FUNDAMENTALS OF ACCOUNTING

LECTURE NOTES NO. 1

Fundamentals of Accounting and Accounting Cycle
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Accounting is the art of recording, classifying and summarizing, in a significant manner and in terms of
money, transactions and events, which are, in part at least of a financial character and interpreting the
results thereof.
 The process of identifying, measuring and communicating economic information to permit
informed judgments and decisions by users of the information

Fundamental Assumptions Basic Principles (GAAP – generally accepted

 Accrual Basis accounting principles)
 Going Concern  Adequate disclosure
 Consistency principle
Fundamental concepts  Historical cost
 Entity concept  Revenue recognition principle
 Periodicity concept  Objectivity principle
 Stable monetary unit concept  Materiality
 Expense recognition principle

Elements of Financial Statements

Statement of Financial Position (Balance Sheet)

Assets - a resource owned and controlled by the enterprise as a result of past events and for which future economic
benefits are expected to flow in the enterprise.

Liability – present obligation of the enterprise arising from past events, the settlement of which shall result in an
outflow from the enterprise of resources embodying economic benefits. Settlement may be: (1) payment of cash (2)
transfer of other assets (3) provision of services (4) replacement of obligation with another obligation (5) conversion
of obligation to equity

Equity or Capital – residual interest in the assets of the enterprise after deducting all the liabilities. It is also called net
worth.

Statement of Financial Performance (Income Statement)

Income (Revenues) - increases in economic benefits during the accounting period and encompasses both revenues
and gains.
Revenues - arise in the course of the ordinary activities of an enterprise.
Gains – represent other items that meet the definition of income and may, or may not, arise in the course of the
ordinary activities of the enterprise.
 Expenses – decreases in economic benefits during the accounting period and encompasses losses.
Losses - represent other items that meet the definition of expense and may, or may not, arise in the course of
the ordinary activities of the enterprise

An account is a summary device of accounting for each element in the financial statement; a detailed record of increases,
decreases and balance of each element in the financial statement. The simplest form of account is the T-account. Page |
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Debit (dr.) side or Credit (cr.) side pr
Left side Right side

The Accounting Equation

ASSETS = LIABILITIES + OWNER’S EQUITY (CAPITAL)

Liabilities = Assets - Owner’s Equity/Capital
Owner’s Equity/Capital = Assets - Liabilities

The Accounting Equation, when expanded becomes:

OWNER’S EQUITY (CAPITAL)

ASSETS = LIABILITIES + (initial investment + additional investment - withdrawals

+ revenues – expenses)

+ Net income (loss)

Normal Balance of Accounts

Debit (dr.) side or Credit (cr.) side pr

Left side Right side

ASSETS LIABILITIES
EXPENSES CAPITAL
LOSSES REVENUES
GAINS/PROFIT

Effect of Transactions on Accounting Elements

Debit (dr.) side or Credit (cr.) side pr

Left side Right side

Increases in ASSETS Decreases in ASSETS

EXPENSES EXPENSES
LOSSES LOSSES

Decreases in LIABILITIES Increases in LIABILITIES

CAPITAL CAPITAL
REVENUES REVENUES
GAINS/PROFIT GAINS/PROFIT
CLASSIFICATION OF COMMONLY USED ACCOUNTS
ASSETS LIABILITIES
Current Assets Non-current/Fixed Assets Current Liabilities
I Nventories/investments B uilding N otes payable
C ash E quipment A ccounts payable
A ccounts F urniture & Fixture I Nterest payable
receivable/(Allowance for Page |
doubtful accounts)* 3
Accrued income
N otes receivable L And/Long-term (A Ccrued expenses)
Investments
M arketable securities (A ccumulated U tilities payable
depreciation)**
O ffice Supplies/other assets T ransportation vehicle, Other
Tools P ayables
P repaid Expenses ** also referred to as allowance for Non-current/long-term Liabilities
*also referred to as allowance for depreciation Any L ong-term payables
bad debts or allowance for B onds payable
uncollectible accounts M ortgage payable
EXPENSES
OWNER’S EQUITY T axes and licenses M iscellaneous expense
C apital accounts R ent expense I nsurance expense
D rawing accounts U tilities expense C omission expense
REVENUES S alaries expense R epresentation expense
P rofessional fees T ransportation expense/ O ther expenses
delivery/freight out
R ent income IN come tax expense B ad debts/doubtful
accounts expense
I nterest income D. epreciatiion expense E xchange loss
S ervice income/Sales I. nterest expense
M Iscellaneous income/Other Against
income S upplies expense
A mortization expense
R epairs and maintenance
S elling expense
Accounting Cycle

1. Identifying recordable transactions and events

2. Documentation of recordable transactions and events
3. Recording in general journal
4. Posting to general ledger
5. Preparation of trial balance
6. Preparation of working paper and adjustments (Accruals , Prepayments, Pre-collections, Depreciation/Amortization,
Uncollectible/Doubtful accounts, Ending Inventory)
7. Preparation of financial statements
8. Recording of adjusting entries in the GJ
9. Recording of closing entries in the GJ
10. Posting of adjusting and closing entries in the GL
11. Preparation of post-closing trial balance
12. Reversing entries for the next accounting period (accruals, expense method of prepayments and income method of
precollections)