FUNDAMENTAL
S OF
ACCOUNTING
Summer 2025
FORMS OF BUSINESS ORGANIZATION
Sole proprietorship
Has a single owner called “proprietor”
Owner receives all the profit, absorbs all the losses and is solely responsible for
all debts
In accounting POV, the sole proprietorship is distinct from its proprietor
FORMS OF BUSINESS ORGANIZATION
Partnership
Article 1767. By the contract of partnership two or more persons bind
themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves.
Two or more persons may also form a partnership for the exercise of a profession
(General Professional Partnership)
Common indicators:
The partnership name shall contain the word "Company" or "Co.". For limited
partnership, the word "Limited" or "Ltd." shall be included.
SGV and Co.
Google LLC
FORMS OF BUSINESS ORGANIZATION
Corporation
"An artificial being created by operation of law, having the right of succession
and the powers, attributes, and properties expressly authorized by law or
incident to its existence." (Section 2, Revised Corporation Code)
Owned by its stockholders/shareholders
Separate legal entity
MICRO, SMALL, MEDIUM ENTERPRISES (MSME)
Micro Enterprises:
Asset Size: Not more than PhP3,000,000 (excluding the land on which the
business entity's office, plant, and equipment are situated).
Number of Employees: 1 to 9 employees.
Small Enterprises:
Asset Size: From PhP3,000,001 to PhP15,000,000.
Number of Employees: 10 to 99 employees.
Medium Enterprises:
Asset Size: From PhP15,000,001 to PhP100,000,000.
Number of Employees: 100 to 199 employees.
BASIC PRINCIPLES
Objectivity Principles – accounting records should be based on the most
reliable data
Historical cost – acquired assets should be recorded at their actual cost
and not at what management thinks they are worth
Revenue recognition principle – revenue is recognized in the
accounting period when goods are delivered or services are rendered or
performed.
Expense recognition principle – expenses should be recognized in the
accounting period in which the goods and services are used up to produce
revenue and not when the entity pays for those goods and services.
Adequate disclosure – all relevant information that would affect user’s
understanding and decision should be disclosed
ELEMENTS OF A FINANCIAL STATEMENT
Asset
Liability
Equity
Income
Expenses
ACCOUNTING EQUATION
DOUBLE ENTRY BOOKKEEPING
ACCOUNTING EVENTS AND TRANSACTIONS
An economic occurrence that causes changes in an enterprise's assets,
liabilities, and/or equity.
Events may be internal actions, such 'as the use of equipment for the
production of goods or services.
It can also be an external event, such as the purchase of raw materials
from a supplier.
A transaction is a particular kind of event that involves the transfer of
something of value between two entities.
Examples of transactions include acquiring assets from owner(s), borrowing
funds from creditors, and purchasing or selling goods and services.
TYPES AND EFFECTS OF TRANSACTIONS
Sources of Assets (SA) – An asset account increases and a
corresponding liability or equity account increases. Example: Purchase of
supplies on account.
Exchange of Assets (EA) – One asset account increases and the other
decreases. Example: Acquired equipment for cash
Use of Assets (UA) – An asset account decreases and a corresponding
liability or equity account decreases. Example: Settled accounts payable
Exchange of claims – One claims account increases and another claims
account decreases. Example: Received utilities bill but did not pay.
1. Increase in Assets = Increase in Liabilities (SA)
2. Increase in Assets = Increase in Owner's Equity (SA)
3. Increase in one Asset = Decrease in another Asset (EA)
4. Decrease in Assets = Decrease in Liabilities (UA)
5. Decrease in Assets = Decrease in Owner's Equity (UA)
6. Increase in Liabilities = Decrease in Owner's Equity (EC).
7. Increase in Owner's Equity = Decrease in Liabilities (EC)
8. Increase in one Liability = Decrease in another Liability (EC)
9. Increase in one Owner's Equity = Decrease in another Owner's Equity (EC)
TYPICAL ACCOUNT TITLES USED (SFP)
Assets
Current assets
Cash
Accounts receivable
Notes receivable
Inventories
Prepaid expenses
Non-current assets
Property, Plant and Equipment
Accumulated depreciation
Intangible asset
TYPICAL ACCOUNT TITLES USED (SFP)
Libilities
Current liabilities
Accounts payable
Notes payable
Accrued liabilities
Unearned revenues
Current portion of long term debt
Non-current liabilities
Mortgage payable
Bonds payable
TYPICAL ACCOUNT TITLES USED (SFP)
Owner’s Equity (Sole Prop)
Capital
Withdrawals
Income Summary
TYPICAL ACCOUNT TITLES USED (IS)
Income
Service income
Sales
Expenses
Cost of sales
Salaries expense
Utilities expense
Rent expense
Supplies expense
Insurance expense
Depreciation expense
Uncollectible account expense
Interest expense
ACCOUNTING FOR BUSINESS TRANSACTIONS
Illustration. Emerita Modesto decided to establish a sole proprietorship
business and named it as Modesto Graphics Design. Modesto is a graphic
designer who has extensive experience in drawing, layout, typography,
lettering, diagramming and photography. She possesses the talent to visually
communicate to a target audience with the right combination of words, images
and ideas.
Modesto Graphics Design can do the layout and production design of
newspapers, magazines, corporate reports, journals and other publications. The
entity can create promotional displays; marketing brochures for services and
products; packaging design for products; and distinctive logos for businesses.
She also enters into agreements with clients for the progressive development
and maintenance of their web sites. Her initial revenue stream comes from web
designing.
The owner, Emerita Modesto, makes the business decisions. The assets of the
company belong to Modesto and all obligations of the business are her
responsibility. Any income that the entity earns belongs solely to Modesto.
1 MONTH TRANSACTION
During March 2020, the first month of operations, various financial
transactions took place. These transactions are described and analyzed as
follows:
Mar. 1 Modesto started her new business by depositing P350,000 in
a bank account in the name of Modesto Graphics Design at BPI Poblacion
Branch.
Mar. 5 Computer equipment costing P145,000 is acquired on cash
basis.
Mar. 9 Computer supplies in the amount of 25,000 are purchased
on account.
Mar. 11 Modesto collected 88,000 in cash for designing interactive
web sites.
Mar. 16 Modesto paid 18,000 to MVP Bills express, a one-stop bills
payment service
Mar. 17 The entity has service agreements with several Netpreneurs
to maintain and update their web sites weekly. Modesto billed these clients
1 MONTH TRANSACTION
Mar. 19 Modesto made a partial payment of P17,000 for the Mar. 9
purchase on account.
Mar. 20 Checks totaling P25,000 were received from clients for
billings dated Mar. 17.
Mar. 27 Alessandra Publishing submitted a bill to Modesto for P8,000
worth of newspaper advertisements for this month. Modesto will pay this
bill next month.
Mar. 31 Modesto paid her assistant designer salaries of P15,000 for
the month.
TRIAL BALANCE
LOCATING ERRORS
THE NEED FOR ADJUSTMENTS
To reflect in the accounts information on economic activities that have
occurred but have not yet been recorded.
Adjusting entries assign revenues to the period in which they are earned,
and expenses to the period in which they are incurred.
These entries are needed to measure properly the profit for the period, and
to bring related asset and liability accounts to correct balances for the
financial statements.
In short, adjustments are needed to ensure that the recognition and
derecognition principles are followed thus resulting to financial statements
reporting the effects of all transactions at the end of the period.
Examples of accounts that needs adjustment: Prepaid expenses, Unearned
revenues, Payables, Revenues, and Expenses.
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 a
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. subscriptions).
Note: Each adjusting entry affect a balance sheet account and income
statement account.
DEFERRALS AND ACCRUALS
Accrual is the recognition of "an expense already incurred but
unpaid", or "revenue earned but uncollected". This adjustment deals
with an amount unrecorded in any account; 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.
SAMPLE ADJUSTING ENTRIES
The records of Angela Corp. show the following information:
(a) Purchased a three-year insurance policy for P7,200 on September 1, 2020, and
recorded the premium payment in the asset account.
(b) Borrowed P60,000 on a 1-year, 12% note on July 1, 2020. Interest is payable at
maturity.
(c) Collected P8,400 on October 1, 2020, to cover six months' rent paid in advance,
and recorded the receipt in a liability account.
(d) The Allowance for Doubtful Accounts shows an unadjusted balance of P300
(debit) as of December 31, 2020. Based on an aging of receivables, it is
determined that the balance in the allowance account should be P1,775 at
December 31, 2020.
(e) Machinery purchased on January 1, 2020, for P300,000 is to be depreciated at
the rate of 20 percent per year. Prepare journal entries to record the above
transactions and adjust the books of Angela Corp. at December 31, 2020.
COMPLETE SET OF FINANCIAL STATEMENTS
Per revised PAS No. 1, a complete set of financial statements comprises:
A statement of financial position as at the end of the period;
A statement of financial performance for the period;
A statement of changes in equity for the period;
A statement of cash flows for the period;
Notes, comprising a summary of significant accounting policies and other
explanatory information; and
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 items in its financial statements.
STATEMENT OF FINANCIAL PERFORMANCE
(INCOME STATEMENT)
Natural Presentation
STATEMENT OF FINANCIAL PERFORMANCE
(INCOME STATEMENT)
Functional Presentation
STATEMENT OF CHANGES IN EQUITY
STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)
Report Form
STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)
Account Form
STATEMENT OF CASH FLOWS
Direct Method
STATEMENT OF CASH FLOWS
Indirect Method
ELEMENTS OF CASH FLOW STATEMENT
Operating activities
Operating activities generally involve providing services, and producing and delivering
goods.
Cash flows from operating activities are generally the cash effects of transactions and other
events that enter into the determination of profit or loss.
This cash flow can be presented using either the direct or the indirect method.
Using the direct method, the entity's net cash provided by (used in) operating
activities is obtained by adding the individual operating cash inflows and then
subtracting the individual operating cash outflows.
The indirect method derives the net cash provided by (used in) operating activities
by adjusting profit for income and expense items not resulting from cash
transactions. The adjustment begins with profit followed by the addition of
expenses and charges (e.g. depreciation) that did not entail cash payments.
Then, increases in current assets and decreases in current liabilities
involved in the determination of profit but which did not actually increase or
decrease cash, are subtracted from profit. Finally, decreases in current assets
and increases in current liabilities are added to profit to obtain net cash
provided by (used in) operating activities.
CASH FROM OPERATING ACTIVITIES
Cash Inflows
• receipts from sale of goods and performance of
services
• receipts from royalties, fees, commissions and
other revenues
Cash Outflows
payments to suppliers of goods and services
payments to employees
payments for taxes
payments for interest expense
payments for other operating expenses
CASH FROM INVESTING ACTIVITIES
Investing activities include making and collecting loans; acquiring and
disposing of investments in debt or equity securities; and obtaining and
selling of property and equipment and other productive assets.
Cash Inflows
receipts from sale of property and equipment
receipts from sale of investments in debt or equity securities
receipts from collections on notes receivable
Cash Outflows
payments to acquire property and equipment payments to acquire debt or equity
securities
payments to make loans to others generally in the form of notes receivable
CASH FROM FINANCING ACTIVITIES
Include obtaining resources from owners and creditors
Cash Inflows
Receipts from investment by owners
Receipts from issuance of notes payable
Cash outflows
Payment to owners in the form of withdrawals
Payment to settle notes payable