FUNDAMENTALS OF ACCOUNTING (Part 1)

What is ACCOUNTING? Business transactions and events having

financial character are expressed in terms
-understood as the language of business of money
Accounting as defined by American  Information is useless if they
Institute of Certified Public Accountants cannot be interpreted and
(AICPA) understood
“Accounting is the art of recording, Communicating
classifying and summarizing in a
significant manner and in terms of money,  Financial data => stakeholders
transactions and events which are, in part at
least of a financial character, and Users of financial statements
interpreting the results thereof.”
1. Primary Users (OIL)
Accounting is an ART  Parties whom general purpose
financial reports are primarily
-It requires the use of skills and creative directed
judgment. a. Existing and potential
investors
- It is considered a science but not an exact
- are concerned with the risk
science since the rules and principles are
inherent in and return
constantly changing.
provided by their
PHASES of Accounting (RCS) investments.
b. Creditors and other creditors
Recording - are interested in
information which enables
 Process in which transactions are them to determine whether
recorded in the books of original their loans, interest thereon
entries (i.e., Journal Books) and other amounts owing to
them will be paid when due.
Classifying

 Transactions or entries of one

nature are grouped together under 2. Other Users
one head of account  Are users of financial
 Transactions recorded in information. They are parties that
‘Journal’ or ‘Subsidiary Books’ may find the general-purpose
are classified or posted in the financial reports useful, but the
LEDGER reports are not directed to them
primarily.
Summarizing a. Employees
- Are interested in information
 Presenting the classified data in about the stability and
the form that is understandable profitability of the entity.
and useful to users of accounting b. Customers
information (preparation of trial - have an interest in information
balance to financial statements) about the continuance of an entity
especially when they have a long-

1 | P a g e “If you fail under pressure, your strength is too small.” -Proverbs
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 FUNDAMENTALS OF ACCOUNTING (Part 1)

term involvement with or Posting to the ledger

dependent on the entity.
c. Government and their - Also known as the Books of
agencies Final Entry, the ledger is a
- are interested in the allocation collection of accounts that shows
of resources and therefore the the changes made to each account
activities of the entity. as a result of past transactions,
d. Public and their current balances
- financial statements may assist
Unadjusted Trial Balance
the public by providing
information about the trend and - A trial balance is prepared to
the range of its activities. test the equality of the debits and
credits. All account balances are
Accounting Process
extracted from the ledger and
- Identifying and analyzing arranged in one report. (Total
transactions and events debits should be equal to total
- Recording in the journals credits.)
- Posting to the ledger - When errors are discovered,
- Unadjusted trial balance correcting entries are made to
- Adjusting entries rectify them or reverse their
- Adjusted trial balance effect. Take note however that
- Financial statements the purpose of a trial balance is
- Closing entries only test the equality of total
- Post-closing entries debits and total credits and not to
- Reversing entries (optional) determine the correctness of
- accounting records.

Identifying and Analyzing Business Adjusting entries

transactions
- Adjusting entries are prepared
- Not all business transactions and as an application of the accrual
events are entered into the basis of accounting.
accounting system
- They are prepared to update the
Recording in the journals accounts before they are
summarized in the financial
- Transactions are recorded using statements.
double-entry bookkeeping system
- They are recorded in the journal - Adjusting entries are made for
entries containing at least two accrual of income, accrual of
accounts (one debit and one expenses, deferrals (income
credit) method or liability method),
- Transaction are recorded in prepayments (asset method or
expense method), depreciation,
chronological order and as they
and allowances.
occur
- Journals are known as Books of Adjusted trial balance
Original Entry

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

- An adjusted trial balance may temporary accounts. Real or

be prepared after adjusting permanent accounts, i.e. balance
entries are made and before the sheet accounts, are not closed.
financial statements are prepared.
This is to test if the debits are Post-Closing Trial Balance
equal to credits after adjusting
- In the accounting cycle, the
entries are made.
last step is to prepare a post-
Financial statements closing trial balance. It is
prepared to test the equality of
- When the accounts are already debits and credits after closing
up-to-date and equality between entries are made. Since
the debits and credits have been temporary accounts are already
tested, the financial statements closed at this point, the post-
can now be prepared. The closing trial balance contains real
financial statements are the end- accounts only.
products of an accounting
system. Reversing Entries: (Optional)

- A complete set of financial - Reversing entries are optional.

statements is made up of: (1) They are prepared at the
Statement of Comprehensive beginning of the new accounting
Income (Income Statement and period to facilitate a smoother
Other Comprehensive Income), and more consistent recording
(2) Statement of Changes in process.
Equity, (3) Statement of
- In this step, the adjusting
Financial Position or Balance
entries made for accrual of
Sheet, (4) Statement of Cash
income, accrual of expenses,
Flows, and (5) Notes to Financial
deferrals under the income
Statements.
method, and prepayments under
Closing entries the expense method are simply
reversed.
- 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

3 | P a g e “If you fail under pressure, your strength is too small.” -Proverbs
24:10