Accounting is a service activity.

Its function is to provide quantitative information, primarily

financial in nature, about economic entities, that is intended to be useful in making decisions, in making
reasoned choices among alternative courses of action. (Accounting Standards Council)
Accounting is the art of recording, classifying , summarizing, in a significant manner and in terms
of money, transactions and events which are in part at least of a financial character interpreting the results
thereof.
Accounting is an information system that measures business activities, processes information into
reports and communicates the reports to decision makers.
Accounting serves as a communication link between the business entity and the users of the
financial information (Accountancy = Language of Business)
Recording or Bookkeeping process of systematically maintaining a record of all business transactions,
either manually or electronically, and is done in chronological order or according to the date of occurrence
Classifying sorting or grouping of similar interrelated transactions in their responsive class
Summarizing the preparation of financial statements (Statement of Comprehensive Income, Statement of
Changes in Owners Equity, Statement of Financial Position, Statement of Cash Flows)
Internal Revenue Code of the Philippines Section 232A all business which are compelled by the law to
pay internal revenue taxes should pay internal revenue taxes to keep books of accounts and records in
accordance with the standard accounting system
Revenue Regulation Section 3 No. V-1 the books of accounts and records shall consist of a journal and
a ledger, or their equivalent and shall contain all information necessary for the accurate determination of
internal revenue taxes due on the businesses
Business an organization in which basic resources are assembled and processed to provide goods or
services to customers or clients; objective is to maximize profit
Accounting system allows businesses to develop financial records that can be used to prepare reports on
the financial state of the business
Public Accounting accountants and their staff who render services for a fee
Auditing the independent examination of financial statements for the purpose of expressing an opinion
on the fairness of the said statements prepared by the company under audit; primary service offered in
public practice
Tax Services preparing of income tax returns and advising of clients on tax matters
Management Advisory Services providing services to clients on matters relating to the design and
maintenance
of a companys accounting system, budgeting, cost accounting, production,
organizational planning and other business matters,
Private Accounting accountants employed by business firms or by a not-for-profit organization
Government Accounting accountants who are employed in any governmental units
Accounting Education accountants employed as instructors, professors, reviewers, researchers
Single or sole proprietorship business owned by only an individual called the proprietor; easiest form of
business to organize since there is only minimal requirements to follow

Partnership - an association of two or more persons who bind themselves to contribute money, property or
industry to a common fund, with the intention of dividing profits among themselves; partnes sign the
Articles of Co-Partnership that contains the terms of partnership(how much of the business is owned by
each partner, their duties and responsibilities, and how the profit and loss are to be divided among the
partners)
Corporation - an artificial being created by operation of law having the rights of succession and the
powers and attributes expressly authorized by law or incident to its existence; gets its capital by issuing
stocks to individuals and to other businesses who become owner or stockholders of the corporation
Service Business - renders services to customers or clients for a fee
Merchandising Business - buys goods or commodities and sells them at a profit
Manufacturing Business - makes finished goods from raw materials or unassembled parts; produces the
goods it sells
Generally Accepted Accounting Principles - defines what is accepted accounting practice and they are
like laws that must be followed in financial reporting
Business Entity Concept - the business entity is treated as separate and distinct from its owner/s and from
other business units
Going Concern or Continuity Assumption - unless there is evidence to the contrary, the business enitty
will continue to operate for an infinite period
Time Period Assumption - the indefinite life of the business be divided into time periods or accounting
periods for the purpose of preparing financial reportd on the performance and financial position of the
business
Monthly Basis - shortest accounting period
Quarterly Basis - at the end of every three months
Semi-Annual Basis - six months
Annually - one year
Calendar Year - begins on January 1 and ends on December 31
Fiscal Year - begins on any month except January and will end on the twelvth month of the following year
Interim Statements - less than one year
Unit of Measurement Assumption - accounting should measure and report the results of a business'
economic activities in terms of a monetary unit
Accrual Basis - revenue or income should be recognized when incurred regardless of when payment is
made
*Cash Basis - method of recognizing revenue and expense when cash is received or when cash is paid
Mathcing Principle - costs and expenses incurred in generating the revenue should be properly matched
against the related revenue in determining the net income or net loss for the period
Statement of Comprehensive Income - shows the summary of the company's revenue and expenses for a
given period
Statement of Financial Position (Balance Sheet) - shows the list of a company's asset, liabilities and
owner's equity as of a specific date; shows the financial position or condition of an enterprise as of a
specific date

Statement of Changes in Owner's Equity - or Capital Statemnt is the summary of changes in the owner's
equity that have occured during the specific period of time
Statement of Cash Flows - provides information about the cash receipts and the cash payments of an
entity for a given period of time: contains what are the sources of cash and the uses or disbursements made
by the company
Notes to the Financial Statements - presents in narrative form the significant accounting policies and
other related explanatory notes that have affected the preaparation of the financial statements
Relevance - information must be relevant to the decision-making needs of users; information would
influence a decision by helping users form predictions about the outcome of past, present and future events,
or confirm and correct prior expectations
Reliability - information is free from errors and bias and can be depended upon by users to represent
faithfully what it purports to represent
Understandability - information provided in the financial statements must be presented ina form and
expressed in terminology that a user understands
Comparability - users must be able to compare the financial statements of an entity through time in order
to identify trends in its financial position or performance from one accounting period to the next
Managerial Accounting - area of accounting that is focused on the accumulation and preparation of
financial preparation of financial reports for the use of management
Financial Accounting - area of accounting that is focused on developing and reporting financial
information needed for external users
ASSETS - resources controlled by the enterprise as a result of past transactions and events from which
future ecocnomic benefits are expected to flow to the eneterprise; properties owned by the business
LIABILITIES - present obligations of an enterprise arising from past transactions or vents, the settlement
of which is expected to result in an outflow from the enterprise of resources embodying economic benefits;
financial obligations or debts of the business; claim or equity of the creditors on the assets of the enterprise
CAPITAL - represnts the equity or claim of the owner on the assets of the business; the residual interest in
the assets of the business after deducting all its liabilities
REVENUE/ INCOME - is the gross inflow of economic benefits during the period in the form of inflows
or enhancements on assets or decrease in liabilities that result in the increase in equity, other than those
relating to contributions from the owner/s
EXPENSES - is the gross outflow of economic benefits during the period in the course of ordinary
activities when these outflows result indecrease in equity other than those relating to distribution to owners;
costs incurred to produce revenue
Accounting Information System - the combination of personnel, records, procedures that a business uses
to provide financial data
*We computerize to do the accounting faster and make it more reliable; specialization combines similar
transactions to speed the process
Business Transaction - an event that has some effect on the resources of a firm or on the source of the
firm's assets; an activity that involves a change of values

External Transaction - transactions that happen between a business and an outsider

Internal Transactions - transactions that happen within the business that do not involve outsiders
Source Document - the evidence of a transaction that describes the essential facts of the transaction
Assets = Liabilities + Owner's Equity
or
Assets - Liabilities = Owner's Equity
Assets - Capital = Liabilities
*the left side of the equation shows the assets while the right side shows who provide the funds or resouces
needed by the business
Equity - rights to properties (Liabilities - the equity of the creditors; Capital - equity of the owner/s)
Account Form (Balance Sheet) - total assets are shown in the same line as with the total liabilities and
capital
Report Form (Balance Sheet) - liabilities and capital section are shown below the assets section
Operating Activities - involve the production or purchase purchase of merchandise and the sale of goods
or services to customers; include the expenditures related in adminestering the business; relate to the
calculation of net income; includes collections of interestn cash payments to settle credit purchase of
merchandise, and payments of interest expense
Investing Activities - transactions that involve making and collection of loans that involve purchasing and
selling plant assets, other proDuctive assets, and investments; ; involve the purchase or sale of assets that
are classified on the balance sheet as plant and equipment, intangible assets or long-term assets
Financing Activities - a company's transactions with its owner/s and long term creditors; includes
borrowng of cash on a short-term basis
Journalizing - process of recording business transactions in the book of original entry or journal (where
transactions are first recorded)
Double-Entry Bookkeeping - method of recording business transactions which recognizes the dual effect
of a transaction; for every value received there is a corresponding value parted with or given up
Account - a record of each asset, liability, owner's equity, revenue, expense items in which the effects of
business transactions are recorded
T-Account - used for illustrations, analyzing transactions
Debit - came from the Latin word "debere" (to owe); left side of an account
Credits - came from the Latin word "credere" (to trust or believe); right side of an account
Debit signifies:
Increase in Assets
Decrease in Liabilities
Decrease in Capital
Increase in Drawing
Decrease in Revenue
Increase in Expense

Credit signifies:
Decrease in Assets
Increase in Liabilities
Increase in Capital
Decrease in Drawing
Increase in Revenue
Decrease in Expense

Simple Journal Entry - there is only one debit and one credit in the entry
Compound Journal Entry - there are more than two accounts involved
Ledger - a group of accounts; provides a summary of transactions for an accounting period; book of final
entry
Posting - process of transferring the entries from the journal to the accounts in the ledger
Pencil Footing - after posting the journal entries to the ledger, the amounts of the debit and credit columns
of the accounts are totalled and the difference between the amount of debit and credit totals is determined
Trial Balance - summary of the listing of the account titles and the balance of each account; prepared to
test the quality of the debit and credit balances of the accounts in the ledger
Chart of Accounts - list of all accounts in the business and their corresponding account number
Transposition - an error committed when the order of numbers are reversed
Slide - an error committed when one or more digits are either moved to the left or right
Accounting Period - period of time into which an entity's life is arbitrarily divided for financial statement
purposes
Adjusting process - step after the preparation of the trial balance; process of gathering and putting together
data necessary to update the balances of the accounts
Adjusting Entries - entries prepared at the end of the accounting period to update or adjust the balances of
accounts; affect at least one income statement account and one balance sheet account
Accrued Expenses - liability account; expenses already incurred but not yet paid; accrued liabilities
accrued payable
Accrued Revenue - asset account; revenue already earned by the business but not yet collected or received
at the accounting period
Interest Receivable - interest earned but not yet collected; reported as a current asset in the balance sheet
since it will be collected in 30 days
Interest Payable - interest expense but not yet paid; reported as a current liability in the balnce sheet since
it will be paid in 30 days
Prepaid/ Deferred Expense - expenses paid in advance; asset account; are expected to become expenses
through the passage of time through use and consumption; opposite af accrued expense
Asset Method - the account debited upon payment is an asset account, upon adjustment an expense
account is debited with a corresponding credit to an asset account
Expense Method - the account debited upon payment is an expense account, upon adjustment an asset
account is debited and an expense account is credited
Unearned/ Defferred Revenues - liability account; revenues collected or received in advance by the
business
Liability Method - the account credited upon receipt of cash is a liability account, upon adjustment such
liability account will be debited and a revenue account is credited

Revenue/ Income Method - the account credited at the date of collection is a revenue/income account,
upon adjustment a revenue account is debited and a liability account is credited
Deferrals - postponement of the recognition of revenue which the company has received or collected in
advance and the postponement of the recognition of expense which has been paid in advance
Accruals - refer to the recognition of expense already incurred though not paid, and the recognition of of
revenue already earned though not received
Property, Plant and Equipment (Fixed/ Plant Assets) - physical resources that are owned and used by
the business which are relatively fixed or permanent in nature that have a long useful life
Depreciation Accounting - process of allocating the depreciable cost of a fixed asset over its estimated
useful life
Accumulated Depreciation - accumulated amount of depreciation expense from the year of recognition to
the latest balance sheet date
Asset Cost - purchase price plus other direct costs incurred in acquiring and bringing the asset to its
intended use
Estimated Residual Value/ Salvage Value/ Scrap Value/ Trade in Value - estimated amount the fixed
asset can be sold at the end of its useful life
Estimated Useful Life - may be expressed in years or number of units, or hours that the asset can be used
Uncollectible Accounts or Bad Debts - the company's receivables which might not be collected
Accounting Cycle - series of steps accountants perform during an accounting period; its purpose is to
generate financial statements
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

The transactions are analyzed by examining source documents

The transactions are journalized
The journal entries are posted to the ledger
A trial balance is prepared
The data needed to adjust the accounts are assembled
A worksheet is prepared
The financial statements are prepared
The adjusting entries are journalized and posted to the ledger
The closing entries are journalized and posted to the ledger
A post-closing trial balance is prepared
The reversing entries are journalized and posted to the ledger

Worksheet - is a columnar shhet of paper used to summarize information needed to make the adjusting and
closing entries and to prepare the financial statemnts, only a tool used by accountants and is not part of the
formal accounting record
Adjusted Trial Balance - the original trial balance plus or minus the adjustments
Net Income - the difference if the total revenues exceed the total expenses that is added to the debit column
total
Net Loss - the difference if the total expenses exceed the total revenues that is added in the credit column
total

Capital Statement(Statement of Owner's Equity) - a financial statement that summarizes the

transactions affecting the owner's capital; prepared by showing the beginning capital balance, adding net
income or deducting net loss, then subtracting owner's withdrawals; the result is the ending capital balance
that is forwarded to the balance sheet
Classified Statement of Financial Position - subdivides the assets and liabilities in order to provide more
specific information for the users of financial statements; assets are classified to current assets and noncurrent assets while liabilities are classified to current liabilities and non-current liabilities
Current Assets - cash and other assets that are converted into cash or used up in a relatively short period of
time, usually onr year or less; listed in order of liquidity (convertability into cash)
Non-current Assets - assets acquired for use in the business rather than for sale; also called fixed assets
because they are used for long-term purposes
Current Liabilities - debts usually due within one year, the payment of which normally will require the
use of current assets; listed in the order of their maturiry(the sooner the liability is to be paid, the earlier it is
normally listed
Non-current Liabilities (Long-term Liabilities) - debts that will be paid after a relatively long pertiod of
time, usually more than one year; the one with the earliest due dates are listed first
International Accounting Standard No. 7 - cash flow information is useful in providing users of financial
statements with a basis to assess the ability of the enterprise to generate cash and the need of the enterprise
to utilize those cash flows. The economic decisions that are taken by users require evaluation of the entity
to generate cash and the timing and certainty of their generation
Operating Activities create revenues and expenses in the entitys major line of business; affect the
income statement; which report the accrual basis effects of operating activities
Investing Activities increase or decrease the assets that the business has to work with; include more than
buying and selling of assets that are classified as investment in the balance sheet
Financing Activities obtain funds from investors and creditors needed to launch and sustain the business
Closing Entries entries prepared at the end of the accounting period to bring the balances of temporary
or nominal accounts to zero, so that they will be ready to receive data for the next accounting period
Temporary Accounts: revenues; expenses; and drawing accounts
Post-Closing Trial Balance the trial balance prepared after the adjusting and closing procedures;
temporary accounts are no longer included since they have been closed
Interim Statements financial statements prepared for the period of less than a year; adjustments for
accrued items must be considered in preparing interim statements
Reversing Entries are prepared for certain types of adjusting entries as of the first day of the next
accounting period; reverses the effects of adjusting entries to which they relate; purpose is to simplify the
first entry relating to that same item in the next accounting period; all adjusting that increase assets or
liabilities must be reversed, adjusting entries that decrease assets or liabilities are not reversed