FAR CHAPTER 2

BASIC ACCOUNTING ELEMENTS

A,L,E (CAPITAL)

ASSETS

ARE PROPERTIES OR ECONOMIC RESOURCES OWNED BY THE BUSINESS

LIABILITY

AMOUNTS OWED BY THE BUSINESS

tangible assets

ASSETS THAT CAN BE SEEN AND TOUCHED (CASH, TRUCK, LAND, ETC

intangible assets.

no physical appearance (cannot be seen nor touched) but their values, sometimes are even higher than some of the tangible assets. (franchise, patent, trademark, copyright, goodwill, etc.)

Capital (Also called Owner's Equlty)

the owner's interest or claim in the assets of the business

FUNDAMENTAL ACCOUNTING EQUATION

ASSETS = LIABILITIES + CAPITAL

LEFT - derived from the word debtor

DEBIT (DR)

RIGHT - derived from the word creditor

CREDIT (CR)

T-ACCOUNT

• It is an accounting device that is used to summarize the changes in the accounting elements. It is called T account because of its T shape.

• his will be a convenient tool to analyze and record the effect of a transaction on the different accounting elements.

• "rules of addition and subtraction by position"

Drawing (Sometimes called Personal)

is the withdrawal made by the owner or partners which is not considered as a reduction ofcapital but rather an advanced distribution of profits.

Revenues (Also called Income)

• inflows ofassets resulting from the sale of goods or services. Revenues increase the owner's equity.

• Example - In a repair shop, the amount charged to the customer for repair service is the revenue or income.

Expenses

• outflows of assets resulting from cash spent or liability incurred in order to generate the revenue.

• Expenses decrease the owner's equity.

• Salaries of the employees, office supplies used, rent of the office space are examples of expenses.

NET PROFIT or NET INCOME

If the revenues earned are greater than the expenses incurred for a given accounting period, there is?

NET LOSS

if the expenses exceed the revenues, there is a TOOT will be subtracted fromthe owner's equity. leven

CHART OF ACCOUNTS

A list of account titles to be used in the recording

ACCOUNT

It is a grouping of similar items to reduce the number of items to be provided for in the recording process.

What will be recorded?

Only the business transactions and evenis affecting the business should be recorded.

Business Transaction

• is an economic activity that directly changes a business enterprise's financial condition or directly affects its result of operations.

• A transaction takes place when a business exchanges a thing or things of value for another.

• In a business transaction, there are two parties involved.

• Examples are buyer and seller, lessor and lessee, borrower and lender, debtor and creditor, mortgagor and mortgagee, etc.

Where are the business transactions recorded?

In the Books ofAccounts.

Book of Original Entry

the accounting book where the business transactions are first recorded hence the term "original entry".

JOURNAL

he book of original entry is called theThe

JOURNALIZING

The process of recording in the journal is called .

Book of Final Entry

the accounting book where the business transactions are finally recorded hence the term "final entry".

LEDGER

The book of final entry is called the

POSTING

The process of recording in the ledger is called

SINGLE ENTRY

If a journal entry has only one debit and one credit, it is called

COMPOUND ENTRY

If there are two or more debits or credits, it is called

Who will do the recording

This is the function of the bookkeeper.

Why must the transactions be recorded? .

It is a requirement by the BIR

How are the business transactions recorded?

• They are recorded first in the journal in a chronological manner (according to dates) in terms of DEBIT and CREDIT entries.

• The entry as recorded in the journal is called journal entry.

• The entry in the journal will then be transferred (recorded) in the general ledger

Debit DEF.

the value received by the business or what the business paid for

CREDIT DEF.

the value parted with or given up by the business or the source of the value received by the business.

general ledger

is called the book of final entry because this is where the business transactions, as originally recorded in the general journal, are finally recorded.

TRIAL BALANCE

• A TOOT is a listing of all the balances of the different accounts (assets, liabilities, capital, drawing, revenues and expenses), as of a given time.

• This is usually prepared at the end of each month.

trial balance of balances

• the traditional or conventional way of preparing the trial balance.

• Only the accounts with balances (whether debit or credit balance) are listed.

• Accounts with zero balances (the total of the debit amount is equal to the total of the credit amount) are not included or shown in the trial balance.

What are the two books of accounts?

1. BOOK OF ORIGINAL ENTRY

2. BOOK OF FINAL ENTRY

Is the exchange of goods or services between two parties.

An accounting device used to summarize the changes in the accounting values or elements.

T ACCOUNT

Is the book of final entry.

GENERAL LEDGER

A journal entry where there is only one debit and credit.A journal

SIMPLE ENTRY

A method of bookkeeping where the transactions are recorded in terms of debit and credit.

"Double Entry Method of Bookkeeping"

A method where the recording is done informallly without a debit or credit entry.

Single Entry Method of Bookkeeping"