Accounting is the language of business. 2. Classifying.

This involves sorting or grouping

of similar transactions and events into their
 Bridge of communication (of financial
respective kind and classes. This is the actually
data/information)
the process of transferring the entries from the
 Two-way communication (Business to Users of
journal to the ledger called Posting.
financial information)
3. Summarizing. This involves the completion of
According to the American Institute of Certified the financial statements and accounting
Public Accountant requirements as well. This includes preparation
of the trial balance, worksheet, financial
It is the art of recording, classifying,
statements, closing entries, post-closing trial
summarizing in a significant manner and in
balance and reversing entries.
terms of money, transactions, and events which
4. Interpreting. This involves the “analytical and
are, in part at least, of a financial character, and
interpretative works”. It is then, that when
interpreting the results thereof.
financial statements are analyzed, interpreted
and are communicated to those interested
TYPE OF BUSINESS parties where these could be of great help to
management as a basis for making a sound
1. Service-Oriented Business – its product is the decision.
service rendered, skills, knowledge or expertise.
2. Merchandising or Trading Business – it sells
finished products which the business buys. FIVE (5) ELEMENTS OF THE FINANCIAL
3. Manufacturing Business - it processes inputs STATEMENTS
to form finished goods which they sell later. 1. ASSET - valuable resources owned by the
4. Agriculture Business – this business are those business.
who do the actual planting of the produce, do  Controlled by the business.
the fishing, raise poultry or cattle, piggery, etc.  These are the results of past
and sell whatever their produce. events (either it is bought,
5. Hybrid Business – the business which has two donated, invested or traded).
or more types of business ex. Bake Shop which  These can provide future
produce their pastries (manufacturing) and sells economic benefits for the
soda or other drinks (merchandising). business.

FORMS OF BUSINESS ORGANIZATIONS 2. LIABILITY - obligation of the business to

outside parties who have furnished
1. Sole Proprietorship – owned by one resources.
person called the Proprietor. It is also the  represents the business
easiest to form. obligations.
2. Partnership – owned by two or more
persons called the Partners. It can be formed  signifies transfer of economic
formally (with a written agreement) or benefit.
informally (may be formed even with a mere  the results of past events.
handshake).  There is a complementary
3. Corporation – owned by share- or nature of assets and liabilities.
stockholders with shares of stock as evidence of
their ownership. There are also Corporations 3. OWNER’S EQUITY - residual interest in the
that does not issue shares of stocks ad these are assets of the business after deducting all its
called Non-Stock Corporation (ex. USJ-R, INC.) liabilities (or also known as the net assets).
and their owners are called members.
4. Cooperative – an organization which 4. INCOME - increases in economic benefits
intention is to help the members to augment
during the accounting period in the form of
their livelihood. The owners are called members
inflows or enhancements of assets or
and they joined the organization voluntarily.
decreases of liabilities that result in
FOUR (4) PHASES OF ACCOUNTING increases in equity.
1. Recording. This involves the routine and
5. EXPENSE - decreases in economic benefits
mechanical process of writing down the
business transactions and events in the books of during the accounting period.
accounts in a chronological manner called
Journalizing.

FIVE (5) BASIC FINANCIAL STATEMENTS

 1. INCOME STATEMENT - otherwise known as DEBIT - Value Received or the left side of the T-
Statement of Comprehensive Income for the Account.
Period presents a summary of the revenues
CREDIT - Value Parted With or the right side of the
or income and expenses of an entity for a
T Account.
specific period.
PROFIT = (income > expense)
ELEMENT NORMAL BALANCE
LOSS = (income < expense)
Asset + - DEBIT
BREAKEVEN = (income = expense)
Liabilities - + CREDIT
2. STATEMENT OF CHANGES IN OWNER’S
Owner’s Equity - + CREDIT
EQUITY - summarizes the changes that
occurred in the owner’s investment or Income - + CREDIT
Capital to the business.
Expense + - DEBIT
1) Results of the Operations of the
Business:
PROFIT (+)
ACCOUNTING CYCLE
LOSS (-)
BREAKEVEN (no effect) What is Accounting cycle?
2) Additional Investments (+)
- a system of recording, processing,
3) Withdrawals or Drawing of the
summarizing and communicating all
owners (-)
financial transactions of a business, in a
uniform and consistent manner. It starts
3. BALANCE SHEET - otherwise known as the
when a transaction occurs, and
Statement of Financial Position. It also
concludes with its representation on the
discloses the financial position or condition
financial statements.
or net worth of the Business by listing its
total Assets, Liabilities and Owner’s Equity. CHART OF ACCOUNTS - a list of account names and
numbers to be used by the business. It will serve
4. STATEMENT OF CASH FLOWS - provides the as the guide of the accounting practitioners in
information about the total cash receipts recording the transactions of the business.
and cash payment of the Business during a
period.
STAGES OF ACCOUNTING CYCLE
3 ACTIVITIES
1. TRANSACTION ANALYSIS
1) Operating
2. JOURNALIZING
2) Investing
3. POSTING
3) Financing
4. PREPARATION OF TRIAL BALANCE
5. PREPARATION OF WORKSHEET
5. NOTES TO FINANCIAL STATEMENTS -
6. PREPARATION OF FINANCIAL STATEMENTS
otherwise known as Disclosures is the only
7. ADJUSTING JOURNAL ENTRIES
narrative report which includes the
8. CLOSING ENTRIES
explanations of what are the significant
9. PREPARATION OF POST – CLOSING TRIAL
information that relates to the different
BALANCE
statements.
10. REVERSING ENTRIES

BASIC ACCOUNTING EQUATION

ASSETS = LIABILITIES + OWNER’S EQUITY

EXPANDED ACCOUNTING EQUATION

ASSETS = LIABILITIES + OWNER’S EQUITY (-
DRAWING + INCOME – EXPENSES)

RULES ON DEBIT AND CREDIT