2. • Define accounting
• Understand the functions of financial
statements
• Identify common account titles
• Be familiar with reports of CPA and
management
• identify the accounting process and cycle,
• Understand the double entry system,
• understand the effects of transactions on the
accounting equation,
• Be familiar with the rules of debit and credit
Objectives
3. Accounting
• An information system that
• measures,
• processes,
• communicates information
• For the purpose of
• making economic
decisions
6. The operating
cycle of a
merchandising
company
ordinarily is
longer than that
of a service
company.
Operating Cycles
LO 1 Identify the differences between service and merchandising companies.
10. Purpose of financial statements
• Provide information about
• Financial position
• Results of operation
• Movement of cash in the enterprise
11. Elements of Financial
Statements
• Balance Sheet- assets,
• liabilities
• Owner’s equity
• Income Statement- income,
• expenses
• Cash Flow Statement-all elements of
• Balance sheet and
• Income Statement
12. Balance Sheet-A quantitative summary of
a company’s financial condition at a specific
point in time, including assets, liabilities and
owner’s equity for a given time.
14. • Provides a financial summary of the
firm’s operating results during a
specified period.
• Measures all your revenue source vs.
business expenses for a given time
period.
• An accounting of revenue, expenses
and new profit for a given period.
A. Income Statement
16. CASH FLOW
STATEMENT
• Measures changes in financial
position. Summarizes the cash
receipts and cash
disbursements for the
accounting period.
• Cash inflows (receipts) less
cash outflows (payments)
17. Cash Receipts less
Cash Disbursements =
Net Cash inflow (Outflow)
Cash Receipts less
Cash Disbursements =
Net Cash inflow (Outflow)
18. Test I
Directions: Shade the letter of the best answer.
Which Financial Statements contain information to
answer the following questions? Shade letter
A-if found in the Income Statement and
B- if found in the Balance Sheet
1. Did the company make money for the period?
2. Did it incur a loss for the period?
3. How much does the company own?
4. To buy all its properties, did it borrow money or
did the money come from the stock holders?
5. How much cash does the company have at the
end of the period?
6. How much did it spend on salaries for the period?
19. 7. How much did it sell for the period?
8. How much tax did it pay for the period?
9. Are its debts greater than the investments of the
owners?
10. Is the company heavily indebted?
11. How big are the investments of the owners?
12. How much interest on bank borrowings did the
company pay for the period?
13. What properties does it own?
14. Is the company big in terms of sales?
15. Is the company big in terms of what it owns?
17. Can the company pay its maturing debts?
18. As of the end of the period, how much does the
company owe?
19. How much is the total investments of the owner?
21. Current Assets
• These are the assets in a business that
can be converted in cash in one year
or less.
Example: Cash, stocks and other liquid
investments, accounts receivable,
inventory and prepaid expenses.
22. • Cash – includes money and
any other negotiable
instrument that are payable in
money and acceptable by the
bank for deposit and
immediate credit.
CURRENT ASSETS
23. Also called “Temporary Investments.”
Must be marketable (i.e., able to readily
sell).
E.g., commercial paper, treasury bills,
publicly traded stocks and bonds issued
by companies.
5-23
24. • Accounts receivables.
–Called trade receivables for
nonfinancial institutions. Amount
collectible from customers
–Notes Receivable-promissory note
issued by customer
–Interest Receivable-interest
collectible on promissory note issued
by the client.
5-24
27. Other receivables.
E.g., advances or loans to
employees for various reasons
(Shown separately e.g. Due from
Employees).
Accrued Income-income already
earned but not yet received.
28. CURRENT ASSETS
• Inventories-unsold goods at the end
of the period.
Prepaid Expenses-supplies or
services bought the benefits of
which shall be received in the future.
29. Until now, we have also assumed that all accounts
receivable will be collected.
However, because of various circumstances, some
customers will not be able to keep their
promises to pay.
Contra-Asset Account-
Allowance for Bad Debts
Uncollectible Accounts
30. CONTRA-ASSET ACCOUNTS
• Allowance for bad debts—losses due to
uncollectible accounts. This is
deducted from accounts receivable .
• Accumulated Depreciation- the expired
cost of the property, plant and
equipment as a result of usage and
passage of time. This is deducted from
the cost of the related account.
31. These are the tangible assets of a
business that won’t be converted to
cash within a year during the normal
course of operation.
Example: Land, buildings, leasehold
improvements, equipment, machinery
and vehicles.
Non-current Assets
32. NON-CURRENT ASSETS
• Long-term investments-intended to be held
for a long period of time.
• Property, Plant and Equipment-for use in
the production of goods and services expected
to be used for more than one period.
• Examples: Land, Building, furniture and fixtures
• Intangible assets-non-physical assets
• Examples: franchises, patents, copyrights,
trademarks, goodwill
34. LIABILITIES
• Liabilities are classified and presented
based on their maturity. Obligations
presently due for payment are listed
first.
• Classified into:
• Current Liabilities
• Non-current Liabilities
35. • These are the obligations of the
business that are due within one year.
• Example: Notes payable on lines of
credit or other short-term loans, current
maturities of long-term debt, accounts
payable to trade creditors, accrued
expenses and taxes, and amounts due
to stockholders.
Current Liabilities
36. LIABILITIES-Current
• Accounts payable-debts arising from
purchase of asset or service on
account.
• Notes Payable-debts evidenced by a
promissory note
• Loans Payable- borrowed from
• financial institutions payable within
twelve months
• Utilities payable-services from PLDT,
Meralco, Maynilad etc.
37. LIABILITIES-Current
• Unearned Revenues—advance payments
received before goods or services are
delivered to the customer.
• Accrued Liabilities- expenses already
incurred but not yet paid.
• Examples: salaries payable, utilities
payable, interest payable
40. • Capital - represents the total amount
invested by the owners plus the
accumulated profit of the business.
• Drawing-withdrawals made by the
owner.
• Income Summary-temporary account
that shows the income or loss for the
period.
Owner’s Equity
41. • Provides a financial summary of
the firm’s operating results during
a specified period.
• Measures all your revenue source
vs. business expenses for a given
time period.
• An accounting of revenue,
expenses and new profit for a
given period.
Income Statement
42. Service organizations sell time to earn revenue.
Examples: Accounting firms, law firms and plumbing services
Net
income
Equals
Expenses
Minus
Revenues
Service Companies
43. Revenue (in business) is the
income that a company
receives from its normal
business activities, usually
from the sale of goods and
services to customers .
5-43
48. Independent Auditor’s Report
• It states the division of responsibility
between the external auditor and the
company.
• Auditor-expresses an opinion on the fair
presentation of financial statements
• Company-responsible for the preparation
of the financial statements
49. Statement of Management’s
Responsibilities
• Acknowledges responsibility
• 1. F/S in conformance with GAAP
• 2. amounts are based on best estimates
• 3. a system of internal controls
• 4. material disclosures were made
• a. deficiencies in the design of internal
control
• b. weaknesses in internal controls
• c. fraud
50. • Philippine regulatory bodies
• Philippine Regulation Commission
(PRC)-
• Board of Accountancy (BOA), the
Securities and Exchange
Commission (SEC)
• Bureau of Internal Revenue (BIR)
• --Philippine Financial Reporting
Standard (PFRS) is now in use.
•
51. STEPS IN THE ACCOUNTING
PROCESS: 1. ANALYZING
DETERMINING EFFECTS OF TRANSACTIONS ON THE
BUSINESS Source Documents
Invoice from
supplier
Billings to
customers
Employee
earnings
records
52. Step 2 : RECORDING
• Inputting of information in
books/journals
63. DOUBLE - ENTRY
ACCOUNTING SYSTEM
Every business transaction
will involve two parties
Each party must give up
something (out) in order
to receive something
in return. (in)
64. When the business sells its goods for cash, it
will give up its goods to its customer and
will receive cash in return.
Cash
IN
Goods
OUT
Example:
Firm
Firm’s goods
65. When a business buys goods with cash, it
will give up its cash to its suppliers and will
receive goods in return.
Goods
IN
Cash
OUT
Example:
Firm
Supplier’s goods
66. When a business purchases a motor vehicle,
it will give up its cash to the seller and will
receive motor vehicle in return.
Example:
Motor
Vehicle
IN
Cash
OUT FirmMotor Vehicle
67. When a debtor pays to the firm, the firm’s cash
will increase and the firm’s debtors will decrease.
Example:
FirmDebtor
Cash
increases
Debtors
decreases
68. When the firm pays to the creditors, the firm’s
cash will decrease and the firm’s creditors will
decrease.
Example:
FirmCreditors
Creditors
decreases
Cash
decreases
69. Hence,
For every business transaction,
two accounts will be involved.
One account will have a debit
entry and another account will
have a credit entry.
70. Examples :
a) John began business with cash in hand
Php500,000.
Cash P500,000 Capital P500,000
b) The firm took a bank loan of P800,000.
Cash P800,000 Bank Loan P800,000
Motor Vehicle P700,000 Cash P700,000
A = L + OE
c) Purchase d a motor vehicle from
ABC Trading for P700,000.
71. Examples : A = L + OE
e) Received P35,000 in check from a debtor.
Debtors P35,000 Cash at Bank P35,000
d) Paid P50,000 to Creditor, Peter.
Cash P50,000 Creditors P50,000
72. Examples : A = L + OE
f) Paid part of bank loan for P150,00.
Cash P150,000 Bank Loan P150,000
g) Purchased office equipment from
Lee Trading on credit for P7,000.
Office Equipment P7,000 CreditorsP7,000
(Lee Trading)
