ACCOUNTING

A financial information system that involves three basic activities:

1. Identifying

• Identification of the economic events relevant to the business

• Selecting the transactions which are financial or economic in nature

  • Applying the Entity Principle

• Personal transactions of the owner is not included

2. Recording

• A long process

• Parts:

  • Preparing the journal entries (Journalizing)

  • Transferring the entries from the journal to the ledger (Posting)

  • Grouping assets, liabilities, revenues, expenses, and equities (Classifying)

  • Prepare the Trial Balance (Summarizing)

3. Communicating

• By providing Financial Statements and Reports

• Analyzing and interpreting the data from these statements

• Income statement shows result of operation for the period

  • Income statement accounts are just temporary accounts, because at the end of the year, it will go back to zero

• Statement of Financial Position shows the financial status or condition

Users of Accounting Data

• Internal Users

  • Board of Directors, managers, etc.

  • People who plan, regulate, and operate the business

• External Users

  • Creditors (suppliers and bankers), Investors, Government regulatory bodies (BIR)

    • Outside organizations and individuals who want financial information on the country

THE ACCOUNTING EQUATION

• Basic Accounting Equation

  • ASSETS = LIABILITIES + OWNER’S EQUITY

    • Debits → assets

    • Credits → liabilities and equity

    • Expenses are debits, revenues are credits

• Expanded Accounting Equation

  • ASSETS = LIABILITIES + OWNER’S CAPITAL - OWNER’S DRAWING + REVENUE - EXPENSES

TRANSACTION ANALYSIS

Transaction 1: Cash Investment by Owner

• Increase in cash and increase in owner’s equity

Transaction 2: Purchase of equipment for cash

• Decrease in cash and increase in equipment

Transaction 3: Purchase of supplies using credit

• Increase in supplies and increase in accounts payable

Transaction 4: Services performed for cash

• Increase in cash and increase in service revenue

Transaction 5: Purchase of advertising expense on credit

• Increase in accounts payable and decrease in advertising expense

Transaction 6: Services performed for cash and credit

• Increase in cash and an increase in accounts receivable and increase in service revenue

Transaction 7: Payment of Expenses

• Decrease in Cash and increase in expenses

Transaction 8: Payment of accounts payable

• Decrease in cash and decrease in accounts payable

Transaction 9: Receipt of cash on account

• Increase in cash and decrease in accounts receivable

Transaction 10: Cash withdrawal by owner

• Decrease in assets and decrease in owner’s equity