FUNDAMENTALS OF ACCOUNTING BUSINESS AND MANAGEMENT 1

BNHS_SHS ( Self Learning Module)

Lesson 1 -- Accounting Introduction

Definition of Accounting
 Accounting is a service activity.
 Accounting is an information system that measures. Processes and communicates financial information
about an economic entity.
 Accounting is the process of identifying, measuring and communicating economic information to performed
judgements and decisions by users of the information.
 Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of
money, transactions and events.

Function of Accounting
Recording: Tracking financial transactions and creating a historical record of an organization's financial activities.
Measuring: Quantifying financial performance and position using standardized units (like currency).
Analyzing: Interpreting financial data to understand trends, assess profitability, and make informed decisions.
Communicating: Presenting financial information clearly and concisely to stakeholders through reports and
statements.

History of Accounting
Ancient Roots:
 Early Civilizations: Rudimentary accounting practices existed in ancient Mesopotamia, Egypt, and Greece.
These involved tracking assets, debts, and transactions using clay tablets, papyrus, and other materials.
 Double-Entry Bookkeeping: While the exact origin is debated, some historians credit the Italian merchant,
Luca Pacioli, with formalizing double-entry bookkeeping in the 15th century. This system, involving debits
and credits, revolutionized accounting by providing a more comprehensive and balanced view of financial
transactions.
Industrial Revolution and Beyond:
 Industrial Revolution: The growth of industry and commerce in the 18th and 19th centuries led to the
development of more sophisticated accounting practices, including cost accounting and financial reporting
standards.
 20th Century: The emergence of large corporations and the need for standardized financial reporting led to
the development of professional accounting bodies and the establishment of Generally Accepted Accounting
Principles (GAAP).
 Digital Revolution: The rise of computers and technology in the late 20th and early 21st centuries has
revolutionized accounting, allowing for faster, more efficient data processing, and the development of
sophisticated financial analysis tools.
Key Milestones:
 Luca Pacioli's "Summa de Arithmetica" (1494): This book formalized double-entry bookkeeping, a
fundamental principle of modern accounting.
 Establishment of Professional Accounting Bodies: Organizations like the American Institute of Certified
Public Accountants (AICPA) and the Institute of Chartered Accountants in England and Wales (ICAEW)
emerged to set standards and regulate the profession.
 Development of Generally Accepted Accounting Principles (GAAP): These standards provide a consistent
framework for financial reporting, ensuring comparability and transparency.
Branches of Accounting
1. Financial Accounting:
•Focus: Provides information to external stakeholders (investors, creditors, government agencies) about an
organization's financial performance and position.
2. Management Accounting:
•Focus: Provides information to internal managers for decision-making, planning, and control within an organization.
3. Government Accounting:
•Focus: Applies accounting principles to government entities, including federal, state, and local governments.
4. Auditing:
•Focus: Independently examines and verifies the accuracy and fairness of financial records and statements.
5. Tax Accounting:
•Focus: Deals with the tax implications of financial transactions and prepares tax returns for individuals and
organizations.
6. Cost Accounting:
•Focus: Tracks and analyzes the costs associated with producing goods or services, helping to improve efficiency and
profitability.
7. Accounting Education:
•Focus: Educates students about accounting principles, practices, and skills.

8. Accounting Research:
• Focus: Conducts research on accounting topics, exploring new theories, analyzing trends, and developing
innovative accounting practices.

Internal and External users of accounting information

External Users:
•Investors: Use financial information to make investment decisions (buy, sell, hold) and assess the profitability and
risk of a company.
•Creditors: (e.g., banks, suppliers) Use financial information to evaluate the creditworthiness of a company and
decide whether to lend money or extend credit.
•Government Agencies: (e.g., tax authorities, regulators) Use financial information to ensure compliance with laws
and regulations, collect taxes, and monitor economic activity.
•Customers: May use financial information to assess the stability and reliability of a supplier.
Internal Users:
•Management: Uses financial information for planning, decision-making, controlling operations, and evaluating
performance.
•Employees: May use financial information to understand the financial health of the company, assess job security,
and make decisions about their own finances.
•Board of Directors: Uses financial information to oversee management, monitor company performance, and make
strategic decisions.

Forms of Business Organization

1. Sole proprietorship, you’re the sole owner of the business.
2. A partnership is a non-incorporated business created between two or more people.
3. A corporation is a legal entity separate from its shareholders.

Activities in Business Organization

1. Financing Activities are transactions between a business and its lenders and owners to acquire or return
resources. In other words, financing activities fund the company, repay lenders, and provide owners with a
return on investment. Financing activities include: Issuing and repurchasing equity.
2. Investing Activities include purchases of physical assets, investments in securities, or the sale of securities or
assets. Investments can be made to generate income on their own, or they may be long-term investments in
the health or performance of the company.
3. Operating Activities are the daily activities of a company involved in producing and selling its product,
generating revenues, as well as general administrative and maintenance activities.

Accounting Concept and Principle

Accounting Concepts:
•Going Concern: Assumes that a business will continue operating in the foreseeable future.
•Business Entity: Separates the business's financial activities from the owner's personal finances
•Monetary Unit: Uses a single currency to measure and record financial transactions.
•Time Period: Divides the business's life into specific periods (e.g., monthly, quarterly, annually) for reporting
purposes.
•Matching Principle: Matches expenses with the revenue they generate in the same accounting period
•Accrual Accounting: Recognizes revenue and expenses when they are earned or incurred, regardless of when cash
is received or paid.
Accounting Principles:
•Historical Cost Principle: Records assets at their original cost
•Revenue Recognition Principle: Recognizes revenue when it is earned, regardless of when cash is received
•Expense Recognition Principle: Recognizes expenses when they are incurred, regardless of when cash is paid.
•Consistency Principle: Uses the same accounting methods from period to period to ensure comparability.
•Materiality Principle: Only records information that is significant enough to affect a user's decision-making.
•Full Disclosure Principle: Discloses all relevant information in financial statements to ensure transparency.

FIVE FUNDAMENTALS OF ACCOUNTING

- The elements of financial statements defined in the March 2018 Conceptual framework for Financial
Reporting (2018 Conceptual framework)
Elements Definition
Assets A present economic resource controlled by the entity as a result of past events. An
economic resource is a right that has the potential to produce economic benefits.
Liability A present obligation of the entity to transfer an economic resource as a result of past
events.
Equity The residual interest in the assets of the entity after deducting all its liabilities
Income Increase in assets, or decrease in liabilities, that result in increase in equity, other than
those relating to contributions from holders of equity claims
Expenses Decrease in assets, or increase in liabilities, that result in decreases in equity, other than
those relating to distributions to holder of equity claims.

The Account

The basic summary device of accounting is the “ACCOUNT”. A separate

account is maintained for each element that appears in the balance sheet
(assets, liabilities and equity) and in income statement (income and
expenses). Thus, an account may be defined as a detailed record of the
increases, decreases and balance of each element that appears in an entity’s
financial statements. The simplest for of the account is known as the “T”
account because of its similarity of the letter “T”. the account has three parts
as follow.
Lesson 2: The Accounting Equation
- The financial statement tells us how a business is performing. The
most basic tool of accounting is the ACCOUNTING EQUATION. This
equation presents the resources controlled by the enterprise, the
present obligations of the enterprise and the residual interest in
the assets. It states that assets must always equal liabilities and
owner’s equity. The basic accounting model is;

DEBITS AND CREDITS – the double- entry system

- Accounting is based on a double-entry system which means that the dual effect of a business transaction is
recorded. A debit side entry must have a corresponding credit side entry. For every transaction, there must
be one or more accounts debited and one or more accounts credited. Each transaction affects at least two
accounts. The total debit transaction must always equal the total credits.
- An account is debited when an account is entered on the left side of the account and credited when an
amount is entered on the right side.
- The account type determines how increases or decreases in it are recorded. Increases in assets are recorded
as debits (on the left side of the accounts) while decreases in assets are recorded as credits (on the right
side). Conversely, increases in liabilities and owner’s equity are recorded by credits and decreases are
entered as debits.
- The rules of debit and credit for income and expense accounts are based on
the relationship of these accounts to owner’s equity. Income increases
owner’s equity and expenses decreases owner’s equity. Hence, increases in
income are recorded as credits and decreases as debits. Increases in expenses
are recorded as debits and decreases as credits.
Normal balance of accounts
The normal balance account of any account refers to the side of the account-debit or credit- whereas
increase are recorded. Assets, owner’s withdrawal and expense account normally have a debit balances;
liability , owner’s equity and income accounts normally have a credit balances. This result occurs because
increases in an account are usual greater than or equal to decreases.
Typical account title used

Statement of financial position

CURRENT ASSETS NON-CURRENT ASSETS

Cash Property, plant and equipment
ASSETS- are should classified only
into two; CURRENT ASSETS and Cash equivalent Accumulated Depreciation
NON-CURRENT ASSETS. Notes Receivable Intangible Assets
Accounts Receivable
Inventories
Prepaid Expenses

LIABILITIES – are should classified only

CURRENT LIABILITIES NON-CURRENT LIABILITIES
into two; CURRENT LIABILITIES and NON-
Account payable Mortgage payable
CURRENT LIABILITIES
Notes payable Bonds payable
OWNER’S INCOME EXPENSES Accrued liabilities
EQUITY Unearned Revenues
Owner’s, Service Salaries or Current portion of long-term debt
Capital income wages
expense
Owner’s, Sales Telecomm
Withdrawa income unication,
ls electricity,
fuel and
water
expenses
Income Profession Rent
Summary al fee expense
Rent Supplies
income expense
Insurance
expense
Depreciatio
n expense
Uncollectib
le account
expense
Interest
expense

ACCOUNTING FOR BUSINESS TRANSACTION

- A business transaction is the occurrence of an event or a condition that affects financial position and can be
reliably recorded

Transaction Analysis (step 1) : Financial Transaction Worksheet

 - Every financial transaction can be analyzed or expressed in terms of its effect on the accounting equation.
The financial transactions will be analyzed by means of a financial transaction worksheet which is a form
used to analyzed increases and decreases in the assets, liabilities or owner’s equity of a business entity.

Lesson 3: ACCOUNTING CYCLE

THE ACCOUNTING CYCLE REFERS TO A SERIES OF SEQUENTIAL STEPS OR PROCEDURE PERFORMED TO

ACCOMPLISH THE ACCOUNTING PROCESS.

1. Identification of events to be recorded

2. Transactions are recorded in the Journal
3. Journal Entries are posted to the ledger
4. Preparation of a Trial Balance
5. Preparation of the Worksheet including adjusting entries
6. Preparation of the financial statement
7. Adjusting journal entries are journalized and posted
8. Closing journal entries are journalized and posted
9. Preparation of a posted-closing Trial Balance
10 Reversing journal entries are journalized and posted

General Journal – the book of original entry.

Ledger – a group of accounts. Used to classify and summarize transactions and to prepare data for basic financial
statements.
1. Permanent Accounts – (balance sheet) Assets, Liabilities and Owner’s Equity
2. Temporary Accounts - (Income statement) income & expenses or nominal accounts are used to gather
information for a particular accounting period.

Trial Balance – listing of all ledger accounts, in order, with their respective debit or credit balance.

THE JOURNAL (step 2)

- The journal is a chronological record of the entity’s transactions. A journal entry shows all the effects of a
business transaction in terms of debit and credits. Each transaction is initially recorded in a journal rather
than directly in the ledger.

FORMAT;
1. Date. The year or month are not rewritten for
every entry unless the year or month changes or
new page is needed.
2. Account title and explanation. The account to be
debited is entered at the extreme left of the first
line while the account to be credited is entered
slightly indented on the next line.
 3. P.R (posting reference). This will be used when the entries are posted.
4. Debit. The debit amount for each account is entered in this column
5. Credit. The credit amount for each is entered in this column.

Transaction are Journalized

Initial investment (Source of Assets)
Rent paid in Advance ( Exchange of Assets)
Note Issued for cash ( Source of Assets)
Service vehicle Acquired for Cash ( Exchange of Assets)
Insurance Premiums Paid ( Exchange of Assets)
Office Equipment Acquired on account ( Exchange and Source of Assets)
Supplies Purchased on Account ( Source of Assets)
Accounts Payable Partially Settled ( Use of assets)
Revenue Earned and Cash Collected ( Source of Assets)
Salaries paid (Use of Assets)
Unearned Revenue Collected ( Source of Assets)
Revenue Earned on Account ( Source of Assets)
Withdrawal of Cash by Owner ( Use of Assets)
Expenses Incurred but Unpaid ( Exchange of Claims)
Accounts Receivable Partially Collected ( Exchange of Assets)
Expenses Incurred and Paid ( Use of Assets)

Chart of Accounts
- A listing of all the accounts and their
account numbers in the ledger.

Posting ( step 3)
– transferring the amounts from the general journal to appropriate accounts in the ledger.

Trial Balance (step 4)

-Is a list of all accounts with their respective debit and credit balances.
Procedures;
1. List the account in numerical order.
2. Obtain the account balance of each account from the ledger and enter the debit balances in the debit
column and the credit balances in the credit column.
3. Add the debit and credit columns.
4. Compare the totals.

Adjusting the accounts (step 5)

- Accountants used adjusting entries to apply accrual accounting to transactions that cover more than one
accounting period. There are two general types of adjustments made at the end of the accounting period.
Two types of Adjustments
DEFERRALS AND ACCRUALS

Deferral is the postponement of the recognition of “an expense already paid but not yet incurred,” or of “revenue
already collected but not yet earned”. This adjustment deals with an amount already recorded in the balance sheet
account; the entry, in effect, decreases the balance sheet account and increases an income statement account.
Deferrals would be needed in two cases;
1. Allocating assets to expense to reflect expenses incurred during the accounting period (e.g. prepaid
insurance, supplies and depreciation).
2. Allocating revenues received in advance to revenue to reflect revenues earned during the accounting period
(e.g. subscription).

Accruals is the recognition of “an expense already incurred but unpaid”, or “revenue earned but uncollected”. This
adjustment deals with an amount unrecorded in any accounts; the entry, in effect, increases both a balance sheet
and an income statement account”.
Accruals would be required in two cases;
1. Accruing expenses to reflect expenses incurred during the accounting period that are unpaid and
unrecorded.
2. Accruing revenues to reflect revenues earned during the accounting period that are uncollected and
unrecorded.

Preparing Worksheet ( step 6)

- Accountants often use a worksheet to help transfer data from the unadjusted trial balance to the financial
statements. This multi-column document provides an efficient way to summarize the data for financial
statements.
Steps in preparation of worksheets
1. Enter the account balances in the unadjusted trial balance columns and total the amounts.
2. Enter the adjusting entries in the adjustments columns and total the amounts.
3. Compute each account’s adjusted balance by combining the unadjusted trial balance and the adjustments
figures. Enter the adjusted amounts in the adjusted trial balance.
A simple combination to observe when extending amounts from the trial balance to adjusted trial balance follows;
a. Add when the type of adjustment (debit or credit) is the same as the unadjusted balance.
b. Subtract when the type of adjustment (debit or credit) id different from the unadjusted balance.
4. Extend the asset, liability and owner’s equity amounts from the adjusted trial balance columns to the
balance sheet columns. Extend the income and expense amount to the income statement columns. Total
the statements columns.
5. Compute profit and loss as the different between total revenues and total expenses in the income
statement. Enter profit or loss as a balancing amount in the income statement and in the balance sheet, and
compute the final column totals.
Profit or Loss is equal to the difference between in the debit and credit columns of the income statement.
 Revenues (income statement credit column total) 71,700
Expenses (income statement debit column total) 36,700
Profit 35,000

Preparing the Financial Statement (step 7)

The financial statement are the means by which the information accumulated and processed in financial
accounting is periodically communicated to the users. Without accounting information embodied in the financial
statements, users may not be able to arrive at sound economic decisions.

Complete set of Financial Statements comprises;

1. A statement of financial position as at the end of the period;
2. A statement of financial performance for the period;
3. A statement of changes in equity for the period;
4. A statement of cash flows for the period;
5. Notes, comprising a summary of significant accounting policies and other explanatory information;
and
6. A statement of financial position as at the beginning of the earliest comparative period when an
entity applies an accounting policy retrospectively or makes a retrospective restatement of items in
its financial statements or when it reclassifies item in its financial statements.
In a nutshell, the statement of financial position (or balance sheet) lists all the assets, liabilities and equity of an
entity as at a specific date. the statement of financial performance (or income statement) presents a summary of the
revenues and expenses of an entity for a specific period.

INCOME STATEMENT STATEMENT OF CHANGES IN OWNER’S EQUITY

STATEMENT OF FINANCIAL POSITION