FUNDAMENTALS OF

ACCOUNTING:
THE ELEMENTS
KONRAD LORENZ M. UYCHOCO
WHAT IS ACCOUNTING?

• “Accounting is a service activity. The accounting function is to provide quantitative

information, primarily financial in nature, about economic entities, that is intended to be
useful in making economic decision” (Accounting Standards Council)
• “Accounting is 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 a financial
character and interpreting the results thereof” (American Institute of Certified Public
Accountants)
IMPORTANT POINTS

1. Accounting is about quantitative information

2. The information is likely to be financial in
nature
3. The information should be useful in decision
making
ACCOUNTING EQUATION

• Assets=Liabilities + Owner’s Equity

 ELEMENTS RELATED TO MEASUREMENT OF
FINANCIAL POSITION
• Asset
• Liability
• Equity
 ELEMENTS RELATED TO MEASUREMENT OF
FINANCIAL PERFORMANCE
• Income
• Expense
DEFINITION OF ASSETS

• Resource controlled by the entity as a result of past events and from

which future economic benefits are expected to flow to the entity
• Recorded at cost
• In a cash transaction, cash payment
• In a noncash transaction, fair value of the asset given/received,
whichever is evident
• If no fair value, cost=carrying amount
DEFINITION OF ASSETS
CURRENT ASSETS
• Assets which can be convertible/can be
easily converted into cash within a year
• Cash, Cash Equivalents (i.e. checks), and
Receivables are some examples
NON-CURRENT/FIXED ASSETS
• Assets which takes more than 1 year to
be able to convert into cash
• Vehicles, Furniture, Machinery, and assets
which can’t be easily sold immediately
are some examples, because it takes a
longer time for them to be sold and
converted to cash.
DEFINITION OF LIABILITY

• Present obligation arising from past events the settlement of which is expected
to result in an outflow from the entity of resources embodying economic
benefits
• Examples of settlement of liability:
• Payment of cash
• Transfer of non-cash assets
• Provision of services
• Replacement of obligation with another obligation
• Conversion of the obligation into equity
DEFINITION OF INCOME

• Increase in economic benefit during the accounting period in the form of

increase in asset or decrease in lability that results in increase of equity,
other than contribution from equity participants
• Recognized when earned, not when cash is paid (Accrual Basis)
• Und
DEFINITION OF EXPENSE

• Recognized when it is probable that a decrease in future economic benefits related to

decrease in an asset or an increase in liability has occurred and that the decrease in
economic benefits can be measured reliably
 NORMAL BALANCES FOR EVERY
ELEMENT/ACCOUNT

DEBIT (DECREASED BY CREDIT) CREDIT (DECREASED BY DEBIT)

• Assets • Liabilities
• Expenses • Capital
• Contra-Capital (e.g. Drawings) • Income
• Counter-Asset (e.g. Accumulated
Depreciation)
 LEARNING TO USE THE
ACCOUNTING EQUATION
• 2 or more accounts will be involved per transaction
• An increase in at least one of the accounts can involve the increase of at least one of the
other accounts as well
• The accounting equation should be balanced
TRANSACTIONS AND EXPLANATIONS

1. Kate Soriano opened up her laboratory, Soriano’s Laboratory, and invested in:
1. P250,000 cash
2. P200,000 equipment
2. Purchased furniture for P50,000 on account
3. Received cash as income from customers, P65,000
4. Soriano withdrew P15,000 cash
5. Partly paid P10,000 for the liability on the furniture
6. Rendered services on account, P15,000
7. Fully collected services rendered on account.
 Asset = Liability + Capital
(250,000+200,000) = 0 + (250,000 + 200,000)
450,000 = 0 + (450,000)
 Asset = Liability + Capital
(250,000+200,000) = 0 + (250,000 + 200,000)
(450,000) = 0 + (450,000)
(450,000 + 50,000) = (50,000) + (450,000)
 Asset = Liability + Capital
(250,000+200,000) = 0 + (250,000 + 200,000)
(450,000) = 0 + (450,000)
(450,000 + 50,000) = (50,000) + (450,000)
(450,000 + 50,000 + 65,000) = (50,000) + (450,000 + 65,000)
 Asset = Liability + Capital
(250,000+200,000) = 0 + (250,000 + 200,000)
(450,000) = 0 + (450,000)
(450,000 + 50,000) = (50,000) + (450,000)
(450,000 + 50,000 + 65,000) = (50,000) + (450,000 + 65,000)
(450,000 + 50,000 + 65,000-15,000) = (50,000) + (450,000 + 65,000-15,000)
 Asset = Liability + Capital
(250,000+200,000) = 0 + (250,000 + 200,000)
(450,000) = 0 + (450,000)
(450,000 + 50,000) = (50,000) + (450,000)
(450,000 + 50,000 + 65,000) = (50,000) + (450,000 + 65,000)
(450,000 + 50,000 + 65,000-15,000) = (50,000) + (450,000 + 65,000-15,000)
(450,000 + 50,000 + 65,000-15,000-10,000) = (50,000-10,000) + (450,000 + 65,000-15,000)
 Asset = Liability + Capital
(250,000+200,000) = 0 + (250,000 + 200,000)
(450,000) = 0 + (450,000)
(450,000 + 50,000) = (50,000) + (450,000)
(450,000 + 50,000 + 65,000) = (50,000) + (450,000 + 65,000)
(450,000 + 50,000 + 65,000-15,000) = (50,000) + (450,000 + 65,000-15,000)
(450,000 + 50,000 + 65,000-15,000-10,000+15,000) = (50,000-10,000) + (450,000 +
65,000-15,000+15,000)
SOURCES:

• 21st Century Accounting Process by Zenaida Vera

Cruz Manuel (2017 edition)
• Conceptual Framework and Accounting Standards
by Valix, et. Al (2018 edition)