BASIC ACCOUNTING

What Is Accounting?
The purpose of accounting is to provide information that will
help you make correct financial decisions. Your accountants
job is to give you the information you need to run your
business as efficiently as possible while maximizing profits
and keeping costs low
 TYPES OF INFORMATION PROVIDED BY
ACCOUNTANTS
Information prepared exclusively by people within a
company (managers, employees, or owners) for their own
use.
Financial information required by various government
agencies such as the Bureau of Internal Revenue (BIR),
Securities and Exchange Commission (SEC).
General information about companies provided to people
outside the firm such as investors, creditors, and labor unions.
 Accounting and Bookkeeping
Bookkeeping procedures and bookkeepers record and keep
track of the business transactions that are later used to generate
financial statements.
Most bookkeeping procedures have been systematized, and, in
many cases, can be handled by computer programs.
Bookkeeping is a very important part of the accounting
process, but it is just the beginning.
 Accounting and Bookkeeping
Accounting is the process of preparing and analyzing financial
statements based on the transactions recorded through the
bookkeeping process.
Accountants are usually professionals who have completed at
least a bachelors degree in accounting, and often have passed
a professional examination, like the Certified Public
Accountant Examination.
Accounting goes beyond bookkeeping and the recording of
economic information to include the summarizing and
reporting of this information in a way that is meant to drive
decision making within a business
 AREAS IN WHICH MANAGERS USE ACCOUNTING
INFORMATION

Marketing

Production

Research and Development

Sales
 AREAS IN WHICH BANKERS USE ACCOUNTING
INFORMATION

Granting loans to individuals and companies

Investing clients money

Setting interest rates

Meeting BSP regulations for protecting your money

 Accountability in Accounting
A businesss financial statements can also be of great interest to other
members of the local or national community.
Labor groups might be interested in what impact managements
financial decisions have on their unions and other employees.
Local communities have an interest in how a businesss
financial decisions (for example, layoffs or plant closings) will impact
their citizens.
As the economy becomes more complex, so do the transactions within a
business, and the process of reporting them to various users and making
them understandable becomes more complex as well.
A solid knowledge of accounting is helpful to individuals, managers and
business owners who are making their decisions based on the
information accounting documents provide.
The Basic Financial Statements
The basic financial statements include:
Balance Sheet
Income Statement
Statement of Cash Flows
Statement of Retained Earnings/Statement of Changes in
Capital
The Balance Sheet is the statement that presents the Assets of
and the Liabilities and Owners Equity.

The Income Statement shows all of the Revenues of the

company less the Expenses, to arrive at the bottom line, the
Net Income.

The Statement of Cash Flows shows how much cash we

started the period with, what additions and subtractions were
made during the period, and how much cash we have left over
at the end of the period.
The Statement of Retained Earnings shows how the balance in
Retained Earnings/Capital has changed during the period of
time (year, quarter, month) for which the financial statements
are being prepared.
Normally there are only two types of events that will cause the
beginning balance to change:
1) the company makes a profit, which causes an increase in
Retained Earnings (or the company suffers a loss, which
would cause a decrease) and
2) the owners of the company withdraw money, which causes
the beginning balance to decrease (or invest more money,
which will cause it to increase).
DIFFERENCES IN THE THREE TYPES OF
BUSINESSES
Business Type Proprietorship Partnership Corporation
Number
of Owners One Two or more Five or more
Accounting
Records Maintained separately from owners record
Owner Has
Managerial
Responsibilities Yes Usually Usually not
 Accounting: The process of recording, classifying, and
summarizing
economic events through the preparation of financial
statements such as the Balance Sheet, the Income
Statement, and the Statement of Cash Flows
Financial Statements: Reports prepared by companies
on the financial
status of their business; examples are Balance Sheets,
Income
Statements, Statement of Cash Flow, and Statement of
Retained
Earnings.
Generally Accepted Accounting Principles (GAAP):
 Generally Accepted Accounting Principles
(GAAP)
Financial statements must present relevant, reliable,
understandable, sufficient, and practicably obtainable
information in order to be useful.
Relevant Information
Relevant information is that information which helps financial
statement users estimate the value of a firm and/or evaluate
how well the firm is being managed.
The financial statements must be stated in terms of a monetary
unit, since money is our standard means of determining the
value of a company.
 Reliable Information
Reliable information is key in accounting. Sufficient and
objective evidence should be available to indicate that the
information presented is valid. In addition, the information
must not be biased in favor of one statement user or one group
of users to the detriment of other statement users.
Verifiable Information
The need for verifiable information does not preclude the use
of estimates and approximation. If you were to eliminate from
accounting all estimates, the resulting statements would not be
useful primarily because the statements would not provide
sufficient information. The approximations that are used,
however, cannot be wild guesses. They must be based on
 Understandable Information
To be understandable, the financial information must be
comparable. Any item on the Balance Sheet that an accountant
labels as an Asset or Liability, users of the financial statements
should also call Assets and Liabilities.
Statement users must compare financial statements of various firms
with one another, and they must compare statements of an
individual firm with prior years statements of that same firm in
order to make valid decisions.
Quantifiable Information
Information is easier to understand and use if it is quantified. Most
information that accountants and users of financial information use
is represented by numbers.
 Obtainable Information
Furthermore, to be useful, information must be reasonably
easy to obtain. This fits into the concept of cost vs. benefit.
The information must be worth more than what it will cost to
obtain it and must be secured on a timely basis. Financial
statements must be prepared at least once a year (in many
cases, quarterly or monthly) and attempting to incorporate
unobtainable information could seriously delay these
schedules.
The Entity Concept
Financial statements must also present information
representing each separate entity. (This idea is called the Entity
Concept). In other words, the transactions of each business or
 The Going Concern
It is normally assumed that a company will continue in
business into the future.

Realizable Value
Assets normally are not shown on the Balance Sheet at more
than either their historical cost or an amount for which they
can be sold below historical cost.
 Materiality
Financial statements data must be as simple and concise as
possible. An item is considered material when its inclusion or
exclusion in the financial statements would change the
decision of a statement user.
A rule of thumb in accounting might be that any item worth 10
percent of the business Net Income is considered material and
should be reported in financial statements.
 Conservatism
Another traditional practice that accountants use to guide them
in preparing financial statements is called Conservatism.
Whenever two or more accounting practices appear to be
equally suitable to record the transaction under consideration,
the accountant should choose the one that results in the lower
or lowest Asset figure on the Balance Sheet and the higher or
highest Expense on the Income Statement, so as to not be
overly optimistic about financial events.
 Consistency: Practices and methods used for presentation on
the financial statements should be the same year to year and
process to process.
If for any reason the company and their accountants decide to
change the method of presentation for any item on the
financial statements, they must present a footnote to the
financial statements explaining why the methods were changed
Historical Cost Principle: According to this rule, most
Assets and Liabilities should be represented on the Balance
Sheet at the amount that was paid to acquire the Asset, or for
the Liabilities, at the amount that was contracted to be paid in
the future. No account is taken for either inflation or
changing value of Assets over time.
 Recognition Principle: This is the process of recording
Revenue into the financial statements. Revenue is recorded at
the point of the transfer of the merchandise or service, and
not at the point of receiving the cash.
That means, for example, that once a service is provided for
which a charge has been incurred, that service should be
shown on the financial statements regardless of whether
money has actually changed hands.
Similarly, Expenses are recognized when incurred, not when
the money is exchanged for that particular Expense.t
Stable-Monetary-Unit Concept: Even though the value of
the peso changes over time (due to inflation), the values that
appear on the financial statements are normally presented at
historical cost and do not take inflation into account.