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INSTRUCTIONAL MATERIAL FORACCO 20203ACCOUNTINGCompiled by:MELINDA S. BALBARINOLEONARDO COQUILLAMARIA TERESA M. CORRALESMARIETTA M. DOQUENIAJULIETA G. FONTEFRANCIA PEÑAFLOREDITHA A. PERALTAANDREA ROSE E. RIMORINCATHERINE D. SOTTO2020GENERAL INFORMATION ABOUT THE COURSEGENERAL INSTRUCTIONS FOR STUDENT...

Description

ACCOUNTING

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INSTRUCTIONAL MATERIAL FOR

ACCO 20203 ACCOUNTING

Compiled by:

MELINDA S. BALBARINO LEONARDO COQUILLA MARIA TERESA M. CORRALES MARIETTA M. DOQUENIA JULIETA G. FONTE FRANCIA PEÑAFLOR EDITHA A. PERALTA ANDREA ROSE E. RIMORIN CATHERINE D. SOTTO 2020

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ACCOUNTING

GENERAL INFORMATION ABOUT THE COURSE

Course Code and Title

: ACCO 20203 – ACCOUNTING

Semester and Academic Year

: First Semester, Academic Year 2020- 2021

Course Credit

: 3 Units

Pre-Requisite

: None

Course Description

: This course provides an introduction to accounting, within the context of business and business decisions. Students obtain basic understanding of the principles and concepts of accounting as well as their applicability and relevance in the national context and learn how to use various types of accounting information found in financial statements and annual reports. Emphasis is placed on understanding the reasons underlying basic accounting concepts and providing students with an adequate background on the recording, classification, and summarization functions of accounting to enable them to appreciate the varied uses of accounting data of a sole-proprietorship for service type of business.

Course Outcomes

:

Upon completion of the course, the students will be able to: a. Have detailed knowledge and understanding of the accounting process of a Single Proprietorship for service business b. Produce the required entries and financial records of a Single Proprietorship c. Competence and honesty in the performance of accountancy service d. Demonstrate the qualities of a future accountant e. Skilled in the use of a calculator, computer and other business equipment

GENERAL INSTRUCTIONS FOR STUDENTS

ACCOUNTING

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This instructional material is composed of five (5) modules that will introduce you to the world of accounting and its reporting. Faculty members who prepared this instructional material purposively chose only five (5) topics which are the most relevant topics when learning about accounting. FOR STUDENTS WITH INTERNET CONNECTIVITY, you are tasked to answer the activities or performance tasks in accordance with the instruction of your instructor. FOR STUDENTS WHO DO NOT HAVE INTERNET CONNECTIVITY AND RECEIVED THIS INSTRUCTIONAL MATERIAL VIA COURIER SERVICES, you are tasked to accomplish the activities or performance tasks at your own space. If the sheets provided are not enough, use another sheet of paper for your answers. You may have your answers handwritten OR computerized and printed.

House Rules The following guides and house rules will help you further to be on track and to say at the end of the module, “Yes! I conquered Accounting!”. 1.

Schedule and manage your time to read and understand every part of the of the module. Peruse it over until you decipher the undertakings.

2.

Study how you can manage to do the activities of the course in consideration of your modules from other courses. Be very conscious with the study schedule. Post it on a conspicuous place so that you can always see. Do not ask you your course facilitator about questions that are already answered in the guide.

3.

Do not procrastinate. Remember, it is not others who will be short- changed if you will do your work on time.

4.

Before you start doing your tasks, read and understand the assessment tools provided. Do not settle with the low standards, target the highest standards in doing your assigned tasks. I know that you can! :)

5.

You are free to browse and read the different materials even prior to doing the tasks in each until the module. However, you need to ensure that you will not miss any part of the module and you will submit course activities in the prescribed due date.

Table of Contents

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Topic Module 1 – Introduction to Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Pages 5 – 29

Module 2 – The Accounting Equation And Analyzing Business Transactions. . . . .30 – 41

Module 3 – Recording and Posting the Business Transactions . . . . . . . . . . .

42 – 66

Module 4 – Adjusting Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

67 – 84

Module 5 – Completion of the Accounting Process . . . . . . . . . . . . . . . . . . . . . .

85 – 107

ACCOUNTING

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Module I

INTRODUCTION TO ACCOUNTING Overview: Accounting is one of the key functions for almost any business. It may be handled by a bookkeeper or an accountant at a small firm, or by sizable finance departments with dozens of employees at larger companies. A bookkeeper can handle basic accounting needs, but a Certified Public Accountant (CPA) should be utilized for larger or more advanced accounting tasks. The reports generated by various streams of accounting, such as cost accounting and managerial accounting, are invaluable in helping management make informed business decisions. Regardless of the size of a business, accounting is a necessary function for decision making, cost planning, and measurement of economic performance measurement. It is therefore important to know and understand the definition of accounting and its branches, its history, principles and standards. Learning Objectives: 1. The learner should be able to know the history of accounting, its origin and the people who first use the system and how the system evolved into its present condition. 2. The Learners should be able to define Accounting and understand every word used in its definition and relate these words with the ultimate purpose or purposes of accounting information system and to identify the primary uses of the financial information. 3. The learner should understand the basic principles in accounting to be able to understand how the system works and how the information should be recorded and presented in the financial reports. 4. The learner should be able to understand the different types of business and the different forms of business organization and should be able to identify each and distinguish it from the others. 5. The learner should be able to understand the basic accounting equation and all the elements in it as well as the account titles that would be used in recording the transactions. History of Accounting The first name that might come to mind when referencing early accounting history is Fra Luca Bartolomeo de Pacioli , an Italian mathematician, Franciscan friar, collaborator with Leonardo da Vinci, who described double-entry bookkeeping in his “Summa de Arithmetica, Geometria, Proportioni et Proportionalita” in 1494. While that may sound like a long time ago, accounting may have roots that trace back even earlier. Accounting has been around for centuries. It’s a critical part of the business, record-keeping, and life in general. The earliest accounting records were found over 7,000 years ago among the ruins of Ancient Mesopotamia. At the time, people relied on accounting to keep a record of crop and herd growth. They used accounting techniques that are still used today to determine if there was a surplus or shortage after crops were harvested each season. The first record of accounting

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that occurred thousands of years ago in Mesopotamia has evolved into the intricate element of business and life that it is today. Accounting History During the Roman Empire During the reign of the Roman Empire, accounting continued to evolve much further. “The Deeds of the Divine Augustus” is an account of Emperor Augustus’ financial dealings. It listed such quantities as distributions to the people, grants of land, building of temples, money to military veterans, religious offerings, and money spent on theatrical shows and gladiator events. This discovery hints at the scope of accounting information available to the emperor, which he then probably used for planning and decision-making purposes. Roman historians also recorded public revenues, the amount of money in the state treasury, taxes, slaves, freedmen, and more. Fra. Luca Pacioli’s Contribution to the Accounting Profession In 1494, Pacioli wrote Summa de Arithmetica, Geometria, Proportioni et Proportionalita, which included a twenty-seven-page treatise on bookkeeping titled, Particularis de Computis et Scripturis (Details of Calculation and Recording) on the subjects of record keeping and doubleentry accounting. Pacioli’s book became the reference text and teaching tool on the subjects of bookkeeping and accounting for the next several hundred years. This was the first time that symbols for plus and minus appeared in a printed book. This book was the first known published work on the topic of double-entry bookkeeping. Accounting During the Middle Ages During the Middle Ages, bartering was the primary form of money-changing, but when Europe changed to a monetary economy is the 13th Century, merchants began relying on bookkeeping to keep a record of multiple transactions. This is when double-entry bookkeeping got its start, which is when a debit and credit value is entered for each transaction by the accountant. Merchants at the time used accounting as a new recording system. It provided them with constant information about their businesses that they could use in decision-making to grow their business as they saw fit. This laid the foundation of how we use and understand accounting today. Accounting Systems in Today’s Generation Nowadays, there are accounting standards, auditing regulations, and ethical standards for accountants to follow. Along with this standard is the advancement in technology and accounting has gone through many changes throughout the ages. Through all the changes, accounting technology has always played a part in making the accountant’s job just a little easier. As people’s knowledge of technology increased so has the accountant’s ability to analyze statistical values. Technology advancements have enhanced the accountant’s ability to interpret data efficiently and effectively. He/she now has the ability to interpret the language of business with such ease that the accountant has become a business’ most trusted business advisor. Accountants were pushed towards acquiring new skills due to the advancements that information technology has made on the accounting industry. Accountants now have to have a high level of computer and technical skills. These skills have become part of the knowledge, and abilities of the accounting professionals. In its report the American Institute of Certified Public Accounts (AICPA) cites that, “The knowledge, skills and abilities necessary for the entry-level accountant now include the application and integration of information technology into the

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accounting process, as well as financial and managerial accounting principles” (Dillon, Kruck, 2004). From this research, not only does an accountant need to have a broad range of accounting knowledge and a strong ability to apply accounting principles, government regulations and interpret tax laws; they must also have strong skills in information technology, to be able to merge accounting with information systems. These accountants will be in greater demand by the profession (Dillon, et al, 2004). Definition of Accounting What Is Accounting? Accounting is the process of recording financial transactions pertaining to a business. The accounting process includes analyzing, recording, summarizing, financial transactions or events over an accounting period, and reporting these transactions in the form of financial statements (Income Statement, Balance Sheet, Capital Statement and Statement of Cash Flows) to government’s regulatory, and tax collecting agencies. In simple explanation, Accounting is how the business records, organizes, and understands its financial information. Accounting can be thought of as a big machine where raw financial information are put into, such as records of all business transactions, taxes, estimates and allowance, etc., that then spits out an easy to understand reports or statements about the financial state of the business. These financial statements tell its reader whether the business is making a profit or not, where the cash came from and where it was put, what the current amount of the assets and liabilities of the business and how much remained as capital of the business owner or owners. Technical definitions of accounting have been published by different accounting bodies. The American Institute of Certified Public Accountants (AICPA) defines accounting as: "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least of financial character, and interpreting the results thereof." The American Accounting Association on the other hand defines accounting as “the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information”. According to the Accounting Standards Council, “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 economic decisions, in making reasoned choices among alternative courses of action.” Branches of Accounting As a result of economic, industrial, and technological developments, different specialized fields in accounting have emerged. The most commonly known branches or types of accounting include: financial accounting, cost accounting, auditing, managerial accounting, AIS ,taxation, forensic, and fiduciary accounting. 1. Financial Accounting- Financial accounting involves recording and categorizing transactions for business. This data is generally historical, meaning it’s from the past. It also involves generating financial statements based on these transactions. All financial

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statements, such a balance sheet and income statement, must be prepared according to the generally accepting accounting principles (GAAP). Financial accounting is performed to conform to external regulations and requirements. 2. Cost Accounting - Cost accounting is considered a type of managerial accounting. Cost accounting is most commonly used in the manufacturing industry, an industry that has a lot of resources and costs to manage. It is a type of accounting used internally to assess a company’s operations. Cost accounting concerns itself with recording and analyzing manufacturing costs. It looks at a company’s fixed (unchanging and constant costs, like rent) and variable costs (changing costs, like shipping charges) and how they affect a business and how these costs can be better managed, according to Accounting Tools. 3. Auditing - There are two types of auditing: external and internal auditing. In external auditing, an independent third party reviews a company’s financial statements to make sure they are presented correctly and comply with GAAP and IFRS. Internal auditing involves evaluating how a business divides up accounting duties, who is authorized to do what accounting task and what procedures and policies are in place. Internal auditing helps a business to zero in fraud, mismanagement and waste or identify and control any potential weaknesses in its policies or procedures. 4. Managerial Accounting -Also known as management accounting, this type of accounting provides data about a company’s operations to managers. The focus of managerial accounting is to provide data that managers need to make decisions about a business’s operations, not comply strictly with GAAP. Managerial accounting includes budgeting and forecasting, cost analysis, financial analysis, reviewing past business decisions and more. Cost accounting is a type of managerial accounting. 5. 5. Accounting Information Systems - Known as AIS for short, accounting information systems concerns itself with everything to do with accounting systems and processes and their construction, installation, application and observation. This can include accounting software management and the management of bookkeeping and accounting employees. 6. 6. Tax Accounting- Tax accounting involves planning for tax diminution, payment scheme and the preparation of tax returns. This branch of accounting helps businesses to comply with regulations of the Philippine Taxing Authorities, more particularly the Local Government Units for the Mayor’s Permits, BIR for the Internal Taxes and Bureau of Customs for taxes on importation and exportation. Tax accounting also helps businesses figure out their income tax and other taxes and how to legally reduce their amount of tax owing. Tax accounting also analyzes tax-related business decisions and any other issues related to taxes. 7. Forensic Accounting -This specialized accounting service is trending in accounting and is becoming increasingly popular. Forensic accounting focuses on legal affairs such as inquiry into fraud, legal cases and dispute and claims resolution. Forensic accountants need to reconstruct financial data when the records are incomplete. This could be to decode fraudulent data or convert a cash accounting system to accrual accounting. Forensic accountants are usually consultants who work on a project basis. 8. 8. Fiduciary Accounting - This branch of accounting centers around the management of property for another person or business. The fiduciary accountant manages any account

ACCOUNTING

and activities related to the administration and guardianship of property. Fiduciary accounting covers estate accounting, trust accounting and receivership (the appointing of a custodian of a business’s assets during events such as bankruptcy). Purposes and Uses of Accounting Information The purpose of accounting is to accumulate and report on financial information about the performance, financial position, and cash flows of a business. Accounting provides people interested in the business or company with various pieces of information regarding business operations, this information is then used to reach decisions about how to manage the business, or invest in it, or lend money to it. Uses of Accounting Information 1. A common use of accounting information is measuring the performance of various business operations. While financial statements are the classic accounting information tool used to assess business operations, business owners may conduct a more thorough analysis of this information when reviewing business operations. Financial ratios use the accounting information reported on financial statements and break it down into leading indicators. These indicators can be compared to other companies in the business environment or an industry standard. This helps business owners understand how well their companies operate compared to other established businesses. 2. Business owners often use accounting information to create budgets for their companies. Historical financial accounting information provides business owners with a detailed analysis of how their companies have spent money on certain business functions. Business owners often take this accounting information and develop future budgets to ensure they have a financial road map for their businesses. These budgets can also be adjusted based on current accounting information to ensure a business owner does not restrict spending on critical economic resources. 3. Accounting information is commonly used to make business decisions. For financial management, an income statement and accounting of expenses provides an important overview of the business. Decisions may include expanding current operations, using different economic resources, purchasing new equipment or facilities, estimating future sales ...