VILLAFLORES COLLEGE

Fundamentals of
Accountancy, Business and
Management 1
Grade 11
Geraldine Regalado
SY 2021-2022 First Semester
 BACKGROUND
The Accountancy, Business and Management (ABM) strand marries creativity,
mathematical application, and business sense to prepare the best business professionals of
tomorrow.
Taking ABM subjects in senior high school will introduce students to the concepts of
financial management, business management, corporate operations, and accounting.
Students who select this route will be prepared for colourful careers as managers,
accountants, and business owners.
This is designed to prepare students who are inclined to take college degrees related to
business and management programs. Taking ABM in senior high school will be about the
basic principles of the various functional areas of business, such as marketing, finance and
accounting, information and technology, and entrepreneurship.
As ABM students, they will also engage in business simulation and be exposed to the
different types of decisions business managers face regularly. It is our goal to challenge
our students to be articulate, have strong analytical skills, and build teamwork skills to
become successful business managers or owners in the future.

COURSES UNDER ABM STRAND

• Bachelor of Science in Accountancy – If you have an eye for accuracy and are
looking to impact the businesses you partner with by keeping track of their finances,
then BS Accountancy might be perfect for you! BS Accountancy graduates are not
limited to jobs as accountants and bookkeepers but are leading fulfilling careers in
various positions befitting their interests as budget analysts, internal auditors, and
even chief financial officers.
• Bachelor of Science in Business Administration – Do you see yourself making
waves in an industry and climbing the corporate ladder? This course will equip you
with the business sense and corporate know-how that you need to become a savvy
professional in your workplace. If you see yourself having jobs such as manager,
administrator, market data analyst, statistician, or even becoming a business-owner
yourself, you may want to consider BS Business Administration for your program!
 INTRODUCTION OF ACCOUNTING
Have you ever made a decision in your life? What are the things that you consider
before making a decision?
From what colour of shirt you are going to wear, how much money you are going to
spend for the day, whether you are going to pack a lunch or not, which tricycle you are
going to ride on, whether you are going to read or write or play music or not. These are the
typical things that happen when decision making is necessary.
In every situation where there are several options or alternatives to choose from,
making a decision is indeed an undertaking that needs careful and intelligent assessment of
all the choices. This thing is needed in order to lessen the risks if it cannot be avoided.
Careful decision making will help you to choose or assess which one is best or not.
As a student in the ABM strand, it is imperative to learn how to make business
decisions. The following are the typical business decisions that every business individual
or organisation makes:
1. Whether or not they will invest in the company.
2. Whether they will continue their operations or shut down.
3. Whether they hire more people or not.
4. Whether or not they will expand their business.
5. Whether they will rent building or construct their own.
Before a business person can make a decision, he needs reliable information about the
alternatives to determine which one is best for his objectives. And here comes the role of
accounting in business. Business needs accounting output, which will serve as the basis in
order for them to make an informed decision. The accounting output refers to the financial
statements which comprise of the following: Statement of Financial Position, Statement of
Income, Statement of Changes in Equity, and Cash Flow Statement Notes of the Financial
Statements.
LESSON 1 - DEFINITION OF ACCOUNTING
The American Institute of Certified Public Accountants (AICPA) defines accounting
as the art of recording, classifying, and summarising in a significant manner and in terms
of money, transactions and events that are, in part, of financial character and interpreting
the results thereof.
Accounting requires creative judgment and skill. For the output of accounting to be
done, it requires discipline and training. These are the reasons why accounting is
considered as art. Accounting can be considered a science because it is a body of
knowledge. But it cannot be considered as an exact science because the rules and
principles of accounting are constantly changing and improving.
The accounting process will undergo a series of steps in order to make the financial
statements. It will begin with identifying of business transactions and events, recording
them in books of accounts, classifying and summarising these accounts which are
presented in terms of money, in part at least of financial character, and finally interpreting
the results of the accounting report to the intended users.
“Accounting is the process of identifying, recording, and communicating economic
events of an organisation to interested users.” (Weygendt, J. et al.)
Identifying involves selecting economic events that are relevant to a particular
business transaction. The economic events of an organisation are referred to as
transactions.
Examples of economic events or transactions – in a bakery business:
• sales of bread and other bakery products
• purchases of flour that will be used for baking
• purchase of trucks needed to deliver the products
Business transactions take place once a business venture starts operations. These are
the interactions between businesses and other stakeholders. Stakeholders include, but are
not limited to, customers, suppliers, investors, and government offices. Business
transactions have to be identified, measured, and documented through an accounting
process.
Recording is the act of listing down accountable events. Accounting records
transactions in the accounting journals, which chronologically list transactions and events
that affect the business. Journal is often called the book of original entry (entries).
Communicating is reporting the results to users of financial information. This involves
the preparation of accounting reports called financial statements, which are submitted or
made available to users of financial information for their decision-making.

TYPES OF FINANCIAL STATEMENTS

• STATEMENT OF FINANCIAL POSITION – This type of financial statement is also
called a balance sheet. This presents the entity’s assets, liabilities, and capital at a
given point in time. The data in this statement provides information about the entity’s
financial condition or position.
• STATEMENT OF COMPREHENSIVE INCOME – This financial statement is also
known as the profit and loss statement. It shows the results of the company’s
performance as results of operations at a particular period of time. Also called an
income statement, this type of financial statement indicates whether the entity has
gained or lost from the operations by detailing its income and expenses.
• STATEMENT OF CHANGES IN EQUITY – Throughout the organisation’s
existence, its capital changes as it receives investments or as it experiences
withdrawals or investments, generates income, or incurs losses. These activities are all
recorded in the statement of changes in equity.
• STATEMENT OF CASH FLOWS – the statement of cash flows provides information
about the entity’s cash flows and outflows resulting from its operating, investing, and
financing activities. Thus, it shows the balance of cash flow from the beginning until
the end of the given period.
• NOTES ON THE FINANCIAL STATEMENTS – shows additional disclosure of
certain information which is useful to users of the financial statements in
understanding the information in the financial statement.
LESSON 2 - HISTORY OF ACCOUNTING
HISTORY AND DEVELOPMENT OF ACCOUNTING
Accounting is as old as civilization itself. It has evolved in response to various social
and economic needs of men. Accounting started as a simple recording of repetitive
exchanges. The history of accounting is often seen as indistinguishable from the history
of finance and business.
The Cradle of Civilization around 36000 B.C., recordkeeping was already common
from Mesopotamia, China and India to Central and South America. The oldest evidence
of this practice was the "clay tablet" of Mesopotamia which dealt with commercial
transaction at the time such as listing of accounts receivable and accounts payable.
In 14th Century - Double-Entry Bookkeeping. The most important event in
accounting history is generally considered to be the dissemination of double entry
bookkeeping by Luca Pacioli (The Father of Accounting) in 14th century Italy. Pacioli
was much revered in his day, and was a friend and contemporary of Leonardo da Vinci.
The Italian of the 14th to 16th centuries are widely acknowledged as the fathers of
modern accounting and were the first to commonly use Arabic numerals, rather than
Roman, for tracking business accounts. Luca Pacioli wrote Summa de Arithmetica, the
first book publish that contained a detailed chapter on double-entry bookkeeping.
The origin of hardcore accounting can be traced from the Renaissance period. Italian
monk and mathematician Frater Luca Bartolomes Pacioli wrote Summa de Arithmetica,
Geometria, Proportioni et Proportonality. Pacioli was born in Borgo San Selpocro and
regarded as the Father of Modern Accounting.
In the Philippines, the first income tax lax law was enacted in the year 1913. In 1967,
the Accountancy Law in the Philippines was revised and passed under Republic Act No.
5166. The Accountancy Law in the Philippines was revised and passed under Presidential
Decree No. 692 in the year 1975.
The Philippines started transitioning from applying American accounting standards to
applying IAS in the year 1997. In the year 2005, the Philippines became fully compliant
with IFRS. In 2001, the International Accounting Standard Board succeeded the
International Accounting Standard Committee.
LESSON 3: WHAT IS AN ACCOUNTANT?
An accountant is a business professional responsible for processing and tracking
financial data within a company. Accountants store and analyze financial information.
They actively track all funds entering and exiting a company, making sure everything is
documented and accurate. They may work individually or as a team depending on the size
and needs of a business.
Accountants are involved in daily monetary functions like payroll and invoicing. They
also plan for future business decisions based on financial reports and analysis by creating
budgets. An accountant works closely with management to evaluate business functions.
They may suggest changes to employee workflow to increase productivity or point out a
way to make a process more cost-effective.
An accountant directs funds for employee use and wages. They make sure invoices
are sent and paid. If a question arises about financial resources, an accountant works to
find the answer. Their overall goal is to see that more money is coming in than going out
of a company's funds. Accountants who earn a Certified Public Accountant (CPA)
certification can conduct audits of businesses or act as a consultant and trainer to others in
their field.
ACCOUNTING COMPETENCIES
Accounting competencies are the technical competencies of the profession that add
value to business and contribute to a prosperous society.

• Risk Assessment, Analysis and Management

Assess, analyze and manage risk using appropriate frameworks, professional
judgment and scepticism for effective business management.

• Measurement Analysis and Interpretation

Identify and apply appropriate, reliable, and verifiable measurements to analyze data
for a given purpose and intended use.
• Reporting
Identify the appropriate content and communicate clearly and objectively to the
intended audience, the work performed and the results as governed by professional
standards, required by law or dictated by the business environment.
• Research
Identify, access and apply relevant professional frameworks, standards, and guidance,
as well as other information for analysis and to make informed decisions.

• Systems and Process Management

Identify the appropriate businesses processes and system(s), related frameworks and
controls to assist in the design and use of systems for efficient and effective
operations.

• Technology and Tools

Identify and utilize relevant technology and tools to analyze data, efficiently and
effectively perform assigned tasks as well as support other competencies.
CORE VALUES OF ACCOUNTANTS
Core Values
A responsive and globally relevant professional organization committed to
service excellence towards its member and stakeholders.
 Professional Excellence
Committed to excellence in all aspects of our professional practice.

 Integrity
Advocate the truth and conduct ourselves at all times with honesty,
uprightness and adherence to sound moral principles, thereby gaining the respect of the
public.
 Commitment
Bind ourselves to uphold these ideals to ensure the accomplishment of
PICPA's Vision and Mission.
 Partnership and Teamwork
Uphold a strong bond of unity, working in the spirit of harmony and
commonality.
 Advocacy for Quality
Strictly adhere to the code of professional conduct adopted by PICPA to
ensure highest spiritual, moral and ethical standards.
 New Technologies and Innovativeness
Seek and apply new ideas to improve performance. We continuously promote
creativity, flexibility and resourcefulness amidst constant change.
 Social Responsibility
Commit ourselves to a strong, active and devoted sense of duty to society.
FUNDAMENTAL PRINCIPLES OF ACCOUNTING
Following are the basic fundamental principles of Accounting:
• Monetary Unit
Accounting needs all values to be recorded in terms of a single monetary unit. It
cannot account for goods like the barter system. Assigning values to goods and items
therefore becomes a problem since it is subjective. However, accounting has prescribed
rules to deal with the same.
• Going Concern
A company is said to have an eternal existence. Once it is formed, the only way to end
it is by dissolution. It does not die a natural death like humans do. Hence, accountants
assume the going concern principle. This principle implies that the firm will continue to do
its business as usual till the end of the next accounting period and that there is no
information to the contrary. Because of the going concern principle, organizations can
function on credit, account for accounts receivables and payables which intend to receive
or pay in the future and charge depreciation assuming that the machine will be used for
many years.
In case, the management has information that the operations will be suspended in the
near future, normal accounting ceases. A special type of accounting meant for dissolution
purpose is used.

• Principle Of Conservatism
Accountants are said to be very conservative by nature. They want to hope for the best
and be prepared for the worst. This is displayed in the rules that they have created for their
profession. One of the central tenets of accounting is the principle of conservatism.
According to this principle, when there is doubt about the amount of expected inflows and
outflows, the organization must state the lowest possible revenue and the highest possible
costs.
This can be seen in the fact that accountants value inventory at lower of cost or
market price. However, such conservatism helps the company be prepared for any
forthcoming financial crises.
• Cost Principle
Closely related to the principle of conservatism is the cost principle. The cost
principle advocates that companies should list everything on the financial statements at the
cost price. Usually assets like land and building, gold, etc appreciate. However, the
accountants will not allow this appreciation to be reflected on the financial statements of
the company till it is realized.
Accountants believe that the market value of anything is just an opinion. Accountants
cannot account on the basis of opinions because there are many of them. The selling price
of something is a fact since someone has paid for it and the same can be verified. Hence
accounting works on cost principle and therefore on facts.
LESSON 4 - FUNCTIONS OF ACCOUNTING IN BUSINESS
Accounting has a vital role in the success of the business in terms of decision making.
The most basic function of accounting in business is to record business transactions that
provide relevant financial information to the businessmen and the stakeholders.
The functions of accounting in business can be attributed to the three fundamental
objective of an information system that performs the following tasks:
1. To fulfil the stewardship function of the management or owners;
2. To help interested users to come up with informed decisions; and
3. To support daily operations of the business.
In this case, accounting is to be considered as the language of business. It serves as a
means of communication between business and interested users either internal or external.
NATURE OF ACCOUNTING
The basic features of accounting are as follows:
• Accounting is a service activity. Accounting provides assistance to decision
makers by providing them financial reports that will guide them in coming up
with sound decisions.
• Accounting is a process. A process refers to the method of performing any
specific job step by step according to the objectives or targets. Accounting is
identified as a process, as it performs the specific task of collecting, processing
and communicating financial information. In doing so, it follows some definite
steps like the collection, recording, classification, summarization, finalization,
and reporting of financial data.
• Accounting is both an art and a discipline. Accounting is the art of recording,
classifying, summarizing and finalizing financial data. The word “art” refers to
the way something is performed. It is behavioural knowledge involving a
certain creativity and skill to help us attain some specific objectives.
Accounting is a systematic method consisting of definite techniques and its
proper application requires skill and expertise. So by nature, accounting is an
art. And because it follows certain standards and professional ethics, it is also a
discipline.
• Accounting deals with financial information and transactions. Accounting
records financial transactions and data, classifies these and finalizes their
results given for a specified period of time, as needed by their users. At every
stage, from start to finish, accounting deals with financial information and
financial information only. It does not deal with non-monetary or non-financial
aspects of such information.
• Accounting is an information system. Accounting is recognized and
characterized as storehouse of information. As a service function, it collects
processes and communicated financial information of any entity. This
discipline of knowledge has evolved to meet the need for financial information
as required by various interested groups.
 Accounting tells you whether or not you’re making a profit, what your cash flow is,
what the current value of your company’s assets and liabilities is, and which parts of your
business are actually making money.
FUNCTIONS OF ACCOUNTING IN BUSINESS
Management, employees, clients and investors are all interested in how well a
business handles its money. Accounting is the part of a business that is responsible for the
company's finances. Understanding the function of accounting will help you manage and
analyze monetary resources. In this article, we explain the functions of accounting and the
types of work performed by an accountant.
FUNTIONS OF ACCOUNTING
All companies use accounting to report, track, execute and predict financial
transactions. The main functions of accounting are to store and analyze financial
information and oversee monetary transactions. Accounting is used to prepare financial
statements for a company's employees, leaders, and investors. Accounting also functions
to ensure the payment of funds into and out of a company.
Accounting creates a fiscal history for any company. It is used to track expenditures
from business operations as well as a company's profits. It can also be utilized to predict
financial success and the future needs of a company to create budgets and take advantage
of new growth opportunities. Accountants use this information to prepare financial
statements used by business professionals and government officials.
The functions of accounting in a business include the following:
• Business Costs and Revenue
An important function of accounting is to track business spending in relation to
income. Just like managing your personal finances, accountants record expenses and
payments to keep an accurate and up to date record of the company's funds.
• Accounts Receivable
Proper accounting ensures the company receives any payment they are due. An
accountant tracks the profits of a business to ensure that revenue is continually flowing
into their bank account.
• Accounts Payable
Accounts payable functions to pay the company's bills. They ensure the business pays
for any money they owe and check that it is a legitimate charge. They also help set the due
dates for payments so a company can best manage their own funds based on when money
is coming in.
• Payroll
Accountants deduct employee wages from company funds for paychecks. They are
also in charge of managing employee benefits if they are paid out of an employee's income.
Accounting may help decide how employees are compensated for their work based on
how wages affect the company's profits.
• Financial Reporting
Accountants use digital systems to store and calculate data. If a company is publicly
owned, it must also prepare both quarterly and yearly reports for shareholders detailing the
assets, profits and losses of the business. Privately-owned companies also utilize fiscal
reports like these to understand the financial resources of their firm.
• Financial Analysis
Companies use accounting to perform regular analysis of how well the business is
performing. Either an outside consultant or internal personnel will look at the business as a
whole to determine what functions can be made more efficient based on financial
outcomes. They may suggest changes to employee departments or streamlined costs for
production to reduce waste.
• Taxes and Compliance
A business must comply with government laws and standards from the Internal
Revenue Service and the Securities and Exchange Commission, among other regulations.
States also enforce monetary guidelines for businesses. Accounting is responsible for
reporting the financial workings of the company and making sure they conform to all local
and national laws and guidelines.
• Budgeting
Accounting is in charge of setting a company's budget. They use financial data from
the past as well as projections for future income to compose annual budgets. Accountants
also prepare budgets for individual departments and special projects within the company.
• Fraud
Accounting makes sure money is not mismanaged or wasted within the company.
They seek to protect the company's assets from internal and external fraud, specifically
through cyber security. An accountant may specialize in securing digital financial data or
hire an outside business to protect the company's funds. They also scrutinize financial data
to make sure an employee is not mismanaging or embezzling funds for company or
personal gain.
DIFFERENCE BETWEEN ACCOUNTING AND BOOKKEEPING
Accounting is broader as it includes the bookkeeping function. While bookkeeping,
on the other hand, is just confined with the recording of monetary transactions which is
part of the accounting process. Bookkeeping is responsible for the recording of financial
transactions whereas accounting is responsible for interpreting, classifying, analyzing,
reporting, and summarizing the financial documents.
LESSON 5: CHART OF ACCOUNTS
ASSETS
An asset is a resource owned or controlled by an individual, corporation, or
government with the expectation that it will generate a positive economic value. Common
types of assets include current, non-current, physical, intangible, operating, and non-
operating. Correctly identifying and classifying the types of assets is critical to the survival
of a company, specifically its solvency and associated risks.
Classification of Assets
Assets are generally classified in three ways:
• Convertibility – classifying assets based on how easy it is to convert them into cash.
• Physical Existence – classifying assets based on their physical existence (in other
words, tangible vs. intangible assets).
• Usage – classifying assets based on their business operation usage/purpose.
Convertibility
 Current Assets – Current assets are assets that can be easily converted into cash
and cash equivalents (typically within a year). Current assets are also termed liquid
assets and examples of such are:
• Cash
• Cash equivalents
• Short-term deposits
• Accounts receivables
• Inventory
• Marketable securities
• Office supplies
 Fixed or Non-Current Assets – Non-current assets are assets that cannot be easily
and readily converted into cash and cash equivalents. Non-current assets are also
termed fixed assets, long-term assets, or hard assets. Examples of non-current or
fixed assets include:
• Land
• Building
• Machinery
• Equipment
• Patents – A patent is the granting of a property right by a sovereign
authority to an inventor. This grant provides the inventor exclusive rights to
the patented process, design, or invention for a designated period in
exchange for a comprehensive disclosure of the invention. They are a form
of incorporeal right.
• Trademarks - a symbol, word, or words legally registered or established
by use as representing a company or product.
Usage
 Operating Assets – Operating assets are assets that are required in the daily
operation of a business. In other words, operating assets are used to generate
revenue from a company’s core business activities. Examples of operating assets
include:
 • Cash
• Accounts receivable
• Inventory
• Building
• Machinery
• Equipment
• Patents
• Copyrights – A copyright is a collection of rights that automatically vest to
someone who creates an original work of authorship like a literary work,
song, movie or software. These rights include the right to reproduce the
work, to prepare derivative works, to distribute copies, and to perform and
display the work publicly.
• Goodwill – Goodwill typically reflects the value of intangible assets such
as a strong brand name, good customer relations, good employee relations
and any patents or proprietary technology.
 Non-Operating Assets – Non-operating assets are assets that are not required for
daily business operations but can still generate revenue. Examples of non-operating
assets include:
• Short-term investments
• Marketable securities
• Vacant land
• Interest income from a fixed deposit
Physical Existence
 Tangible Assets – Tangible assets are assets with physical existence (we can touch,
feel, and see them). Examples of tangible assets include:
• Land
• Building
• Machinery
• Equipment
• Cash
• Office supplies
• Inventory
• Marketable securities
 Intangible Assets – Intangible assets are assets that lack physical existence.
Examples of intangible assets include:
• Goodwill
• Patents
• Brand
• Copyrights
• Trademarks
• Trade secrets
• Licenses and permits
• Corporate intellectual property – an intellectual property is owned and
legally protected by a company from outside use or implementation without
consent. Intellectual property can consist of many types of assets, including
trademarks, patents, and copyrights.

LIABILITIES
Liabilities are legal obligations payable to a third party. A liability is recorded in the
general ledger, in a liability-type account that has a natural credit balance. A number of
examples of liability accounts are presented in the following list, which is split into current
and long-term liabilities:
Current Liability Accounts (due in less than one year):
• Accounts payable are amounts due to vendors or suppliers for goods or services
received that have not yet been paid for. The sum of all outstanding amounts owed to
vendors is shown as the accounts payable balance on the company's balance sheet.
• Accrued liabilities are a financial obligation that a company incurs during a given
accounting period. Although the goods and services may already be delivered, the
company has not yet paid for them in that period. They are also not recorded in the
company's general ledger.
• Accrued wages refers to the amount of liability remaining at the end of a reporting
period for wages that have been earned by hourly employees but not yet paid to them.
This liability is included in the current liabilities section of the balance sheet of a
business.
• Customer deposits are money from a customer to a company before the company
earns it. It is a simple cycle whereby when the company receives cash from a
customer and in return, they need to supply goods and services or return the money. A
customer deposit could also be the amount of money deposited in a bank.
• Current portion of debt payable is the amount of unpaid principal from long-term
debt that has accrued in a company's normal operating cycle (typically less than 12
months). It is considered a current liability because it has to be paid within that period.
• Deferred revenue, also known as unearned revenue, refers to advance payments a
company receives for products or services that are to be delivered or performed in the
future. The company that receives the prepayment records the amount as deferred
revenue, a liability, on its balance sheet.
• Income taxes payable is a type of account in the current liabilities section of a
company's balance sheet. It is compiled of taxes due to the government within one
year.
• Interest payable is the amount of interest on its debt that a company owes to its
lenders as of the balance sheet date.
• Payroll taxes payable is a liability account that contains the combined total of payroll
taxes deducted from employee pay and the employer portion of payroll taxes.
• Salaries payable is a liability account that contains the amounts of any salaries owed
to employees, which have not yet been paid to them
• Sales taxes payable is a liability account in which is stored the aggregate amount of
sales taxes that a business has collected from customers on behalf of a governing tax
authority.
• Use taxes payable. Use taxes are essentially sales taxes that are remitted directly to
the government having jurisdiction, rather than through a supplier who would
otherwise remit the tax.
• Warranty liability is a liability account in which a company records the amount of the
repair or replacement cost that it expects to incur for products already shipped or
services already provided.

Long Term Liability Accounts (due in more than one year):

• Bonds payable is a liability account that contains the amount owed to bond holders by
the issuer. This account typically appears within the long-term liabilities section of the
balance sheet, since bonds typically mature in more than one year. Bonds are typically
issued by larger corporations and governments.
• Loan payable is a debt that is due for payment in more than one year.

EQUITY
“Owner's Equity” is the words used on the balance sheet when the company is a sole
proprietorship. If the company is a corporation, the words Stockholders' Equity is used
instead of Owner's Equity. An example of an owner's equity account is Mary Smith,
Capital (where Mary Smith is the owner of the sole proprietorship). Examples of
stockholders' equity accounts include:
• Capital
• Drawing
• Current Year Earning
• Retained Earning

INCOME
Income is actually not the money itself. The money is a separate thing (an asset). One
could think of income as the reason for the inflow of money or the actions that were done
to cause the money to flow in. That is the income. Examples of Income:
• Sales
• Consultancy
• Shipping
• Other Income

EXPENSES
An expense in accounting is the money spent, or costs incurred, by a business in their
effort to generate revenues. Essentially, accounts expenses represent the cost of doing
business; they are the sum of all the activities that hopefully generate a profit.
An expense account is the right to reimbursement of money spent by employees for
work-related purposes. Some common expense accounts are: cost of sales, utilities
expense, discount allowed, cleaning expense, depreciation expense, delivery expense,
income tax expense, insurance expense, interest expense, advertising expense, promotion
expense, repairs expense, maintenance expense, rent expense, salaries and wages expense,
transportation expense, supplies expense and refreshment expense.
TYPE OF MAJOR ACCOUNTS

Account is the basic storage of information in accounting. It is a record of the

increases and decreases in a specific item of asset, liability, equity, income or expense.
An account may be depicted through a ”T-account”. “T-account” is called as such
because it resembles the letter “T”. A “T-account has three parts, namely:
1. Account title – describes the specific item of asset, liability, equity, income or
expense.
2. Debit side – the left side of the account.
3. Credit side – the right side of the account.

This is the “account title”

Cash
Debit Credit The term “credit” (Cr.) simply refers to
1-Jan 500.00 the right side of the account. It is
3-Jan 1000.00 sometimes referred to as the “value
700.00 800.00 4-Jan parted with”.
Balance 700.00

The difference between the total debit and credit in

The term “debit” (Dr.) simply refers the account represents the balance of the account
to the left side of the account. It is (500.00 + 1,000.00 – 800.00 = 700.00)
sometimes referred to as the “value
received.” If the total debits exceed total credits, the account
has a debit balance. If the credits exceed total debits,
the account has a credit balance.

The Five Major Accounts

The five major accounts, also called the elements of the financial statements, are
actually the items in the expanded accounting equation.

1. ASSETS – are the economic resources you control that have resulted from past events
and can provide you with future economic benefits.
2. LIABILITIES – are your present obligations that have resulted from past events and
can require you to give up resources when settling them.
3. EQUITY – is assets minus liabilities.
4. INCOME – is increase in economic benefits during the period in the form of increases
in assets, or decreases in liabilities, that result in increase in equity, excluding those
relating to investments by the business owner.

Income includes both revenue and gains.

a. Revenue arises in the course of the ordinary activities of the business, e.g., sales and
service fees.
b. Gains represent other items that meet the definition of income and may or may not
arise in the course of the ordinary activities of an entity.
Example 1:

Your business sells barbecue. The income you derive from selling barbecue is called
revenue (i.e., sales revenue) because selling barbecue is your main business (ordinary
business activity).

One day, you decided to replace your old beach umbrella. The umbrella has a
carrying amount of ₱2,000.00 in your books of accounts. You were able to sell the old
umbrella for ₱2,200.00. The difference between the selling price of ₱2,200.00 and the
carrying amount of ₱2,000.00, represents gain (₱2,200.00 - ₱2,000.00 = ₱200.00 gain).
This is because selling of umbrella is not your main business (not your ordinary business
activity).

Carrying amount refers to the net amount at which an item is carried (i.e., recorded) in
the books of accounts.

5. EXPENSES – are decrease in economic benefits during the period in the form of
decrease in assets, or increases in liabilities, that result in decrease in equity,
excluding those relating to distributions to the business owner.

Expenses include both expenses and losses.

a. Expenses arise in the curse of the ordinary activities of a business
b. Losses represent other items that meet the definition of expenses and may not arise in
the course of the ordinary activities in the entity.

Example 2:

In your barbeque business (see Example 1 above), the cost of the barbecue you have
sold is an expense.

If you were able to sell the old umbrella with carrying amount of ₱2,000 for only
₱1,600, the difference now of ₱400 represents a loss ) ₱1,600 - ₱2,000 - ₱400 loss).

CLASSIFICATION OF THE FIVE MAJOR ACCOUNTS

The five major accounts are classified according to the financial statement where they
appear as follows

BALANCE SHEET ACCOUNTS INCOME STATEMENT

ACCOUNTS
 ASSETS  INCOME
 LIABILITIES  EXPENSES
 EQUITY

 The balance sheet (or the statement of financial position) is one of the components of
a complete set of financial statements. The balance sheet shows the financial position
of a business.
  The income statement (or the statement of profit or loss) is a sub-component of the
statement of comprehensive income, which is also one of the components of a
complete set of financial statements. The income statement shows the profit or loss of
the business.

CHART OF ACCOUNTS

A chart of account is a list of all accounts used by a business. The following is an

example of a basic chart of account:

Chart of Account
BALANCE SHEET INCOME STATEMENT ACCOUNTS
Account Account
No. No.
ASSETS INCOME
110 Cash 410 Service fees
120 Accounts receivable 420 Sales
125 Allowance for bad debts 430 Interest income
130 Notes receivable 440 Gain
140 Inventory
150 Prepaid supplies EXPENSES
155 Prepaid rent 510 Cost of Sales
160 Prepaid insurance 515 Freight-out
170 Land 520 Salaries expense
180 Building 525 Rent expense
185 Accumulated depreciation – Bldg. 530 Utilities expense
190 Equipment 535 Supplies expense
195 Accumulated depreciation –
540 Bad debts expense
Equipment
LIABILITIES 545 Depreciation expense
210 Accounts payable 550 Advertising expense
220 Notes payable 555 Insurance expense
230 Interest payable 560 Taxes and licenses
240 Salaries payable 565 Transportation and travel expense
250 Utilities payable 570 Interest expense
260 Unearned income 575 Miscellaneous expense
EQUITY 580 Losses
310 Owner’s capital
320 Owner’s drawing

Account numbers are assigned to the accounts to facilitate recording, cross-

referencing and retrieval of information. Although there is no standard way of assigning
account numbers, account numbers should be assigned in a manner that the accounts are
categorized logically.
Each business shall formulate a chart of accounts that best suits its needs. Large
corporations may have thousands of accounts and have more digits in their account numbers.
Smaller companies may have fewer accounts and fewer digits in their account numbers. As
the number of accounts increases, the digits in the account numbers also increase to
accommodate the increased number of accounts.
 The account titles in the chart of accounts shown above are numbered in the following
manner.

1. The first digit in the 3-digit numbering refers to the major types of accounts:

Major types of accounts Assigned number

ASSETS 1
LIABILITIES 2
EQUITY 3
INCOME 4
EXPENSES 5

Thus, in the chart of accounts, the 3-digit numberings of all assets start with 1; the 3-
digit numberings of all liabilities start with 2; etc.

110 Cash

The first digit signifies that this account is an asset account.

2. The second digit in the 3-digit numbering refers to the account titles and the sequence
on how they are listed in the chart of accounts.

Thus, in the chart of accounts, the second digit in the 3-digit numbering of
“Cash” is 1 because it is the first asset account listed in the chart; the second digit in
the 3-digit numbering of “Accounts receivable” is 2 because it is the second asset
account listed in the chart; etc.

110 Cash
120 Accounts receivable

The second digits refer to specific account titles and the

sequence on how they are listed in the chart of accounts.

3. The third digit in the 3-digit numbering, if not zero, signifies that the account is contra
account or an adjunct account to a related account.

180 Building
185 Accumulated depreciation – Bldg.

The third digit signifies that this account, “Accumulated depreciation –

Bldg.” is a contra-account to the “Building account”.
 To promote comparability, a business shall use account titles that conform to the
PFRSs (Philippine Financial Reporting Standards) and industry practices. Furthermore,
regulated businesses should have chart of accounts and/or account numbering system that
conform to relevant regulations. For example:

a. The chart of account of a bank should conform to the chart of accounts endorsed by
the Bangko Sentral ng Pilipinas (BSP);
b. The chart of accounts of a cooperative should conform to the chart of accounts
endorsed by the Cooperative Development Authority (CDA); and
c. The chart of accounts and the account numbering system of a national government
agency must conform to the Revised Chart of Accounts (RCA) issued by the
Commission on Audit (COA).

Common Account Titles

The following are the common account titles and their descriptions.

BALANCE SHEET ACCOUNTS

ASSETS

 Cash – includes money or its equivalent that is readily available for

unrestricted use, e.g., cash on hand and cash in bank.
 Accounts receivable – receivables supported by oral or informal promises to
pay.
 Allowance for bad debts – the aggregate amount of estimated losses from
uncollectible accounts receivable. Another term is “allowance for doubtful
accounts.”
 Notes receivable – receivable supported by written or formal promises to pay
in the form of promissory notes.
 Inventory – represents the goods that are held for sale by a business. For a
manufacturing business, inventory also includes goods undergoing the process
of production and raw materials that will be consumed in the production
process.
 Prepaid supplies – represents the cost of unused office and other supplies.
 Prepaid rent – rent paid in advance.
 Prepaid insurance – cost of insurance paid in advance.
 Land – the lot on which the building of the business has been constructed or a
vacant lot which is to be used as future plant site. Land is not depreciable.
 Building – the structure owned by a business for use in its operations.
 Accumulated depreciation – building – the total amount of depreciation
expenses recognized since the building was acquired and made available for
use.
 Equipment – consists of various assets such as:
o Machineries and other factory equipment
o Transportation equipment, e.g., vehicles, delivery trucks
o Office equipment, e.g., desks, cabinets, chairs
o Computer equipment, e.g., server, personal computers, laptops
o Furniture and fixtures, e.g., desks, cabinets, movable partitions.
  Accumulated depreciation – equipment – the total amount of depreciation
expenses recognized since the equipment was acquired and made available for
use.

Collectively, land, building and equipment are referred to as “Property, plant and equipment,”
“Capital assets,” or Fixed assets.”

LIABILITIES

 Accounts payable – obligations supported by oral informal promises to pay

by the debtor.
 Notes payable – obligations supported by written or formal promises to pay
by the debtor in the form of promissory notes.
 Interest payable – interest incurred but not yet paid. Interest payable arises
from interest-bearing liabilities. For example, you will incur interest on your
bank loan.
 Salaries payable – salaries already earned by employees but not yet paid by
the business.
 Utilities payable – utilities (e.g., electricity, water, telephone, internet, cable
TV, etc.) already used but not yet paid.
 Unearned income – items related to income that were collected in advance
before they are earned. After the earning process is completed, these items are
transferred to income.

EQUITY (Capital, Net assets or Net worth)

 Owner’s capital (or Owner’s equity) – the residual amount after deducting
liabilities from assets.

The Owner’s Capital account is

INCREASED by: DECREASED by:
 Investment or contributions by the  Withdrawal or distribution to the
owner. owner.
 Income or Profit earned by the  Expenses or Loss incurred by the
business. business.

 Owner’s drawing – this account is used to record the temporary withdrawals of the
owner during the period. At the end of the accounting period, any balance in this
account is closed to the Owner’s capital account.

INCOME STATEMENT ACCOUNTS

INCOME

 Service - revenues earned from rendering services (e.g., services of a spa, services of
a beauty salon, etc.)
 Sales – revenues earned from the sale of goods (e.g., sale of barbecue, sale of
souvenir item, etc.).
 Interest income – revenues earned from the issuance of interest-bearing receivables.
  Gains – income earned from the sale of assets (except inventory) or from
enhancements of assets or decreases in liabilities that are not classified as revenue.

EXPENSES

 Cost of sales (or cost of goods sold) - represents the value of inventories that have
been sold during the accounting period.
 Freight-out – represents the sellers’ cost of delivering goods to customers. Other
terms for freight-out are “delivery expense,” transportation-out,” and “carriage
outwards.”
 Salaries expense – represents the salaries earned by employees for the services they
have rendered during the accounting period.
 Rent expense – represents the rentals that have been used up during the accounting
period.
 Utilities expense – represents the cost of utilities (e.g., electricity, water, telephone,
internet, cable TV, etc.) that have been used during the accounting period.
 Supplies expense – represents the cost of supplies that have been used during the
period.
 Bad debts expense – the amount of estimated losses from uncollectible accounts
receivable during the period. Other term is “doubtful accounts expense.”
 Depreciation expense – the portion of the cost of a depreciable asset (e.g., building
or equipment) that has been allocated to the current accounting period.
 Advertising expense – represents the cost of promotional or marketing activities
during the period.
 Insurance expense – represents the cost of insurance pertaining to the current
accounting period.
 Taxes and licenses – represents the cost of business and local taxes required by the
government for the conduct of business.
 Transportation and travel expense
o Transportation expense represent the necessary and ordinary cost of
employees getting from one workplace to another which are reimbursable by
the business, e.g., reimbursable taxi fares of employees running some errands
and those who are working on late shifts.
o Travel expenses represent the costs incurred when travelling on business trips,
e.g., out-of-town travel costs of employees sent to seminars.
 Interest expense – represents the cost of borrowing money. It is the price that a
lender charges a borrower for the use of the lender’s money. Other terms for interest
expense are finance cost and borrowing costs.
 Miscellaneous expense – represents various small expenditures which do not warrant
separate presentation.
 Losses – expenses which may or may not arise from the ordinary course of business
activities. Losses may arise from:
o Sale of assets, other than inventory, at a sale price that is less than the carrying
amount.
o Decreases in the value of assets due to destruction, damage, obsolescence and
other changes in values caused by market factors, e.g., loss on fire, earthquake,
storm, and other calamities, decrease in the value of foreign currencies held
due o changes in exchange rates.
LESSON 6: BOOKS OF ACCOUNTS
All business establishments and taxpayers are required to keep a record of their day to
day business transactions in order to know the result of their operations. The said record is
referred to as “book of accounts”.
Whenever a business establishment or taxpayer applies for certificate of registration
(COR) with the BIR, it also required to register the book of accounts. Also, the books of
account should also be registered annually on or before January 31 of each year.
Registration of book of accounts can be any of the following type:

 Manual Books of Account

• Manual books of account are the traditional journal, ledger and
columnar books you can buy in the book and office supplies store.
• Recording in the manual books of account is handwritten. This is the
most of popular type of books of account for small enterprises since it
is less costly and easy to register with the BIR.
 Loose-leaf Books of Account
• Loose-leaf books of account are printed and bounded journals and
ledgers. Recording can be done using Microsoft Excel.
 Computerized Books of Account
• Computerized book of account is an accounting program that facilitate
efficient and fast record keeping.

Books of Accounts – Minimum Requirements

The type of books the business will maintain depends on many factors such as the size
of the business and financial capacity. However, regardless of the type of book of accounts
the company would maintain, below are the minimum requirement:
General Journal
• General journal is referred to as the book of original entry. It records business
transaction in order of date using the principle of “debit and credit”.
General Ledger
• General ledger is referred to as the book of final entry. It summarized all the
journal entries of an account to get the ending balances.
Cash Receipt Journal
• Cash receipt journal is a special journal used to record cash sales and/or
collection of receivables.
Cash Disbursement Journal
• Cash disbursement journal is a special journal used to record cash payments of
expenses and/or payables.
Sales Journal
• Sales journal iss a special journal used to record sales on credit (receivable
from customer)
Purchase Journal
• Purchase journal is a special journal used to record purchases on credit
(payable to supplier)
Books of Accounts for Service Business
For business or taxpayer engaged in sale of services,, it is required to maintain at least
four which are the following:
• General journal
• General ledger
• Cash receipt journal
• Cash disbursement journal

Books
oks of Accounts for Businesses Engaged in Sales of Goods or Properties
For business
ss or taxpayer engaged in sale of goods or properties,, it is required to
maintain at least six, which are the following:
• General journal
• General ledger
• Cash receipt journal
• Cash disbursement journal
• Sales journal
• Purchase journal

Journal Entries
Another way
ay to visualize business transactions is to write a general journal entry.
Each general journal entry lists the date, the account title(s) to be debited and the
corresponding amount(s) followed by the account title(s) to be credited and the
corresponding amount(s).
mount(s). The accounts to be credited are indented. Let's illustrate the
general journal entries for the two transactions that were shown in the T T-accounts above.
T-accounts
Accountants and bookkeepers often use T T-accounts
accounts as a visual aid to see the effect of
a transaction or journal entry on the two (or more) accounts involved. (Learn more about
accountants and bookkeepers in our Accounting Career Center.)
We will begin with two T
T-accounts: Cash and Notes Payable.
 Let's demonstrate the use of these T
T-accounts
accounts with two transactions:
On June 1, 2019 a company
ompany borrows ₱5,000
5,000 from its bank. As a result, the company's
asset Cash must be increased by ₱5,000
5,000 and its liability Notes Payable must be increased
by ₱5,000.
5,000. To increase the asset Cash the account needs to be debited. To increase the
company's liability Notes Payab
Payable
le this account needs to be credited. After entering the
debits and credits the T-accounts
accounts look like this:

On June 2, 2019 the company repays ₱2,000

2,000 of the bank loan. As a result, the
company's asset Cash must be decreased by ₱2,000 and its liability Notes Payable must be
decreased by ₱2,000.
2,000. To reduce the asset Cash the account will need to be credited for
₱2,000.
2,000. To decrease the liability Notes Payable that account will need to be debited for
₱2,000. The T-accounts
accounts now look like this:
General Ledger
The general ledger is comprised of all the individual accounts needed to record the
assets, liabilities, equity, revenue, expense, gain, and loss transactions of a business. In
most cases, detailed transactions are recorded directly in these general ledger
edger accounts.
BOOKS OF ACCOUNT AND DOUBLE-ENTRY SYSTEM
A business maintains two books of accounts, namely:
1. Journal; and
2. Ledger

Journal

The journal, also called the “book of original entries,” is the accounting record where
business transactions are first recorded. Business transactions are recorded in the journal
through journal entries. This recording process is called journalizing.
Types of Journals
Journals can be classified into the following:
1. Special Journal – is used to record transactions of a similar nature. Special journals
simplify the recording process, thus providing an efficient way of recording and
retrieving of information.
Common examples of Special journals
a. Sales journal – is used to record sales on account.
b. Purchased journal – is used to record purchases of inventory on account.
c. Cash receipt journal – is used to record all transactions involving receipts
of cash.
d. Cash disbursements journal – is used to record all transactions involving
payments of cash.
2. General Journal – All other transactions that cannot be recorded in the special journals
are recorded in the general journal. Examples of such transactions include purchases
of inventory in exchange of notes payable, adjusting entries, correcting entries,
reversing entries, and the like.
If a business does not utilize special journals, all its transactions are recorded
in the general journal.
Examples:
a. You sold barbecue to a customer who promised orally to pay the sale price
next week
 This transaction involves sale on account; therefore, it is
recorded in the sales journal.
b. You sold barbecue to a customer who immediately paid the sale price.
 This transaction involves the receipt of cash; therefore, it is
recorded in the cash receipts journal.
c. You sold barbecue to a customer who promised in writing to pay the sale
price next week.
 This transaction cannot be recorded in the special journal,
therefore, it is recorded the general journal.

Ledger
The ledger is a systematic compilation of a group of accounts. It is used to classify the
effects of business transactions on the accounts. The ledger is also called the “book of
secondary entries” or the “book of final entries” because it is used only after business
transactions are first recorded in the journals. The process of recording in the ledger is called
“posting”.
Kinds of Ledgers
Ledgers can be classified into the following:
a. General ledger – contains all the accounts appearing in the trial balance.
 b. Subsidiary Ledger – provides a breakdown of the balances of controlling accounts.
A controlling account (or control account) is one which consists of a group of
accounts with similar nature. The balance of the controlling accounts is shown in the general
ledger, while the balances of the accounts that comprise the controlling account are shown in
the subsidiary ledger. Not all accounts in the general ledger though are controlling accounts.
Only those whose balances necessarily need a breakdown are considered controlling
accounts.
Example:
Yu sell barbecue on credit. The balance of credit sales not yet collected is ₱100,000.
This information is shown in Accounts Receivable, which is a controlling account in the
general ledger.
However, knowing only the total balance is insufficient. You need a breakdown of
this amount. You need information on which customers owe you money and the amount each
customer owes you. This information is provided by the subsidiary ledgers. Analyze the
illustration below.

GENERAL LEDGER SUBSIDIARY LEDGER

Accounts Receivable from

Customer A, ₱20,000

Accounts Receivable ₱100,000 Accounts Receivable from

Customer B, ₱30,000

Accounts Receivable from

Customer C, ₱50,000

Summary:

Books of Accounts Description Function

1. Journal  Book of original  Journalizing (Initial
a. General Journal entries Recording)
b. Special Journal
2. Ledger  Book of secondary  Posting (Classifying)
a. General Journal entries
b. Special Journal
Formats of the Books of Accounts
General journal can have the following format:

Date column – indicates the Account titles column – Account numbers column –
recording dates of the the accounts affected by the corresponding
transactions. Transactions are a business transaction numberings of the account
recorded in the journal are recorded in this affected by the transaction
chronologically, meaning column. are listed here.
arranged by dates.

GENERAL JOURNAL
Acct.
Date Account titles Debit Credit
Nos.
8/3/16 Bad debts expense 540 250 00
Allowance for bad debts 125 250 00
to record the bad
debts expense for the
period

Debit and Credit columns – the Centavos are placed

monetary effects of the here.
transaction to the accounts are
recorded here.

Other columns may be included, such as “posting reference” (P.Ref) which is used to
cross-reference journal entries to the ledger, and journal entry number (GJ No.) which is used
to number the journal entries.

Special Journal
A special journal can have the following format:
 The amount of credit to a The amount of cash
“sundry” account is recorded collection (debit to cash)
here. is recorded here.

CASH RECEIPTS JOURNAL

Sundry Credit
Accounts Sales Account Cash
Date Description receivable Credit Credit title Amount Debit

Accounts that are normally Accounts affected by a

credited when cash collection is transaction other than “accounts
recorded are separately indicated receivable” and “sales” are
here. This eliminates the need to recorded here. “Sundry” means
record these accounts repeatedly miscellaneous or various.
each time a collection is made.

General Leger and Subsidiary Ledger

SUBSIDIARY LEDGERS GENERAL LEDGER

Customer A ACCOUNTS RECEIVABLE No, 120

Date Ref. Debit Credit Balance Date Ref. Debit Credit Balance
Balance Balance
forwarded 1,000.00 forwarded 40,000.00
July 2, July 2,
20x2 4,000.00 5000 20x2 6,000.00 46,000.00

Customer B
Date Ref. Debit Credit Balance
Balance
forwarded - -
July 2,
20x2 2,000.00 2,000.00
DOUBLE-ENTRY SYSTEM

All transactions are recorded in the accounting records using the “double-entry
system”. Under this system, each transaction is recorded in two parts – debit and credit.
No transaction is recorded by a debit alone or a credit alone. For each amount that is
debited, there must be a corresponding amount that is credited, and vice-versa. This is in
order for the accounting equation to be balanced at all times. If at any time the accounting
equation does not balance, there is an error.
Recall from our previous discussions that debit (Dr.) simply refers to the left side of
an account, while credit (Cr.) refers to the right side of an account.

Concept of Duality and Equilibrium

The double-entry system involves the use of the concepts of “duality” and
“equilibrium.”
a. The concept of duality views each transaction as having a two-fold effect on
values – a value received and a value parted with, and each transaction is
recorded using at least two accounts.
b. The concept of equilibrium requires that each transaction is recorded in terms
of equal debits and credits. For every peso debited, there is a corresponding
peso credited, and vice versa.

Normal Balances of Accounts

The normal balance of an account is on the side where an increase in that account is
recorded. The following are the normal balances of accounts:

Type of Account Normal Balance

Asset Debit
Liability Credit
Equity Credit
Income Credit
Expense Debit

To help us remember the normal balances of accounts, let us recall the expanded basic
accounting equation:

Assets = Liabilities + Equity + Income - Expenses

Notes:
 “Assets” which is on the left side of the equation has a normal debit balance.
 “Liabilities,” “Equity,” and “Income” which are additions on the right side of the
equation have a normal credit balances.
 “Expenses” which is a deduction on the right side of the equation has a normal debit
balance.
 Income increases equity, thus, it has a normal credit balance (same with equity).
Expense decreases equity, thus, it has a normal debit balance (opposite of that of
equity).
 Another way to depict the normal balances of the accounts is as follows:
 DEBITS CREDIT
=
Assets + Expenses Liabilities + Equity + Income

Rules of Debits and Credits

To debit an account with a normal debit balance means to increase that account. To
credit it means to decrease it.
To credit an account with a normal credit balance means to increase that account. To
debit it means to decrease it. Analyze the table below.

Type of account Normal balance Debit Credit

Asset Debit Increase Decrease
Liability Credit Decrease Increase
Equity Credit Decrease Increase
Income Credit Decrease Increase
Expense Debit Increase Decrease

Balance Sheet Accounts:

LIABILITY
ASSET ACCOUNTS
ACCOUNTS
Credit
Debit for Credit for Debit for
for
increase decreases decreases increases
(+) (-) (-) (+)

EQUITY ACCOUNTS
Credit
Debit for
for
decreases increases
(-) (+)

Income Statement Account:

EXPENSE INCOME
ACCOUNTS ACCOUNTS
Credit
Debit for Credit for Debit for
for
increase decreases decreases increases
(+) (-) (-) (+)
ENDING BALANCE OF AN ACCOUNT

Debits to a specific asset or expense account should be greater than (or equal to) the
credits to that account. On the other hand, credits to a liability, equity or income account
should be greater than (or equal to) the debits to that account.
The difference between the monetary totals of debits and credits to an account
represents the ending balance of the account. The minimum ending balance of an account is
zero. This occurs when the total debits equal total credits to an account.
If an asset or expense account results to an ending balance that is a credit, meaning
the total amount of debit is less than the total amount of credits, the amount is said to have an
abnormal balance. This means a recording error has been committed. A correction is needed
to eliminate the abnormal balance. This is also true when a liability, equity, or income
account results to an ending balance that is a debit. Analyze the T-accounts below:

ASSET ACCOUNTS
Debit Credit
100 20
Ending Balance
(100 Dr. - 20 Cr.) NORMAL* 80

*The ending balance of ₱80 is a “normal balance” because the total debits is greater than the
total credits (i.e., 100 > 20).

ASSET ACCOUNTS
Debit Credit
100 100
Ending Balance
(100 Dr. - 100 Cr.) NORMAL* 0

The asset account has a zero balance. This is the minimum balance an asset account
can have. A zero balance occurs when total debits equal total credits
 ASSET ACCOUNTS
Debit Credit
100 120
Ending Balance
20 (100 Dr. - 120 Cr.) ABNORMAL

The ending balance of the asset account is an “abnormal balance” because the total
debits are less than the total credits.

LIABILITY ACCOUNT
Debit Credit
100 70
Ending Balance
(70 Cr. - 100 Dr.) ABNORMAL 30

The ending balance of the liability account is an “abnormal balance” because the
total credits are less than the total debits.

Illustration: Rules of debits and credits

Case 1: Asset account

At the beginning of the period, you have a cash balance of ₱2,000. During the period,
you had total cash collections amounting to ₱10,000 and made total cash payments of ₱8,000.

Requirement: Using “t-account” analysis, compute for the ending balance of your cash.

Solution:
CASH
Dr. Cr.
Beginning balance 2,000
Cash collections 10,000 8,000 Cash payments

Beginning balance 4,000

Notes:
 The beginning balance is placed on the debit side because “Cash” is an asset account
and assets have a normal debit balance.
 Cash collections increase the balance of cash; thus, they are placed on the debit side.
 Cash payments decrease the balance of cash; thus, they are placed on the credit side.
 The ending balance is the difference between the debits and credits in the account. It
is computed as follows: 2,000 Dr. + 10,000 Dr. – 8,000 Cr. = 4,000 ending balance.
 The 2,000 and 10,000 amounts are added because they are both debits. The 8,000
amount is deducted because it is a credit.
Case 2: Liabilities Account

At the beginning of the period, you have a note payable of ₱1,200. During the period,
you obtained and additional loan amounting to ₱800 and made total payments of ₱500.

Requirement: Using a T-account, compute for the ending balance of notes payable.

Solution:
NOTES PAYABLE
Dr. Cr.

1,200 Beginning balance

Payment on the loan 500 8,000 Cash payments

1,500 Beginning balance

Notes:
 The beginning balance is placed on the credit side because “Notes payable” is a
liability account and liabilities have a normal credit balance.
 Additional loan increases the balance of notes payable; thus, it is placed on the credit
side.
 Payment of loan decreases the balance of notes payable; thus, it is placed on the debit
side.
 The ending balance is the difference between the total credit and total debits in the
account. The ending balance is computed as follows: 1,200 Cr. + 800 Cr. – 500 Dr. =
1,500.
 The 1,200 and 800 amounts are added because they are both credits. The 500 amount
is deducted because it is s debit.

CONTRA AND ADJUNCT ACCOUNTS

Some accounts have related accounts to them. An account related to another account
is referred to as either a contra account or an adjunct account.

 Contra accounts are presented in the financial statements as deduction to their related
accounts.
 Adjunct accounts are presented in the financial statement as addition to their related
accounts.
Thus:
 If an account has a normal debit balance, its contra account has a normal credit
balance (the opposite). To credit a normal debit balance means to deduct.
 If an account has a normal debit balance, its adjunct account has a normal debit
balance (the same. To debit a normal debit balance means to add.

On the other hand:

 If an account has a normal credit balance, its contra account has a normal debit
balance (the opposite). To debit a normal credit balance means to deduct.
 If an account has a normal credit balance, its adjunct account has a normal credit
balance (the same). To credit a normal credit balance means to add.
 A contra asset account has a normal credit balance, while an adjunct asset account
has a normal debit balance.

Examples of account with contra account:

ACCOUNT RELATED ACCOUNT
Accounts receivable  Allowance for bad debts
 Type of account: Contra Account
Building  Accumulated depreciation – building
 Type of account: Contra Account
Equipment  Accumulated depreciation – building
 Type of account: Contra Account

The sum of the balances of an account and its related contra or adjunct account is
called the net carrying amount (or simply the carrying amount) of that account.

Example 1:

Your accounts receivable has a balance of ₱100,000, while the related allowance for
bad debts account has a balance of ₱20,000. How much is the carrying amount of your
accounts receivable?

Solution:

Accounts receivable ₱100,000

Allowance for bad debts (20,000)
Accounts receivable – net ₱ 80,000

The “Allowance for bad debts” is deducted because it is a contra account to

“Accounts receivable”.

Example 2:
You have a building with a historical cost of ₱1,000,000 and an accumulated
depreciation of ₱300,000. How much is the carrying amount of your building?

Solution:

Building ₱1,000,000
Accumulated depreciation – building (300,000)
Building – net ₱ 700,000