INTRODUCTORY ACOUNTING

CHAPTER 1 & 2 reviewACCOUNTING

-The Language of Business

• 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

Accounting

• An information system that• measures,• processes,• communicates information• For the purpose of

• making economic decisions

Identifying Business Activities

Recording Business Activities

Communicatin

g Business Activities

Accounting ActivitiesC 1

1-4

IdentifiesIdentifies

RecordsRecords

CommunicatesCommunicatesRelevantRelevant

ReliableReliable

ComparableComparable

Importance of Accounting

AccountingAccounting

is a

system that

information

that is

about an organization’s business activities.

about an organization’s business activities.

C1

1-5

The operating cycle of a merchandising company ordinarily is longer than that of a service company.

Operating CyclesOperating Cycles

LO 1 Identify the differences between service and merchandising companies.

© 2007 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 10e by Slater

Steps in Accounting Cycle

Transaction Journalize Post

Worksheet Financial Statements

Journalize & Post Adjusting

Entries

Journalize & Post Closing Entries

Post-Closing Trial Balance

Reversing entry

An Overview…GeneralJournal

SpecialJournals

Ledger Accounts

Trial Balance

Prepare Simple Financial Statements

Adjustments

FINANCIAL

STATEMENTS

• BALANCE SHEET• INCOME STATEMENT• OWNER’S EQUITY STATEMENT• CASH FLOW STATEMENT

Purpose of financial statements

• Provide information about• Financial position• Results of operation• Movement of cash in the enterprise

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

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.

AssetsLiabilities + Equity

Balance Sheet

LiabilitiesLiabilities EquityEquityAssetsAssets = +

A1

1-13

• 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

Income

/Sales

- Expenses

INCOME STATEMENT

Profit

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)

Cash Receipts less

Cash Disbursements =

Net Cash inflow (Outflow)

Cash Receipts less

Cash Disbursements =

Net Cash inflow (Outflow)

Test IDirections: 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 andB- 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?

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?

LandLand

EquipmentEquipment

BuildingsBuildings

CashCash

prepaymentsprepayments

Store Supplies

Store Supplies

Notes Receivable

Notes Receivable

Accounts Receivable

Accounts Receivable

Resources owned or controlled

by a company

Resources owned or controlled

by a company

AssetsA1

1-20

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.

• 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

Marketable Securities· 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

Trade and Other Receivables• 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

Accounts Receivable

Amounts owed to the company.

Arise from credit sales to customers.

Not all customers will pay in full.

Trade and Other Receivables

Trade and Other

Receivables

· 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.

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.

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

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.

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

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

Mortgage Payable

Mortgage Payable

Wages Payable

Wages Payable

Notes Payable

Notes Payable

Accounts Payable

Accounts Payable

Creditors’ claims on

assets

Creditors’ claims on

assets

LiabilitiesA1

1-33

Salaries payable

Unearned Income

Unearned Income

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

• 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

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.

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

NON-CURRENT LIABILITIES

• Mortgage Payable-debts secured by a collateral

• Bonds Payable-certificates of indebtedness with specific terms of payment and interest rate.

Owner’sclaim on

assets

Owner’sclaim on

assets

withdrawalswithdrawals

Contributed Capital

Contributed Capital Earnings Earnings

EquityA1

1-39

• 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

• 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

Service organizations sell time to earn revenue.

Examples: Accounting firms, law firms and plumbing services

Service organizations sell time to earn revenue.

Examples: Accounting firms, law firms and plumbing services

Netincome

Netincome

EqualsExpensesExpenses

MinusRevenuesRevenues

Service Companies

What is revenue?

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

Service Income• Revenues earned by the business in

performing services for a customer.

Examples:

• Medical services by a doctor• Dental services by a dentist• Services by a lawyer• Services by an accountant

• Cost of Sales or cost of Services• The direct cost of the products sold

or the services rendered

Expenses

• Salaries• Utilities• Supplies• Insurance• Transportation• Depreciation• Bad debts• interest

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

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

• 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.•

STEPS IN THE ACCOUNTING PROCESS: 1.

ANALYZING DETERMINING EFFECTS OF TRANSACTIONS ON THE

BUSINESS Source DocumentsInvoice from

supplier

Billings to customers

Employee earnings records

Step 2 : RECORDING

• Inputting of information in books/journals

STEP 3: CLASSIFYING

• Sorting like transactions into account titles

STEP 4: SUMMARIZING

• Grouping the accounts

STEP 5: REPORTING

• Preparation of Financial Statements

STEP 6: INTERPRETING

• Computation of relationship of figures.

What is an Account ?

An account is a brief and systematic record of

transactions which are

similar in nature.

LEDGER BOOK

Account Account

DEBIT CREDIT

Dr Cr NAME OF ACCOUNT

‘T’ Account

Left side

Right side

DEBIT CREDIT

Dr Cr ASSETS ACCOUNT

‘T’ format

DEBIT CREDIT

Dr Cr LIABILITY ACCOUNT

‘T’ format

DEBIT CREDIT

Dr Cr OWNER’S EQUITY ACCOUNT

‘T’ format

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)

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:

FirmFirm’s goods

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:

FirmSupplier’s goods

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

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

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

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.

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.

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

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)

Seatwork/Homework

• Do exercise

• Thank you for your patience and your

admirable desire to learn!