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Accounting- art of recording, classifying,

Government Accounting- checks those

summarising in a significant manner and in terms of

submitted in the government

money, transactions and events, which are in part,

Accounting Education- must be CPA

at least, of financial character and interpreting the

International Accounting- transactions dealing

results. Language of Business

with international trade

Four Phases of Accounting

Social Accounting- measurement of social

1. Recording- bookkeeping; business transactions

costs (e.g. measurement of traffic patterns for

are recorded systematically and chronologically

in the proper accounting books.
Single-entry bookkeeping- shows only the debit

the most efficient use of traffic funds)

Business Organisation
1. Ownership

OR credit of each transaction

Single or sole proprietorship- owned by one

Double-entry bookkeeping- reflects two-fold


effects of business transactions. Has debit and

Partnership- two or more persons; partners


agree on capital contributions, management of

2. Classifying- items are sorted and grouped

firm and distribution of profits and losses

3. Summarizing- data recorded are

Corporation- not less than five; organized by

summarized through financial statements

4. Interpreting- interpretation on the financial
Fields of Accounting
1. Public Accounting- professional service of CPA
Auditing- examines, tests and checks the
accuracy of the reports
Management Advisory Services- includes

operation of law

Nature of Business
Service Concern- rendering of services to the
Trading or Merchandising- buying and selling of
Manufacturing Concern- turns raw materials to
finished products

design, installation, and improvements of firms

Business is always assumed to be distinct and

general accounting system

separate from its owner

Tax services- preparation and filing of income

tax returns
2. Private Accounting- accounting job done in
private business enterprise
General Accounting- recording transactions
and preparing financial statements
Cost Accounting- determining, controlling costs

Transaction- data recorded in accounting books

External Transaction- activities involves
enterprise and another enterprise
Internal Transaction- activities within the
Generally Accepted Accounting Principles

particularly those in producing a product or



Entity Concept- own being of the company

Budgeting- provides management a plan for

future operations
Internal Auditing- check the records prepared
and maintained in each department or branch

different from the owner

Going Concern- assumption that the business
will run on long-term

Measurement and Unit of Measure-

Non-Current Assets

- Tangible Assets- Property, Plant,

measurement- anything that is entered in the

book of the company should be quantified and


- Intangible Assets- Long-Term

unit of measure- value on the book of accounts

should have currency
Periodicity- Accounting period should be divided


Liabilities- debts or obligations of the business


Current or Short Term- due for

Historical Cost- Record the value of an asset at

payment within a short period of time

- Accounts Payable- indebtedness arising

its acquisition cost (original value of the asset)

Revenue Recognition- you recognise the

from purchase of goods services

- Notes Payable- short-term indebtedness

expense once it is incurred even though not yet


with promissory note

- Accrued Expenses- expenses already

Matching Principle- cost of product should be

recorded in the year it was incurred

incurred but not yet paid

- Unearned Income- payments for

Disclosure- if there are anything highly stackable

to the stockholders; financial statements footnote

undelivered goods or services not yet

Estimates/ Judgments- not everything can be

rendered are received

Capital- owners equity or investment

computed (e.g. estimate for allowance of doubtful

Assets = Liabilities + Proprietorship


Equity- right, claim or interest of a person over the

Materiality- of high significance (payable 1B to

one company)
Consistency- same accounting policy from year
to year

Liability- claim in the assets
Proprietorship- owners interest in the business
T-Account- simple form of account; simpler form of

Conservatism- you do not overstate your


receivables and income; you do not understate

Account- accounting devise used to summarize

your payables

the increases and decreases in the liability, asset

Accounting Elements or Values

Current Assets- regular operation of the
business; can be converted to cash within
a short period of time

- Cash
- Receivables- collectible from customer
- Inventories- items of tangible personal

- Prepaid Expense- paid before they are

used or consumed

and proprietorship
Debit To:

Credit To:

1. Increase in Asset

1. Decrease in Asset

2. Decrease in Liabilty

2. Decrease in Liability

3. Decrease in
Proprietorship due to:

Increase in
Proprietorship due to:

a. withdrawal of assets
by owner

a. investment by owner

b. increase in expenses b. decrease in

and losses
expenses and losses
c. decrease in income

c. increase in income

Real Accounts- Permanent accounts; accounts


found in balance sheet (balance are carried over to

Salaries Payable- amount due to employees

the next acct. year)

Proprietorship Titles

Nominal Accounts- Temporary accounts;

Owners Capital- amount of capital contribution

accounts found in income statement (closed or put

to zero balance at the end of acct. year)
Chart of Accounts- list of account titles used by

of owner
Owners Drawing- amount withdrawn by owner
from asset

the business

Income Titles

Asset Titles

Sales- total sales

Cash- cash on hand or cash in bank

Professional Fee Income- amount earned by

Receivable- collectible from customer with

promissory note
Accounts Receivable- claims from customers
Allowance for Bad Debts- contra-asset;
deducted from A/R
Merchandise Inventory- Goods purchased to be
Interest Receivable- Interest earned but not yet
Unused Supplies- office use supplies but not yet
Prepaid Insurance- already paid insurance
Furnitures and Fixtures- tables, chairs,
counters and others used by business in its
Equipment- typewriters, calculators and others
Delivery Equipment- used for transporting
Accumulated Depreciation- valuation account
that reduces the total cost of a fixed asset;

Rent Income- amount of rental earned
Service Income- amount of income from
Interest Income- amount earned from lending
Expense Titles
Cost of Sales/ Cost of Goods Sold- cost of
goods when purchased; real value
Advertising Expense- expense incurred to
promote the product
Supplies Expense- Amount of supplies used
Taxes- duties incurred
Utilities Expense- amount of light and water
Repairs and Maintenance- expenses from
Bad Debts- estimated amount of losses from
Depreciation Expense- allocated cost of fixed
asset in current period

contra-asset; total amount of depreciation

Accounting Period or Fiscal Period- segment of


time which statements are prepared. Length of


acct. period depends on nature of business


(annual, semi-annual, quarterly, monthly)

Liability Titles

Accounting Cycle- successive steps starting with

Notes Payable- amount due to creditors with

the recording of transactions in the books of

promissory note
Accounts Payable- amount due to creditors
Interest Payable- interest incurred but not yet

accounts and ending with post- closing trial balance


2. Trial Balance of Totals- Total debit and credit

1. Journalizing

Need for Adjusting Entries- recognizes income

2. Posting

and expenses that should be included in the

3. Preparation of Trial Balance

accounting period

4. Adjusting Entries

6 Accounts that should be Adjusted

5. Preparation of Worksheet

Allowance for Bad Debts

6. Preparation of Financial Statement

2 Methods in Recognizing Bad Debt Losses

7. Closing Entries

1. Direct Write-off Method

8. Reversing Entries

Original Entry

Adjusting Entry

Journalizing- first step in accounting cycle;

A/R xxx


process of recording business transactions in




2. Allowance Method - yearly provision; GAAP

Journal- book of original entry; book of accounts

Accounts Receivable

where business transactions are recorded for the

Less: Allowance for Bad Debts

first time

= Net Realizable Value (NRV)

2 kinds:

Bad Debt Expensexxx

1. Special journals
cash receipts journal

Allowance for Bad Debtsxxx

To record allowance for bad debts

cash payments journal

[Bad Debt Expense- Income Statement; Part of

sales journal

Operating Expense and Allowance of Bad Debts-

purchase journal

Balance Sheet; contra-assets]

2. General Journal- simplest form of journal

Ways to Determine Allowance for Bad Debts

2 types:

1. % of Sales

1. Simple Journal Entry- contains only one

200,000> 5% uncollectible (from past sales)

debit and credit accounts

2. Compound Journal Entry- either one debit
and two or more credits

200,000 X .5 = 10,000
12/31 Bad Debt Expense 10,000
Allowance for Bad Debts 10,000

Posting- Book of Final Entry; Process of

To record allowance for bad debts

transferring records from journal to ledger

based on 5% of sales

Trial Balance- list of accounts with open balances

2. % of Accounts Receivables

in general ledger; proves equality of debit and

1,000,000 > 10% of outstanding A/R


12/31 Bad Debt Expense 100,000

2 Types:
1. Trial Balance of Balances- accounts with
open balances
Debit balance- debit total > credit total
Credit balance- credit total > debit total
Zero balance/ Closed account- credit total = debit

Allowance for Bad Debt 100,000

To record allowance for bad debts based
on 10% outstanding A/R

Recognition of Prepaid Expenses

3. Aging of Receivables
1- 30










1. Asset Method- Debit an asset acct.


50,000 150k

2 Methods

and up

Example: Oct. 1 Paid 10,000 for a 10-month


30,000 total:

Accumulated Depreciation for Fixed Assets

advertisement fee
Oct. 1, 2014 Dec. 31, 2014
10/1 Prepaid Advertising 10,000
To record 10 mos. advr. payment

Cost of Asset

10,000/ 10 mos. = 1,000 per month

Less: Accumulated Depreciation

Prepaid Account

= Net Book Value (NBV)

AJE 12/31 Depreciation Expense Bldg xxx

Oct. 1- 10,000

Dec. 31- 3,000 (for 3

mos Oct-Dec)

Accumulated Depreciation bldg xxx

To record depreciation of bldg for
the year 2014

Dec. 31- 7,000

AJE 12/31 Advertising Expense 3,000

[Depreciation Expense- Income Statement; Part of

Prepaid Advertising 3,000

Operating Expense and Acc. Dep.- Balance Sheet;

To record advr. exp. from Oct. to

contra-asset of fixed asset]


Computation for Depreciation

2. Expense Method- Debit a credit acct.

1. Straight-line Method

10/1 Advertising Expense 10,000

Depreciation = Cost Salvage or Scrap Value/


established life in years

To record payment of advertising

Equipment was purchased for 100,000 with an

Advertising Expense

east. useful life of 5 years

Depr.= 100,000/ 5 = 20,000/yr

Oct. 1- 10,000

AJE 12/31 Depreciation Expense Eqpt. 20,000

Dec. 31- 3,000

Accumulated Depreciation 20,000

To record dep. of eqpt. for the year

Dec. 31- 7,000

12/31 Prepaid Advertising 7,000

Advertising Expense 7,000


To record remaining prepaid advertising

year 1

year 2

year 3

Deferred/ Unearned Income

Depr. Exp- 20,000

Acc. Dep- 20,000



Example: Oct. 1 Received rental payment of 7,000

Eqpt (100,000)
Less: Acc. Dep



NBV= 80,000

NBV= 60,000

NBV= 40,000

for a 9 month rental of your office space

2 Methods
1. Liability Method- income already received but

Year 1 20,000 per yr (6/12) = 10,000 [bought on

June (6) of 12 mos]

not yet earned

10/1 Cash 7,000
Deferred/Unearned Rent 7,000
To record receipt of payment for 9
month rent of office space

12/31 Deferred/Unearned Rent 2,333.33
Rent Income 2,333.33
To record used prepaid rent
Deferred Rent Income
Oct. 1- 7,000

Dec.31- 4,666.67

Dec. 31- 2.333.33

2. Income Method
10/31 Cash 7,000
Rent Income 7,000
To record receipt of payment for rent
12/31 Rent Income 4,666.67
Deferred/ Unearned Rent 4,666.6
To record remaining prepaid rent

Accrued Expenses
Oct.1 Issued 120-day promissory note amounting
to 200,000 with 10% interest
12/31 Accrued Interest Expense 5,000
Accrued Interest Payable 5,000
To record accrued interest
[Acc. Int. Expense- Income Statement and Acc. Int.
Payable- Balance Sheet]

Accrued Income
Oct.1 Received a 120-day promissory note
amounting to 200,000 with 10% interest
Oct.1 Jan. 31 (200,000 and interest)
Interest = Prt
= (200,000)(.1)(90/360)
= 5,000
12/31 Interest Receivable 5,000
Accrued Interest Income 5,000
To record accrued interest for a 120-day
promissory note
[Interest Receivable- Balance Sheet and Acc. Int.
Income- Income Statement]