Review of the Previous Lesson. ACCOUNTING EQUATION & THE DOUBLE-ENTRY SYSTEM Week 2 ACCOUNTING...
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Transcript of Review of the Previous Lesson. ACCOUNTING EQUATION & THE DOUBLE-ENTRY SYSTEM Week 2 ACCOUNTING...
Learning Objectives
• Differentiate the elements of financial statements• Explain the meaning of the account• Discuss the accounting equation• Explain the nature of debits and credits – the
double-entry system• Discuss accounting events and transactions• Identify and differentiate typical account titles
used – Balance Sheet & Income Statement• Explain the accounting procedures for business
transactions
ELEMENTS OF FINANCIAL STATEMENTS
1.Assets2.Liabilities
3.Owner’s Equity or Capital
4. Income or Revenue5. Expenses
• The elements of financial statements refer to the quantitative information shown in the statement.
ACCOUNT T-ACCOUNT
A detailed record of the increases, decreases & balance of each element that appears in an entity’s financial statements.
The simplest form of the account.
It has 3 parts: account title, debit side & credit side.
Account Title
Left side or Debit side
Right side or Credit Side
ASSET ACCOUNTS - Debit
Cash
Petty Cash Fund
Cash Equivalents
Notes Receivable
Accounts Receivable
Allowance for Bad Debts
Accrued Interest Income
Advances to Employees
Inventories
Prepaid Expenses
Unused Supplies
Property, Plant & Equipment
Land
Building
Equipment
Furniture & Fixtures
Accumulated Depreciation
Intangible Assets
Current Assets Non-Current Assets
LIABILITIES ACCOUNTS - Credit
Accounts Payable
Notes Payable (short-term)
Accrued Expenses or Accrued Liabilities
Unearned Revenues or Unearned Income
SSS Premium Payable
Philhealth Premium Payable
Pag-ibig Premium Payable
Withholding Tax Payable
Pre-collected or Unearned Income
Mortgage Payable
Bonds Payable
Notes Payable (Long-term)
Accounts Payable
Current Liabilities Non-Current Liabilities
OWNER’S EQUITY ACCOUNTS
- The original and additional investments of the owner of the business entity.
- Increased by net income
- Decreased by net loss
When the owner of a business entity withdraws cash or other assets
Capital (Credit)
Withdrawals(Debit)
INCOME OR REVENUE ACCOUNTS - Credit
Professional Income
Accounting or Auditing Fees Income
Legal Fees Income
Dental Fees Income
Medical Fees Income
Rental Income
Interest Income
Miscellaneous Income
Income or revenue derived from the sale of merchandise.
Sales
Service Income or Service Revenue Income or revenue derived from rendering services.
EXPENSES ACCOUNTS - Debit
Cost of Sales or Cost of Goods Sold
Salaries or Wages Expense
Bad Debts or Uncollectible Accounts Expense
Utilities Expense
Depreciation Expense
Taxes & Licenses
SSS Contribution
Philhealth Contribution
Pag-ibig Contribution
Insurance Expense
Supplies Expense
Miscellaneous Expense
CHART OF ACCOUNTS – list of account titles or account name.
ACCOUNT T-ACCOUNT
A detailed record of the increases, decreases & balance of each element that appears in an entity’s financial statements.
The simplest form of the account.
It has 3 parts: account title, debit side & credit side.
Account TitleLeft side or Debit side (Dr.)
Value received
Right side or Credit Side (Cr.)
Value parted with
In every transaction, there is a value received, we call Debit and value parted with, we call a Credit.
Debit balance Credit balance
Account Title
Left side or Debit side (Dr.)
Value received
Right side or Credit Side (Cr.)
Value parted with
Debit total Credit total = account balance
Account titles are identifications or brief descriptions of items that fall to same kind, class or nature. In other words, are assigned names to various accounts.
DEBIT ENTRY:
An amount entered on the left-hand side of the account.
CREDIT ENTRY:
An amount entered on the right-hand side of the account.
ACCOUNT BALANCE the difference between the debit total & credit total of an account.
DEBIT BALANCE if the debit total exceeds credit total.
CREDIT BALANCE if the credit total exceeds debit total.
IN BALANCE or CLOSED ACCOUNT if the debit total equals credit total.
Example of Chart of Accounts
Account titles are identifications or brief descriptions of items that fall to same kind, class or nature. In other words, are assigned names to various accounts.
CHART OF ACCOUNTS – list of account titles or account name.
THE NATURE OF DEBITS AND CREDITS – The double-entry system
• A double-entry system means that the dual effects of a business transaction is recorded.
Dual effects
Business transactions
A debit side entry must have a corresponding credit side entry.
Each transaction affects at least two accounts. The total debits for a transaction must always equal the total credits.
THE RULES OF DEBIT & CREDIT
Rule 1 – Asset: debit to increasecredit to decrease
Rule 2 - Liabilities: credit to increasedebit to decrease
Rule 3 – Owner’s Equity: credit to increasedebit to decrease
Rule 4 – Drawing: debit to increasecredit to decrease
Rule 5 – Income: credit to increasedebit to decrease
Rule 6 – Expenses: debit to increasecredit to decrease
NORMAL BALANCE OF THE ELEMENTS OF FINANCIAL STATEMENTS
DEBIT BALANCE CREDIT BALANCE
Assets
Income or Revenue
Owner’s Equity
Liabilities
Expenses
PHASES OF ACCOUNTING
1. Identifying transactions and events – source documents
2. Journalizing transactions – the journal
3. Posting to the ledger – general ledger
4. Trial balance preparation
5. Adjusting journal entries
6. Preparing the worksheet
7. Preparing financial statements
8. Closing entries
9. Post-closing trial balance
10. Reversing entries
Profitability – How much is the increase in capital as a result of business operation?
Liquidity – Are there available funds to finance the business operation?
Solvency – Can the business pay its long-term obligations to others?
NOTE: Steps 1 to 10 is the ACCOUNTING
CYCLE.
PHASE 1 - RECORDING
1. Identifying transactions and events – source documents
Steps 1 of the ACCOUNTING CYCLE.
a) Identification of business transaction what transactions are considered as accountable and what are not.
RULE: Only transactions & events which are of financial character to the business are being recognized.
SOURCE DOCUMENTS or SUPPORTING BUSINESS DOCUMENTS the basis of identifying transactions.
b) Analysis of business transactions Business transactions are analyzed from the view point of the business. “Always consider yourself as the business” when making the analysis.
By analyzing, we have to ask: What is the value received and value parted with in this particular transactions?
c) Measuring of business transaction the peso is our financial denominator.
Example of Source Documents(under Servicing Activities)
1. Customers’ & suppliers’ sales invoices
2. Official receipts
3. Cash or Check Vouchers
4. Service Order Slip
PHASE 1 - RECORDING
2. Journalizing transactions – the journal
Steps 2 of the ACCOUNTING CYCLE.
RECORDING is the 1st phase of accounting. This involves the writing down of business transaction in a systematic manner and in order of their occurrence in the book of original entry called Journal.
JOURNALIZING is the process of recording the effects of economic transaction in the journal.
the act of recording business transactions in the journal.
JOURNAL ENTRY the accounting record written in the journal which consists of debit account and credit account with their respective values.
ANALYSIS OF BUSINESS TRANSACTION
Transaction: Bought a car for cash, P650,000.00.Questions guide:1. Identifying: Who bought the car? The
business.2. Analyzing: What is the value received? Car.
What is the value parted with? Cash.3. Measuring: What is the amount involved?
P650,000.00.4. Journalizing:
1. Debit, value received – car P650,000.002. Credit, value parted with – cash 650,000.00
To illustrate the analyzing process of accounting, consider the transactions of Valrox, a servicing business.
Cash on hand
Cash in bank
Accounts Receivable
Office equipment
Notes PayableValrox, Capital
SSS Premium Payable
Withholding tax payable
Supplies expense
Utility expenseBank charge expense
Service Income
Salaries expense
Owner’s drawing
Financial StatementsObjective: To provide financial information useful to the users.
The formal reports prepared by accountants The final products of the accounting
process.
The information that accumulated and processed in financial accounting
2. Income Statement
1. Statement of Financial Position
3. Statement of Changes in Equity
4. Cash Flow Statement
5. Notes to the Financial Statement
Shows the financial position of a business entity as of a particular date.
Shows the performance of the business entity for a given period.
Shows the movement or changes in owner’s capital or equity in a certain period.
Shows and explains the changes of cash during an accounting period.
Part of the financial statements in a parenthesis form, to achieve proper understanding of the financial reports.
Example of Statement of Financial Position
Account Form – in horizontal order
Report Form – in vertical order
ELEMENTS OF FINANCIAL STATEMENTS
1.Assets2.Liabilities
3.Owner’s Equity or Capital
4. Income or Revenue5. Expenses
• The elements of financial statements refer to the quantitative information shown in the statement.
Real accounts are not closed at the end of the accounting period.
Nominal accounts are temporary accounts that are closed or put to zero balance at the end of the accounting period.
ELEMENTS OF FINANCIAL STATEMENTS
1. Assets – are resources controlled by the entity as a result of past transactions or events and from which future economic benefits are expected to flow to the entity. Asset accounts have a normal debit balance.
1. Is a leased lot or rented machines considered an asset of the entity?
2. Is a machine that can not be repaired and owned by the entity considered an asset?
3. Is buying a machine in the future transactions considered an asset?
4. Is a machine bought by the entity for the personal use of the owner considered an asset?
ELEMENTS OF FINANCIAL STATEMENTS
2. Liabilities – are present obligations of the entity arising from past transactions or events the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Liability accounts have normal credit balance.
a. Is the debt of the owner considered a liability of the entity?
b. Is a bank loan in the future transaction, thus a future obligation considered a liability?
ELEMENTS OF FINANCIAL STATEMENTS
3. Equity – is the residual interest in the assets of the entity after deducting all of its liabilities (asset – liabilities = equity). Equity accounts have normal credit balance.
4. Income or Revenue – represents the earnings of the business from sales of goods or service rendered. Revenue accounts have a normal credit balance.
5. Expenses – are costs incurred in conducting the business activities. Expense accounts have normal debit balances.
ELEMENTS OF FINANCIAL STATEMENTS
RECOGNITION OF ELEMENTS MEASUREMENT OF ELEMENTS
Recognition means the process of reporting the elements of financial statements of an entity.
1. Probability of future benefit When the item has any future economic benefit that will flow to or from the entity.
2. Reliability of measurement When the item has a cost or value that can be measured with reliability.
Measurement is the process of determining the monetary amounts at which the elements of financial statements are recognized.
1. Historical cost
2. Current cost
3. Realizable value
4. Present value
MEASUREMENT OF ELEMENTS
1. Historical cost is the amount paid when an asset was acquired.
2. Current cost is the amount to be paid if the asset (already acquired) was acquired today.
3. Realizable value or settlement value is the amount to be received if the asset is to be sold.
4. Present value the amount that a future sum of money is worth today given a specified rate of return.
5 years from now P1,000.00 P620.00 10%
ACCOUNTING CONCEPTS & PRINCIPLES
• Accounting concepts are important assumptions or ideas which accountants observe in recording business transactions in the books of accounts.
• Accounting conventions are the means of implementing accounting principles. They are the rules, procedures & methods used in accounting practice. They comprise the large body of practices that prescribe definitely how to do the accounting process.
• Accounting principles refers to a doctrine which is the basis of accounting conventions.
• GAAP Generally Accepted Accounting Principles– Guide accountants in the accounting process of an enterprise.– Are developed based on experience, research, & careful study.– Become generally accepted by agreement among accounting
practitioners.– OBJECTIVE: to fairly present the financial statements…in conformity
with GAAP.
IMPLICIT ASSUMPTIONS
ACCOUNTING PRINCIPLES1. Entity concept
2. Periodicity concept
3. Stable monetary unit concept
1. Objectivity principle
2. Historical cost
3. Revenue recognition principle
4. Expense recognition principle
5. Adequate disclosure
6. Materiality
7. Consistency principle
1. Accrual basis
2. Going concern
UNDERLYING ASSUMPTIONS
Assignment: Give the description of each concepts & principles(except implicit assumptions).