ACCOUNTING REVIEWER: MODULE 1

PREFACE
Accounting- Plays a crucial role in financial management and decision-making for firms.
- This discipline enables stakeholders, including creditors, investors,
management, and regulatory agencies, to assess an organization's financial
health, performance, and compliance.

➢​ Providing a systematic framework for recording, summarizing, and assessing financial

transactions, it guarantees accountability and transparency in corporate operations.

Accounting- Is often referred to as the "language of business" because it is essential for

recording, summarizing, and analyzing financial transactions to make informed
decisions.
- In a business enterprise, accounting provides a systematic approach to
tracking income,expenses, assets, and liabilities, ensuring that the
organization operates efficiently and complies with legal and regulatory
requirements.
- Includes financial reporting, budgeting, auditing, and providing information for
strategic planning and decision-making.
- Is crucial to ensuring transparency and accountability in business operations.

ACCOUNTING AS: Art

Science
Ideology
Language
Historical Record
Commodity
Economic Reality
System of Information

ACCOUNTING AS ART
Art- Describes the manner in which something is performed.
Accounting- The art of documenting, categorizing, and summarizing financial data
- Is a methodical process that involves specific methodologies and their proper
implementation, requiring experience and applicable skills. Accounting is
therefore by definition an art.
ACCOUNTING AS A SCIENCE
Science- Is to discover a systematic pattern through investigation and observation.
Accounting- Is the science of recording and forecasting the financial facts of an economic
body by examining and applying recognized methods to analyze the economic
happenings.

ACCOUNTING AS IDEOLOGY
Ideology- Is a system of views and beliefs about specific concepts or behaviors in the world.
Accounting- Is also considered an ideology because it is perceived as a means of defending
the current social, political, and economic structures.
ACCOUNTING AS LANGUAGE
Language- Is used to report an organization's actions in the form of financial
reports and statements, accounting is also known as the language of business.
- A specific set of processes used to produce financial data for a business is defined
by accounting.
ACCOUNTING AS HISTORICAL RECORD
- An organization's historical accounting records provide information about previous business
 transactions, earnings, and losses.
ACCOUNTING AS COMMODITY
Accounting- The reason for this is that the financial markets have a need for this kind of
accounting data.
- Investors in the stock market, for instance, research companies' accounting and
financial reports prior to purchasing their stock.
ACCOUNTING AS ECONOMIC REALITY
Accounting- Frequently seen as a way to illustrate an organization's present financial status. -
- When creating an organization's financial statements, accountants must make an
effort to reflect the state of the economy.
ACCOUNTING AS SYSTEM OF INFORMATION
Information Source- Input, processing, communication channel, output, and receiver are
the main parts of an information system.
Accounting- The input data used in accounting is gathered from various business operations
and then processed in order to improve its meaning.
Interpretation of Data- Many consumers, including the government, suppliers, researchers,
investors, managers, creditors, and many more, are informed of the
final product.
SCOPE OF ACCOUNTING
Scope of Accounting- Has been increasing with the changes in the economy and societal
demands.
- It covers a wide range of topics, including trade, business, government,
financial institutions, people, and families.
VARIOUS FIELDS IN SCOPE OF ACCOUNTING: Business Organizations
Non-Profit Organizations
Government Organizations
Professionals
Individuals
BUSINESS ORGANIZATIONS
Accounting- Is the language of business
Money- Making this is every company’s primary goal
Books of Accounts- Business’s financial transactions are documented here to identify
operating results and determine the financial condition.
NON PROFIT ORGANIZATIONS
Non-Profit Organizations- These groups keep track of their transactions, including the
donations they receive, the subscriptions they members as well
at all costs.
Accounting Rules- Receipts and balance sheet, income and expense account, and payment
account are created in accordance with this.
GOVERNMENT ORGANIZATIONS
Government Organizations- These businesses use the accounting system for a number of
reasons, including figuring out their revenue, figuring out their
expenses, and managing their administration successfully.
Accounting- Is frequently used in state-owned and central organizations.
Analysis and Assessment of Accounting Data- National planning, financial budget
preparation, assessing national progress or regression, and other tasks all depend on this
PROFESSIONALS
Professionals- Engineers, physicians, attorneys, and athletes also keep track of their earnings
and expenses in order to calculate their income tax obligation.
INDIVIDUALS
- To make a living, people also engage in financial transactions. In order to get financial data
and make their own economic decisions, they also engage in accounting of some form.

SYSTEMS FOR ACCOUNTING AND BOOKKEEPING

 ❖​ The goal of accounting, a service activity, is to give quantitative data on economic
entities—mostly financial information—that can be used to guide financial choices
Accounting- Mostly focuses on the structure and layout of the documents. Based on the data that
has been recorded and the reports' interpretation, accountants create reports.
Bookkeeping- Is the process of recording business transactions to their respective journals
and ledgers in a prescribed manner, whereas accounting is the art of recording,
classifying, and summarizing in a significant manner and in terms of money
transactions and events that are, at least in part, of a financial character, and
interpreting the results thereof.
- Is only one facet of accounting, which has a wider scope.
- Its work is examined by the accountants.
- Part of an accountant’s job description
CONCEPT OF ACCOUNTING
Operations Results- Refers to the outcome of the actions that were conducted within the
specified time period, which could have produced a profit or a loss.
➢​ Primary objective of accounting is providing multiple interested parties quantifiable
information about a company's financial situation is the main goal of accounting.
➢​ The following are the essential requirements that the parties must satisfy: The state of the
company's finances, including its assets and liabilities, as well as the owners' stake at any
particular moment.
➢​ The sources and uses of funds during the time, or the financing and investment activities,
are what cause the fluctuations in the business's financial resources.

●​ When creating financial statements, accountants use a set of generally recognized

accounting rules which are:
ACCOUNTING RULES: Financial Reporting Standards (FRS)
International Accounting Standards (IAS)
Generally Accepted Accounting Principles (GAAP)

ORGANIZATIONS THAT HELPED SHAPE ACCOUNTING CONCEPTS:

1.​ The American Institute of Certified Public Accountants
2.​ The American Accounting Association
3.​ Philippine Institute of Certified Public Accountants

The Securities and Exchange Commission (SEC) & Public Accountants (PICPA):
These organizations create rules, regulations, views, and bulletins that have shaped our nation's
auditing and accounting practices.
Financial Reporting Standards (FRS) and International Accounting Standards (IAS):
Accountants and practitioners are urged to concentrate on these principles and application in
accounting practice.
Generally Recognized- If a large number of professionals in the field firmly support an
accounting principle.
Accounting Principles- Were created to best effectively address the acknowledged needs for
financial and other business enterprise information.

ACCOUNTING EQUATION
Assets Equities- The link between assets and equities may be expressed using this.
Assets- Are the properties that a firm owns, while equities are the rights to the properties.
Owner’s Equity- Is referred to as capital, proprietor's equity, or owner's equity,
Liabilities- the creditors' equity that represents the business's debts.
To give recognition to these two types of equities, we form the accounting equation:
Assets = Liabilities + Capital.

Liabilities are often placed before capital in the accounting equation because creditors have
priority rights to the assets. By moving liabilities to the opposite side of the equation, the
remaining claim of the owner or owners may be given more weight, which results in:
Assets - Liabilities = Capital.

Accounting equation may be expressed in the following formulas:

1. Balance Sheet Version: Assets= Liabilities + Equity

2 Income Statement Version: Net Income= Revenue - Expenses

3. Combined Version:
Assets= Liabilities + Equity
Equity= Beginning Equity + Net Income
Assets= Liabilities + Beginning Equity + Net Income
Net Income= Revenue - Expenses

Example: On January 1, 2024 the balance of equity was P100,000. During the year, revenue and
expenses were:

Revenue 200,000​
Expenses = 140,000

The balance of equity on December 31, 2024 is:

Equity= Beginning Equity + Revenue-Expense
= P100,000 + P200,000 - P140,000
= P160,000

On December 31, 2024. A had the following balances:

Assets 580,000​
Liabilities P420,000​
Equity = 160,000

Using the Balance Sheet Version

Assets= Liabilities + Equity
P580,000 = P420,000 + P160,000

Using the Combined version

Assets= Liabilities + Beginning Equity + Revenue – Expenses
P580,000 = P 420,000+ P 100,000+ P 200,000- P 140,000

Expanded accounting equation

Assets= liabilities + (original capital of additional investments-withdrawals income-deductions
from income)
For the purpose of determining the normal balance of accounts, the equation will be presented as
follows:

Normal balance of accounts- the increases side of the account

​ a. Debit Normal Balance- Assets, withdrawals and expenses
​ b. Credit Normal Balance- Liabilities, investment and revenue​

The other side of the equation:

​ Assets- this is the left side of the T-account. Therefore, this is debit.

Liabilities + capital- this is the right side of the T-account. Therefore, this is the credit.

Learning Activity:
1. Assets 42,000​
Liabilities is 12,000 ​
Equity is P30,000

Assets = Liabilities +Equity

P42,000 = P12,000 + P30,000

Assets 42,000 and liabilities 12,000.

The amount of equity is:
Equity= Assets-Liabilities
42,000-12,000=30,000

2. a. Revenue 56,000; Expenses = 20,000

Net Income =Revenue - Expenses = 56,000-20,000 = 36,000

b. If Revenue = 56,000 and Expenses = 21,000, the amount of net income is:

Net income= Revenue - Expenses = 56,000-21,000 35,000

3. In the following data, the amount of beginning equity is

Assets= P32,000
Liabilities= 15,000
Beginning Equity=P13,000
Revenue=36,000
Expenses=32,000
Assets =Liabilities + Beginning Equity + Revenue - Expenses
P32,000-15,000+13,000+36,000 - 32,000

In the following data, the amount of beginning equity is

Assets=P75,000
Liabilities=31,000
Revenue= P96,000
Expenses= 62,000
Beginning Equity is unknown.

Assets Liabilities + Beginning Equity + Revenue - Expenses

75,000 31,000+7+96,000 - 62,000
Beginning Equity is ___________
ACCOUNTING REVIEWER: MODULE 2
ACCOUNTING CONCEPTS AND PRINCIPLES

Accounting Concepts and Principles- The logical concepts and procedures that guide the
accountant in documenting and disseminating
economic data.
- Also known as assumptions or postulates.
- They offer a broad framework of
references that can be used to assess accounting
practices and function as a roadmap for creating new
procedures and practices.
BASIC ACCOUNTING CONCEPTS: Concepts of Separate Entities
Accounting Period
Accrual Concept
Objectivity Principle
Materiality Principle
Cost Principle
Matching Principle
Revenue Recognition
Conservatism
1. Concepts of Separate Entities- According to the separate accounting entity principle, a
business is an economic entity distinct from its owner; as
such, events and transactions should be examined from the
firm's perspective rather than the owner's.
EXAMPLE: A business must maintain its own records from a commercial perspective and
refrain from combining its transactions with those of its owners.
2. Accounting Period- According to the accounting period principle, an organization's life is
split up into equal-length intervals, which are referred to as accounting
periods or fiscal year.
- After that, financial data is gathered over time, meaning that events
and transactions that take place during the year are documented and
compiled.
- Financial reports are then created to show the financial situation at the
conclusion of the period as well as the outcomes of activities during
that time.
EXAMPLE: Record-keeping and other bookkeeping activities begin on January 1st and
conclude on December 31st, respectively, in an accounting period that aligns
with the calendar year. Financial reports are then prepared for the full
accounting year.
3. Accrual Concept- The accrual concept and the accounting period principle are closely
related in that events and transactions involving income and expenses
should be documented during the accounting period in which they
occurred, when the income was earned or the expense was incurred,
instead of when the income was received or when the expense was paid.
4. Objectivity Principle- The reliability principle is another name for the objectivity
principle.
- The transactions must be verified by third parties and adequately
backed up by evidence in order to be considered objective.
- For this same reason, a transaction must have the appropriate
supporting documentation before it is documented in order to be
verifiable.
5. Materiality Principle- Asserts that professional judgment determines whether an account
is material.
- All accounts, regardless of size, must be regarded as material
accounts for academic purposes.
6. Cost Principle- Defines those transactions must be documented at the actual amount paid
for.
7. Matching Principle- States that the business produces an income by merely spending.
- As a result, for accounting purposes, we will match the expense
expended with the revenue generated.
EXAMPLE: On January 31, 2019, X delivered items to a customer in Quezon City. X paid a
delivery charge of P500 for the product, which sold for P20,000. The consumer
had just gotten the product, and in February, he paid the corporation P20,000
through X's collector. The P20,000 in sales, which were collected in February,
must be recorded in January because the sales contract was concluded at that
time. Furthermore, delivery costs must be matched with money earned.
8. Revenue Recognition- An accounting principle that determines the specific conditions
under which income becomes realized as revenue or income.
- In general, income is recognized when a specific event occurs and
the resulting income is quantified.
- Furthermore, income is recognized when a corporation provides
merchandise or services to its clients.
9. Conservatism- This is a concept of recognizing expenses and liabilities in the least
amount of time if there is uncertainty of the outcome and certainty of
revenue and assets received.
- When one has the choice of selecting multiple, he should choose
transactions that result in a lesser or deferred reward based on the
probabilities.
- Accountants should apply their best judgment to analyze situations and
record transactions based on available facts.
- The conservatism principle serves as a guideline.

ACCOUNTING STANDARDS
Explicit- Are outlined in the conceptual framework for financial reporting in the Philippine
Financial.
Implicit- Are widely accepted in the accounting profession, but are not explicitly stated.
- Reporting Standards: PFRS

❖​ In practice, the terms "concepts", "principles", "standard", "assumption", and "postulates"

are used interchangeably.
Standard- Refers to the Philippines Financial Reporting Standard (PFRS).
Accounting Rules- Known as Generally Accepted Accounting Principles (GAAP)
Philippine Financial Reporting Standards (PFRS):
Are standards and interpretations adopted by the Financial Reporting Standards Council
(FRSC): Philippine Financial Reporting Standards (PFRS)
Philippine Accounting Standards (PAS)
Interpretations
❖​ Just like the basic accounting concepts, the standards serve as a guide when recording
and communicating accounting information. The difference is that the standards provide
a more detailed application of concepts. They also prescribe which principle is most
appropriate for specific economic transactions. They also require certain information that
should be included in financial reports and how this information is presented.
❖​ The PFRSs are issued by the Financial Reporting Standards Council (FRSC), which is the
official accounting standard setting body in the Philippines.
RELEVANT REGULATORY BODIES: Securities and Exchange Commision (SEC)
The Bureau of Internal Revenue (BIR)
The Bangko Sentral ng Pilipinas (BSP)
The Cooperative Development Authority (CDA)
1. Securities and Exchange Commision (SEC)- Is responsible with regulating corporations,
including partnerships.
- Mandates that businesses and collaborations
must submit financial accounts that have been
audited.
2. The Bureau of Internal Revenue (BIR)- Is responsible for gathering national paying taxes
and enforcing the Tax Code's rules.
- The Tax Code's provisions occasionally affect the
selection of accounting practices and
methodologies, even though they don't always align
with the objectives of financial reporting.
3. The Bangko Sentral ng Pilipinas (BSP)- Is responsible for overseeing banks and other
organizations carrying out banking operations.
- These companies' selection and implementation of
accounting policies are influenced by the BSP.
4. The Cooperative Development Authority (CDA)- Is responsible for enforcing cooperatives.
- Cooperatives' choice and implementation of accounting policies are influenced by the CDA.

THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

CLASSIFICATION AND DEFINITION OF ACCOUNTS: Assets
Liabilities
Capital
Revenue
Expenses
1. Assets- Any owned material or immaterial property with a monetary worth
- The balance sheet displays assets as property, plant, and equipment as well as current
assets.
Cash- Any form of payment that a bank may take at face value is considered cash.
- Checks, Money Orders, Bank Drafts, Bank Deposits are included.
Notes Receivable- Known as the written promissory notes against debtors that require them to
pay a specific amount of money at a specific time following the directive of a
designated bearer or person
Current Assets- Are those that, under normal business circumstances, might be expected to be
sold, consumed, or recognized in cash in less than a year.
- Notes, accounts receivable, supplies, and other prepayments are a few more
current assets
Notes Payable & Accounts Payable- Are the most prevalent liabilities in the organization; they
are identical to their counterparts in receivables, with the
exception of the debtor-creditor connection.
Accounts Receivable- Claims against debtors resulting from the sale of goods or services on
account.
Prepaid Expenses- On-hand supplies and upfront payments for costs like property taxes and
insurance.
Property, Plant and Equipment or Plant Assets:
- Known as “Plant Assets”, are material resources that are utilized in the company and are either
permanent or comparatively fixed.
They deteriorate or lose value with time, with the exception of land.
- One account records the depreciation for a certain accounting period, whereas another account
records the cumulative depreciation.
- Typically include land, buildings, and equipment.
- Equipment categorized under three distinct accounts: Office
Store
Delivery Equipment

2. Liabilities- Liabilities are sums due to external creditors and are typically denoted by titles
that contain the word payable on the balance sheet.
- Current obligations and long-term liabilities are the two main categories into
which these falls.
Current Liabilities- These are debts that must be settled with current assets and have a short
payback period, typically less than a year.
- Notes payable and accounts payable are the most prevalent liabilities in
the organization; they are identical to their counterparts in receivables,
with the exception of the debtor-creditor connection.
- Salaries Payable, Interest Payable, and Taxes Payable are a few other
current obligation items that are frequently seen in the ledger.
Long-term Liabilities- Liabilities that are due in more than a year are referred to as long-term
liabilities.
- An installment that is due within a year of the balance sheet date is
categorized as a current liability when long-term liabilities or debts need
to be paid over a number of years.
- Notes payable typically increase long-term liabilities. ​
- The obligation may be known as mortgage notes payable or mortgage
payable when the notes are backed by security in the form of a mortgage.
3. Capital- Refers to the owner's stake in the company.
- It is a claim that remains against the company's assets after all liabilities have been
paid off.
- Owner's equity, proprietor's equity, and net worth are other phrases that are frequently
used to refer to capital.
4. Revenue- The gross gain in capital brought about by business operations is known as revenue.
- It is the outcome of renting out real estate, lending money, selling goods, providing
services to clients or customers, and engaging in other professional and business
endeavors with the intention of making money.
- Sales, fees, commission revenue, fees received, and interest income are some of the
precise phrases used to define the source of revenue.
5. Expenses- In the process of generating income, expenses are spent or consumed.
- The size and structure of an organization determine how many expense categories
and individual expense accounts are kept in the ledger.

Classification and Definition of Expenses

Selling Expenses-Are past-due charges associated with the sale, marketing, and delivery of
goods, services, or items to consumers.
- Store expenses, promotion, delivery costs, samples, sales taxes, and salesman's
fee are a few examples.
-Referred to Marketing and Distribution Costs.
General and Administrative Expenses- These are past-due expenses that are realistic for the
management and general oversight of the company.
-Expenses not related to the business's production,
selling, or financing operations fall under this category.
Other Income and Other Expenses
➢​ Along with any expenses or losses incurred in connection with activities that are not
directly related to the primary business operations, this shows every additional item of
profit or income received.
FINANCIAL ITEMS/NON-OPERATING REVENUE & EXPENSES:
➢​ Royalties
➢​ Dividend Income
➢​ Rent Income
➢​ Interest Income
➢​ Interest Expense
➢​ Regular & Recurring Gains
➢​ Losses from Investments
➢​ Real Estate

Income Tax- Is presented separately from operational expenses and subtracted just before
determining net income for the period since it is viewed as a sharing of income
with the government.
- The amount of income tax due will depend on the type of business and the amount
of taxable income the company generates.
Sales Revenue- Are the amounts charged to customers for products sold or services rendered
during normal business operations.
- These are gross increases in assets or gross decreases in liabilities resulting from
an enterprise's profit-directed operations, as defined by generally accepted
accounting principles.
Cost of Sales- The cost of sales is the price of goods sold during normal business operations.
- Product costs are shown separately from other expiring costs since they are a
substantial expense that may be directly connected to sales.
HOW MERCHANDISING COMPANY CALCULATES COST OF SALES
1.​ Start of Merchandise Inventory
2.​ Purchases, Net of Returns, Allowances and Discounts
3.​ Cost of Goods Available for Sale
4.​ Less: Merchandise Inventory
5.​ Cost of Sales

EXAMPLE OF ASSET ACCOUNTS: Cash and Cash Equivalents

Inventories
Prepaid Expenses
Investment in Debt & Equity Securities
Property & Plant/Equipment
Intangible Assets
Cash and Cash Equivalents: Accounts Receivable
Notes Receivable
Interest Receivable
Inventories: Merchandise Inventory
Raw Materials
Work-In-Progress
Finished Goods
Supplies
Prepaid Expenses: Prepaid Rent Expense
Prepaid Insurance Expense
Prepaid Interest Expense
Investment in Debt and Equity Securities: Trading Securities
Available for Sale Securities
Held to Maturity Securities
Property and Plant/Equipment: Land
Buildings
Equipment
Machinery
Capitalized Leases
Leasehold Improvements
Intangible Assets: Goodwill
Trademarks
Patents

EXAMPLES OF EXPENSES & LOSS ACCOUNTS:

➢​ Cost of Goods Sold
➢​ Selling, General & Administrative Expenses
➢​ Insurance Expense
➢​ Supplies Expense
➢​ Utilities Expense
➢​ Depreciation Expense
➢​ Other Expenses and Losses

Selling, General & Administrative Expenses: Salaries Expense

Advertising Expense
Rent Expense
Travel Expense
Communication Expense
Other Expenses and Losses: Interest Expense
Loss on Disposal of Equipment
Income Tax Expense

ACCOUNTS THAT HAVE NORMAL BALANCES ON THE CREDIT SIDE:

1.​ Liability Accounts
2.​ Equity Accounts
3.​ Revenue and Gain Accounts

INCREASES AND DECREASES

CREDIT SIDE DEBIT SIDE

Increases in liability accounts Decreases in liability accounts

Increases in equity accounts Decreases in equity accounts

Increases in revenue and gain accounts Decreases in revenue and gain

EXAMPLES OF LIABILITY ACCOUNTS: Accounts Payable
Notes Payable
Salaries Payable
Rent Payable
Insurance Payable
Interest Payable
Income Taxes Payable
Dividends Payable
Unearned Rent Revenue
Borrowings
Bonds Payable
Capital Lease Obligations

EXAMPLES OF EQUITY ACCOUNTS: Paid in Capital

Common Stock
Preferred Stock
Additional Paid in Capital
Retained Earnings

EXAMPLES OF REVENUE & GAIN ACCOUNTS: Sales revenue

Services Revenue
Commissions Revenue
Interest Revenue
Rent Revenue
Dividend Income
Gain on Sale of Buildings

CHARACTERISTICS OF ASSET ACCOUNTS:

➢​ Assets represent future economic benefits.
➢​ Assets have normal balances on the debit side.
➢​ Increases in asset accounts are recorded on the debit side.
➢​ Decreases in asset accounts are recorded on the credit side.
CLASSIFICATION OF ASSETS:
Assets- Are classified as current and noncurrent assets
Current Assets- Are expected to be converted to cash or consumed within a year or normal
operating cycle, whichever is longer.
CURRENT ASSETS: Cash and Cash Equivalents
Receivables, current
Investments, current
Inventories
Prepaid expenses
Non-Current Assets- It is anticipated that non-current assets will either be consumed or turned
into cash after a year or a typical business cycle, whichever comes first.

NON CURRENT ASSETS: Receivables, non-current

Investments, non-current
Property, plant and equipment
Intangible assets
Other non-current assets

Net Working Capital

A. Net working capital = Current Assets-Current Liabilities
Characteristics of Net Working Capital
A. It measures the margin of current assets over current liabilities.
B. More net working capital implies that the entity has more liquidity.

Expense Accounts
Significance of Expense
1. It is the use of resources to generate revenue.
2. It is recognized when related revenue is recognized, which is called the matching principle.

Characteristics
1. Expense accounts have normal balances on the debit side.
2. Increases in expense accounts are recorded on the debit side.
3. Decreases in expense accounts are recorded on the credit side.

Examples:
1. Cost of goods sold
2. Selling, general and administrative expenses: a. Salaries expense
b. Advertising expense
c. Travel expense
d. Communication expense
e. Insurance expense
f. Supplies expense
g. Utilities expense
h. Depreciation expense
i. Other expenses and losses
j. Interest expense
k. Income tax expense

Summary:
To sum up, account categorization ensures accurate financial reporting and analysis by assisting
in the logical grouping of financial data. The production of financial statements, including the
revenue and balance sheets, depends on all types of accounts.

QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION

Qualitative Features- The qualities that make information valuable to users
Information- Could be considered useless if it lacks these qualities.

QUALITATIVE TRAITS: Fundamental Qualitative Characteristics

Improving Qualitative Attributes

1.Fundamental Qualitative Characteristics- Refers to the necessary qualities that data must
possess in order to be included in financial
statements.
- Includes Relevance & Faithful Representation

2. Improving Qualitative Attributes- These attributes reinforce the essential attributes.

- They increase the information's utility.
- They must therefore be optimized.
The following are the enhancing qualitative characteristics: Comparability
Verifiability
Timeliness
Understandability
FUNDAMENTAL QUALITATIVE CHARACTERISTICS: Relevance
Faithful Representation
Relevance- If information has the potential to influence users' decisions, it is deemed relevant.
- Information is considered meaningless and useless without this.
RELEVANCE COMPONENTS: Information
Confirmatory Value
Materiality

Information- Is said to have predictive value if it can be used as a basis for forecasting or
predicting how events will turn out.
Confirmatory Value- Also known as feedback value, is associated with predictive value.
- If consumers may use the information to validate their previous
predictions, then it has confirmatory value.
Materiality- Information is considered material if leaving it out or presenting it incorrectly could
affect how users make decisions.

Faithful Representation- Information that is factual—that is, it depicts the true consequences of
actual events—is said to be faithfully reported.
- For instance, if a company's entire revenue is P1M, it should only
include that amount in its financial statements—neither more nor less.
FAITHFUL REPRESENTATION COMPONENTS: Completeness
Neutrality
Error Free

Completeness- Information must be provided in enough depth for consumers to comprehend it.

Neutrality- Data is chosen or displayed impartially. It is forbidden to alter information in order

to make it more likely that people will view it positively or negatively.

Error Free- This implies that no information should be left out. Furthermore, there have been no
mistakes in the selection and application of the supplied information.
- Nonetheless, this does not imply that accounting data have to be entirely correct.
-This is due to the fact that some accounting data must be believed.

ENHANCING QUALITATIVE CHARACTERISTICS: Comparability

Verifiability
Timeliness
Understandability

Comparability- Information possesses this quality if it allows users to compare things in order
to recognize and comprehend their similarities and differences.
- Is not tied to a specific thing, in contrast to the other qualitative traits.
- A minimum of two elements are needed for a comparison.
Verifiability- If it allows various, independent users to come to a general consensus about what
the information is supposed to represent, then it can be verified.
Timeliness- Users must receive information on time in order to have an impact on the decisions
they make.
Understandability- For consumers to understand information, it must be conveyed succinctly
and simply.
- However, users are expected to evaluate and analyze the information
carefully, possess a fair understanding of business and economic activities,
and be able to comprehend the information in the financial statement.
MODULE 3: Classification of Accounts
CLASSIFICATION AND DEFINITION OF ACCOUNTS
Asset- Any owned material or immaterial property with a monetary worth is considered an asset.
Balance Sheet- Displays assets as property, plant, and equipment as well as current assets.
Cash- Any form of payment that a bank may take at face value is considered cash.
- Checks, money orders, bank drafts, cash, and bank deposits are all included.
Notes Receivable- Written promissory notes against debtors that require them to pay a specific
amount of money at a specific time following the directive of a designated
bearer or person.
Current Assets- Are those that, under normal business circumstances, might be expected to be
sold, consumed, or recognized in cash in less than a year.
- Notes, accounts receivable, supplies, and other prepayments are a few more
current assets.
Accounts Receivable- Claims against debtors resulting from the sale of goods or services on
account
Prepaid Expenses- On-hand supplies and upfront payments for costs like property taxes and
insurance
Property, Plant and Equipment/Plant Assets- Often known as Plant Assets, are material
resources that are utilized in the company and are
either permanent or comparatively fixed.
- They deteriorate or lose value with time, with the
exception of land.
- One account records the depreciation for a certain
accounting period, whereas another account
records the cumulative depreciation.
- Plant asset accounts typically include land,
buildings, and equipment.
EQUIPMENT THREE DISTINCT ACCOUNTS: Office
Store
Delivery Equipment
Liabilities- Are sums due to external creditors and are typically denoted by titles that contain the
word payable on the balance sheet.
TWO MAIN CATEGORIES OF LIABILITIES: Current Obligations
Long-Term Liabilities
Current Liabilities- These are debts that must be settled with current assets and have a short
payback period, typically less than a year.
Notes Payable & Accounts Payable- Are the most prevalent liabilities in the organization; they
are identical to their counterparts in receivables, with the
exception of the debtor-creditor connection.
Salaries Payable, Interest Payable, and Taxes Payable- Are a few other current obligation
items that are frequently seen in the
ledger.
Long-term Liabilities- Liabilities that are due in more than a year.
➢​ An installment that is due within a year of the balance sheet date is categorized as a
current liability when long-term liabilities or debts need to be paid over a number of
years.
➢​ Notes payable typically increase long-term liabilities. The obligation may be known as
mortgage notes payable or mortgage payable when the notes are backed by security in
the form of a mortgage.
Capital- The term "capital" refers to the owner's stake in the company.
- It is a claim that remains against the company's assets after all liabilities have been paid
off.
- Owner's equity, proprietor's equity, and net worth are other phrases that are frequently
used to refer to capital.
Revenue- The gross gain in capital brought about by business operations.
- It is the outcome of renting out real estate, lending money, selling goods, providing
services to clients or customers, and engaging in other professional and business
endeavors with the intention of making money.
- Sales, fees, commission revenue, fees received, and interest income are some of the
precise phrases used to define the source of revenue.
Expenses- In the process of generating income, expenses are spent or consumed.
- The size and structure of an organization determine how many expense categories
and individual expense accounts are kept in the ledger.

CLASSIFICATION AND DEFINITION OF EXPENSES:

Selling Expenses- Expenses are past-due charges associated with the sale, marketing, and
delivery of goods, services, or items to consumers.
- Store expenses, promotion, delivery costs, samples, sales taxes, and
salesman's fee are a few examples.
- In certain financial reports, these costs are referred to as marketing and
distribution costs.
General & Administrative Expenses- These are past-due expenses that are realistic for the
management and general oversight of the company.
- Expenses not related to the business's production,
selling, or financing operations fall under this category.

OTHER INCOME & OTHER EXPENSES:

Other Income & Other Expenses- Along with any expenses or losses incurred in connection
with activities that are not directly related to the primary
business operations, this shows every additional item of
profit or income received.
- Royalties, dividend income, rent income, interest income,
interest expense, and regular and recurring gains and losses
from investments or real estate sales are a few examples.
- These are known as financial items or non-operating
revenue and expenses.
Income Tax- Is presented separately from operational expenses and subtracted just before
determining net income for the period since it is viewed as a sharing of income
with the government.
- The amount of income tax due will depend on the type of business and the amount
of taxable income the company generates.
Sales Revenue- Are the amounts charged to customers for products sold or services rendered
during normal business operations.
- These are gross increases in assets or gross decreases in liabilities resulting from
an enterprise's profit-directed operations, as defined by generally accepted
accounting principles.
Cost of Sales- Is the price of goods sold during normal business operations.
- Product costs are shown separately from other expiring costs since they are a
substantial expense that may be directly connected to sales.

HOW A MERCHANDISING COMPANY CALCULATES ITS COST OF SALES:

1.​ Start of merchandise inventory
2.​ Purchases, net of returns, allowances and discounts
3.​ Cost of goods available for sale
4.​ Less: Merchandise Inventory, end​ ​ (xxx)
5.​ Cost of Sales​ ​ ​ ​ ​ XXX
EXAMPLE OF ASSET ACCOUNTS: Cash & Cash Equivalents
Inventories
Prepaid Expenses
Investment in Debt and Equity Securities
Property and Plant/Equipment
Intangible Assets

Cash & Cash Equivalents: Investment in Debt and Equity Securities:

1.​ Accounts receivable 1.​ Trading securities
2.​ Notes receivable 2.​ Available for sale securities
3.​ Interest receivable 3.​ Held to maturity securities

Inventories: Property and Plant/Equipment:

1.​ Merchandise inventory 1.​ Land
2.​ Raw materials 2.​ Buildings
3.​ Work-in-process 3.​ Equipment
4.​ Finished goods 4.​ Machinery
5.​ Supplies 5.​ Capitalized leases
6.​ Leasehold improvements
Prepaid Expenses:
1.​ Prepaid rent expense Intangible Assets:
2.​ Prepaid insurance expense 1.​ Goodwill
3.​ Prepaid interest expenses 2.​ Trademarks
3.​ Patents

EXAMPLE OF EXPENSE AND LOSS ACCOUNTS:

➢​ Cost of Goods Sold
➢​ Selling, General & Administrative Expenses
➢​ Insurance Expense
➢​ Supplies Expense
➢​ Utilities Expense
➢​ Depreciation Expense
➢​ Other Expenses & Losses

Selling, General & Administrative Other Expenses & Losses:

Expenses: 1.​ Interest expense
1.​ Salaries expense 2.​ Loss on disposal of equipment
2.​ Advertising expense 3.​ Income tax expense
3.​ Rent expense
4.​ Travel Expense
5.​ Communication expense

ACCOUNTS THAT HAVE NORMAL BALANCES ON THE CREDIT SIDE

A.​ Liability Accounts
B.​ Equity Accounts
C.​ Revenue & Gain Accounts

INCREASES AND DECREASES

CREDIT SIDE DEBIT SIDE

Increases in liability accounts Decreases in liability accounts

Increases in equity accounts Decreases in equity accounts

Increases in revenue and gain accounts Decreases in revenue and gain

EXAMPLES OF LIABILITY ACCOUNTS:
Accounts Payable Income Taxes Payable
Notes Payable Dividends Payable
Salaries Payable Unearned Rent Revenue
Rent Payable Borrowings (Short Term & Long Term)
Insurance Payable Bonds Payable
Interest Payable Capital Lease Obligations

EXAMPLES OF EQUITY ACCOUNTS: Paid-in Capital

Common Stock
Preferred Stock
Additional Paid-in Capital
Retained Earnings

EXAMPLES OF REVENUE & GAIN ACCOUNTS: Sales Revenue

Services Revenue
Commissions Revenue
Interest Revenue
Rent Revenue
Dividend Income
Gain on Sale of Buildings
CHARACTERISTICS OF ASSET ACCOUNTS:
A. Assets represent future economic benefits.
B. Assets have normal balances on the debit side.
C. Increases in asset accounts are recorded on the debit side.
D. Decreases in asset accounts are recorded on the credit side.

CLASSIFICATION OF ASSETS: Assets

Current Assets
Assets- Are classified as current and noncurrent assets.
Current Assets- Are expected to be converted to cash or consumed within a year or normal
operating cycle, whichever is longer.
CURRENT ASSETS: Cash & Cash Equivalents
Receivables, Current
Investments, Current
Inventories
Prepaid Expenses

Non-Current Assets- It is anticipated that non-current assets will either be consumed or turned
into cash after a year or a typical business cycle, whichever comes first.
NON-CURRENT ASSETS: Receivables, Non-current
Investments, Non-current
Property, Plant & Equipment
Intangible Assets
Other Non-Current Assets

Net Working Capital: Net working capital= Current Assets-Current Liabilities

CHARACTERISTICS OF NET WORKING CAPITAL:
➢​ It measures the margin of current assets over current liabilities.
➢​ More net working capital implies that the entity has more liquidity.
Expense Accounts:
SIGNIFICANCE OF EXPENSE: It is the use of resources to generate revenue
Matching Principle- It is recognized when related revenue
is recognized.
CHARACTERISTICS OF EXPENSE:
1.​ Expense accounts have normal balances on the debit side
2.​ Increases in expense accounts are recorded on the debit side.
3.​ Decreases in expense accounts are recorded on the credit side.
EXAMPLES OF EXPENSE: Cost of Goods Sold
Selling, General & Administrative Expenses
Selling, General & Administrative Expenses:
Salaries expense Utilities expense
Advertising expense Depreciation expense
Travel expense Other expenses and losses
Communication expense Interest expense
Insurance expense Income tax expense
Supplies expense

MODULE 4: Theory of Debit and Credit

THE THEORY OF DEBIT & CREDIT
Assets- Normally on the debit
Liabilities & Proprietorship- Normally on the credit

Debit to Credit to

Increase an asset Decrease an asset

Decrease a liability Increase a liability

Decrease a proprietorship Increase a proprietorship

Accounting equation interspersed with the theory of debit

and credit appears as follows: Assets = Liabilities + Capital

THOSE INCREASING PROPRIETORSHIP: Original capital

Additional investment
Income
THOSE DECREASING PROPRIETORSHIP: Withdrawal
Deductions from income (costs, expenses, and
losses)

Complete Rules on Debit & Credit

Debit to Credit to

Increase an asset Decrease an asset

Decrease a liability Increase a liability

Decrease the capital or decrease additional Increase a capital or additional investment

investment

Increase a withdrawal Decrease a withdrawal

Decrease an income Increase an income

Increase a deduction from income Decrease a deduction from income

THE NATURE OF DEBIT & CREDIT: BALANCE SHEET ACCOUNTS
The rules of debit and credit may therefore be stated as follows:
Debit Signifies Credit Signifies

An increase in the asset account Decrease in asset accounts

Decrease in liability accounts Increase in liability accounts

Decrease in capital accounts A decline in capital accounts

➢​ Instead of using left and right or increase and decrease, the outcome of a transaction is
typically described in terms of debit and credit.

For instance, the following is the result of paying $1,000 for store goods with cash: $1,000 is
deducted from Store goods, and $1,000 is credited to Cash.

According to the accounting equation, the balance sheet can be used to express the laws of
credit and debit as follows:
Balance Sheet
Assets
Dr Cr

Debit for increase Credit for decrease

Liabilities
Dr Cr

Debit for decrease Cr Credit for increase

Capital
Dr Cr

Debit for decrease Credit for increase

➢​ The balances of the revenue and expense accounts are transferred to a summary account
after being reported in the income statement at the conclusion of the accounting period.
➢​ Temporary capital or nominal accounts are other names for the balance of the summary
account, which is the net income or net loss for the periodic closing of the revenue and
expense accounts.
➢​ The balances of the capital account, liabilities, and assets are carried over to the next
accounting period.

Drawing Account- The owner of a sole proprietorship occasionally takes money out of the
account while conducting business. These withdrawals lower the company's
capital and may be documented as capital account debits.
- To make it easier to calculate the total withdrawals at the conclusion of the
accounting period, it is better to record them in a different drawing or
personal account.
- It is possible to view debits and the drawing account as either increases in
drawings or declines in capital.
- Withdrawals can no longer be shown as expenses on the income statement
and are now referred to as draws. In contrast to expenses, drawings do not
reflect depreciated costs that can be deducted from revenue.
NORMAL BALANCES OF ACCOUNTS
In determining the normal balances of accounts, the following should be observed:
Debit Side (Normal Balances) Credit Side (Normal Balances)

Asset Accounts Liability Accounts

Equity Accounts

Expense Accounts Revenue Accounts

Accounts with regular balances are reported on the sides of the financial statements:
Balance Sheet
Assets Liabilities

Owner’s Equity

Income Statement
Expenses Revenues

➢​ As the entire amount of account increases will surely equal or surpass the total amount of
account decreases, the balances of all accounts are typically positive rather than negative.
➢​ When determining the balance of an account, the smaller of the two sums is subtracted
from the larger.
➢​ For example, because the total debits (increases) in an asset account are usually more
than the total credits (decreases), asset accounts usually have debit balances.
➢​ An account is said to be in balance when its debits and credits are equal.

The regular balances of the different types of accounts and the principles governing credit
and debit are as follows: Rises in both types of accounts that indicate decreases in capital are
reported as debits.
Account Normal

Type Increase Decrease Balance

Asset Debit Credit Debit

Liability Credit Debit Credit

Capital
Capital Credit Debit Credit

Drawing Debit Credit Debit

Revenue Credit Debit Credit

Expenses Debit Credit Debit

➢​ A recording error or an unexpected transaction credit balance in the office equipment
account could be the cause of an account that typically has a debit balance but ultimately
has a credit balance, or vice versa.
➢​ However, if you pay more than what is owed, you can end up with a debit balance in your
account payable account.