assets = Liabilities + Equity + Income - Expenses

Notice that income is added while expenses are deducted in the equation. These are because income increases equity while
expenses decrease equity.

INCOME/ REVENUES – are increases in economic benefits during the period in the form of increase in assets (received
cash through sales) or decreases in liabilities (unearned revenue – payment already receive but service or goods are not yet
delivered; when delivered, unearned revenue is reduced and revenue is recognized), that result in increases in equity.

EXPENSES – are decreases in economic benefits during the period in the form of decreases in assets, or increases in
liabilities, that result in decreases in equity.

The difference between income and expenses represents profit or loss.

• If income is greater than expenses, the difference is profit (profit means ‘kita’ or ‘tubo’ in Filipino).
• If income is less than expenses, the difference is loss (loss means ‘lugi’ in Filipino).

We can make another variation to the equation above as follows:

Assets = Liabilities + Equity + Profit/ - Loss

Profit increases equity while loss decreases equity.

PROVIDE AN EXAMPLE

II. Major Account Titles

The five (5) major accounts are:

1. Assets 4. Revenues

2. Liabilities 5. Expenses

3. Capital or Stockholders’/Owner’s Equity

1. ASSETS

Assets are classified as either Current or Non-current.

A. Current Assets
Current assets are all assets which are expected to be realized within the ordinary course of business, or usually a
span of 12months,whichever is longer. Realization here only means that these assets are expected to be converted
into cash, sold, or disposed of after a certain period of time, or through the passage of time.

1. Cash

The most basic and familiar of all the assets is Cash or Money. Money means everything composed of bills and
coins, considered as legal tender (such as the Philippine Peso in the Philippines), or legal tenders of other nations
(such as the U.S. dollar). Cash also includes money in the form of bank deposits in checking accounts and savings
accounts. It can also include checks, such as those provided by the customers in payment for goods or services
received.

2. Accounts Receivable

Accounts receivable are oral promises to the entity to receive cash at a later date. This represents amounts that
are collectible from customers. They arise when a business sells its goods or services on account or on credit.
While they can be just as easily convertible and liquid as cash, definitely not all receivables can be collected.
Hence, businesses also set-up a contra-asset account called Allowance for Doubtful Accounts, that estimates how
much of their current receivables are uncollectible.
3. Short-term Investments

The short-term investments account contains the company’s investments in low-risk, highly liquid assets such as
bonds and stocks, which are expected to be liquidated in less than one(1) year. Most often, short-term investments
are entered into by the company to make the most income out of its, otherwise, idle cash.

4. Notes Receivable

Similar to Accounts Receivable, a Notes Receivable account represents promises to the entity to receive cash at
a later date, not to exceed within one(1) year, with the main distinction that notes receivables are all written, and
hence more formal than accounts receivable. This added formality feature ensures that, in the case of a default by
the borrower, the company can seek additional legal remedies to recover what has been lent. Notes Receivables
are covered by Promissory Notes.

5. Inventories

Inventories are assets or goods that are held for sale in the normal operations of the business. Merchandising
businesses normally maintain one(1) inventory account – Merchandise Inventory. A service business normally
has no inventory account. For manufacturing companies, aside from the finished goods inventory which are
already available for sale, inventory also includes raw materials, work-in-process items, and supplies. Raw
materials are basically inputs for producing other materials. Once they are entered into production, but awaiting
completion, they are called work-in-process items. Meanwhile, there are items which do not actually serve as
input for a product but are nevertheless used during production – these are called supplies.

6. Prepayments
A prepayment is an amount simply paid in advance for goods or services anticipated to be received by the entity
in the future. It consists of costs already paid but are yet to be used or incurred. Usual examples are Prepaid Rent
and Prepaid Insurance. Prepayments would only cease to be as such, when they are finally used-up.

B. Non-current assets

These include all other assets not classified as current assets whose future benefits will be recognized by the
company or business entity, over a relatively long period of time.
1. Investments
They are long-term investments which are not expected to mature or are not expected to be realized (sold or
otherwise converted to cash), within a period of one(1) year.

2. Property, Plant and Equipment

Property, plant and equipment are those fixed assets that have some physical existence. They are used in the
business operations, with relatively long life, and are not intended for resale in the ordinary course of the business.
They are grouped into different classes such as Land, Land Improvements, Building, Transportation Equipment,
Machinery & Equipment, Furniture & Fixtures, etc. based on their function and depreciated over their estimated
useful lives. Property, plant and equipment, with the exception of Land, gradually deteriorates with the passage
of time through usage, normal wear-and-tear, and obsolescence. Such deterioration is termed as Depreciation,
which is a form of an expense.
3. Intangible Assets

Intangible assets lack physical substance, and yet are similarly realizable over long periods of time. Being
intangible, their value as assets is harder to measure and evaluate, compared to tangible assets. Prime examples
include patents, copyrights, franchises, goodwill, trademarks, and licenses. Often, they are simply represented by
written documents or certificates stating their description and ownership status.

2. LIABILITIES

A. Current Liabilities

1. Accounts Payable
Accounts Payable is the opposite of accounts receivable. While in accounts receivable, the entity is on the
receiving side, in accounts payable, the entity is now on the paying side, hence, the borrower. It is also defined as
the business’ trade payables to its suppliers.
2. Notes Payable

Notes Payable are written promises of the entity to pay a sum certain in a future determinable time, but not
exceeding one(1) year. While these can usually arise from larger trade or business transactions, they can also arise
from the regular borrowings of the entity.

3. Accrued Expenses Payable

Throughout the operating cycle, it is very much possible that the company has already received benefits from
certain events yet has been unable to pay for it.

4. Deferred/Unearned Revenues or Customers Deposits

This is a form of accrued liability related to goods or services that the entity has yet to deliver but has already
received payment from a customer.

B. Non-Current Liabilities

1. Mortgage Loan Payable

A mortgage loan is a loan with a lien on real property, so that the lender has collateral until the loan is repaid. On
any given date, the borrower is liable for the unpaid principal balance plus any interest/s due. It is common for
mortgage loans to require monthly interest and principal payments that will repay the principal balance over a
number of years. The principal payments due within one(1) year, as of the date of the Balance Sheet, must be
reported as a current liability. The remaining balance of the principal will be reported as a non-current liability or
long-term liability, since it is not due within one(1) year from the date of the Balance Sheet.

2. Bonds Payable
Bonds payable are a form of non-current liability or long-term debt, often in huge sums contained in an agreement
called as the Bond Indenture. They are usually issued by the government, banks, and huge corporations seeking
huge financing resources.

3. EQUITY/OWNER’S CAPITAL/STOCKHOLDERS’ EQUITY

1. Common Stock
Those who own common stocks of a corporation are called Common Stockholders. A common stockholder has
many rights among which are the following:
a. Right to vote in the Stockholders’ meeting;

b. Right to receive dividends;

c. Pre-emptive right which is the right to be offered first to buy additional shares in the event of a future issuance
of shares.

All common stock comes with a par value. This is the legal nominal value assigned to it, and it is illegal for it to
be issued for less than this price. In the Balance Sheet, the common stock account represents the number of
common shares issued and outstanding, multiplied by the stock’s par or stated value.

2. Preferred Stock
Similar to the common stock account, the preferred stock account represents the number of preferred shares issued
and outstanding, multiplied by the stock’s par value. Owners of preferred stocks are called preferred stockholders.
Preferred stockholders have preference as to corporate dividends, and/or liquidation. When a corporation declares
a dividend, preferred stockholders are given priority over common stockholders. But they do not have voting
rights, or they do, it is limited compared to common stockholders.

3. Additional Paid-in Capital

Additional Paid-in Capital is also called share premium. It is the excess over par value contributed by the
company’s shareholders in a stock issue which can either be from the issuance of common or preferred shares.
Additional paid-in capital arises when the selling value of a stock is greater than its par value. In other words, the
par value is the minimum amount a share can be issued for.
4. Retained Earnings

Retained earnings represent the accumulated net income from operations of the company over several periods. It
shows how much the company has earned since day one(1) of its operations. But when the company gives back
to its shareholders in the form of dividends, the dividends will reduce the company’s retained earnings.

4. REVENUES

1. Operating Revenue – revenues that originate from the main business operations. (e.g., sales, service revenue,
etc.).

2. Non-Operating Revenue – revenues that do not originate from the main business operations and are a result
of some side activities (e.g., interest income, rent income of a business not engaged in the leasing industry).

5. EXPENSES

1. Cost of Goods Sold 7. Insurance Expense 13. Advertising Expense

2. Salaries & Wages 8. Interest Expense 14. Training and Development

3. Rent Expense 9. Telecommunications Expense 15. Bank Service Charge

4. Utilities Expense 10. Repair and Maintenance Expense 16. Bad Debt Expense
5. Delivery Expense 11. Office Supplies Expense 17. Representation Expense

6. Depreciation Expense 12. License Fees and Taxes 18. Sales Commissions

III. Double Entry System

Double-entry bookkeeping or double-entry accounting means that every transaction will involve at least two
accounts. The words debit and credit have been associated with double-entry bookkeeping and accounting for
more than 500 years. Here are the meanings of those words: debit: an entry on the left side of an account credit:
an entry on the right side of an account The debit and credit rule in double-entry bookkeeping can be stated several
ways:

• For each and every transaction, the total amount entered on the left side of an account (or accounts) must be
equal to the total amount entered on the right side of another account (or accounts).

• For each and every transaction, the total of the debit amounts must be equal to the total of the credit amounts.

• Debits must equal credits.

IV. Posting and Trial Balance

Posting Defined Posting is the method of transferring information from journal to the ledger. Posting is done in
the ledgers, also called “book of final entry”. Ledgers are utilized in order to know the balances of the different
accounts at the end of the period. Folio is very significant in posting similar accounts A group of accounts is
referred to as ledger. To illustrate, a standard account form of a ledger is presented below:

ACCOUNT TITLE: CODE NUMBER:

DATE PARTICULARS REFERENCE DEBIT CREDIT BALANCE

1. Date – The date of transaction.

2. Particulars – Explanation of the transaction.

3. Reference – Journal Page Number
4. Debit or Credit – The peso amount of the transaction.

5. Code number – The account number designated from the chart of accounts.
A substitute for the standard ledger is the “T” account, from which is the skeleton form of the capital letter T. The
space on the left side is the debit side and the right is the credit side. Such account will appear as follows:

ACCOUNT TITLE

DEBIT CREDIT

The T-account is often used for classroom purposes. This method is faster and easier. To determine the ending
balance of an account, simply total the debit side and the credit side. Any difference will be the account balance.
Some accountants may use it for checking. However, in actual setting, the standard format is used.

SAMPLE PROBLEM:

NADARANG AUTO REPAIR SHOP

CHART OF ACCOUNTS

CODE NO ASSETS CODE NO INCOME

1 Cash 41 Service Income
2 Accounts Receivable
3 Repair Equipment

LIABILITIES EXPENSE
21 Accounts Payable 51 Rent Expense
52 Supplies Expense
53 Salaries and Wages
EQUITY
31 Nadarang, Drawing
32 Nadarang, Capital

Coding is done to facilitate posting from journal to the ledger. Allowance in the numbering is purposely done to
give place for future accounts that may be included to the present chart of account.

DATE TRANSACTIONS
2024
Jan 2 o Mr. Odon Nadarang opened an auto repair shop investing cash of ₱5,000.
3 o Paid rent for the month, ₱200.
5 o Bought tools and repair equipment form Jasmin Repair Equipment, ₱3,000; paying ₱1,000
and the balance on account.
8 o Collected ₱400 for service rendered.
9 o Repair supplies paid, ₱350.
15 o Partials payment for Jasmin Repair Equipment, ₱1,000.
20 o Paid salaries of trainee-mechanic ₱100.
25 o Mr. Nadarang withdraw ₱500 for personal use.
30 o Collected ₱480 cash for service rendered.
31 o Billed Wylengco Trading for service rendered, ₱250.

Trial Balance

A trial balance is a list of accounts and their balances at a given time. The primary purpose of a trial balance is to
provide the mathematical equality of debits and credits after posting. A trial balance uncovers errors in
journalizing and posting. It is also useful in the preparation of financial statements which will be discussed in the
succeeding chapter. However, a trial balance does not prove that all transactions have been recorded or that a
ledger is correct. There are possibilities that the debit and credit sides are equal, yet a transaction is not journalized,
a correct journal entry is not posted, a journal entry is posted twice, incorrect accounts are used in journalizing or
posting, etc.

NOTE: AMOUNTS SHOULD BE AT RIGHT ALIGNMENT.

 V. Common Errors in Posting

1. Transposition Errors

Definition: A transposition error occurs when the digits of a number are reversed. For example, posting $154 as
$145.

Impact: This error can cause the ledger to be out of balance, leading to discrepancies in financial statements.

2. Double Posting
Definition: Double posting occurs when the same transaction is posted twice to the ledger.

Impact: This error inflates account balances and can lead to overstated financial positions.

3. Omission of Posting

Definition: An omission error happens when a transaction is recorded in the journal but is not posted to the ledger.

Impact: Omissions lead to incomplete financial records, which can result in understated balances and incomplete
financial statements

4. Sliding Error

Definition: This error occurs when the amount posted to the ledger differs from the amount recorded in the journal.
For example, a transaction recorded as $500 in the journal might be posted as $50 in the ledger.

Impact: Posting the incorrect amount can cause significant discrepancies in the financial records, leading to an
inaccurate portrayal of the company’s financial status.