“Bookkeeping is a mechanical task involving the collection of basic financial data. The data are first entered in the accounting records of the books of accounts, and then extracted, classified and summarized in the form of income statement, balance sheet and cash flows statement. This process normally takes place once a month. An income statement shows whether the business has made a profit or loss during the period, i.e. it measures how well the business has done. A balance sheet lists what the entity owns (its assets), and what it owes (its liabilities) as at the end of the period. The cash flows statement presents the cash inflows and outflows of the business during the period.
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The bookkeeping procedures usually end when the basic data have been entered in the books of accounts of each entry had been tested. At that stage, the accounting function takes over. Accounting tends to be used as a generic term covering almost anything to do with the collection and use of basic financial data. It should, however, be more properly applied to use to which the data are put once they have been extracted from the books of accounts. Bookkeeping is a routing operation, while accounting requires the ability to examine a problem using both financial and non-financial data (Ballada, 2013).”
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Typical Account Titles Used
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STATEMENT OF FINANCIAL POSITION
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Assets – classified into two: current assets and non-current assets.
Based from Philippine Accounting Standards (PAS) No. 1, an entity shall classify current when:
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It expects to realize the asset, or intends to sell or consume it, in its normal operating cycle;
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It holds the asset primarily for the purpose of trading;
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It expects to realize the asset within twelve months after the reporting period; or
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The asset is cash or a cash equivalent (as defined in PAS No. 7) unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.
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All other assets should be classified as non-current assets. Operating cycle is the time between the acquisition of assets for processing and their realization in cash or cash equivalents. When the entity’s normal operating cycle is not clearly identifiable, it is assumed to be twelve months.
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CURRENT ASSETS
Cash – any medium of exchange that a bank will accept for deposit at face value. It includes coins, currency, checks, money orders, bank deposit and drafts
Cash Equivalents – Per PAS No. 7, these are short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
Notes Receivable – a written pledge that the customer will pay a business a fixed amount of money on a certain date
Accounts Receivable – claims against customers arising from sale of services or goods on credit. This type of receivable offers less security than a promissory note.
Inventories – Per PAS No. 2, these are assets which are (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.
Prepaid Expenses – paid for by the business in advance. It is an asset because the business avoids having to pay cash in the future for a specific expense. These include insurance and rent. These prepaid items represent future economic benefits-assets-until the time these start to contribute to earning process; these, then, become expenses.
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NON-CURRENT ASSETS
Property, plant and equipment – Per PAS No. 16, these are tangible assets that are held by an enterprise for use in the production or supply of goods or services, or for rental to others, or for administrative purposes and which are expected to be used during more than one period. Included are such items as lands, building, machinery and equipment, furniture and fixtures, motor vehicles, and equipment.
Accumulated Depreciation - a contra-account that contains the sum of the periodic depreciation charges. The balance in this accounted is deducted from the cost of the related asset-equipment or building-to obtain books value.
Intangible Assets – Per PAS No. 38, these are identifiable, non-monetary assets without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. These include goodwill, patents, copyrights, licenses, franchises, trademark, brand names, secret processes, subscription lists and non-competitive agreements.
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LIABILITIES
Per revised PAS No. 1, an entity shall classify a liability is current when:
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It expects to settle the liability in its normal operating cycle;
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It holds the liability primarily for the purpose of trading;
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The liability is due to be settled within twelve months after the reporting period or;
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The entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period.
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All other liabilities should be classified as non-current liabilities.
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CURRENT LIABILITIES
Accounts Payable – represents the reverse relationship of the accounts receivable. By accepting the goods and services, the buyer agrees to pay for them in the near future
Notes Payable – reverse sense of notes receivable. In the case of notes payable, the business entity is the maker of the note; that is, the business entity is the party who promises to pay the other party a specified amount of money on a specified amount of date.
Accrued Liabilities – amounts owed to others for unpaid expenses. This account include salaries payable, utilities payable, interest payable and taxes payable.
Unearned Revenues – When the business entity receives payment before providing its customers with goods and services, the amounts received are recorded in the unearned revenue account (liability method). When the goods or services are provided to the customer, the unearned revenue is reduced and income is recognized.
Current Portion of Long-Term Debt – portions of mortgage notes, bonds and other long-term indebtedness which are to be paid within one year from the balance sheet date.
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NON-CURRENT LIABILITIES
Mortgage Payable – record long-term debts of the business entity for which the business entity has pledged certain assets as security to the creditor. In the event that the debt payments are not made, the creditor can foreclose or cause the mortgaged asset to be sold to enable the entity to settle the claim.
Bonds Payable – Business organizations often obtain the substantial sums of money from lenders to finance the acquisition of equipment and other needed assets. They obtain these funds by issuing bonds. The bond is a contract between the issuer and the lender of specifying the terms of repayment and the interests to be changed.
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OWNER'S EQUITY
Capital – used to record the original and additional investments of the owner of the business entity. It is increased by the amount of profit earned during the year or is decreased by a loss. Cash or other assets that the owner may withdraw from the business ultimately reduce it. This account title bears the name of the owner.
Withdrawal – When the owner of the business entity withdraws cash or other assets, such are recorded in the drawing or withdrawal account rather than directly reducing the owner’s equity account.
Income Summary – temporary account used at the end of the accounting period to close income and expenses. This account shows the profit or loss for the period before the closing to the capital account.
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INCOME STATEMENT
Income
Service Income – revenues earned by performing services for a customer or client; for example accounting services by a CPA firm, laundry services by a laundry shop.
Sales – revenues earned as a result of sale of merchandise; for example, sale of building materials by a construction supplies firm.
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Expenses
Cost of Sales – the cost incurred to purchase or to produce the products sold to customers during the period; also called costs of goods sold
Salaries or Wages Expense – includes all payments as a result of an employer-employee relationship such as salaries or wages, 13th month pay, cost of living allowances and other related benefits
Telecommunications, Electricity, Fuel and Water Expenses – expenses related to use of telecommunications facilities, consumption of electricity, fuel and water
Rent Expense – expense for space, equipment or other asset rentals
Supplies Expense – expense of using supplies (e.g. office supplies) in the conduct of daily business
Insurance Expense – portion of premiums paid on insurance coverage (e.g. on motor vehicle, health, life, fire, typhoon or flood) which has expired
Depreciation Expense – portion of the cost of a tangible asset (e.g. buildings and equipment) allocated or charged as expense during an accounting period
Uncollectible Accounts Expense – the amount of receivables estimated to be doubtful of collection and charged as expense during an accounting period
Interest Expense – an expense related to use of borrowed funds
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Reference:
Ballada, W. (2013). Basic Accounting. Domdane Publishers & Made Easy Books.
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