Accounting Principles: Journal Entries and Balance Sheet, Study notes of Organization and Business Administration

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DON MARIANO MARCOS MEMORIAL STATE UNIVERSITY

MID-LA UNION CAMPUS

COLLEGE OF MANAGEMENT

CITY OF SAN FERNANDO, LA UNION

MODULE

In

PASC 103 (BASIC ACCOUNTING)

JOSEPHINE G. JAVONITALLA

BA Faculty

Course Outline in PASC 103 (Basic Accounting) COURSE DESCRIPTION: This is an introductory course in accounting that deals with the nature, functions and scope of the accounting discipline affecting a service concern and merchandising enterprise organized as a sole proprietorship. Emphasis is on the basic accounting processes and principles in providing the students with adequate knowledge in the recording, classifying and summarizing phases of accounting. COURSE OBJECTIVES: Upon completion of the course, the students should be able to:

1. Describe the nature, functions, scope and limitations of accounting, its major uses and users.
2. Understand and be able to explain the logic of double entry bookkeeping and the nature and significance of each step in the accounting cycle.
3. Identify, record, classify and summarize typical transactions of a sole proprietorship engaged in a service and merchandising business. 4) Prepare in good form the basic financial statements; the income statement, balance sheet and statement of changes in owner’s equity. COURSE CONTENT: MODULE I: INTRODUCTION Lesson 1: Meaning of Accounting Terminologies and Roles/Functions of Accounting Lesson 2: Forms of Business Organizations Lesson 3: Accounting Relationships Lesson 4: Debit and Credit MODULE II: RECORDING PHASE Lesson 1: The Accounting Cycle Lesson 2: Journalization Lesson 3: Posting Lesson 4: Trial Balance

MODULE I

INTRODUCTION

Lesson 1: Meaning of Accounting Terminologies and

Roles/Functions of Accounting

Lesson 2: Forms of Business Organizations

Lesson 3: Accounting Relationships

Lesson 4: Debit and Credit

MODULE 1

INTRODUCTION

Accounting is useful because it tries to analyze and solve financial and economic problems which affect everyone – husband, wife, student, employee and businessman. An understanding of accounting is needed for one to be able to manage financial resources, be it money or property. Every business executive and business owner needs good financial information to be able to make good decisions in running the affairs of the business. Large, small or medium business organizations use accounting information to make decisions. Even the government and non-profit organizations also need accounting information as the basis for making decisions. After reading Module 1, you will learn to:  Define accounting and appreciate its role in business.  Know what an accounting system is and the accounting reports it generate.  Identify the forms of business organizations and types of operations.  Define and identify the accounting elements.  Use the accounting equation to analyze business transactions.

ACCOUNTING INFORMATION SYSTEM

Accounting information system involves a systematic or orderly way of measuring business transactions through a process of recording, classifying and summarizing, and from which process reports are generated for proper communication to decision makers. Accounting Process PHASE 1 FUNCTIONS OF ACCOUNTING:

1. Recording – writing down the business transaction for the first time. It is often referred to as bookkeeping. BOOKKEEPING – the systematic and chronological recording of business transactions and events. It is one of the functions of accounting. The accountant designs the system of records which the bookkeeper uses.
2. Classifying – sorting out and grouping together of similar items. Items are grouped as to accounting element.
3. Summarizing – preparation of financial reports.
4. Interpreting – preparation of additional financial reports and analysis of financial statements. ACCOUNTING REPORTS  Balance Sheet gives information about the financial position of the business by showing a list of its assets, liabilities and owner’s equity.  Income Statement is a report, which describes how the business operated over a given period of time.  Statement of Changes in Owner’s Equity describes the activities that led to a change in the owner’s net worth over a number of years.  Cash Flow Statement shows the cash inflow and cash outflow activities of the business.

PHASE 2 PHASE 3 PHASE 4

Analyzed Measured Recorded Classified Stored Decision Making Summarized Reported Interpreted Data Gathered

TRANSACTION – the exchange of goods or services for a certain value. It is also defined as any financial event that changes the resources of the business. A transaction has two fold effect, value received and value parted with. ILLUSTRATION: Transaction Value Received Value Parted With

1. Investment of cash by the owner
2. Purchase of equipment on cash
3. Payment of rent
4. Receipt of cash for services rendered
5. Purchase of office supplies on account
6. Rendered services on account Cash Equipment Right to occupy the space Cash Office supplies Right to collect Obligation for the entity to hold the investment of the owner Cash Cash Services Obligation to pay Services LEARNING ACTIVITY:
7. Differentiate accounting from bookkeeping.
8. Enumerate the four functions of accounting.
9. Enumerate and give example the users of accounting information.
10. Identify the value received and value parted with for the following transactions: a. Mr. X invested his car to the business. b. Purchase office supplies on cash. c. Received cash for services rendered. d. Sale of merchandise on account. e. Collected the account in letter d.

Advantages:

1. Unlimited life.
2. Transferability of ownership.
3. Limited liability of the owners.
4. Greater source of capital.
5. Permits the use of management specialist. Disadvantages:
6. Difficult and expensive to organize.
7. Subject to more legal restrictions.
8. Subject to higher tax on business income.
9. Stockholders have little control over management of business.
10. Subject to more government controls. B. As to operations or source of income:  Service Business is a type of business that derives income from sale of services to clients or customers.  Merchandising or Trading Business is engaged in the buying and selling of goods without changing the form.  Manufacturing Business a kind of business that purchases raw materials which are converted to finished goods before finally selling them at a profit. LEARNING ACTIVITY:
11. Differentiate the type of business organizations as to ownership.
12. Identify the following whether service, merchandising or manufacturing business. a. Sari-sari Store f. Textile Mill b. Beauty Parlor g. Shoe Factory c. Hospital h. Drug Store d. Softdrinks Factory i. PLDT e. Computer Shop j. CSI Mall

Lesson 3 ACCOUNTING RELATIONSHIPS ELEMENTS OF ACCOUNTING There are five accounting elements namely: Assets, Liabilities, Capital, Revenue and Expenses. ASSETS are resources owned by the business. They are properties and rights owned by the business. Two major classifications of Assets: Current Assets and Non-current Assets.

1. Current Assets – assets which can be converted into cash within one year. Common examples include the following: cash, marketable securities, receivables, inventories, and prepaid expenses. 2. Non-current assets – include tangible, intangible, operating and financial assets of long- term nature. a. Fixed Assets – known as Property, Plant and Equipment. Examples are: Land, Building, Machinery, Furniture and Fixture, Office Equipment, Store Equipment and Delivery Equipment. b. Long-term Investments – assets held by the enterprise for the accretion of wealth through distribution such as interest, royalties, dividends and rentals for capital appreciation or for other benefits. Examples are: Investment in stocks, Investment in Bonds and Fund for noncurrent purposes. c. Intangible Assets – identifiable nonmonetary assets without physical substance. Examples are: patent, copyright, trademark, franchise and goodwill. d. Other Non-current Assets – include other long-term items which cannot be appropriately classified under the usual asset categories. LIABILITIES are financial obligations of the business. It has two major classifications: Current Liabilities and Long-term Liabilities. 1. Current Liabilities – obligations which are to be settled within one year like Accounts Payable, Notes Payable, Unearned Revenues and Accrued Expenses. 2. Non- current Liabilities – all other liabilities like Long-term Notes Payable, Bonds Payable and Mortgage Payable.

EFFECTS OF TRANSACTION ON THE ACCOUNTING ELEMENTS

Nine possible two-fold effects:

1. Increase in Assets = Increase in Liabilities
2. Increase in Assets = Increase in Capital
3. Increase in Assets = Decrease in Other Forms of Assets
4. Decrease in Assets = Decrease in Liabilities
5. Decrease in Assets = Decrease in Capital
6. Decrease in Liabilities = Increase in Capital
7. Decrease in Liabilities = Increase in Other Forms of Liabilities
8. Decrease in Capital = Increase in Liabilities
9. Decrease in Capital = Increase in Other Forms of Capital ILLUSTRATION: Assume that on June 1, 2013, Arsen starts a a computer rental business. The following transactions transpired during the first month of operations: June 1 – Arsen invested cash of Php200,000. The Owner’s investment increases an Asset (Cash) in the amount of Php200,000 and increases Owner’s Equity (Arsen, Capital) in the amount of Php200,000. June 2 – Bought computer units for Php150,000 on account. The purchase of computers on credit increases an Asset (Store Equipment) and increases a Liability(Accounts Payable) both for Php150, June 5 – Paid Php2,500 for computer paper, printer ribbon and other supplies for cash. Purchase of supplies for cash increases an Asset(Supplies) and decreases another form of Asset(Cash) both for Php2,500. June 8 – The business receives a bill for Php 1,500 from Bombo Radio for advertising the opening of the business. Purchase of advertising on credit is an example of incurring an expense but payment is done in the future. It has an effect of increasing Liabilities (Accounts Payable) for Php1,500. Being an expense, it will reduce Owner’s Equity(Arsen, Capital). July 15 – Php10,000 cash was received from various customers for computer services rendered. The transaction representing the main revenue-producing activity of Arsen’s Computers has an effect of increasing an Asset(Cash) and increasing Revenue Service Revenue). Being a revenue, it will increase Owner’s Equity(Arsen, Capital).

July 16 – Paid the bill of Bombo Radio. The payment of obligation decreases an Asset(Cash) and decreases a Liability (Accounts Payable). June 19 – Billed Erika for computer services rendered, Php 5,000. Since the revenue is earned on June 19, a bill is sent to the client and the transaction is recorded on the same date not on the date when the client would pay. This revenue transaction, increase an Assets(Accounts Receivable) for Php5,000 and it has also an effect of increasing Capital (Arsen, Capital). Learning Activity: A. State whether each of the following is an asset, liability, or capital. If asset or liability, state the kind: Example: Cash on Hand Asset Current

1. Petty Cash Fund
2. Prepaid rent expense
3. Salaries payable
4. Cash in Bank
5. Furniture
6. Unused supplies
7. Prepaid insurance
8. Accrued interest on Notes receivable
9. Accrued interest on Notes payable
10. Notes receivable
11. Notes payable
12. Land
13. Building
14. Interest receivable
15. Interest payable
16. Accounts receivable

C. State the effects of the following transactions on the assets, liabilities, and capital by placing a plus (+) sign and a minus (-) sign on the spaces provided for. Transactions Assets Liabilities Capital

1. Invested cash and equipment
2. Collected cash from a customer
3. Purchased additional equipment on credit
4. Paid the assistant’s salary
5. Billed a customer for services rendered
6. Paid the telephone bill
7. Paid the account due in number 3
8. Purchased supplies for cash
9. Received payment from customer in number 5.
10. Withdrew cash from the business for personal use.

LESSON 4

DEBIT AND CREDIT

Use of T-Accounts The simplest form of the account is known as the “T” account because of its similarity to the big letter “T”. The Account is an accounting device used to record increases and decreases in the different elements of accounting caused by the business transactions that have transpired. The account is illustrated below: Account Title

---

Left side or I Right side or Debit side I Credit side I An account is debited when an amount is entered on the left side of the account and credited when an amount is entered on the right side. It is a simple, direct means of recording transactions. Rules on DEBIT and CREDIT DEBIT TO: CREDIT TO:

1. Increases an Asset 1. Decreases an Asset
2. Decreases a Liability 2. Increases a Liability
3. Decreases a Capital 3. Increases a Capital
4. Decreases a Revenue 4. Increases a Revenue
5. Increases an Expenses 5. Decreases an Expense
6. Increases a Withdrawal 6. Decreases a Withdrawal ILLUSTRATION: TRANSACTION DEBIT CREDIT
7. Mr. X invested cash to start a computer rental business.
8. Purchased computer sets on cash.
9. Paid taxes and licenses.
10. Received cash for services rendered.
11. Bought office supplies on account.
12. Billed a customer for services rendered.
13. Paid the account in number 5.
14. Collected the account in number 6. Cash Office equipment Taxes and licenses Cash Office supplies Accounts receivable Accounts payable Cash Mr. X, Capital Cash Cash Service Revenue Accounts Payable Service Revenue Cash Accounts receeivable

MODULE SUMMARY

Accounting is a service activity, which measures, records and reports information, about the economic activities and condition of a business, to be used in making decisions. Business activities are recorded in the books of accounts. From these records, reports and statements showing the progress and status of the business are prepared periodically. These reports are indispensable in planning as well as in making decisions. There are four functions of accounting, namely: recording, classifying, summarizing and interpreting. There are also two broad classification of business organization: as to ownership (sole, partnership and corporation) and as to nature of business (service, merchandising and manufacturing). The elements of accounting are: assets, liabilities and capital. The relationship of these elements could be expressed in an accounting equation: A = L + C. This means that the total assets of the business are divided into the equity of the creditors and the equity of the owner. The present accounting system follows the double-entry bookkeeping which is founded on the concept of value received and value parted with. It is a system in which transaction has dual effect on the accounting elements. It is based on the hypothesis: “Value of Economic Resources equals Value of Rights on the Economic Resources. The Account is an accounting device used to record increases and decreases in the different elements of accounting caused by the business transactions that have transpired. An account is debited when an amount is entered on the left side of the account and credited when an amount is entered on the right side. Normally, assets have a debit balance while liabilities and capital have credit balances. SUMMATIVE TEST Let us find out how well you understood the module. Your score to the self-test will determine if you are ready to go to the next module. GOOD LUCK!!! TEST I: TRUE OR FALSE: Write true if the statement is correct and false if it is wrong. Write your answers on the space provided before each number. ___________ 1. Accounting is the language of business. ___________ 2. Bookkeeping is the same as recording. ____________ 3. A sole proprietorship can have more than on owner. ____________ 4. The basic accounting device is the accounting equation.

____________ 5. A debit entry always decreases the balance of an account. ____________ 6. For every transaction, there is at least one account affected. ___________ 7. The journal is called the book of original entry. ___________ 8. Income increases owner’s equity, therefore it is recorded as debit. ___________ 9. Assets are properties owned by the business. ___________ 10. Expenses decreases owner’s equity. TEST II: IDENTIFICATION : Identify the word/s described in the following statements: Write your answers on the space provided before each number. __________ 1. The systematic and chronological recording of business transactions and events. __________ 2. It is owned by two or more individuals. __________ 3. These are financial obligations of the business. __________ 4. Skeletal form of a ledger. __________ 5. Left side of a “T” account. __________ 6. A type of business organization which is engaged in the selling of goods. __________ 7. A person who is concerned with the ability of the borrower to pay not only the principal debt but also the interest. __________ 8. It is a statement of financial condition of the business. __________ 9. It is the exchange of goods or services for a certain sum of money. __________ 10. Assets which can be turned into cash for a short period of time usually on year.