Chapter 1.

Introduction
to Accounting
IRISH GLORY D. GARSULAO
Instructor
Accounting is the process of analyzing, classifying, recording, summarizing, and interpreting business
transactions

Identifying business activities requires selecting transactions and events relevant to an organization.
Examples are the sale of iPhones by Apple and the receipt of ticket money by TicketMaster.

Recording business activities requires keeping a chronological log of transactions and events
measured in the currency and classified and summarized in a useful format.

Communicating business activities requires preparing accounting reports such as financial

statements.
It also requires analyzing and interpreting such reports.
There are many items that businesses keep records of. Each of these
accounts fall into one of five categories.

1. Assets: Anything of value that a business owns

2. Liabilities: Debts that a business owes; claims on assets by outsiders
3. Stockholders’ equity: Worth of the owners of a business; claims on
assets by the owners
4. Revenue: Income that results when a business operates and generates
sales
5. Expenses: Costs associated with earning revenue
Different accounts fall into different categories.

• Cash is an account that falls in the asset category. The Cash account keeps track of the
amount of money a business has. Checks, money orders, and debit and credit cards are
considered to be cash.

• Revenue is income that results from a business engaging in the activities that it is set up to
do. For example, a computer technician earns revenue when they repairs a computer for a
customer. If the same computer technician sells a van that they no longer needs for his
business, it is not considered revenue.

• Fees Earned is an account name commonly used to record income generated from
providing a service. In a service business, customers buy expertise, advice, action, or an
experience but do not purchase a physical product. Consultants, dry cleaners, airlines,
attorneys, and repair shops are service-oriented businesses. The Fees Earned account falls
into the revenue category.

• Expenses are bills and other costs a business must pay in order for it to operate and earn
revenue. As the adage goes, “It takes money to make money.”
 Expense accounts differ from business to business, depending on
individual company needs.

Example:
Wages Expense Cost of paying hourly employees
Rent Expense Cost for the use of property that belongs to someone else
Utilities Expense Costs such as electricity, water, phone, gas, cable TV, etc.
Supplies Expense Cost of small items used to run a business
Insurance Expense Cost of protection from liability, damage, injury, theft, etc.
Advertising Expense Cost of promoting the business
Maintenance Expense Costs related to repair and upkeep
Miscellaneous Expense Costs that are minor and/or non-repetitive
ANY Expense Any cost associated with earning revenue
Accounting Fields
The accounting profession is generally divided into two categories:
1. private accounting
2. public accounting

Accounting fields exist that specialize in very specific areas of a

business. Examples are auditing, budgetary, tax, social, cost,
managerial, financial and international.
The goal of accounting is to provide useful information for decisions. For information to be useful, it
must be trusted. This demands ethics in accounting. Ethics are beliefs that distinguish right from
wrong. They are accepted standards of good and bad behavior.

Identifying the ethical path is sometimes difficult. The preferred path is a course of action that
avoids casting doubt on one’s decisions. For example, accounting users are less likely to trust an
auditor’s report if the auditor’s pay depends on the success of the client’s business. To avoid such
concerns, ethics rules are often set. For example, auditors are banned from direct investment in
their client and cannot accept pay that depends on figures in the client’s reports.

Guidelines for Ethical

Decision Making
 Accounting Scandals
Satyam Computer Services was an Indian IT The Federal Home Loan Mortgage Corporation,
services and back-office accounting firm based also known as Freddie Mac, is a US federally-
out of Hyderabad, India. In 2009, it was backed mortgage financing giant based out of
discovered that the company had inflated Fairfax County, Virginia. In 2003, it was
revenue by $1.5 billion, marking one of the discovered that Freddie Mac had misstated over
largest accounting scandals. $5 billion in earnings. COO David Glenn, CEO
An investigation by India’s Central Bureau of Leland Brendsel, former CFO Vaughn Clarke, and
Investigation revealed that Founder and former Senior Vice Presidents Robert Dean and
Chairman, Ramalinga Raju, had falsified revenues, Nazir Dossani had intentionally overstated
margins, and cash balances. During the earnings in the company’s books. The scandal
investigation, Raju admitted to the fraud in a came to light due to an SEC investigation into
letter to the company’s board of directors. Freddie Mac’s accounting practices. Glenn,
Although Raju and his brother were charged with Clarke, and Brendsel were all fired and the
breach of trust, conspiracy, fraud, and falsification company was fined $125 million.
of records, they were released when the Central
Bureau of Investigation failed to file charges on
time.
Common Ethical Dilemmas that Accountants Face
• Play with the numbers – One of the most common unethical requests clients make of their
accountants involves having them manipulate the books in order to distort a company’s or
individual’s overall financial picture. This request can put an accountant into a particularity
difficult situation: risk losing the business or go along with the unethical request.
• Turn a Blind Eye – Another common unethical request is to insist that an account simply turn
a blind eye to unethical or illegal business or accounting practices. Once again, this kind of
situation may place the accountant in a difficult lose-lose situation.
• Give a bad idea the stamp of approval – Sometimes an accountant’s opinion will be
requested in order for one party to convince another party that a particular financial course
of action is prudent.
Some of Ethical Issues in Accounting
• Misleading or inaccurate reporting, including
inaccuracy, incompleteness and questionable re-
categorisation.
• Fraud and tax evasion.
• Lack of transparency in accounting decisions.
• Breaches of confidentiality.
The following approaches to solve an ethical dilemma were deduced:
•Refute the paradox (dilemma): The situation must be carefully analyzed.
In some cases, the existence of the dilemma can be logically refuted.
•Value theory approach: Choose the alternative that offers the greater
good or the lesser evil.
•Find alternative solutions: In some cases, the problem can be
reconsidered, and new alternative solutions may arise.
Basic Accounting Principles & Concepts

BOOKKEEPING

VS

ACCOUNTING
 Three Forms of Business Formation
Factors Proprietorship Partnership Corporation
Ownership Individual No limitation of partners No limitation on number of
stockholders

Liability of owners Individual liable for business In general partnership, all Amount of capital
liabilities individuals liable for business contribution is limit of
liabilities. Limited partners are shareholder liability
liable for amount of capital
contribution. In limited
liability partnership (LLP),
there is no liability except
when negligence exists.

Cost of starting a business None other than filling fees for Partnership agreement, legal Created only by statute.
trade name. costs, and minor filling fees for Articles of incorporation,
trade name. filling fees, taxes, and fees for
states in which corporation
registers to do business.
Generally Accepted Accounting Principles (GAAP)

Two types of accounting principles:

• General principles are the basic assumptions, concepts, and guidelines for
preparing financial statements. General principles stem from long-used
accounting practices.

• Specific principles are detailed rules used in reporting business transactions

and events. Specific principles arise more often from the rulings of
authoritative groups.
Generally accepted accounting principles, or GAAP, are standards that encompass the details, complexities, and
legalities of business and corporate accounting. The Financial Accounting Standards Board (FASB) uses GAAP as the
foundation for its comprehensive set of approved accounting methods and practices.

10 GAAP Principles
1. Principle of Regularity: GAAP-compliant accountants strictly adhere to established rules and regulations.
2. Principle of Consistency: Consistent standards are applied throughout the financial reporting process.
3. Principle of Sincerity: GAAP-compliant accountants are committed to accuracy and impartiality.
4. Principle of Permanence of Methods: Consistent procedures are used in the preparation of all financial reports.
5. Principle of Non-Compensation: All aspects of an organization's performance, whether positive or negative, are fully
reported with no prospect of debt compensation.
6. Principle of Prudence: Speculation does not influence the reporting of financial data.
7. Principle of Continuity: Asset valuations assume the organization's operations will continue.
8. Principle of Periodicity: Reporting of revenues is divided by standard accounting periods, such as fiscal quarters or fiscal
years.
9. Principle of Materiality: Financial reports fully disclose the organization's monetary situation.
10. Principle of Utmost Good Faith: All involved parties are assumed to be acting honestly.
 is a book of raw business transactions recorded in chronological
GENERAL order by date. It is the first place a transaction is recorded. The amounts
JOURNAL are then posted to the appropriate accounts such as accounts
receivables, cash accounts or asset accounts.

When a transaction occurs, two or more accounts are

affected. There is also a dollar amount associated with each
of the accounts. Determining which accounts are impacted,
and by how much, is the first step in making a journal entry.
This is a sample of a few rows in a journal. It has five
columns: Date, Account, Post. Ref., Debit, Credit.
 It is the process of evaluating and translating financial events into
Journalizing
the language of accounting.
Steps in Journalizing:
1. Select two (or more) accounts impacted by a transaction.
2. Determine how much each account is affected. Often times the amounts are given;
other times the amounts must be calculated based on the information provided.
3. Based on the rules of debit and credit, decide which account(s) is debited and which is
credited.
4. Enter the date on the first line of the transaction only.
5. Enter the account that will be debited on the first line of the transaction. Enter its
amount in the Debit column on the same line.
6. Enter the account that will be credited on the second line of the transaction. Enter its
amount in the Credit column on the same line.
NOTE: Indent the credit account name three spaces.