Basic Accounting
I.
Introduction to Accounting
A. Accounting Defined
1. Accounting is a service activity. Its function is to provide quantitative information primarily
financial in nature, about economic activities, that is intended to be useful in making economic
decisions. (Accounting Standard Codification)
2. Accounting is the art of recording, classifying and summarizing in a significant manner and in
terms of money, transaction and events which are in part, at least of a financial character and
interpreting the results thereof. (American Institute of Certified Public Accountants)
3. The process of identifying, measuring and communicating economic information to permit
informed judgements and decisions by users of the information. ( American Accounting
Association)
B. Phases of Accounting
1. Recording
• Also called journalizing.
• Recording of all transactions that occurred in a given time in a systematic and
chronological manner in the journal book.
▪ General Journal
▪ Sales Journal
▪ Purchases Journal
▪ Cash Receipts Journal
▪ Cash Disbursement Journal
• Transactions to be recorded are based on source documents such as receipts and cash
vouchers.
2. Classifying
• Also known as posting.
• All about sorting and grouping of all individual accounts.
• Transactions from the journals are transferred or posted to the ledgers.
3. Summarizing
• Summarizing data thru the preparation of financial statements, charts or graphs to
interpret data easily and effectively.
• Done after an accounting period. (Monthly, Quarterly, Yearly, etc.)
4. Interpreting
• The final stage where users of financial information interpret data for decision making,
interpreting the financial position of a company and the results of its operation.
6. Government Agencies, Regulatory Agencies, and Taxing Authorities
7. General Public
E. Accounting as a Profession
1. Practice in Public Accountancy
• Accountants who offer their professional services to clients for a fee including partners
and staff members of an accounting or auditing firm.
2. Practice in Commerce and Industry
• Accountants employed in a private company or a nonprofit organization.
3. Practice in Academe
• Accountants teaching accounting subjects. (schools, review centers)
4. Practice in the Government
• Accountants working in a government body. (BIR, COA, DBM, etc.)
F. Standard-Setting Bodies
A.
International
1. IFRS Foundation
• Formerly known as the Internal Accounting Standards Foundation, is a nonprofit
corporation developing International Financial Reporting Standards Foundation.
2. International Accounting Standards Board (IASB)
• Formerly known as the IASC is the independent, accounting standard-setting
body of the IFRS Foundation that develops and approves IFRSS.
• With 14 board members.
3. International Auditing and Assurance Standards Board (IAASB)
• Issues International Standards on Auditing.
B.National
1. Philippine Institute of Public Accountants (PICPA)
• The national professional Accountancy body in the country.
2. Financial Reporting Standard Council (FRSC)
• Successor of Accounting Standards Council (ASC), created to assist the BOA to
carry out its powers and functions under RA9298.
• Philippine Counterpart of IASB.
• With 1 chairman and 14 members.
3. Auditing and Assurance Standards Council (AASC)
• The body authorized to establish and promulgate generally accepted auditing
standards (GAAS) in the country.
• With 1 chairman and 14 members.
C. Objectives of Accounting
1. To provide general purpose financial statements about a reporting entity that is useful to the
financial users involved to assist them in making sound economic decisions.
2. To determine the results of the business operation in a given period.
3. To determine the financial position of an entity. (Asset, Liability, Equity)
4. To implement and maintain internal controls over assets.
5. To help management in planning, decision making and performance evaluation.
6. To provide financial and/or legal information to government agencies.
D. Users of Accounting Information
A.
Internal Users
1. Owner (Board of Directors/Board of Trustees)
2. Management (Manager, Employees)
B.External Users
1. Investors and Potential Investors
2. Lenders and Financing Institutions
3. Suppliers and Trade Creditors
4. Employees and Labor Unions
5. Customers
1
G. Regulatory Government Agencies
1. Professional Regulation Commission (PRC)
• The agency mandated to implement the regulatory laws and policies for various regulated
professions including CPAs.
2. Board of Accountancy (BOA)
• Has the legal power to administer the Accountancy Law.
• Has the only power to issue and revoke CPA licenses.
• With 1 chairman and 6 members.
3. Securities and Exchange Commission (SEC)
• For registration and monitoring of partnership and corporations.
4. Department of Trade and Industry
• For registering sole proprietorship business.
5. Cooperative Development Authority
• Regulates cooperatives in the country.
6. Commission on Audit (COA)
• Supreme audit institution in the country that audits government units.
7. Bangko Sentral ng Pilipinas (BSP)
• Agency that maintains price stability.
2
8. Bureau of Internal Revenue (BIR)
• Raises revenue for the government by the collection of national taxes and enforcement
of tax laws.
9. Local Government Units (LGUs)
• Ensures payment of local taxes.
10.
Insurance Commission (IC)
• Regulates and supervises insurance industry in the country.
H. Professional Organizations of CPAs
A.
International
1. Association of International Certified Professional Accountants (AICPA)
2. Institute of Management Accountants (IMA)
3. Association of Accounting Technicians (AAT)
4. Institute of Certified Forensic Accountants (ICFA)
5. Institute of Internal Auditors (IIA)
B.National
1. Association of CPAs in Public Practice (ACPAPP)
2. Association of CPAs in Commerce and Industry (ACPACI)
3. Association of CPAs in Education (ACPAE)
4. Government Association of CPAs (GACPA)
5. Philippine Association of Management Accountants (PAMA)
6. Philippine Institute of Management Accounting (PIMA)
7. National Institute of Accounting Technicians (NIAT)
I.
Forms of Business Organization
1. Sole Proprietorship
• Owned by a single person or a married couple.
2. Partnership
• 2 or more owners contributing money, property or industry to a common fund to earn
profit.
3. Corporation
• A juridical entity created by the operation of law, separate and distinct from its owners
and has rights, duties, and privileges of an actual person
• Company has shares of stocks.
4. Cooperatives
• An autonomous and duly registered association of persons, with a common bond of
interest, who have voluntarily joined together to achieve their social, economic and
cultural needs and aspirations by making equitable contributions to the capital re quired,
patronizing their products and services and accepting a fair share of risks and benefits of
the undertaking in accordance with the universally accepted cooperative principles.
(Cooperative Development Authority)
•
Provides supplementary information, required disclosures by standards, supporting
computations, breakdown of line items on the FS and other useful information for the
user.
K. 5 Elements of Financial Statements
1. Asset
• resources owned and controlled by the entity
1. Current Asset
o assets that can be sold, consumed or exhausted through the normal operating
cycle of a business usually yearly.
2. Noncurrent Asset
a. long term assets that is not expected to be sold, consumed or exhausted through
the normal operating cycle of a business.
2. Liability
• present obligation of the entity
1. Current Liability
o short term obligations that are due within a year or within the normal operating
cycle of the business.
2. Noncurrent Liability
o long term obligations that are not due for settlement within a year or within the
normal operating cycle of the business.
3. Capital/ Equity
• remaining interest after the liabilities was deducted from the assets.
4. Revenue
• increase in economic benefits during a period
1. Sales Revenue or Service Revenue
o income earned from the ordinary course of business activities
2. Gains
o income that does not arise from the core operations of the business.
5. Expenses
• decrease in economic benefits during a period
II. Accounting Cycle
A. Identify and Analyze Transactions
Understanding Transactions
• Transaction is a transfer of resources (asset) and obligations (liability). A business can be
involved in many affairs and activities- when it pays electricity, hire employees, incur debts and
even receiving investments from investors a transaction occurs.
Below are some examples of common financial transactions.
1. Owner invested money in the business.
2. Purchase of office furniture and supplies
3. Purchase of a fire insurance for the office building.
J.
Complete Set of Financial Statements
1. Statement of Financial Performance
• Shows the entity’s results of operations over a period, presenting its revenues and
expenses and the resulting income or loss.
2. Statement of Changes in Owner’s Equity
• Shows the balance of the capital accounts at the beginning of the period, the changes that
may increase or decrease these accounts such as income, loss, additional contribution
and withdrawal and the resulting ending balance during the period.
3. Statement of Financial Position
• Shows the assets, liabilities and capital of an entity as of a given date.
4. Statement of Cashflows
• Shows the cash inflows and outflows during a period from three activities: operating,
investing, and financing.
5. Notes to the Financial Statement
3
4. Hiring and training employees.
5. Purchasing inventories.
6. Purchasing supplies on credit.
7. Getting a loan from the bank.
8. Paying bills and loan interest.
9. Depreciation of factory machine.
10. Paying government taxes.
In a transaction there is a value received and a value parted with.
Let's try to analyze this transaction:
4
•
Asset = Liability + Equity
When a business pays the salary of an employee, the business gives cash in exchange of services from
the employee. So, the value received by the business is the service provided by the employee and the
cash is the value parted with.
Asset = Liability +Equity +Revenue – Expenses
B. Journalizing
Here are analyses of some transactions.
Transaction
Investment of Owner
Cash
Value Received
Purchased of Office Supplies
Office Supplies
Purchase of Machine on Account
Machine
Loan from the bank
Cash
Payment of Loan
No more Obligation to Pay
Payment of Salaries
Services from Employees
The Basic Accounting Elements
Value Parted With
Obligation of the business to hold
and make use of investment
Cash
Obligation to Pay (accounts payable)
Obligation to Pay
Cash
Cash
Double Entry Bookkeeping
•
A method used in journalizing transactions where there is always a value received and a value
parted with, hence a debit and credit side.
Chart of Accounts
•
A list of accounts that a business use in journalizing transactions. The industry uses standard
names for common accounts; however, a business may opt to adopt its own.
Now let’s try journalizing the following transactions.
There are 5 types of Accounting elements that you need to know to better understand a transaction .
1. Katrina invested 1 million to open a restaurant; the money was deposited in a savings account.
1. Asset – all resources of the business.
a. Current Asset - are assets that can be realized by the business within its normal operating
cycle usually 12 months and can be easily converted to cash
b. Noncurrent Asset - all others assets that are not current.
2. Liability - all obligations/debts of the business
a. Current Liability - a liability expected to be settled within the normal operating cycle of
the business, usually 12 months
b. Noncurrent Liability - all liabilities that are not current
3. Equity/Capital - refers to the investment of the owner
4. Revenue/Income - all profits of the business from its day to day operations
5. Expenses - all cash outflows and costs incurred by the business
Cash in Bank
Katrina, Capital
to record initial report
Dr
1,000,000
Cr
1,000,000
2. She paid 100,000 to rent a space in a building.
Rent Expense
Cash in Bank
to record 1-month rent
Dr
100,000
Cr
100,000
Here are examples of the 5 different types of accounts.
Asset
Cash
Office Supplies
Furnitures and
Fixtures
Land
Building
Machine
Patent
3. Purchased kitchen equipment amounting to 250,000.
Liability
Accounts Payable
Notes Payable
Loans Payable
Capital
Owner’s Equity
Partners’ Capital
Share Capital
Revenue
Service Income
Sales
Interest Income
Expenses
Supplies Expense
Insurance Expense
Salaries Expense
Interest Payable
Mortgage Payable
Owner, Withdrawal
Rent Income
Interest Expense
Miscellaneous
Expense
Utilities Expense
Depreciation Expense
SSS Payable
Tax Payable
Normal Balance - An account has 2 sides, the debit and the credit side. The normal balance of an account is the
side where the account increases.
Account
Asset
Liability
Capital
Revenue
Expense
Normal Balance
Debit
Credit
Credit
Credit
Debit
Equipment
Cash in Bank
to record purchased of equipment
Dr
250,000
Cr
250,000
4. She acquired a loan of a half million from the bank.
Cash in Bank
Loan Payable
to record loan from the bank
Dr
500,000
Cr
500,000
5. She paid her employees 50,000.
Salaries Expense
Cash in Bank
to record salaries expense
Dr
50,000
Cr
50,000
6. Paid utilities for the office 20,000.
For Example:
Cash
Debit (Dr)
Credit (Cr)
Beginning Balance
10,000
Ending Balance
520,000
Cash from Income
500,000
Payment for Exp.
20,000
Cash from Rent Inc.
30,000
Total
540,000
Total
540,000
Take note that the normal balance of Cash(asset) is Debit, so every time the business receives cash the debit side
increases and when it pays expenses the cash decreases on the credit side- both sides should always be equal!
Utilities Expense
Cash on Hand
to record payment for electricity
Dr
20,000
Cr
20,000
7. Earned 50,000 for the 1st week of operations.
Cash in Bank
Accounting Equation
5
Dr
50,000
Cr
6
Income
50,000
to record income
In journalizing, remember that a transaction must occur, there should always be a value and a value parted
with. Otherwise, you will not have a journal entry on your book.
Equipment
Debit (Dr)
250,000
Credit (Cr)
Cash in Bank
Debit (Dr)
1,000,000
C. Posting
Credit (Cr)
100,000
250,000
T-accounts – has 3 main parts:
1. Account Title
2. Debit (left side)
3. Credit (right side)
Debit (Dr)
1,000
200
5,000
4. She acquired a loan of a half million from the bank.
Cash (account title)
Dr
500,000
Cash in Bank
Loans Payable
to record loan from the bank
Credit (Cr)
2,000
150
500,000
Cash in Bank
Debit (Dr)
1,000,000
500,000
Now let’s try posting the following journal entries:
1. Katrina invested 1 million to open a restaurant; the money was deposited in a savings account.
Dr
1,000,000
Cash in Bank
Katrina, Capital
to record initial report
Cr
Loans Payable
Credit (Cr)
500,000
5. She paid her employees 50,000.
Cash in Bank
Debit (Dr)
1,000,000
Credit (Cr)
100,000
250,000
Debit (Dr)
1,000,000
Credit (Cr)
Debit (Dr)
Dr
50,000
Salaries Expense
Cash in Bank
to record salaries expense
Katrina, Capital
Salaries Expense
Debit (Dr)
50,000
Dr
100,000
Rent Expense
Cash in Bank
to record 1-month rent
Cr
Credit (Cr)
Cash in Bank
Debit (Dr)
1,000,000
500,000
100,000
Credit (Cr)
100,000
250,000
50,000
Rent Expense
Debit (Dr)
100,000
Credit (Cr)
6. Paid utilities for the office 20,000.
Dr
20,000
Utilities Expense
Cash on Hand
to record payment for electricity
Cash in Bank
Debit (Dr)
1,000,000
Cr
50,000
Credit (Cr)
1,000,000
2. She paid 100,000 to rent a space in a building.
Credit (Cr)
100,000
Cr
20,000
Utilities Expense
3. Purchased kitchen equipment amounting to 250,000.
Equipment
Cash in Bank
to record purchased of equipment
Cr
Dr
250,000
Debit (Dr)
50,000
Cr
250,000
Credit (Cr)
Cash in Bank
Debit (Dr)
1,000,000
7
Credit (Cr)
100,000
8
500,000
250,000
50,000
20,000
01/02/17
01/03/17
Income
Other Income
12,000
6,000
Total Debit:
42,000
7. Earned 50,000 for the 1st week of operations.
01/02/17
01/03/17
01/03/17
42,000
Dr
50,000
Cash in Bank
Income
to record income
Telephone Expense
Drawing
Office Supplies
Total Credit:
Dr Balance
2,000
10,000
3,000
20,000
22,000
42,000
Cr
D. Trial Balance
50,000
A statement created to the quality of the debit and the credit side. A correct trial balance is proof of
accuracy in posting and journalizing your transactions.
Now let’s try to make one using the amounts we posted from the previous part.
Cash in Bank
Debit (Dr)
1,000,000
500,000
50,000
Credit (Cr)
100,000
250,000
50,000
20,000
Katrina, Capital
Debit (Dr)
Credit (Cr)
1,000,000
Rent Expense
Debit (Dr)
100,000
Income
Credit (Cr)
Equipment
Debit (Dr)
Credit (Cr)
50,000
Same accounts from the journal entry will be posted in just one account. This is done in order to monitor the
amounts of a specific account. Remember that if the journal entry is on the debit side then it will be posted on
the debit side of the t-account, same with the credit sales.
Debit (Dr)
250,000
Credit (Cr)
Loans Payable
Debit (Dr)
Credit (Cr)
500,000
Salaries Expense
Debit (Dr)
50,000
Totaling your Ledger Accounts
Utilities Expense
After posting all your journal entries to your t-accounts/ledger accounts, the next step is to total the
amounts. In doing this you need to identify if the account is open or closed.
Debit (Dr)
50,000
Closed Account – equal amounts in both debit and credit side.
Income
Cash on Hand
Credit (Cr)
50,000
Cash in Bank
Open Account – amount in both sides are unequal.
Credit (Cr)
100,000
250,000
50,000
20,000
420,000
1,550,000
1,130,000
The amounts of the accounts should be posted on their normal side.
Cash in Bank
Credit (Cr)
100,000
250,000
50,000
20,000
420,000
Trial Balance
Account
Debit
Credit
Cash in Bank
1,130,000
Equipment
250,000
Loans Payable
500,000
Katrina Capital
1,000,000
Income
50,000
Rent Expense
100,000
Salaries Expense
50,000
Utilities Expense
20,000
Total
1,550,000
1,550,000
Take note that both sides should always be equal. If not, go ahead and check your journal entries and t -accounts, you
must have missed something, recorded a wrong amount, totaled incorrectly, posted to a wrong account, etc.
≠
Not equal
1,550,000 – 420,000 = 1,130,000
On this example, Cash in Bank has a debit balance of 1,130,000.
Sample General Ledger
GENERAL LEDGER
Account: Cash
Account No.: 101
Date
Item
01/01/17 Initial Investment
Credit (Cr)
50,000
Debit (Dr)
1,000,000
500,000
50,000
=
Both sides are equal
1,550,000
Credit (Cr)
Debit (Dr)
Debit (Dr)
50,000
Debit (Dr)
1,000,000
500,000
50,000
Credit (Cr)
E. Adjusting Entries
PR.
Debit
24,000
Date
01/01/17
Item
Office Supplies
PR.
Updating the balances of certain accounts which is necessary before preparing for the financial
statements, usually at the end of the accounting period.
Credit
5,000
9
10
Supports the matching principle and also to avoid overstatement and understatement.
Date
12/31/17
These entries should also be posted.
1. Accruals
a. Accrued Revenue
Date
12/31/17
12/31/17
Account Title
Accounts Receivable
Service Revenue
To record unbilled service
Interest Receivable
Interest Income
To record interest income
Debit
24,000
Date
12/31/17
Credit
12/31/17
24,000
Debit
24,000
Credit
24,000
24,000
EB
Write-off
Total
Debit
Credit
24,000
24,000
24,000
Date
12/31/17
24,000
Adjusting Entry
Item
Debit
Expense
12,000
Prepaid
Expense
Depreciation Expense = ____Cost- Salvage Value____
Estimated Useful Life in Years
F. Worksheet
A working paper showing the account balances from the trial balance, adjustments, unadjusted trial
balance, income statement, and balance sheet. Though this part is optional, it does facilitate the
preparation of financial statements.
Below is an example showing as a guide in preparing your working paper.
1st Column: Unadjusted Trial Balance
2nd Column: All the amounts from the Adjusting Entries
3rd Column: Adjusted Trial Balance (A trial balance reflecting the amounts from the adjusting entries.
4th Column: Income Sheet (A column that will reflect all the revenue and expense accounts.
5th Column: Balance Sheet (A column that will show all the balances of asset, liability, and equity.
ASSET METHOD
Credit
BB
Bad Debts
Recovery
Total
5. Depreciation and Amortization
24,000
2. Prepayments/Prepaid Expense
Initial Transaction
Item
Debit
Prepaid Expense 24,000
Cash
Account Title
Bad Debts
Allowance for Bad Debts
Credit
24,000
Allowance for Bad Debts
24,000
Account Title
Salaries Expense
Salaries Payable
To record salaries payable
Interest Expense
Interest Payable
To record interest payable
Date
01/01/17
Debit
24,000
b. Accrued Expense
Date
12/31/17
Account Title
Depreciation Expense
Accumulated Depreciation
Credit
12,000
LIABILITY METHOD
Date
01/01/17
Initial Transaction
Item
Debit
Expense
24,000
Cash
Credit
Date
12/31/17
24,000
Adjusting Entry
Item
Debit
Prepaid Expense 12,000
Expense
Credit
12,000
3. Precollections/Unearned Revenue/Deferred Revenue
LIABILITY METHOD
Date
01/01/17
Initial Transaction
Item
Debit
Cash
24,000
Income
Credit
Date
12/31/17
24,000
Adjusting Entry
Item
Debit
Unearned Income 12,000
Income
Credit
12,000
REVENUE METHOD
Date
01/01/17
Initial Transaction
Item
Debit
Cash
24,000
Income
Credit
Date
12/31/17
24,000
Adjusting Entry
Item
Debit
Income
12,000
Unearned
Income
Credit
G. Financial Statements
Formal records of all financial transactions of an entity presented according to Accounting Standards and
Principles.
12,000
5 Types of Financial Statements
1. Statement of Financial Performance/Statement of Comprehensive Income/Income Statement
• A formal statement containing all revenue and expense.
Servicing Business
Statement of Financial Performance
For the Period Ended December 31, 2007
4. Bad Debts/Uncollectible Accounts
Percentage from Sales = Bad Debts Expense
Percentage from Accounts Receivable = Allowance Ends
11
12
Revenues
Service Revenue
151,000.00
Expenses
Salaries Expense
Utilities Expense
Communication Expense
Office Supplies Expense
Interest Expense
Insurance Expense
Depreciation Expense
Rent Expense
Accrued Utilities Expense
Accrued Communication Expense
Accrued Salaries Expense
Net Loss
41,000.00
15,000.00
6,000.00
52,000.00
3,000.00
10,000.00
6,444.44
40,000.00
5,000.00
2,000.00
20,000.00
(200,444.44)
49,444.44
2. Statement of Changes in Owner’s Equity
• A formal statement containing the owner’s capital, withdrawal, income, and additional
investments.
Servicing Business
Statement of Changes in Owner’s Equity
For the Period Ended December 31, 2007
Capital
Less: Net Loss
Total
Less: Drawing
R. Suarez, Capital (End)
900,000.00
49,444.44
850,555.56
250,000.00
600,555.56
Current Liabilities:
Notes Payable
Interest Payable
Accrued Utilities Payable
Accrued Communication Payable
Accrued Salaries Payable
Accrued Service Revenue
Capital (End)
Total Liability & Owner’s Equity
50,000.00
3,222.22
110,000.00
3,222.22
153,555.56
932,555.56
110,000.00
Cash Flow from Financing Activities
Cash Received as Investment by the Owner
Payments to settle Account Payable
Payments to settle Notes Payable
Cash Received from Borrowings
Payments for Owner’s Withdrawal
900,000.00
48,000.00
50,000.00
300,000.00
250,000.00
852,000.00
658,000.00
NOTE 1 SALES
Projected Selling Price
Multiply By: Projected Capacity
Total Cash Sales
Less: Output VAT
Net Sales
2021
4,916.33
2,542
12,494,857.24
1,338,734.70
11,156,122,53
NOTE 2 COST OF SALES
Projected Unit Cost
Multiply By: Projected Capacity
Cost of Sales
3,376.60
2,542.00
8,581,632.72
NOTE 4 OFFICE SUPPLIES EXPENSE
Scissors
Envelope
Hole Punch
Calculator
Printer Inks
Stamp Items
Soft Broom
Dust Pan
Feather Duster
Broomstick
Tissue Rolls
Hand Soap
Hand Towels
Liability & Owner’s Equity
300,000.00
3,000.00
5,000.00
2,000.00
20,000.00
2,000.00
Cash Flows from Investing Activities
Payment for Office Equipment
NOTE 3 ADMINISTRATIVE SALARIES
Bookkeeper
Delivery Truck Driver
Delivery Personnel
Total Administrative Salaries
779,000.00
46,777.78
106,777.78
84,000.00
5. Notes to the Financial Statement
• A formal statement containing necessary notes, descriptions or disclosures about the
first financial statement.
Servicing Business
Statement of Financial Position
As of December 31, 2007
Assets
658,000.00
80,000.00
1,000.00
20,000.00
20,000.00
Servicing Business
Statement of Cash Flows
For the Period Ended December 31, 2007
Cash Flows from Operating Activities
Cash Received from Clients
133,000.00
Payments for Prepaid Rent
120,000.00
Payment for Employees
41,000.00
Payments for Supplies
5,000.00
Payments for Prepaid Insurance
30,000.00
Payments for Utilities
15,000.00
Payments for Communication
6,000.00
Cash Balance at the end of the Period
3. Statement of Financial Position/Balance Sheet
• A formal statement containing all assets, contra-assets, liabilities, and equity accounts.
Current Assets:
Cash
Prepaid Rent
Office Supplies
Accounts Receivable
Prepaid Insurance
Non-Current Assets:
Furniture and Fixtures
Accumulated Depreciation - Furnitures and Fixtures
Office Equipment
Accumulated Depreciation - Office Equipment
Total Asset
4. Statement of Cash Flows
• A formal statement containing records of all cash inflows and cash outflows.
332,000.00
600,555.56
932,555.56
13
134,550.00
110,630.00
110,630.00
355,810.00
23.75
33.33
12.25
18.75
186.67
25.00
80.00
11.67
39.00
20.83
133.33
110.00
33.33
14
First Aid Kit
Garbage Bag
Shot Bond Paper
Long Bond Paper
A4 Bond Paper
Permanent Marker
Pen
Pencil
Pencil Sharpener
Highlighter Pen
180.00
1.33
125.42
280.00
175.00
10.00
12.50
17.50
46.67
20.83
A trial balance that only contains amounts from real accounts. Nominal accounts that were closed is not
part of this trial balance.
Servicing Business
Post-Closing Trial Balance
12/31/17
Account Title
Cash
Prepaid Rent
Furnitures and Fixtures
Accumulated Depreciation – Furniture and Fixtures
Office Equipment
Accumulated Depreciation – Office Equipment
Office Supplies
Accounts Receivable
Prepaid Insurance
Note Payable
Capital
H. Closing Entries
• Only nominal accounts are being closed and drawings.
1. Closing Entries for Servicing
REVENUE
Date
11/31/17
Revenue
Income Summary
Account Title
Debit
50,000
Credit
50,000
J.
Date
11/31/17
Income Summary
Expenses
Account Title
Debit
26,000
Credit
Capital
Drawing
Account Title
24,000
Credit
Date
12/31/17
5,000
Credit
5,000
Date
12/31/17
Merchandise Inventory, Ending
Purchase Returns and Allowance
Cost of Sales
Date
11/31/17
Income Summary
Cost of Sales
INCOME SUMMARY
Account Title
Sales
Purchase Discounts (Other Income)
I.
Debit
544,700
Credit
291,700
3,000
250,000
Credit
Date
01/01/18
24,000
Reversing Entry
Account Title
Debit
Payable
24,000
Expense
Credit
24,000
Adjusting Entry
Account Title
Debit
Receivable
24,000
Income
Credit
Date
01/01/18
24,000
Reversing Entry
Account Title
Debit
Income
24,000
Receivable
Credit
24,000
3. Prepayment/Prepaid Expense (Expense Method)
Date
12/31/17
350,000
13,100
361,100
Debit
181,600
Adjusting Entry
Account Title
Debit
Expense
24,000
Payable
2. Accrued Income
COST OF SALES
Cost of Sales
Purchases
Freight-in
Merchandise Inventory, Beginning
Reversing Entries
1. Accrued Expense
24,000
Debit
Account Title
300,000.00
600,555.56
Optional
Debit
2. Closing Entries for Merchandising
Date
11/31/17
3,222.22
Necessary for recording expense payments and revenue receipts in the usual manne r.
DRAWING
Date
11/31/17
1,000.00
20,000.00
20,000.00
3,222.22
Certain adjusted entries recorded at the end of the period are reversed at the beginning of a new
accounting period.
26,000
INCOME SUMMARY
Account Title
Income Summary (credit balance)
Capital
110,000.00
Credit
Reverse all accounts from the Post-Closing Trial Balance that came from the adjustments.
EXPENSE
Date
11/31/17
Debit
658,000.00
80,000.00
50,000.00
Adjusting Entry
Account Title
Debit
Prepaid Expense 24,000
Expense
Credit
Date
01/01/18
24,000
Reversing Entry
Account Title
Debit
Expense
24,000
Prepaid
Expense
Credit
24,000
4. Precollections/Unearned Revenue/ Deferred Revenue (Revenue Method)
Credit
Date
12/31/17
181,600
248,050
5,422
Adjusting Entry
Account Title
Debit
Income
24,000
Unearned
Income
Credit
24,000
Date
01/01/18
Reversing Entry
Account Title
Debit
Unearned
24,000
Income
Income
Credit
24,000
Post-Closing Trial Balance
K. Post-Reversing Trial Balance
15
16
Includes all accounts from the post-closing trial balance reflecting accounts that were already closed.
Specific Identification - the cost of units is identified as coming from specific purchase
Optional
FIFO - first merchandise acquired is the first merchandise sold
L. Correcting Entries
Moving Average - An average unit price is computed each time a purchase is made. The average unit price
is used to determine the cost of items sold until another purchase is made (for perpetual inventory
system)
Use to correct accounting errors and necessary changes.
Normally, part of adjustment.
Weighted Average - The average unit cost is computed by dividing the total cost of goods available for
sale by the total number of goods available for sale (for periodic inventory system)
If books are already closed, close the accounts to either the income summary or capital.
III. Merchandising Concepts
A. Freight Terms
Buyer
FOB Shipping Point
Freight Collect
Ownership
Who Should Pay
IV. Manufacturing Concepts
1. Prime Cost/Direct Cost = Direct Material + Direct Labor
2. Conversion Cost = Direct Labor + Factory Overhead
3. Total Manufacturing Cost = Direct Material + Direct Labor + Factory Overhead
4. Gross Margin = Sales – Cost of Goods Sold
5. Net Income = Gross Margin – Operating Expenses
Seller
FOB Destination
Freight Prepaid
B. Credit Terms
Cash Discount
•
•
•
•
A. Raw Materials
5,8,15
2/10, 3/15, 10/20
EOM, n/30
Journalized
Beginning Balance
Purchases
Total Raw Materials Used
Gross Method - cash discount is not yet deducted
Net Method - cash discount is already deducted
Ending Balance
Direct Material
Total Raw Materials Used
B. Work in Process
Trade Discount
•
•
•
•
Raw Materials
120,000
50,0000
80,000
150,000
200,000
200,000
Beginning Balance
Direct Material
Direct Labor
Factory Overhead
Total Goods Process
5,8,15
2/10, 3/15, 10/20
EOM, n/30
Not journalized
Work in Process
100,000
20,0000
150,000
260,000
20,000
10,000
280,000
280,000
Ending Balance
Cost of Goods Manufactured
Total Goods Process
End of Month - start counting from the first day of the next month
C. Finished Goods
List Price - before discounts
Invoice Price - after discounts, what you can see on a receipt
Beginning Balance
Cost of Goods Manufactured
Total Goods Available for Sale
C. Periodic Inventory System vs. Perpetual Inventory System
1. Periodic Inventory System – no continuous record of inventory.
2. Perpetual Inventory System – continuous record of inventory and cost of goods sold.
Periodic Inventory System
Account Title
Debit
500
Purchases
Cash
Freight-in
Cash
Accounts Receivable
Purchase Returns and Allowances
Accounts Receivable
Sales
Sales Returns and Allowances
Accounts Receivable
Credit
500
100
150
600
100
150
600
100
100
Perpetual Inventory System
Account Title
Debit
Merchandise Inventory
500
Cash
Merchandise Inventory
100
Cash
Accounts Receivable
150
Merchandise inventory
Accounts Receivable
600
Sales
Cost of Goods Sold
400
Merchandise Inventory
Sales Return and Allowances
100
Accounts Receivable
Merchandise Inventory
50
Cost of Goods Sold
Credit
500
100
150
600
400
100
D. Costing Method
17
Finished Goods
50,000
25,0000
260,000
285,000
310,000
310,000
Ending Balance
Cost of Goods Sold
Total Goods Available for Sale
V. Partnership
A. Partnership Theories
i. Meaning
• Partnership - “The Act of One is the Act of All”
• At least 2 persons sharing a business fund (money, property, industry)
ii. Kinds/Classification of Partnership
1. As to Object
a. Universal Partnership
▪ Of all present property
▪ Of profit
b. Particular Partnership
2. As to Liability
a. General/Unlimited Partnership
b. Limited Partnership
3. As to Duration
a. Partnership at Will
b. Partnership with Fixed Term
4. As to the Nature of Business
18
a. Trading Partnership
b. Non-trading Partnership
5. As to Purpose
a. Commercial Partnership
b. Professional Partnership
6. As to the Legality of Existence
a. De Jure Partnership
b. De Facto Partnership
iii. Kinds of Partners
a. As to Contribution
a. Capitalist Partner
b. Industrial Partner
c. Capitalist – Industrial Partner
b. As to Liability
a. General Partner
b. Limited Partner
c. As to Participation
a. Universal Partner
b. Particular Partner
d. As to Third Person/Public
a. Secret Partner
b. Ostensible Partner
e. As to Relationship with the Partnership
a. Real Partner
b. . Nominal Partner
c. Silent Perner
d. Dormant Partner
f. As to Management of Work
a. Managing Partner
b. Liquidating Partner
iv. Advantages of Partnership
1. Ease of Formation
2. Broader Sources of Capital
3. Broader Management Base
4. Tax Implications
5. Juridical Personality
v. Disadvantages of Partnership
1. Unlimited Liability
2. Limited or Uncertain Life
3. Difficulty in Transferring Ownership
4. Limitations in Raising Capital
5. Stages of Partnership Formation
a. First time in business
b. A conversion of a Single proprietorship to a partnership
1. Record adjustments of the sole proprietorship business (Based on the agreed
value or fair value
2. Close the books of the Sole Proprietorship business
c. Admission of new partner to an existing partnership
6. Notes
a. The contribution of an industrial partner is recorded in the general ledger as a
memorandum entry.
b. Assets are to be recorded at the agreed value or by using the fair market value
C. Partnership Operation
1. Rules in Profit and Loss Contribution
• No agreement on capital = equal
• No agreement on profit and loss (no industrial partner) = base on capital contribution
• No loss agreement = follow profit agreement but exclude industrial partner
Type of Partner
Capitalist
P
R
O
F
I
T
L
O
S
S
Summary of Profitt and Loss Distribution
With Profit & Loss
With Profit Agreement only
Agreement
Divide profit based on
Divide profit based on profit
profit and loss ratio
ratio
Industrial
Divide profit based on
profit and loss ratio
Divide profit based on profit
ratio
Industrial Capitalist
Divide profit based on
profit and loss ratio
Divide profit based on profit
ratio
Divide loss based on profit
or loss ratio
Divide loss based on loss
ratio
Divide loan based on loss
ratio as capitalist
Divide loss based on profit
ratio
Capitalist
Industrial
Industrial –
Capitalist
No Profit and Loss
Agreement
Divide base on capital
contributions
Equal to share of the
capitalist with smallest
share
Equal to share of the
capitalist with smallest
share, the balance
proportionate to capital
contribution
Divide base on capital
contribution
No share in losses
No share in losses
Divide loss based on profit
ratio as capitalist
Divide base on capital
contributions
2. Methods in Computing Profit and Loss
a. Equally
b. Specified Ratio or Percentage
c. Capital Ratio
1. Original Capital
2. Beginning Capital
3. Ending Capital
4. Average Capital
• Simple Average (Ending Balance – Beginning Balance)/2
• Weighted Average – with dates
d. Interest on Partner’s Capital + Remainder in an agreed ratio
e. Salaries and Bonus for partner’s services + Remainder in an agreed ratio
f. Multiple Allocations
• Up to whatever extent possible
• Follow priorities
3. Other Computations
a. Salaries – base on agreement
b. Interest – base on capita;
c. Bonus
• Bonus I given to a managing partner only when there is a profit
• Bonus = Bonus Rate x Net Income
• Bonus = Bonus Rate (Net Income – Salaries – Interest – Bonus)
B. Partnership Formation
1. Partnership Accounts
a. Partner’s Capital
b. Partner’s Drawing
c. Loans Receivable from Partners
d. Loans Payable to Partners
2. Formation
a. Execution of Partner’s Agreement
b. Valuation of Partner’s Agreement
c. Adjustments of Accounts (Net Asset = Asset – Liability)
3. Issues on Capital Contribution
a. Amount of Contribution
b. Valuation of Partner’s Contribution
4. Capital Contribution
a. Additional Investments and Withdrawals
b. Bonus Method (All partner’s capital must be equal)
c. Goodwill (Imaginary contribution)
19
20
•
•
Example:
B = .15 (300,000 – 50,000 – B)
•
B = 37,500 - .15B
Cash
C, Capital
To record the direct purchase of incoming Partner C of Partner’s A interest
1.15B = 37,500
B = 32,608.69
4. Distribution of Insufficient Income (w/o parentheses)
• Salaries and interest should be given and the earnings deficiency shall be allocated among
partners base on profit and loss ratio.
• Bonus to a managing partner will be given if the based-on income before deducting the
salary and interest. However, if the bonus is based on the income after deducting salaries
and interest and will result to an income deficit then there will be no bonus to the
managing partner.
• Sample insufficient income of 100,000
Profit and Loss Ratio
Salary
Interest
Bonus
Deficit
Total
Partner A
70%
60,000
5,000
0
(22,400)
42,600
Partner B
30%
50,000
7,000
10,000
(9,600)
57,400
Total
100,000
(110,000)
(12,000)
(10,000)
32,000
5. Distribution of Partnership Losses (w/parentheses• Salaries and interest should be given but no bonus
• Only the partner with a negative share will have a debit on his capital account
• Sample loss of 50,000
Profit and Loss Ratio
Salary
Interest
Bonus
Deficit
Total
Partner A
60%
55,000
6,000
0
(103,200)
(42,200)
Total capital of the old partnership is equal to the capital of the new partnership
(TCO = TCN)
Only capital accounts are involved.
Partner B
40%
55,000
6,000
0
(68,800)
(7,800)
Total
(50,000)
(110,000)
(12,000)
0
172,000
6. Indifference Point – both options shall be equal
• Bonus – Bonus Rate (Net Income – Salaries – Interest – Bonus)
• Salary 250,000 vs. Salary of 70,000 + 10%B
70,000 = .1 (NI – 70,000 – 70,000)
70,000 = .1NI - 14,000
70,000 +14,000 + .1NI
NI = 840,000
D. Partnership Dissolution
1. Dissolution
• Termination of the life of the existing partnership, however it does not mean that
business activities will not continue.
2. Causes of Dissolution
a. Admission of a new partner
b. Withdrawal/Death/Retirement/Insanity of a partner
c. Insolvency of a partner/partnership- the business or a partner cannot pay outstanding
debts as they mature which impairs the mutual agency principle.
d. Liabilities are greater than the fair value of assets
e. Incorporation of the partnership
3. Incoming Partner
a. Direct Purchase
21
300,000
300,00
b. Direct Investment
• Total capital of the old partnership is less than the total capital of the new
partnership (TCO < TCN)
Cash
300,000
C, Capital
300,000
To record the direct investment of Partner C
• Bonus Method (Total Capital Invested should be equal to the Total Agreed Capital
(TCI = TCA)
• Bonus to new partner
Cash
A, Capital
B, Capital
C, Capital
To record the investment of Partner C, plus bonuses from Partners A and B
• Bonus to old partner
300,000
10,000
5,000
315,000
Cash
500,000
C, Capital
420,000
A, Capital
30,000
B, Capital
50,000
To record the investment of Partner C, plus bonuses to Partners A and B
• Asset Revaluation Method (TCi ≠ TCa)
• Negative Asset Revaluation
• Positive Asset Revaluation
▪ TCi < TCa – increases capital balances
▪ TCi > TCa – decreases capital balances
4. Outgoing Partner
a. Partners pay the interest of the outgoing partner
• Total capital of the old partnership is equal to the total capital of the new
partnership (TCO = TCN)
• Only capital accounts are involved
300,000
A, Capital
B, Capital
To record sale of partner A’s interest purchased by Partner B
b. Partnership pays the interest of the outgoing partner
• Bonus Method
▪ Bonus to outgoing partner
▪ Bonus to remaining partner
• Asset Revaluation Method
▪ Partial
▪ Total
5. Excess or Deficit Capital Contribution
a. Excess
• The partnership will pay the partners if there is an excess
• Base on profit and loss ratio
A, Capital
B, Capital
Cash
To adjust partners’ capital balances
b. Deficit
• Partners invest additional investments
300,000
10,000
5,000
15,000
22
•
Base on profit and loss ratio
Cash
A, Capital
B, Capital
To record partners’ additional investments to reach total agreed capital
20,000
12,000
8,000
VI. Corporation
A. Corporation Theories
1. Corporation
• An artificial being with ownership consisting of shares (at least 5 owners)
• Managed by Board of Directors (BOD) (at least 5 stockholders but not more than 15) for
profit corporations and Board of Trustees (BOT) for a non-profit organization
• Created by operation of law and requires special authority/grant by the state
2. Advantages of a Corporation
• limited liability
• transferability of shares
• continued life existence
• greater source of funds
3. Disadvantages of a Corporation
• Complicated and complex formation and operation
• Greater government control and supervision
• Centralized management (not all shareholders can participate in the management of the
business which may lead to abuse of power)
• Heavier income tax (tax exemptions can be given to nonprofit and non-stock
corporations)
4. Kinds of Corporation
a. As to shares
•
Stock corporation
•
Non-Stock corporation
b. As to nationality
1. Domestic corporation
2. Foreign corporation
c. As to purpose
1. Government Corporations
• Public corporation
• Government owned and controlled corporation (GOCC)
2. Privately owned Corporation
• Civil corporation (for business and profit)
• Wasting Asset corporation (extract natural resources)
• Eleemosynary corporation (for charitable purpose)
• Ecclesiastical corporation (religious purpose)
3. Quasi-Public Corporation (privately financed but for a public purpose)
d. As to legal right
1. De jure corporation (fully complied with the law)
2. De facto corporation (partially complied with the law)
e. As to number of persons
1. One Person Corporation (owned and registered by one corporator/member and
his successors)
2. Aggregate corporation (more than one corporator or member)
f. As to extent of membership
1. Open corporation (shares are open to public subscription)
2. Close corporation (shares are not open to public subscription and
owned/managed by a family or close relative)
g. As to relation to other corporations
1. Parent or holding corporation
2. Subsidiary corporation
h. Religious Corporation
1. Corporation Sole- incorporated by one individual
2. Religious Societies- incorporated by more than one person
23
5. Components of a Corporation
a. Incorporators (people who originally formed the corporation)
b. Corporator (all shareholders and members)
c. Shareholder (profit) and Member(nonprofit) *can be a natural or an artificial person
d. Subscribers (people who agreed to buy shares for a future payment)
6. Rights of Shareholders
1. Right to vote
2. Right to profit
3. Right to inspect corporate books/records
4. Right to financial statements
5. Right to corporate assets in case of dissolution
7. Major Classifications of Share Capital
a. Ordinary Share/ Common Stock
• 2nd priority when it comes to dividend contribution
• ordinary shareholder has the right to vote and be voted in the BOD
• when a corporation offers only 1 kind of stocks then it must be ordinary shares
b. Preference Share/ Preferred Stock
• 1st priority when it comes to dividend contribution
• Preference shareholder has no voting rights and cannot be voted in the BOD
• Has a fixed dividend percentage (e.g. 15% preference share)
Types of Preference Shares
Has the right to receive dividends in arrears (undeclared dividends from
the previous year/s).
2. Noncumulative Ps
Has no right to receive dividends in arrears and will only receive
declared dividends from the current year.
3. Participating PS
Has the right to receive additional dividends after the dividend for both
OS and PS are paid.
4. Nonparticipating PS Has no right to receive additional dividends and will only receive
declared dividends from the current year.
8. Other Classifications of Share Capital
1. Cumulative PS
Founder’s Stock
Bonus Stock/Stock Warrant
Treasury Shares
Promotion Stock
Donated Stock
Convertible Stock
Watered Stock
Other Classifications of Share Capital
Shares given to incorporators with certain dividend privileges and
voting rights.
Shares given as a premium in connection with or to encourage the sale
of other securities.
Shares required by the corporation.
Shares given as incentives payments to people during the organization
of the corporations.
Securities given by the shareholders to the corporation, usually for
resale.
Preference share convertible to ordinary shares and other securities.
Share issued as fully paid share capital when in fact the whole amount
of the par value has not been paid.
9. Legal Capital
• amount that cannot be distributed to shareholders
• issued OS + issued PS + Subscribed Shares
10.
Trust Fund Doctrine
• a legal principle that prohibits a private corporation to distribute its legal capital to its
shareholders to protect corporate creditors.
B. Corporation Formation
1. Steps in Organizing a Corporation
a. Promotion (Initial Stage of Formation)
b. Incorporation
1. Registration of corporate name with SEC
2. Making of the Articles of incorporation
• Must be submitted to SEC
• Base on Section 14 of the Corporate Code of the Philippines
24
•
Majority of BOD/BOT must be residing in the Philippines
Articles of Incorporation
1.
2.
3.
4.
5.
6.
7.
The name of corporation.
The specific purpose of corporation.
The place of the principal office of the corporation (Must be in the Philippines).
The term for which the corporation will exist.
The names, nationalities, and residences of the incorporators.
The number of BOD/BOT (at least 5 not more than 15).
The names, nationalities, and residences of persons who shall act as directors or trustees until the first regular
directors or trustees are duly elected and qualified in accordance with this Code.
8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the
number of shares into which it is divided, and in case the share are par value shares, the par value of each, the
names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on
his subscription, and is some or all of the shares are without par value, such fact must be stated.
9. If it be a non-stock corporation, the amount of its capital, the names, nationalities, and residences of the
contributors and the amount contributed by each.
10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and
convenient.
3. Execution of sworn affidavit and bank certificates.
• Base on Section 14 of the Corporate Code of the Philippines
4. Payment of filling and publication fees etc.
a. Organization Expenses
• Incurred during the formation of the corporation prior to the
commencement of corporate business are treated as expenses
b.Direct issue costs for share capital issuance
• Costs arising from capital stock issuance must be charged directly
to the related share premium or additional paid-in capital.
c. Recurring costs for share capital issuance
• Indirect in nature and changed against corporate income.
5. Issuance of Certificate of Incorporation
c. Formal Organization and Commencement of Business Operations
1. Commencement of Corporate Business
• Base on Section 22 of the Corporate Code of the Philippines
• If a corporation does not formally organize and commence the
transaction of its business or the construction of its work within two (2)
years from the date of its incorporation, its corporate powers cease and
the corporation shall be deemed dissolved. However, if a corporation has
commenced the transaction of its business but subsequently become
continuously inoperative for a period of at least five (5) years, the same
shall be a ground for the suspension or revocation of its corporate
franchise or certificate of incorporation.
2. Corporate Officers
a. Corporate President (must be a member of the BOD)
b.Vice Presidents (the corporation may employ several VPs)
c. Other Officers (need not to be a member of the BOD unless stated in the
By-laws)
d.Corporate Secretary (who will keep corporate records etc.)
e.Corporate Treasurer (authorized to received and keep the corporation’s
funds)
3. By-laws
• Provided in Section 47 of the Corporate Code of the Philippines
1.
2.
3.
4.
5.
Corporate By-laws
The time, place, and manner of calling and conducting regular or special meetings of the directors or trust ees.
The time and manner of calling and conducting regular or special meetings of the stockholders or members.
The required quorum in meetings of stockholders or members and the manner of voting therein.
The term for which the corporation will exist.
The qualifications, duties, and compensation of directors or trustees, officers and employees.
25
6. The time for holding the annual elections of directors or trustees and the mode or manner of giving notice
thereof.
7. The manner of election or appointment and the term of office of all officers other than directors or trustees.
8. The penalties for violation of the by-laws.
9. In case of stock corporations. The manner of issuing stock certificates.
10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and
affairs.
4. Books and Records
• Provided in Section 74 of the Corporate Code of the Philippines
• Every corporation shall keep and carefully preserve at its principal office:
1. Minutes Books
2. Stocks and Transfer Bokk
3. Books of Accounts (Journal and Ledger)
4. Subscription Book
5. Shareholder’s Ledger
6. Subscriber’s Ledger
7. Share Certificate Book
C. Corporation Operation
A.
Shareholder’s Equity
• Refers to the corporation’s total capital section that can be found on the statement of
financial position.
• The owner’s contributions are generally credited to share capital account without denying
the specific person making the investment.
• Total Asset – Total Liabilities = Shareholders Equity
Elements of Shareholders Equity
A. Total Share Capital
1. Share Capital/Capital Stock
CR The total PAR of the shares issued
2. Subscribed Share Capital
CR The portion of share capital that an investor
agreed to purchase for future payments.
3. Subscriptions Receivable
DR Unpaid portion of the Subscribed Share Capital,
deducted to the total SHE, considered an asset for
book value computation.
4. Treasury Sales
DR Shares reacquired by the corporation, delinquent
subscription with no highest bidder or own
corporate share donated by a shareholder. No
dividends and will be deducted to the total SHE.
B. Other Reserves
1. Appropriation Reserve/Retained
CR A portion of the Accumulated Profits that is
Earnings- Appropriated
restricted from dividend distribution for special
purposes.
2. Additional Paid in Capital
CR Generally, refers to the amounts above par value
a. Share Premium – amounts above
or stated value.
par value or stated value.
b. Excess of the sale proceeds of
treasury stock over cost.
c. Donated Capital
d. Equity Shares options issued
e. Other premiums related to share
capital
issuances
and
retirements.
3. Revaluation Surplus/Revaluation
CR Increases the recorded value of a plant asset due
Increment/Revaluation Reserve
to approval.
4. Unrealized gains and losses
CR Profits or losses from completed transactions
5. Foreign Currency Translation
CR Net changes due to change in currency
Differences
C. Unappropriated Accumulated
CR Distributed to shareholder as dividends
Profits/Retained Earnings Unappropriated
B. Accounting for Share Capital Transactions
26
C.Authorization
• Recording of capital share upon approval of SEC
Memorandum Method
Journal Entry Method
Unissued Share Capital
50,000
(1,000 shar @ 50 par value)
Authorized Share Capital
Memo entry in the ledger
D.
•
•
Loss (Treasury Share Exceed its par value)
Share Capital (P100x10,000)
1,000,000
Cash
I. Conversion
• From preference to ordinary
• If 0S > PS add to accumulated profit
• If PS + SPPS > OS add to SPOS
50,000
Subscription
Recording of share capital that will be paid in the future.
Delinquent subscription – if a subscriber cannot pay his on the agreed date the
delinquent shares can be sold to the highest bidder (a person who will pay the officer
and is willing to receive the smallest amount of share.
Memorandum Method
Subscription Receivable
10,000
Subscribed Share Capital
Journal Entry Method
Subscription Receivable
10,000
10,000
Subscribed Share Capital
Memorandum Method
Preference Share (@PV)
Share Minimum – PS
Accumulated Profit
Ordinary Share (@PV)
Share Premium – OS
Journal Entry Method
Cash
10,000
10,000
Unissued Share Capital
J. Recapitalization
• To avoid improperly accumulated profit or to avoid negative accumulated profit.
1. Change of Par Value
Increase of PAR (sample:100 to 150)
Ordinary Share – old (P100 x 1,000)
Share Minimum – OS
Accumulated Profit
Ordinary Shares (P150 x 1,000)
10,000
Journal Entry Method
Subscribed Share Capital
10,000
10,000
Cash
10,000
Unissued Share Capital
10,000
Subscription Receivable
Increase of PAR (sample:100 to 150)
Ordinary Share – old (P100 x 1,000)
Share Minimum – OS - old
Ordinary Shares – new (P80 x 1,000)
Share Premium – OS – New
10,000
10,000
G.
•
•
Journal Entry Method
Cash
70,000
Appropriation Reserve
70,000
70,000
Treasury Shares
(70x10,000)
70,000
Accumulated Profits
100,000
10,000
80,000
30,000
Par to No par
Ordinary Share – old (P100 x 1,000)
Share Minimum – OS - old
Ordinary Shares – new
100,000
10,000
110,000
3. Change from No Par to Par
70,000
70,000
No Par to Par
Ordinary Share – old
Ordinary Shares – new (P120 x 1,000)
Share Minimum – OS -
Reissuance
Treasury shares are reissued.
Memorandum Method
Cash
70,000
Appropriation Reserve
70,000
Treasury Shares
(70x10,000)
Accumulated Profits
H.
Journal Entry Method
Treasury Chare (70x1,000)
70,000
Accumulated Profits
70,000
70,000
Cash
70,000
Appropriation Reserve
150,000
2. Change from Part to No Par
F. Reacquisition
• Shares are reacquired and retained by the corporation (treasury shares)
Memorandum Method
Treasury Share (70x1,000)
70,000
Accumulated Profits
70,000
Cash
Appropriation Reserve
100,000
10,000
40,000
Decrease
2. Payment for Subscribed Share
Memorandum Method
10,000
Subscribed Share Capital
10,000
Cash
Share Capital
Subscription Receivable
Journal Entry Method
Preference Share (@PV)
Share Premium – PS
Accumulated Profit
Ordinary Share (@PV)
Share Premium – OS
10,000
E. Issuance
• Accounting for share capital payments that can be paid by cash or noncash payments,
discounts can also be recognized.
• Certificate can only be issued upon full payment of the subscribed capital share.
• Can be a direct payment or payment for subscribed share.
1. Direct Payment
Memorandum Method
Cash
10,000
Share Capita;
1,000,000
150,000
120,000
30,000
4. Share Split (for all issued shares)
• Split up – increase of number of shares, decrease of PV (sample:2 for 1 split)
70,000
Memorandum Method
Memo Entry
70,000
Retirement
Retirement of shares resulting to loss or gain.
•
Journal Entry Method
Ordinary Share Capital (50 x
50,000
1,000)
Ordinary Share Capital
50,000
(25 x 2,000)
Split down – decrease of number of shares, increase of PV (sample: 1 for 2 split)
Memorandum Method
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Journal Entry Method
28
Memo Entry
Ordinary Share Capital (50 x
1,000)
Ordinary Share Capital
(25 x 2,000)
50,000
Accumulated Profit
50,000
Share
Date of Donation
Share Capital (@PV)
M.
Accounting for Corporate Earnings
• EPS – Earnings Per Share
• Only for ordinary share
• EPS = Net Income – DPS/Average Outstanding Share
N.
Accounting for BVPS
• For both ordinary share and preference share
• Book Value = Total Assets – Total Liabilities
• BVPS = TSHE/Outstanding Shares
100,000
100,000
2. Noncash Donation
Date of Donation
Land
Donated Capital
Share Dividend Distributable
Share Premium (only for
small share dividend)
K.Donation
1. Donation
Cash
Donated Capital
-
Share Dividend Distributable
100,000
100,000
D. Corporate Liquidation
3. Shares (from the same corporation)
1. Meaning
Date of Donation
Memo Entry Only
•
100,000
Corporate liquidation is the process of selling off all the assets of an entity, settling its liabilities,
distributing any remaining funds to shareholders, and closing it down as a legal entity
2. Insolvency
•
•
Date of Sale
Cash
Donated Capital
100,000
100,000
•
L. Accounting for Dividends
• DPS- Dividends per Share
• For both ordinary share and preference share
3. Process of Liquidation
a. Declaration of insolvency
DPS = Accumulated Profits/Outstanding Shares
b. Assets and liabilities are placed under the jurisdiction and control of the court.
A. Type of Dividends
1. Dividends out of Capital/Liquidating Dividends – during liquidation
2. Dividends out of Earnings – from accumulated profit
a. Cash Dividend
b.Property Dividend – noncash assets
c. Share Dividend – the corporation will give additional share in exchange
of cash.
1. Small Share Dividend – less than 20% of the outstanding share
and with premium.
2. Large Share Dividend – 20% or more of the outstanding share,
with no premium.
d.Scrip Dividend
Dividend
Cash
Property
Scrip
Date of Declaration
Accumulated Profit
Date of
Record
-
Cash Dividend Payable
Accumulated Profit
-
Accumulated Profit
Scrip Dividend Payable
Cash Dividend Payable
d. All assets are realized @ FV
e. Goodwill and Prepaid expenses are zeroed
f. Creditors and shareholders are paid according to the order of preference in debt settlement as
stipulated by the law
g. Statement of Affairs and Statement of Realization and Liquidation and other required reports
are submitted to the court by the trustee.
4. Order of Preference of Debts Settlements
Fully Secured Creditors
Partially Secured Creditors
Unsecured Creditors with priority
Unsecured Creditors without priority
Preference Stockholders
Ordinary Stockholders
Property Divided Payable
Equipment
-
c. An assignee/ trustee is appointed by the court or by the creditors to take care of the liquidation
process and all the corporation’s estate.
a.
b.
c.
d.
e.
f.
Date of Payment
Cash
Property Dividend Payable
When an entity is unable to pay its liabilities as they become due and demandable
When an entity’s financial condition is which its total liabilities is greater than all of its assets at
fair value
Voluntary insolvency is when the entity declares itself to be insolvent while involuntary solvency
is when 3 or more creditors petitions to declare the entity as insolvent.
5. Statement of Affairs
Scrip Dividend Payable
a. Meaning
Cash
•
29
A financial condition prepared for a corporation entering into the stage of liquidation or
bankruptcy containing the amounts that would be received by each class of creditors
30
b. Assets
1. Assets pledged to fully secured creditors
•
•
Assets that would be realized in an amount enough or greater to satisfy the
debt
Example is a PPE sold for 100,000 which secures a debt of 50,000, excess is
considered a free asset
2. Assets pledged to partially secured creditors
•
•
Assets that would be realized in an amount lesser to satisfy the debt
Example is a PPE sold for 50,000 which secures a debt of 70,000, deficit is
considered as deficiency to unsecured creditors
3. Free Assets
•
Assets that are not pledged and available to satisfy claims of other creditors
4.Net Free Assets
•
Free assets less unsecured liability with priority
C. Liabilities
1. Fully Secured Liability
•
Fully paid/payable liabilities from proceeds of selling assets that was pledged
2. Partially Secured Liability
•
Partially paid/payable liabilities from insufficient proceeds of selling assets that
was pledged
3. Unsecured Liability with priority
•
•
Liabilities prioritized by law
Funeral expenses, salaries and wages, employee compensation, legal expenses,
government fines and penalties, local and national taxes
4. Unsecured Liability with no priority
•
Liabilities with no collateral, deficit from partially secured creditors and
liabilities with no priority under the law
6. Recovery Percentage of Unsecured Creditors
Estimated Recovery Percentage =
(Net Free Assets)________
(Unsecured Liabilities w/o Priority)
7. Statement of Realization and Liquidation
•
An activity statement containing the progress of liquidating the corporation’s estate and the
transactions that happened during the liquidating period.
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