I. Accounting.

It is an art of recording, classifying, 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.

Elements of Financial Statements:

1. Assets – denote things of value that are owned and used by the enterprise in its
operations.
Current Assets – refer to all assets that are expected to be realized, sold
or consumed within the enterprise’s normal operating cycle or 12
months.
Non-Current Assets – all other assets not classified as current.

2. Liabilities – denote financial obligations of the business to its creditors.

Current Liabilities – financial obligations of the enterprise which are
expected to be settled in the normal course of the operating cycle
or within one year from the balance sheet date.

Non-Current Liabilities – financial long-term obligations of the

enterprise which are due and payable for more than one year.

3. Owner’s Equity or Capital – the amount of money or value of property put by the
proprietor into the business to start with its operations.

4. Income or Revenue – gross inflow of economic benefits during the period arising
in the course of ordinary activities of an enterprise when these inflows result
in increase in equity, other than those relating to contributions from owners.

5. Expenses – gross outflow of economic benefits during the period arising in the
course of ordinary activities of an enterprise when those outflow result in
decrease in equity, other than those relating to distribution to owners.

II. BASIC ACCOUNTING EQUATION : A = L + O.E.

EXPANDED ACCOUNTING EQUATION: A = L + 0.E. - W + I - E

III. Account Titles = are identification or brief description of items that fall to the

same kind, class or nature.

STATEMENT OF FINANCIAL POSITION OR BALANCE SHEET ACCOUNTS

ASSETS

Current Assets

Cash – the account title to describe money, either in paper or in coins and
money substitutes like check, postal money orders, bank drafts and
treasury warrants.

Cash on Hand = when cash is within the premise of the business

Cash in Bank = when cash is deposited in the bank

Cash Equivalents = short-term, highly liquid instruments that are convertible

into cash.

Petty Cash Fund = money placed and set aside for petty or small expenses.

Notes Receivable = is a promissory note that is received by the business from

the customer arising from rendering of services, sale of merchandise, etc.

Accounts Receivable = amounts collectible arising from services rendered to a

customer or client on credit or sale of goods to customers on account.

Estimated Uncollectible Accounts or Allowance for Bad Debts = an asset

offset or a contra-asset accounts. It provides for possible losses from
uncollected accounts. It is shown as a deduction from the Accounts
Receivable. The difference between accounts receivable and the related
estimated uncollectible accounts is called Estimated Realizable Value.

Accrued Income = the amount of income earned but not yet collected.

Advances to Employees = amounts collectible from employees for allowing

them to make cash advances which are deductible against their salaries or
wages.

Inventories = these are assets which are (1) held for sale in the ordinary
course of business; (2) in the process of production for such sale; or (3)
in the form of materials or suppliers to be consumed in the production
process or in the rendering of services.
 Prepaid Expenses = expenses that are paid in advance but are not yet
incurred or have not yet expired such as Prepaid Rental, Prepaid
Insurance, Prepaid Interest, Prepaid Advertising.

Unused Supplies = cost of stationery and other supplies purchased for use but
are left on hand and still unused. The account title should be specified as
to Unused Office Supplies if intended for the office, Unused Shop
Supplies if intended for the shop.

Non-Current Assets

Property and Equipment = tangible assets which are held by an enterprise for
use in production or supply of goods and services, for rental to others, or
for administrative purposes, and which are expected to be used during
more than one period.

Land = the site where the building used as office or store is constructed. Land is
not subject to depreciation because it is expected to be useful to business
enterprise for indefinite period of time.

Building = a finished construction owned by the business where operations and

transactions took place.

Equipment = includes calculators, typewriters, adding machines, computers,

steel filing cabinets and the like. If these are used in the office, the
account title is Office Equipment and if used in the store, Store
Equipment. Trucks, jeeps, vans, automobiles and other kinds of motor
vehicles are used exclusively for delivering goods, the account title is
Delivery Equipment.

Furniture & Fixtures = includes chairs, tables, counters, display cases and the
like. If these are used in the office, the account title is Office Furniture
and Fixtures and if these are used in store, the account title is Store
Furniture & Fixtures.

Accumulated Depreciation = an asset offset or contra-asset account. This is

called a Valuation Account which is shown as a deduction from property
and equipment.

Intangible Assets = these are identifiable non-monetary assets without

physical existence. Examples are patients, copyright, franchise,
trademarks, etc.
 LIABILITIES

Current Liabilities = financial obligations of the enterprise which are (a) expected to
be settled in the normal course of the operating cycle; (b) due to be
settled within one year from the balance sheet date.

Accounts Payable = financial obligation of an enterprise that constitutes an

oral or verbal promise to pay.

Notes Payable (short-term) = same as Accounts Payable in nature but only

the obligation is evidenced by a promissory note. The enterprise is the
one who issued the note.

Accrued Expenses = these are expenses incurred by the enterprise but are not
yet paid. This normally occurs when the accounting period ended, such as
rent, salaries, interest, taxes payable, etc.

Pre-collected or Unearned Income = an income collected or received in

advance and is not yet considered as earned.

Non-current Liabilities =are financial long term obligations of the enterprise which
are due and payable for more than one year.

Notes Payable (long-term) = requires payment for more than a year.

Mortgage Payable =a financial obligation of the enterprise which requires a

fixed or tangible property to be pledged as a collateral to ensure
payment.

OWNER’S EQUITY OR CAPITAL

The owner’s capital be given a title by indicating the name, with the word capital
written after the name which is separated by a “comma”.

Juan dela Cruz, Capital

Owner’s Withdrawal for personal use:

Juan dela Cruz, Drawing or Juan dela Cruz, Personal

Income & Expense Summary = this is a temporary account created at the end of
the accounting period where Income and Expenses are temporarily closed to the
account.
 INCOME STATEMENT ACCOUNTS
( Temporary Accounts )

Income or Revenue = gross inflow of economic benefits during the period arising in
the course of ordinary activities of an enterprise when those inflows result
in increase in equity, other than those relating to contributions from
owners.

Service Income =this is the account title used for all types of Income derived
from rendering of services.

Professional Income =the account title generally used by professionals for

income earned from the practice of their profession or may be specified
as Accounting or Auditing Fees Income for Accountants, Legal Fees
Income for Lawyers. Dental Fees Income for Dentists, Medical Fees
Income for Doctors, etc.

Rental Income = for income earned on buildings, space or other properties

owned and rented out by the business as the main line of its activity.

Interest Income = for income received by the business arising from an

amount of money borrowed by a customer and is usually covered by a
promissory note.

Expenses = gross outflow of economic benefits during the period arising in the course
of ordinary activities of an enterprise when those outflow result in
decrease in equity, other than those relating to distribution to owners.

Profit (Loss) = the excess of revenues over expenses is called “Profit”. If expenses
exceed the revenues, it is called a “Loss”.

Interest Expense = an expense incurred from borrowed money.

Rent Expense = for the amount paid or incurred for use of property, usually
premises.

Repairs and Maintenance = for expenses incurred in repairing or servicing

the buildings, machineries, vehicles, equipment, etc., which are owned by
the business.

Stationery and Office Supplies Expense = the stationery, envelopes, clips,

fasteners, etc., used in the office will bear the account title as Office
Supplies; if use in the store, Store Supplies or another title may be
used to describe the kind of supplies used.
Salaries Expense =for compensation given to employees of a business. It may
be specified as Office Salaries, Salesmen’s Salaries, etc.

Uncollectible Accounts = for the anticipated loss that the business may incur
arising from uncollectible accounts.

Depreciation Expense = for the portion of the cost of property and equipment
or fixed assets that has expired based on rational and systematic
allocation procedure.

Amortization Expense = the expired or expense portion of an intangible

asset.

Taxes and Licenses = for the amount paid for business permits, licenses and
other government dues except the Income Tax paid which is not
allowable by law as a deduction.

Insurance Expense =account title for the expired portion of the insurance
premium paid.

Utilities Expense = the account title for telephone, light and water bills.

Gas & Oil =the account title for gasoline, diesoline, lubricants, grease, fluids,
lube oils, etc. for use by company vehicles.

Miscellaneous Expense = any amount paid as expense which is not significant

enough to warrant a particular classification.
 THE T-ACCOUNT

The T-account is an accounting device used to summarized the effect of changes

in Assets, Liabilities and Owner’s equity. It is commonly called T-account
because it resembles a capital letter “T”

ACCOUNT TITLE

Left-Hand side Right-Hand side

Or Or
Debit side Credit side
Is for Is for
VALUE RECEIVED VALUE PARTED WITH
DR. CR.

Debit entry = the amount entered on the left-hand side of the account.
Credit entry= the amount entered on the right-hand side of the account.
Debit total = the total of the debit amounts or the debit entries of an account.
Credit total = the total of the credit amounts or credit entries of an account.

Account balance = the difference between the debit total and credit total of an
Account.
Debit balance = if the total of the debit side exceeds the total of the credit side.
Credit balance = if the total of the credit side exceeds the total of the debit side.
In-balance or
closed account = if the debit total equals with that of the credit total.

The term debit means “left” and credit means “right”. The left will always equal
to the right.
VALUE RECEIVED = VALUE PARTED WITH
DEBIT (DR.) = CREDIT (CR.)
The amount of value received will always equal with that of the amount of the
value parted with.
Example: Bought a delivery car for cash, P600,000.
Value received : Delivery Equipment
Value parted with: Cash
RULES OF DEBIT AND CREDIT:

We debit to: We credit to:

Rule 1: Increase in Asset decrease in asset

Rule 2: Decrease in liability increase in liability
Rule 3: Decrease I n owner’s equity increase in owner’s equity
Rule 4: Increase in drawing decrease in drawing
Rule 5: Decrease I n Income increase in income
Rule 6: Increase in Expenses decrease in Expenses

DR. CR.

A = L + O.E. - D + I - E

RULE 1: ASSETS
DEBIT (DR.) CREDIT (CR.)
INCREASE DECREASE

RULE 2: LIABILITIES
DEBIT (DR.) CREDIT (CR.)
DECREASE INCREASE

RULE 3: OWNER’S EQUITY

DEBIT (DR.) CREDIT (CR.)
DECREASE INCREASE
RULE 4: DRAWING
DEBIT (DR.) CREDIT (CR.)
INCREASE DECREASE

RULE 5: INCOME
DEBIT (DR.) CREDIT (CR.)
DECREASE INCREASE

RULE 6: EXPENSES
DEBIT (DR.) CREDIT (CR.)
INCREASE DECREASE

Normal Balance Note:

Assets Debit The words “Debit” (Dr.)and “Credit”

Liabilities Credit ( Cr.) came from the Latin words

Owner’s Equity Credit “debere” and “Credere”. The term

Drawing Debit debit means “left” and credit means

Income Credit “right”.

Expenses Debit

ADE = Debit

LOI = Credit