Basic Accounting Crash Course (Assets & Liabilities)

Accounting
- art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and
events which are, in part at least, of a financial character, and interpreting the results thereof. (According to
American Institute of Certified Public Accountants)
 Recording – journal entry
 Classifying – ledger
 Summarizing – financial statements (balance sheet, income statement, cash flow, changes in equity,
notes to financial statements)
- Business owners are the decision makers
- “Accounting is the process of IDENTIFYING, RECORDING, and COMMUNICATING economic events of an
organization to interested users.” (Weygandt, J. et. al)
 IDENTIFYING – this involves selecting economic events that are relevant to a particular business
transaction
 RECORDING – this involves keeping a chronological diary of events that are measured in pesos.
The diary referred to in the definition are the journals and ledgers which will be discussed in
future chapters.
 COMMUNICATING – occurs through the preparation and distribution of financial and other
accounting reports.

Nature of Accounting

1. Accounting is a service activity.

2. Accounting is a process: A process refers to the method of performing any specific job step by step according to
the objectives or targets.
3. Accounting is both an art and a discipline.
4. Accounting deals with financial information and transactions: Accounting records financial transactions and
data, classifies these and finalizes their results given for a specified period of time, as needed by their users.
5. Accounting is an information system: Accounting is recognized and characterized as a storehouse of information.

Possible Answers:
• Is my business earning? (profitability)
• How much daily or monthly sales do I need in order to recover my fixed cost? (break-even)
• Do I need to hire additional workers to help me with my production?
• Can I afford to set up a new store in another place? Where do I get the funds?
• Can I afford to pay a bank loan?

Branches of Accounting
1. Financial Accounting
- is the broadest branch and is focused on the needs of external users
- conforms with accounting standards developed by standard-setting bodies. In the Philippines, there is a Council
created to set these standards.
- is primarily concerned with processing historical data

2. Management (or Managerial) Accounting

- emphasizes the preparation and analysis of accounting information within the organization
- The objective of
- managerial accounting is to provide timely and relevant information for those internal users of accounting
information, such as the managers
 - and employees in their decision-making needs.

3. Government Accounting
- is the process of recording, analyzing, classifying, summarizing, communicating and interpreting financial
information about the government in aggregate and in detail reflecting transactions and other economic events
involving the receipt, spending, transfer, usability and disposition of assets and liabilities.

4. Auditing
- There are two types of auditing: external and internal auditing.
1. External Auditing - refers to the examination of financial statements by an independent CPA (Certified
Public Accountant) with the purpose of expressing an opinion as to fairness of presentation and
compliance with the generally accepted accounting principles (GAAP).
2. Internal Auditing - deals with determining the operational efficiency of the company regarding the
protection of the company’s assets, accuracy and reliability of the accounting data, and adherence to
certain management policies. It focuses on evaluating the adequacy of a company's internal control
structure by testing segregation of duties, policies and procedures, degrees of authorization, and other
controls implemented by management.

5. Tax Accounting
- helps clients follow rules set by tax authorities. It includes tax planning and preparation of tax returns.

6. Cost Accounting
- Sometimes considered as a subset of management accounting, cost accounting refers to the recording,
presentation, and analysis of manufacturing costs.
- Cost accounting is very useful in manufacturing businesses since they have the most complicated costing
process.
- Cost accountants also analyze actual and standard costs to help managers determine future courses of action
regarding the company's operations.
- Cost accounting will also help the owner set the selling price of his products

7. Accounting Education
- This branch of accounting deals with developing future accountants by creating relevant accounting curriculum.
Accounting professionals can become faculty members of educational institutions.
- Accounting educators contribute to the development of the profession through their effective teaching,
publications of their research and influencing students to pursue careers in accounting.

8. Accounting Research
- Accounting research focuses on the search for new knowledge on the effects of economic events on the
process of summarizing, analyzing, verifying, and reporting standardized financial information, and on the
effects of reported information on economic events.

Users of Accounting Information

1. INTERNAL USERS are those individuals inside a company who plan, organize, and run the business. These users
are directly involved in managing and operating the business.
 Management
Information need: income/earnings for the period, sales, available cash, production cost
 Employees
Information need: profit for the period, salaries paid to employees
  Owners
Information need: profit or income for the period, resources or assets of the business,
liabilities of the business

2. EXTERNAL USERS are individuals and organizations outside a company who want financial information about the
company. These users are not directly involved in managing and operating the business.
 Creditors: for determining the credit worthiness of an organization. Terms of credit are set by
creditors according to the assessment of their customers' financial health. Creditors include
suppliers as well as lenders of finance such as banks.
 Tax Authorities (BIR): for determining the credibility of the tax returns filed on behalf of a
company.
 Investors: for analyzing the feasibility of investing in a company. Investors want to make sure
they can earn a reasonable return on their investment before they commit any financial
resources to a company.
 Customers: for assessing the financial position of its suppliers which is necessary for them to
maintain a stable source of supply in the long term.
 Regulatory Authorities (SEC, DOLE): for ensuring that a company's disclosure of accounting
information is in accordance with the rules and regulations set in order to protect the interests
of the stakeholders who rely on such information in forming their decisions.

Basic Concepts
1. Periodicity
 Means business is can be divided into periods
 The business should report financial statements every period
2. Entity
 Two different entity should be separated
 Owner’s cash shouldn’t be included to the business’ accounts
3. Going concern
 The company expects/ assumes that it will continue its operation in the future
4. Stable monetary unit
 Legal tender of the Philippines (Philippine Peso)
 Ignore inflation

Fundamental Principles – made so that everyone would have the same interpretation of a financial statement
1. Consistency – should use the same accounting method
2. Revenue Recognition – recorded as revenue when delivered or rendered, even though you didn’t receive
the cash yet
3. Expense Recognition – recorded as expense when used or incurred, even though you already paid in cash
4. Adequate Disclosure – disclose all relevant information
5. Materiality – determine if it is significant enough to affect decision
6. Objectivity – should be based on the most reliable data
7. Historical cost – recorded at their actual cost

Luca Pacioli
- Father of Double Entry Accounting
- “Frequent Accounting makes for long friendship”
- “Sa bawat binibigay, may natatanggap. Sa bawat natatanggap, may ibibigay.”

Accounting Equation
 Assets (A) = Liabilities (L) + Equity (E)
To have assets, it should be financed with debt (liabilities) or investment (equity)

Elements of Financial Statements

1. Asset – present economic resource controlled by the entity as a result of past events. It has a potential to
produce economic benefits
2. Liability – present obligations of entity
3. Equity – residual interest in the assets after deducting liabilities
4. Income – increases in assets, or decreases in liabilities, that result in increases in equity
5. Expenses – decreases in assets, or increases in liabilities, that result in decreases in equity. It is done to gain
profit.

Double Entry System

Basic Account Titles

Assets:
Current – expected to be realized, used or sold within 12 months
– holds an asset for purpose of trading (ex. Inventory)
– cash and cash equivalent
1. Cash – any medium of exchange that a bank will accept for deposit at face value
2. Accounts Receivable – claims against customer arising from sales on credit or account
3. Notes Receivable – written pledge that the customer will pay on a certain date. It may be a non-current
asset
4. Prepaid Expense – expenses paid in advance
2 methods:
Asset Method Expense Method
-not yet incurred Ex.
Ex. Rent Expense 100
Prepaid Expense 100 Cash 100
Cash 100

Non-current
– more than one year; not current asset
1. Property, Plant & Equipment (PPE) – tangible assets that can be used more than one period. It only uses
Asset Method.
Depreciation Expense – expense reducing the value of PPE
Ex. Accumulated Depreciation 10
Equipment 100
Depreciation Expense 10
–Accumulated Depreciation (10)

Equipment net 90
 Capital Expenditures Revenue Expenditures
Requires cash outflow
Non-current assets Expenses
Used more than 1 year Used for the current year
Expensed over period Expensed in the current
period
2. Intangible Property – identifiable, non-monetary without physical substance

Liabilities:
Current – expected to be settled or pain within 1 year
1. Accounts Payable – reverse of accounts receivable; money you owed to vendors
2. Notes Payable – written pledge by the entity to pay the other party a specified amount of money on a fixed
date
3. Accrued Liabilities:
Unpaid Expenses/ Accrued Expenses – expenses incurred but not yet paid
Unearned Revenues/ Deferred Revenues – receives payment before providing its customers with good/
services
Non-Current
1. Bonds Payable – business organization often obtain substantial sums of money from lenders to finance the
acquisition of equipment and other needed assets.

Issuer Holder

Bond

Money

Borrower Lender