FUNDAMENTALS OF ACCOUNTING (Part 1)

What is ACCOUNTING?
2. Other Users
-understood as the language of business ● Are users of financial information. They are parties that may
find the general purpose financial reports useful but the reports
Accounting as defined by American Institute of Certified Public
are not directed to them primarily.
Accountants (AICPA)
a. Employees
“Accounting is the art of recording, classifying and summarizing in a - Are interested in information about the stability and profitability of the
significant manner and in terms of money, transactions and events which entity.
are, in part at least of a financial character, and interpreting the results b. Customers
thereof.” - have an interest in information about the continuance of an entity
especially when they have a long-term involvement with or
Accounting is an ART dependent on the entity.
c. Government and their agencies
-It requires the use of skills and creative judgment.
- are interested in the allocation of resources and therefore the activities
- It is considered a science but not an exact science since the rules and of the entity.
principles are constantly changing. d. Public
- financial statements may assist the public by providing information
PHASES of Accounting (RCS) about the trend and the range of its activities.

Recording Accounting Process

● Process in which transactions are recorded in the books of - Identifying and analyzing transactions and events
original entries (i.e., Journal Books) - Recording in the journals
- Posting to the ledger
Classifying
- Unadjusted trial balance
● Transactions or entries of one nature are grouped together - Adjusting entries
under one head of account - Adjusted trial balance
● Transactions recorded in ‘Journal’ or ‘Subsidiary Books’ are - Financial statements
classified or posted in the LEDGER - Closing entries
- Post-closing entries
Summarizing
- Reversing entries (optional)
● Presenting the classified data in the form that is -
understandable and useful to users of accounting information
Identifying and Analyzing Business transactions
(preparation of trial balance to financial statements)
- Not all business transactions and events are entered into the
Business transactions and events having financial character are
accounting system
expressed in terms of money
Recording in the journals
● Information is useless if they cannot be interpreted and
understood - Transactions are recorded using double-entry bookkeeping
Communicating system
- They are recorded in the journal entries containing at least two
● Financial data => stakeholders accounts (one debit and one credit)
- Transaction are recorded in chronological order and as they
Users of financial statements occur
1. Primary Users (OIL) - Journals are known as Books of Original Entry
● Parties whom general purpose financial reports are primarily Posting to the ledger
directed
a. Existing and potential investors - Also known as the Books of Final Entry, the ledger is a
- are concerned with the risk inherent in and return provided by collection of accounts that shows the changes made to each
their investments. account as a result of past transactions, and their current
b. Creditors and other creditors balances
- are interested in information which enables them to determine
whether their loans, interest thereon and other amounts Unadjusted Trial Balance
owing to them will be paid when due.

1 | Page “If you fail under pressure, your strength is too small.” -Proverbs 24:10
 FUNDAMENTALS OF ACCOUNTING (Part 1)

- A trial balance is prepared to test the equality of the debits - In the accounting cycle, the last step is to prepare a post-
and credits. All account balances are extracted from the ledger closing trial balance. It is prepared to test the equality of debits
and arranged in one report. (Total debits should be equal to and credits after closing entries are made. Since temporary
total credits.) accounts are already closed at this point, the post-closing trial
balance contains real accounts only.
- When errors are discovered, correcting entries are made to
rectify them or reverse their effect. Take note however that the Reversing Entries: (Optional)
purpose of a trial balance is only test the equality of total
debits and total credits and not to determine the correctness of - Reversing entries are optional. They are prepared at the
accounting records. beginning of the new accounting period to facilitate a
smoother and more consistent recording process.
Adjusting entries
- In this step, the adjusting entries made for accrual of
- Adjusting entries are prepared as an application of the income, accrual of expenses, deferrals under the income
accrual basis of accounting. method, and prepayments under the expense method are
simply reversed.
- They are prepared to update the accounts before they are
summarized in the financial statements.

- Adjusting entries are made for accrual of income, accrual of

expenses, deferrals (income method or liability method),
prepayments (asset method or expense method), depreciation,
and allowances.

Adjusted trial balance

- An adjusted trial balance may be prepared after adjusting

entries are made and before the financial statements are
prepared. This is to test if the debits are equal to credits after
adjusting entries are made.

Financial statements

- When the accounts are already up-to-date and equality

between the debits and credits have been tested, the financial
statements can now be prepared. The financial statements are
the end-products of an accounting system.

- A complete set of financial statements is made up of: (1)

Statement of Comprehensive Income (Income Statement and
Other Comprehensive Income), (2) Statement of Changes in
Equity, (3) Statement of Financial Position or Balance Sheet,
(4) Statement of Cash Flows, and (5) Notes to Financial
Statements.

Closing entries

- Temporary or nominal accounts, i.e. income statement

accounts, are closed to prepare the system for the next
accounting period. Temporary accounts include income,
expense, and withdrawal accounts. These items are measured
periodically.

- The accounts are closed to a summary account (usually,

Income Summary) and then closed further to the appropriate
capital account. Take note that closing entries are made only
for temporary accounts. Real or permanent accounts, i.e.
balance sheet accounts, are not closed.

Post-Closing Trial Balance

2 | Page “If you fail under pressure, your strength is too small.” -Proverbs 24:10