The Commission on Higher Education
in collaboration with the Philippine Normal University
Teaching Guide for Senior High School
FUNDAMENTALS OF
ACCOUNTANCY,
BUSINESS, AND
MANAGEMENT 1
SPECIALIZED SUBJECT | ACADEMIC - ABM
This Teaching Guide was collaboratively developed and reviewed by
educators from public and private schools, colleges, and universities. We
encourage teachers and other education stakeholders to email their
feedback, comments, and recommendations to the Commission on Higher
Education, K to 12 Transition Program Management Unit - Senior High School
Support Team at k12@ched.gov.ph. We value your feedback and
recommendations.
Development Team
Team Leader: Joselito G. Florendo.
Writers: Carlsberg S. Andres, Arthur P. Barrido, Jr.,
Christopher B. Honorario
Technical Editor: Daniel Vincent H. Borja
Copy Reader: Fermin J. Villegas
Cover Artists: Paolo Kurtis N. Tan, Renan U. Ortiz
Published by the Commission on Higher Education, 2016
Chairperson: Patricia B. Licuanan, Ph.D.
Commission on Higher Education
K to 12 Transition Program Management Unit
Office Address: 4th Floor, Commission on Higher Education,
C.P. Garcia Ave., Diliman, Quezon City
Telefax: (02) 441-0927 / E-mail Address: k12@ched.gov.ph
Senior High School Support Team
CHED K to 12 Transition Program Management Unit
Program Director: Karol Mark R. Yee
Lead for Senior High School Support:
Gerson M. Abesamis
Lead for Policy Advocacy and Communications:
Averill M. Pizarro
Consultants
THIS PROJECT WAS DEVELOPED WITH THE PHILIPPINE NORMAL UNIVERSITY.
University President: Ester B. Ogena, Ph.D.
VP for Academics: Ma. Antoinette C. Montealegre, Ph.D.
VP for University Relations & Advancement: Rosemarievic V. Diaz, Ph.D.
Ma. Cynthia Rose B. Bautista, Ph.D., CHED
Bienvenido F. Nebres, S.J., Ph.D., Ateneo de Manila University
Carmela C. Oracion, Ph.D., Ateneo de Manila University
Minella C. Alarcon, Ph.D., CHED
Gareth Price, Sheffield Hallam University
Stuart Bevins, Ph.D., Sheffield Hallam University
Course Development Officers:
Danie Son D. Gonzalvo, John Carlo P. Fernando
Teacher Training Officers:
Ma. Theresa C. Carlos, Mylene E. Dones
Monitoring and Evaluation Officer:
Robert Adrian N. Daulat
Administrative Officers:
Ma. Leana Paula B. Bato, Kevin Ross D. Nera,
Allison A. Danao, Ayhen Loisse B. Dalena
Printed in the Philippines by EC-TEC Commercial, No. 32 St.
Louis Compound 7, Baesa, Quezon City, ectec_com@yahoo.com
This Teaching Guide by the
Commission on Higher Education is
licensed under a Creative
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International License. This means
you are free to:
Share — copy and redistribute the
material in any medium or format
Adapt — remix, transform, and
build upon the material.
The licensor, CHED, cannot revoke
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Attribution — You must give
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transform, or build upon the
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contributions under the same license
as the original.
Introduction
As the Commission supports DepEd’s implementation of Senior High School (SHS), it upholds the vision
and mission of the K to 12 program, stated in Section 2 of Republic Act 10533, or the Enhanced Basic
Education Act of 2013, that “every graduate of basic education be an empowered individual, through a
program rooted on...the competence to engage in work and be productive, the ability to coexist in
fruitful harmony with local and global communities, the capability to engage in creative and critical
thinking, and the capacity and willingness to transform others and oneself.”
To accomplish this, the Commission partnered with the Philippine Normal University (PNU), the National
Center for Teacher Education, to develop Teaching Guides for Courses of SHS. Together with PNU, this
Teaching Guide was studied and reviewed by education and pedagogy experts, and was enhanced with
appropriate methodologies and strategies.
Furthermore, the Commission believes that teachers are the most important partners in attaining this
goal. Incorporated in this Teaching Guide is a framework that will guide them in creating lessons and
assessment tools, support them in facilitating activities and questions, and assist them towards deeper
content areas and competencies. Thus, the introduction of the SHS for SHS Framework.
SHS for SHS
Framework
The SHS for SHS Framework, which stands for “Saysay-Husay-Sarili for Senior High School,” is at the
core of this book. The lessons, which combine high-quality content with flexible elements to
accommodate diversity of teachers and environments, promote these three fundamental concepts:
SAYSAY: MEANING
HUSAY: MASTERY
SARILI: OWNERSHIP
Why is this important?
How will I deeply understand this?
What can I do with this?
Through this Teaching Guide,
teachers will be able to facilitate
an understanding of the value
of the lessons, for each learner
to fully engage in the content
on both the cognitive and
affective levels.
Given that developing mastery
goes beyond memorization,
teachers should also aim for
deep understanding of the
subject matter where they lead
learners to analyze and
synthesize knowledge.
When teachers empower
learners to take ownership of
their learning, they develop
independence and selfdirection, learning about both
the subject matter and
themselves.
Parts of the
Teaching Guide
This Teaching Guide is mapped and aligned to the DepEd SHS Curriculum, designed to be highly
usable for teachers. It contains classroom activities and pedagogical notes, and is integrated with
innovative pedagogies. All of these elements are presented in the following parts:
1.
•
•
•
•
•
2.
•
•
•
•
3.
•
•
•
•
•
4.
•
•
•
•
5.
•
•
•
•
6.
•
•
Introduction
Highlight key concepts and identify the essential questions
Show the big picture and concept maps
Present the relevant vocabulary
Connect and review prerequisite knowledge
Clearly communicate learning competencies and objectives
Motivation
Give local examples and applications
Engage in a game or movement activity
Provide a hands-on/laboratory activity
Connect to a real-life problem
Instruction/Delivery
Give a demonstration/lecture/simulation/hands-on activity
Show step-by-step solutions to sample problems
Use multimedia and other creative tools
Give applications of the theory
Focus on a specific story using the case study method
Practice
Discuss worked-out examples
Provide easy-medium-hard questions
Give time for hands-on unguided classroom work and discovery
Use formative assessment to give feedback
Enrichment
Provide additional examples and applications
Introduce extensions or generalisations of concepts
Encourage analysis through higher order thinking prompts and reflection questions
Allow pair/small group discussions to summarize and synthesize the learnings
Evaluation
Supply a diverse question bank for written work and exercises
Provide alternative formats for student work: written homework, journal, portfolio, group/individual
projects, student-directed research project
K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACCOUNTANCY, BUSINESS AND MANAGEMENT (ABM) SPECIALIZED SUBJECT
Semester: 2nd Semester
No. of Hours/ Semester: 80 hours/ semester
Grade: 11
Course Title: Fundamentals of Accountancy, Business and Management 1
Course Description: This is an introductory course in accounting, business, and management data analysis that will develop students’ appreciation of
accounting as a language of business and an understanding of basic accounting concepts and principles that will help them analyze business transactions.
CONTENT
1. Introduction to
Accounting
CONTENT STANDARDS
The learners demonstrate an
understanding of…
the
definition,
nature,
function, and history of
accounting
PERFORMANCE STANDARDS
LEARNING COMPETENCIES
The learners shall be able to…
The learners…
1.
cite specific examples in which 2.
accounting is used in making business
decisions
3.
4.
2. Branches of
Accounting
3. Users of Accounting
Information
the varied branches and areas 1. make a list of business within the
of accounting, particularly
community on the types of
1.
1. financial accounting
accounting services they require
2. management accounting 2. solve exercises in the identification
3. government accounting
of the branches of accounting
4. auditing
described through the types of
5. tax accounting
services rendered
2.
6. cost accounting
7. accounting education
8. accounting research
the external and internal 1. solve exercises and problems on the
1.
users of financial information
identification of users of information,
type of decisions to be made, and
type of information needed by the
2.
users
2. cite users of financial information
K to 12 Senior High School ABM Specialized Subject – Fundamentals of Accountancy, Business and Management 1 May 2016
CODE
define accounting
ABM_FABM11IIIa-1
describe the nature of
accounting
ABM_FABM11IIIa-2
explain the functions of
accounting in business
ABM_FABM11IIIa-3
narrate the history/origin
of accounting
ABM_FABM11IIIa-4
differentiate the branches
of accounting
ABM_FABM11IIIa-5
explain the kind/type of
services rendered in each
of these branches
ABM_FABM11IIIa-6
define external users and
gives examples
ABM_FABM11IIIa-7
define internal users and
give examples
ABM_FABM11IIIa-8
Page 1 of 7
K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACCOUNTANCY, BUSINESS AND MANAGEMENT (ABM) SPECIALIZED SUBJECT
CONTENT
CONTENT STANDARDS
PERFORMANCE STANDARDS
and identify whether they
external or internal users
LEARNING COMPETENCIES
are 3.
4.
4. Forms of Business
Organizations
5. Types of Business
According to
Activities
6. Accounting Concepts
and Principles
7. The Accounting
Equation
the various forms of business
organization, as follows:
1. sole / single
proprietorship
2. partnership
3. corporation
4. cooperatives
1. differentiate the forms of business
organization in terms of nature of
ownership
2. make a list of existing business
entities in their community and
identify the form of business
organization
the
types
of
business 1. differentiate the types of business
according
to
activities,
according to activities
particularly:
1. service business
2. make a list of businesses in
2. merchandising business
their community according to
3. manufacturing business
their activities
accounting
principles
concepts
the accounting equation
and
identify generally accepted accounting
principles
solve problems applying the accounting
equation
K to 12 Senior High School ABM Specialized Subject – Fundamentals of Accountancy, Business and Management 1 May 2016
identify the type of
decisions made by each
group of users
describe the type of
information needed by
each group of users
1. differentiate the forms of
business organization
2. identify the advantages
and disadvantages of each
form
1. compare and contrast the
types of business
according to activities
2. identify the advantages,
disadvantages, and
business requirements of
each type
1. explain the varied
accounting concepts and
principles
2. solve exercises on
accounting principles as
applied in various cases
1. illustrate the accounting
equation
CODE
ABM_FABM11IIIa-9
ABM_FABM11IIIa-10
ABM_FABM11IIIb-11
ABM_FABM11IIIb-12
ABM_FABM11IIIb-13
ABM_FABM11IIIb-14
ABM_FABM11IIIb-c-15
ABM_FABM11IIIb-c-16
ABM_FABM11IIIb-c-17
Page 2 of 7
K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACCOUNTANCY, BUSINESS AND MANAGEMENT (ABM) SPECIALIZED SUBJECT
CONTENT
8. Types of Major
Accounts
9.
Books of Accounts
10. Business
Transactions
and Their Analysis
As Applied to the
Accounting Cycle of
a Service Business
a. Rules of Debits
and Credits
b. Journalizing
c. Posting
CONTENT STANDARDS
PERFORMANCE STANDARDS
the five major accounts, define, identify, and classify accounts
namely,
according to the five major types
1. assets
2. liabilities
3. capital
4. income
5. expenses
the two major types of books differentiate a journal from a ledger
of accounts, namely, journal and identify the types of journals and
and ledger
ledgers
the business transactions and
their analysis, to include
definition and nature of
business transactions, types
of
source
or
business
documents, and the rules of
debits and credits
identify business and nonbusiness
transactions, enumerate the types of
business documents, recite the rules of
debit and credit, and apply these to
simple cases
K to 12 Senior High School ABM Specialized Subject – Fundamentals of Accountancy, Business and Management 1 May 2016
LEARNING COMPETENCIES
2. perform operations
involving simple cases
with the use of accounting
equation
1. discuss the five major
accounts
CODE
ABM_FABM11IIIb-c-18
ABM_FABM11IIId-e-19
2. cite examples of each
type of account
ABM_FABM11IIId-e-20
3. prepare a Chart of
Accounts
1.
identify the uses of the
two books of accounts
2.
illustrate the format of a
general and special
journals
3. illustrate the format of a
general and subsidiary
ledger
1.
describe the nature and
gives examples of
business transactions
2.
identify the different
types of business
documents
3.
analyze common
business transactions
using the rules of debit
and credit
ABM_FABM11IIId-e-21
ABM_FABM11IIIf-22
ABM_FABM11IIIf-23
ABM_FABM11IIIf-24
ABM_FABM11IIIg-j-25
ABM_FABM11IIIg-j-26
ABM_FABM11IIIg-j-27
Page 3 of 7
K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACCOUNTANCY, BUSINESS AND MANAGEMENT (ABM) SPECIALIZED SUBJECT
CONTENT
CONTENT STANDARDS
PERFORMANCE STANDARDS
d. Preparation of
a Trial Balance
LEARNING COMPETENCIES
4.
11. Business
Transactions and Their
Analysis As Applied to
the Accounting Cycle of
a Service Business
a. Adjusting Entries
b. Adjusted Trial
Balance
c. Preparation of
Basic Financial
Statements
(Income
Statement)
the accounting cycle of a
service business
12. Accounting Cycle
of a Merchandising
Business
the accounting cycle of a
merchandising business to
include the following:
1. Journalizing of
transactions using the
general and special
journals, namely: sales
journal, purchase journal,
cash receipts journal and
cash payments journal
identify business and nonbusiness
transactions, enumerate the types of
business documents, recite the rules of
debit and credit, and apply these in
simple cases
1.
2.
3.
4.
prepares a trial balance
5.
prepares adjusting
entries
complete the
accounting cycle
6.
prepare journal entries, post to the
ledger, prepare the trial balance,
worksheet, adjusting entries and
complete the accounting cycle of a
merchandising business.
K to 12 Senior High School ABM Specialized Subject – Fundamentals of Accountancy, Business and Management 1 May 2016
solve simple problems
and exercises in the
analyses of business
transaction
describes the nature of
transactions in a service
business
records transactions of
a service business in
the general journal
posts transactions in
the ledger
CODE
ABM_FABM11IIIg-j-28
ABM_FABM11IVa-d-29
ABM_FABM11IVa-d -30
ABM_FABM11IVa-d -31
ABM_FABM11IVa-d -32
ABM_FABM11IVa-d -33
ABM_FABM11IVa-d -34
1.
describes the nature of
transactions in a
merchandising business
ABM_FABM11IVe-j -35
2.
records transactions of
a merchandising
business in the general
and special journals
ABM_FABM11IVe-j-36
Page 4 of 7
K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACCOUNTANCY, BUSINESS AND MANAGEMENT (ABM) SPECIALIZED SUBJECT
CONTENT
CONTENT STANDARDS
PERFORMANCE STANDARDS
2. Posting to the ledger,
namely: general and
subsidiary ledgers
3. Preparation of trial
balance
4. Adjusting entries to
include pre payments,
accrual and deferral
5. Worksheet preparation,
and
6. Completing the
accounting cycle of a
merchandising business
K to 12 Senior High School ABM Specialized Subject – Fundamentals of Accountancy, Business and Management 1 May 2016
LEARNING COMPETENCIES
CODE
3.
posts transactions in
the general and
subsidiary ledgers
4.
prepares a trial balance
5.
prepares adjusting
entries
6.
completes the
accounting cycle of a
merchandising business
ABM_FABM11IVe-j -40
7.
prepares the Statement
of Cost of Goods Sold
and Gross Profit
ABM_FABM11IVe-j -41
ABM_FABM11IVe-j -37
ABM_FABM11IVe-j -38
ABM_FABM11IVe-j -39
Page 5 of 7
K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACCOUNTANCY, BUSINESS AND MANAGEMENT (ABM) SPECIALIZED SUBJECT
Code Book Legend
Sample:
ABM_FABM11-IIIa-5
LEGEND
SAMPLE
Learning Area and Strand/ Subject or
Specialization
Accountancy, Business and Management
Strand
Grade Level
Grade 11
Domain/Content/
Component/ Topic
Fundamentals of Accountancy, Business and
Management 1
First Entry
Uppercase Letter/s
ABM_FABM11
Roman Numeral
*Zero if no specific quarter
Quarter
Third Quarter
III
Week
Week one
a
Lowercase Letter/s
*Put a hyphen (-) in between letters to indicate
more than a specific week
Arabic Number
Competency
differentiate the branches of accounting
K to 12 Senior High School ABM Specialized Subject – Fundamentals of Accountancy, Business and Management 1 May 2016
5
Page 6 of 7
K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACCOUNTANCY, BUSINESS AND MANAGEMENT (ABM) SPECIALIZED SUBJECT
References:
Anastacio, Ma. Flordeliza. Fundamentals of Financial Management (with Industry Based Perspective).( Manila: Rex Book Store, 2011).
Gilbertson, Claudia. Fundamentals of Accounting. 8th ed. (Australia: Cengage Learning, 2010).
Padillo, Nicanor, Jr. Financial Statements Preparation, Analysis and Interpretation. (Manila: GIC Enterprises, 2011).
Pefianco, Erlinda C. The Accounting Process: Principles and Problems. (Makati: Goodwill Trading, 1996).
Young, Felina C. Principles of Marketing. (Manila: Rex Book Store, 2008).
K to 12 Senior High School ABM Specialized Subject – Fundamentals of Accountancy, Business and Management 1 May 2016
Page 7 of 7
On DepEd Functional Skills and CHED College Readiness Standards
As Higher Education Institutions (HEIs) welcome the graduates of
the Senior High School program, it is of paramount importance to
align Functional Skills set by DepEd with the College Readiness
Standards stated by CHED.
The DepEd articulated a set of 21st century skills that should be
embedded in the SHS curriculum across various subjects and tracks.
These skills are desired outcomes that K to 12 graduates should
possess in order to proceed to either higher education,
employment, entrepreneurship, or middle-level skills development.
On the other hand, the Commission declared the College
Readiness Standards that consist of the combination of knowledge,
skills, and reflective thinking necessary to participate and succeed without remediation - in entry-level undergraduate courses in
college.
The alignment of both standards, shown below, is also presented in
this Teaching Guide - prepares Senior High School graduates to the
revised college curriculum which will initially be implemented by AY
2018-2019.
College Readiness Standards Foundational Skills
DepEd Functional Skills
Produce all forms of texts (written, oral, visual, digital) based on:
1.
2.
3.
4.
5.
Solid grounding on Philippine experience and culture;
An understanding of the self, community, and nation;
Visual and information literacies, media literacy, critical thinking
Application of critical and creative thinking and doing processes;
and problem solving skills, creativity, initiative and self-direction
Competency in formulating ideas/arguments logically, scientifically, and creatively; and
Clear appreciation of one’s responsibility as a citizen of a multicultural Philippines and a
diverse world;
Systematically apply knowledge, understanding, theory, and skills for the development of
the self, local, and global communities using prior learning, inquiry, and experimentation
Global awareness, scientific and economic literacy, curiosity,
critical thinking and problem solving skills, risk taking, flexibility
and adaptability, initiative and self-direction
Work comfortably with relevant technologies and develop adaptations and innovations for
significant use in local and global communities
Global awareness, media literacy, technological literacy,
creativity, flexibility and adaptability, productivity and
accountability
Communicate with local and global communities with proficiency, orally, in writing, and
through new technologies of communication
Global awareness, multicultural literacy, collaboration and
interpersonal skills, social and cross-cultural skills, leadership
and responsibility
Interact meaningfully in a social setting and contribute to the fulfilment of individual and
shared goals, respecting the fundamental humanity of all persons and the diversity of
groups and communities
Media literacy, multicultural literacy, global awareness,
collaboration and interpersonal skills, social and cross-cultural
skills, leadership and responsibility, ethical, moral, and spiritual
values
TABLE OF CONTENTS
Lesson 1: Introduction to Accounting
1
Lesson 2: Branches of Accounting
7
Lesson 3: Users of Accounting Information
12
Lesson 4: Forms of Business Organizations
20
Lesson 5: Types of Business According to Activities
28
Lesson 6: Accounting Concepts and Principles
32
Lesson 7: The Accounting Equation
41
Lesson 8: Types of Major Accounts
52
Lesson 9: Books of Accounts
65
Lesson 10: Business Transactions and Their Analysis as Applied to the
Accounting Cycle of a Service Business Pt.1
80
Lesson 11: Business Transactions and Their Analysis as Applied to the
Accounting Cycle of a Service Business Pt.2
97
Lesson 12: Accounting Cycle of a Merchandising Business
119
Fundamentals of Accountancy, Business, and Management 1
60 MINS
Introduction to Accounting
Content Standards
The learners demonstrate an understanding of the definition, nature, function,
and history of accounting
LESSON OUTLINE
Performance Standards
The learners shall be able to cite specific examples in which accounting is used
in making business decisions.
Introduction
Communicating learning objectives
Review types of businesses
3
Motivation
Examples of Service Businesses
2
Learning Competencies
The learners shall be able to
Instruction
Discussion
30
Practice
Problem Sets
10
Enrichment
Group Discussions
Evaluation
Quizzes
•
•
•
•
define accounting (ABM_FABM11-IIIa-1)
describe the nature of accounting (ABM_FABM11-IIIa-2)
explain the functions of accounting in business (ABM_FABM11-IIIa-3)
narrate the history/origin of accounting (ABM_FABM11-IIIa-4)
Specific Learning Objectives
At the end of this lesson, the learners will be able to define accounting and
describe its nature; explain the functions of accounting in business; give
examples of business transactions and decisions requiring the need for
accounting; and narrate the history of accounting
1
5
10
Materials
manila paper, colored markers
•
Accounting Theory (n.d.) Retrieved from http://
accountingtheory.weebly.com/nature-and-scope-of-accouting
•
Valencia, E. and Roxas, G. (2009). Basic Accounting, 3rd
ed. Valencia Education Supply
•
Valix, Conrado T. et.al. (2015). Financial Accounting, Vol.
1, First part. GIC Enterprises & Co. Inc.
•
Weygandt, J. et. al. (2012) Accounting Principles 10th ed.
John Wiley & Sons (Asia) Pte. Ltd.
INTRODUCTION (3 MINS)
Teacher tip
Communicating learning objectives
1. Introduce the following learning objectives:
a. I will be able to define accounting.
b. I will be able to describe the nature of accounting.
c. I will be able to explain the functions of accounting in business.
d. I will be able to narrate the history/origin of accounting.
2. Ask the learners the following questions:
a. Do your parents ask how you spend your allowance every day?
b. When deciding between buying a bottle of soft drinks or fruit juice, what is the basis of your decision?
Do you compare the prices of both and then decide?
c. When going home, do you sometimes choose to walk from school rather than riding a jeepney because
you want to save?
3. Acknowledge all the answers of the learners and make a conclusion that accounting is involved in all of
these.
4. Relate the connection of accounting to our daily activities.
MOTIVATION (2 MINS)
Acknowledge the answers of the
learners. As an alternative, ask
the learners to write anything
they know about accounting on
the board.
Ask the learners “Is accounting important to you?”. Leave this question unanswered. Remind the learners that you will ask this question again
after you discuss the introduction to accounting.
INSTRUCTION (30 MINS)
Define accounting
“Accounting is the process of IDENTIFYING, RECORDING, and
COMMUNICATING economic events of an organization to interested
users.” (Weygandt, J. et. al)
Explain the three highlighted words in the graphic:
IDENTIFYING – this involves selecting economic events that are
relevant to a particular business transaction
The economic events of an organization are referred to as transactions.
Examples of economic events or transactions - In a bakery business:
• sales of bread and other bakery products
2
• purchases of flour that will be used for baking
• purchases of trucks needed to deliver the products
RECORDING – this involves keeping a chronological diary of events that are measured in pesos. The diary referred to in the definition are the
journals and ledgers which will be discussed in future chapters.
COMMUNICATING – occurs through the preparation and distribution of financial and other accounting reports.
Discuss the nature of accounting
According to Accounting Theory (http://accountingtheory.weebly.com/nature-and-scope-of-accounting.html): “Accounting is a systematic
recording of financial transactions and the presentation of the related information to appropriate persons.” Based on this definition we can
derive the following basic features of accounting:
• Accounting is a service activity. Accounting provides assistance to decision makers by providing them financial reports that will guide them in
coming up with sound decisions.
• Accounting is a process: A process refers to the method of performing any specific job step by step according to the objectives or targets.
Accounting is identified as a process, as it performs the specific task of collecting, processing and communicating financial information. In
doing so, it follows some definite steps like the collection, recording, classification, summarization, finalization, and reporting of financial
data.
• Accounting is both an art and a discipline. Accounting is the art of recording, classifying, summarizing and finalizing financial data. The word
‘art’ refers to the way something is performed. It is behavioral knowledge involving a certain creativity and skill to help us attain some specific
objectives. Accounting is a systematic method consisting of definite techniques and its proper application requires skill and expertise. So by
nature, accounting is an art. And because it follows certain standards and professional ethics, it is also a discipline.
• Accounting deals with financial information and transactions: Accounting records financial transactions and data, classifies these and finalizes
their results given for a specified period of time, as needed by their users. At every stage, from start to finish, accounting deals with financial
information and financial information only. It does not deal with non-monetary or non-financial aspects of such information.
• Accounting is an information system: Accounting is recognized and characterized as a storehouse of information. As a service function, it
collects processes and communicates financial information of any entity. This discipline of knowledge has evolved to meet the need for
financial information as required by various interested groups.
Discuss the function of accounting in business
Ask the learners to comment on why accounting is considered as the language of business.
Accounting is the means by which business information is communicated to business owners and stakeholders. The role of accounting in
business is to provide information for managers and owners to use in operating the business. In addition, accounting information allows
business owners to assess the efficiency and effectiveness of their business operations. Prepared accounting reports can be compared with
3
industry standards or to a leading competitor to determine how the business is doing. Business owners may also use historical financial
accounting statements to create trends for analyzing and forecasting future sales.
Accounting helps the users of these financial reports to see the true picture of the business in financial terms. In order for a business to survive,
it is important that a business owner or manager be well-informed.
Let us now discuss the function of accounting in business.
Mr. Juan is a retired government employee who is good at baking. One day he decides to put up a bakery shop in your barangay. He
renovates a portion of his house to serve as the area for the production of bread. He purchases baking equipment and raw materials to
produce five different types of bread. Mr. Juan also hires Jose to help him with the baking and, at the same time, to be in-charge of
sales. Mr. Juan pays Jose on a weekly basis. Every day, Mr. Juan’s wife deposits the daily cash sales in their bank account at XY Savings
Bank. With the help of accounting, what possible decisions or questions of Mr. Juan can accounting provide an answer to?
Possible Answers:
•
•
•
•
•
Is my business earning? (profitability)
How much daily or monthly sales do I need in order to recover my fixed cost? (break-even)
Do I need to hire additional workers to help me with my production?
Can I afford to set up a new store in another place? Where do I get the funds?
Can I afford to pay a bank loan?
Discuss the history of accounting
Accounting is as old as civilization itself. It has evolved in response to various social and economic needs of men. Accounting started as a
simple recording of repetitive exchanges. The history of accounting is often seen as indistinguishable from the history of finance and business.
Following is the evolution of accounting:
• The Cradle of Civilization
Around 3600 B.C., record-keeping was already common from Mesopotamia, China and India to Central and South America. The oldest
evidence of this practice was the “clay tablet” of Mesopotamia which dealt with commercial transactions at the time such as listing of
accounts receivable and accounts payable.
• 14th Century - Double-Entry Bookkeeping
The most important event in accounting history is generally considered to be the dissemination of double entry bookkeeping by Luca Pacioli
(‘The Father of Accounting’) in 14th century Italy. Pacioli was much revered in his day, and was a friend and contemporary of Leonardo da
Vinci. The Italians of the 14th to 16th centuries are widely acknowledged as the fathers of modern accounting and were the first to commonly
use Arabic numerals, rather than Roman, for tracking business accounts. Luca Pacioli wrote Summa de Arithmetica, the first book published
that contained a detailed chapter on double-entry bookkeeping.
4
• French Revolution (1700s)
The thorough study of accounting and development of accounting theory began during this period. Social upheavals affecting government,
finances, laws, customs and business had greatly influenced the development of accounting.
• The Industrial Revolution (1760-1830)
Mass production and the great importance of fixed assets were given attention during this period.
• 19th Century – The Beginnings of Modern Accounting in Europe and America
The modern, formal accounting profession emerged in Scotland in 1854 when Queen Victoria granted a Royal Charter to the Institute of
Accountants in Glasgow, creating the profession of the Chartered Accountant (CA).
In the late 1800s, chartered accountants from Scotland and Britain came to the U.S. to audit British investments. Some of these accountants
stayed in the U.S., setting up accounting practices and becoming the origins of several U.S. accounting firms. The first national U.S.
accounting society was set up in 1887. The American Association of Public Accountants was the forerunner to the current American Institute
of Certified Public Accountants (AICPA).
In this period rapid changes in accounting practice and reports were made. Accounting standards to be observed by accounting
professionals were promulgated. Notable practices such as mergers, acquisitions and growth of multinational corporations were developed.
A merger is when one company takes over all the operations of another business entity resulting in the dissolution of another business.
Businesses expanded by acquiring other companies. These types of transactions have challenged accounting professionals to develop new
standards that will address accounting issues related to these business combinations.
• The Present - The Development of Modern Accounting Standards and Commerce
The accounting profession in the 20th century developed around state requirements for financial statement audits. Beyond the industry's
self-regulation, the government also sets accounting standards, through laws and agencies such as the Securities and Exchange Commission
(SEC). As economies worldwide continued to globalize, accounting regulatory bodies required accounting practitioners to observe
International Accounting Standards. This is to assure transparency and reliability, and to obtain greater confidence on accounting information
used by global investors.
Nowadays, investors seek investment opportunities all over the world. To remain competitive, businesses everywhere feel the need to
operate globally. The trend now for accounting professionals is to observe one single set of global accounting standards in order to have
greater transparency and comparability of financial data across borders.
5
PRACTICE (10 MINS)
Teacher tip
Divide the class into 2 groups. The first group will act out the definition of accounting while the second
group will act out the evolution/history of accounting.
ENRICHMENT (5 MINS)
Go back to the unanswered question during your introduction of this topic.
Ask the learners the following questions: Is accounting important to you? Does it affect your daily
activities? How?
EVALUATION (10 MINS)
Give a short quiz. Ask the following questions:
1. Define accounting
Answer: Accounting is the process of IDENTIFYING, RECORDING and COMMUNICATING
economic events of an organization for interested users.
2. Give examples of decisions or questions that can be supported by accounting information.
Suggested Answers:
• Is my business earning? (profitability)
• How much daily or monthly sales do I need in order to recover my fixed cost? (break-even)
• Do I need to hire additional workers to help me with my production?
• Can I afford to set up a new store in another place? Where do I get the funds? (financing
decisions)
• Can I afford to pay a bank loan?
6
Offer a reward system for the best group or
to learners who show outstanding
performance.
Fundamentals of Accountancy, Business, and Management 1
60 MINS
Branches of Accounting
Content Standards
The learners demonstrate an understanding of the varied branches and areas
of accounting, particularly:
•
•
•
•
•
•
•
•
Financial Accounting
Management Accounting
Government Accounting
Auditing
Tax Accounting
Cost Accounting
Accounting Education
Accounting Research
LESSON OUTLINE
Introduction
Introduce the learning objectives
5
Motivation
Trees and branches
5
Instruction
Branches of Accounting
30
Practice
Boardwork
10
Enrichment
One question
10
Materials
manila paper, colored markers
Performance Standards
The learners shall be able to
• make a list of business within the community on the types of accounting
services they require.
• solve exercises in the identification of the branches of accounting described
through the types of services rendered.
Resources
Accounting Basics: Branches of Accounting (n.d.) Retrieved
from http://www.investopedia.com/university/accounting/
accounting2.asp
•
Valencia, E. and Roxas, G. (2009). Basic Accounting, 3rd
ed. Valencia Education Supply
Learning Competencies
The learners shall be able to
•
Valix, Conrado T. et.al. (2015). Financial Accounting, Vol.
1, First part. GIC Enterprises & Co. Inc.
• Differentiate the branches of accounting. (ABM_FABM11-IIIa-5)
• Explain the kinds/types of services rendered in each of these branches.
(ABM_FABM11-IIIa-5)
•
Weygandt, J. et. al. (2012) Accounting Principles 10th ed.
John Wiley & Sons (Asia) Pte. Ltd.
7
INTRODUCTION ( 5 MINUTES)
Introduce the following learning objectives:
• I will be able to differentiate the different branches of accounting
• I will be able to explain the types of services rendered on the different branches.
MOTIVATION (5 MINUTES)
Draw a big tree with eight branches. As you discuss the topic, write the particular branch of accounting you are discussing on each branch.
Label the root of the tree as ’Accounting’.
INSTRUCTION (30 MINUTES)
Branches of Accounting
Discuss the branches of accounting: According to Investopedia, (http://www.investopedia.com/university/accounting/accounting2.asp:
“Accounting is divided into several branches to better serve the needs of different users with varying information needs. These branches
sometimes overlap and they are often closely intertwined.”
Financial Accounting
Financial accounting is the broadest branch and is focused on the needs of external users. Financial accounting is primarily concerned with the
recognition, measurement and communication of economic activities. This information is communicated in a complete set of financial
statements. It is assumed under this branch that the users have one common information need. Financial accounting conforms with accounting
standards developed by standard-setting bodies. In the Philippines, there is a Council created to set these standards.
Examples of these financial reports include:
• the balance sheet (statement of financial condition)
• income statement (the profit and loss statement, or P&L)
• statement of cash flows
Financial accounting is primarily concerned with processing historical data. Although financial accounting generally meets the needs of external
users, internal users of accounting information also use these information for their decision-making needs.
Management (or Managerial) Accounting
8
Management accounting emphasizes the preparation and analysis of accounting information within the organization. The objective of
managerial accounting is to provide timely and relevant information for those internal users of accounting information, such as the managers
and employees in their decision-making needs. Oftentimes, these are sensitive information and is not distributed to those outside the business
- for example, prices, plans to open up branches, customer list, etc.
Managerial accounting involves financial analysis, budgeting and forecasting, cost analysis, evaluation of business decisions, and similar areas.
Government Accounting
Government accounting is the process of recording, analyzing, classifying, summarizing, communicating and
interpreting financial information about the government in aggregate and in detail reflecting transactions and other
economic events involving the receipt, spending, transfer, usability and disposition of assets and liabilities. This
branch of accounting deals with how the funds of the government are recorded and reported.
Ask the learners the following questions:
Teacher tip
Introduce the the Bureau
of Internal Revenue and its
role in the administration
and implementation of our
tax laws.
• What are the sources of income of the government? Possible Answer: Taxes paid by Filipinos
• Where do these taxes go? Possible Answer: Roads, Hospitals, for education and others
Government accounting deals with these transactions, the recording of inflow and outflow of funds of the
government.
Auditing
There are two types of auditing: external and internal auditing. External auditing refers to the examination of financial statements by an
independent CPA (Certified Public Accountant) with the purpose of expressing an opinion as to fairness of presentation and compliance with
the generally accepted accounting principles (GAAP). The audit does not cover 100% of the accounting records but the CPA reviews a
selected sample of these records and issues an audit report.
Internal auditing deals with determining the operational efficiency of the company regarding the protection of the company’s assets, accuracy
and reliability of the accounting data, and adherence to certain management policies. It focuses on evaluating the adequacy of a company's
internal control structure by testing segregation of duties, policies and procedures, degrees of authorization, and other controls implemented
by management.
Tax Accounting
Tax accounting helps clients follow rules set by tax authorities. It includes tax planning and preparation of tax returns. It also involves
determination of income tax and other taxes, tax advisory services such as ways to minimize taxes legally, evaluation of the consequences of tax
decisions, and other tax-related matters.
9
Cost Accounting
Sometimes considered as a subset of management accounting, cost accounting refers to the recording, presentation, and analysis of
manufacturing costs. Cost accounting is very useful in manufacturing businesses since they have the most complicated costing process.
Cost accountants also analyze actual and standard costs to help managers determine future courses of action regarding the company's
operations.
Cost accounting will also help the owner set the selling price of his products. For example, if the cost accounting records shows that the total
cost to produce one can of sardines is PHP50, then the owner can set the selling price at PHP60.
Accounting Education
This branch of accounting deals with developing future accountants by creating relevant accounting curriculum. Accounting professionals can
become faculty members of educational institutions. Accounting educators contribute to the development of the profession through their
effective teaching, publications of their research and influencing students to pursue careers in accounting. Accounting teachers share their
knowledge on accounting so that students are informed of the importance of accounting and its use in our daily lives.
Accounting Research
Accounting research focuses on the search for new knowledge on the effects of economic events on the process of summarizing, analyzing,
verifying, and reporting standardized financial information, and on the effects of reported information on economic events. Researchers
typically choose a subject area and a methodology on which to focus their efforts. The subject matter of accounting research may include
information systems, auditing and assurance, corporate governance, financials, managerial, and tax. Accounting research plays an essential
part in creating new knowledge. Academic accounting research "addresses all aspects of the accounting profession" using a scientific
method. Practicing accountants also conduct accounting research that focuses on solving problems for a client or group of clients. The
Accounting research helps standard-setting bodies around the world to develop new standards that will address recent issues or trend in global
business.
10
PRACTICE (10 MINUTES)
Boardwork
Prepare eight flashcards with the branches of accounting written in every card.
Write the following on a sheet of Manila paper and ask a learner to identify what branch of accounting renders this service:
1. Preparation of general-purpose financial statements Answer: Financial
2. Evaluation of the performance of a sales department Answer : Managerial
3. Develop standards to address a new business set up Answer: Accounting Research
4. Review tax compliance of the business Answer: Tax Accounting
5. Evaluate whether a branch of the business complies with the collection and deposit policy of the company Answer: Auditing (Internal)
6. Review whether the financial statements are presented fairly and in compliance with accounting standards Answer: Auditing (External)
7. Report on the spending of government funds Answer: Government Accounting
8. Report on the total cost of materials and labor used in the production Answer: Cost Accounting
9. Conducting lectures on accounting topics Answer: Accounting Education
ENRICHMENT (10 MINUTES)
Ask the learners what branch of accounting do you want to focus on and why?
11
Fundamentals of Accountancy, Business, and Management 1
60 MINS
Users of Accounting Information
Content Standards
The learners demonstrate an understanding of the external and internal users
of financial information.
Performance Standards
The learners shall be able to
• Solve exercises and problems on the identification of users of information,
types of decisions to be made, and types of information needed by the
users.
• Cite users of financial information and identify whether they are external or
internal users.
LESSON OUTLINE
Introduction
Introduce the learning objectives
5
Motivation
Dream Business
5
Instruction
Discussion
30
Practice
Role playing users
20
Enrichment
Dream Business continued
5
Evaluation
Quiz
5
Learning Competencies
The learners shall be able to:
Materials
school supplies
• define external users and gives examples ABM_FABM11-IIIa-7
• define internal users and give examples ABM_FABM11-IIIa-8
• identify the type of decisions made by each group of users ABM_FABM11IIIa-9
• describe the type of information needed by each group of users
ABM_FABM11-IIIa-10
Resources
• Valencia, E. and Roxas, G. (2009). Basic Accounting, 3rd
ed. Valencia Education Supply
12
•
Valix, Conrado T. et.al. (2015). Financial Accounting, Vol.
1, First part. GIC Enterprises & Co. Inc.
•
Weygandt, J. et. al. (2012) Accounting Principles 10th ed.
John Wiley & Sons (Asia) Pte. Ltd.
INTRODUCTION (5 MINUTES)
Introduce the following learning objectives:
•
•
•
•
I will be able to define external users of accounting information and give examples
I will be able to define internal users of accounting information and give examples
I will be able to identify the types of decisions made by each group of users
I will be able to identify the types of information needed by each group of users
MOTIVATION (5 MINUTES)
1. Ask the learners to recall the definition of accounting and why accounting is considered as the language of business.
Accounting information helps users to make better financial decisions.
2. By emphasizing on the communicating part of the definition of accounting, ask the learners what business they would want to enter into.
Possible answers:
• buying and selling of cars
• boutique
• gasoline station
• bakery
3. From the businesses enumerated, choose one business and use this as your example.
Ask the learners: “If you are the owner, what do you want to know about the business? What possible decisions can accounting support?”
Possible answers on information needs:
• How much income have I earned for a certain period?
• How much receivables do I have?
• How much do I owe my suppliers?
• How much is the value of my inventory?
•
•
•
•
Possible answers on decision support
Will I be able to pay my liabilities if I earn this much?
Can I expand my business? Will I be able to afford buying new equipment?
Do I need to adjust my selling price?
Do I need to cut costs?
13
4. “What if you are from a Local Government Unit (City/Municipality)? Do you think the Local Government ( City/Municipality) will be interested
with your accounting reports/records?” Leave this question hanging and introduce to the topic for this lecture. Emphasize to the learners
that the focus of your discussions are the users of accounting information and their information needs.
INSTRUCTION (30 MINUTES)
Branches of Accounting
Discuss the internal users of accounting information.
“Who uses accounting data or information?”
There are two broad categories of users of financial information: internal and external users.
INTERNAL USERS
Internal users of accounting information are those individuals inside a company who plan, organize, and run the business. These users are
directly involved in managing and operating the business. These include marketing managers, production supervisors, finance directors,
company officers and owners
Engage the learners in a question-and-answer type lecture.
Ask the learners to give examples of internal users and follow up with a question: “what information will that user need that can be answered by
accounting?”
Internal users (Primary Users) of accounting information include the following:
Management
Information need: income/earnings for the period, sales, available cash, production cost
Decisions supported: analyze the organization's performance and position and take appropriate measures to improve the company
results. sufficiency of cash to pay dividends to stockholders; pricing decisions
Employees
Information need: profit for the period, salaries paid to employees
Decisions supported: job security, consider staying in the employ of the company or look for other employment opportunities
14
Owners
Information need: profit or income for the period, resources or assets of the business, liabilities of the business
Decisions supported : considerations regarding additional investment, expanding the business, borrowing funds to support any
expansion plans.
Accounting information is presented to internal users usually in the form of management
statements. This information will support whatever decision of the internal users.
accounts, budgets, forecasts and financial
Discuss the external users of accounting information
EXTERNAL USERS
External users are individuals and organizations outside a company who want financial information about the company. These users are not
directly involved in managing and operating the business. The two most common types of external users are potential investors and creditors.
Potential Investors use accounting information to make decisions to buy shares of a company . Creditors (such as suppliers and bankers) use
accounting information to evaluate the risks of granting credit or lending money. Also included as external users are government regulatory
agencies such as Securities and Exchange Commission (SEC), Bureau of Internal Revenue (BIR), Department of Labor and Employment (DOLE),
Social Security System (SSS), and Local Government Units (LGUs).
External users (Secondary Users) of accounting information include the following:
Creditors: for determining the credit worthiness of an organization. Terms of credit are set by creditors according to the assessment of their
customers' financial health. Creditors include suppliers as well as lenders of finance such as banks.
Tax Authorities (BIR): for determining the credibility of the tax returns filed on behalf of a company.
Investors: for analyzing the feasibility of investing in a company. Investors want to make sure they can earn a reasonable return on their
investment before they commit any financial resources to a company.
Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term.
Regulatory Authorities (SEC, DOLE): for ensuring that a company's disclosure of accounting information is in accordance with the rules and
regulations set in order to protect the interests of the stakeholders who rely on such information in forming their decisions.
Engage the learners in a question-and-answer type lecture:
15
Ask the learners to give examples of external users. Follow up with a question: “what kind of information do users need that can be answered
by accounting?”.
Possible answers on examples of External Users:
potential investors –
banks
suppliers
BIR
DOLE
Possible answers on information provided by Accounting:
Income or profit of the business
resources or assets of the business
liabilities or amount owed by the business to its suppliers
taxes paid by the business
salaries and other benefits paid to employees
Possible answers on the decisions of external users that are supported by accounting information:
Potential Investors – Is it profitable for me to invest in this business?
Banks – If extend a loan to this company, will it be able to pay this loan? Does this company have sufficient resources to pay its loan?
Suppliers – Do I extend credit to this company? For how long?
BIR – Is the owner paying the correct taxes?
DOLE – Are the employees paid according to what the law states? Do they get the benefits required?
16
SUMMARY OF THE DIFFERENCES BETWEEN INTERNAL AND EXTERNAL USERS
Internal users of accounting information are those who are involved in planning, organizing and running the business. They need more detailed
information on a timely basis in order to support their decisions. Examples of these internal users are managers, employees and owners.
The external users of accounting information are those individuals or organizations outside a company who are interested in its financial
information. Examples of these external users are potential investors, suppliers and government agencies.
17
PRACTICE (10 MINUTES)
Boardwork
Divide the class into two groups. Require them to act out internal and external users of accounting information. Give them five to ten minutes
to meet and prepare for their presentation. Each group should be able to present the information needs of the different users and relate these
information to their decision-making process.
ENRICHMENT (10 MINUTES)
Go back to the unanswered question in the first part of your introduction. Is the Local Government Unit (LGU) interested in your accounting
reports?
Possible Answer:
Yes. The LGU will check whether you are paying your local taxes. As required, businesses must have a business permit before they are allowed
to operate in the city or municipality. This is renewed every year, with appropriate taxes paid. The local government may review your
accounting records to check whether you are declaring or paying the correct taxes.
Ask this follow-up question: “Are the officers of the Local Government Unit internal or external users? Why?
Answer: External. They are not directly involved in the operation or management of the business.
EVALUATION (5 MINUTES)
Give at least 3 internal users of accounting information.
Give at least 3 external users of accounting information.
Differentiate internal users from external users of accounting information.
18
19
Fundamentals of Accountancy, Business, and Management 1
60 MINS
Forms of Business Organizations
Content Standards
The learners demonstrate an understanding of the various forms of business
organizations, as follows:
LESSON OUTLINE
Introduction
Sharing Dream Businesses
5
Motivation
Allowance
5
Instruction
Discussion and Interactive Recitation
30
Cooperatives
Practice
Group work
10
Performance Standards
The learners shall be able to
Enrichment
Matrix
5
Evaluation
Quiz
5
•
Sole /Single Proprietorship
•
Partnership
•
Corporation
• differentiate the forms of business organizations in terms of nature of
ownership
• make a list of existing business entities in their community and identify the
form of business organization
Learning Competencies
The learners shall be able to
• differentiate the forms of business organizations. (ABM_FABM11-IIIb-11)
• identify the advantages and disadvantages of each form. (ABM_FABM11IIIb-12)
Specific Learning Objectives
At the end of this lesson, the learners will be able to:
• identify the forms of business organizations by nature of ownership.
• give examples of businesses in their respective communities and identify
the form
• identify the advantages and disadvantages of the four forms of business
organization
20
Materials
sample stock certificate, sample articles of incorporation,
Manila paper, permanent marker
Resources
• Partnerships (Title IX). Civil Code of the Philippines.
Articles 1767 to 1867
•
Corporation Code of the Philippines. (n.d) Retrieved from
http://www.sec.gov.ph/laws/pdf/Corporation Code of the
Philippines.pdf
•
Republic Act 9520 (2008). Philippine Cooperative Code of
2008. Retrieved from http//www.cda.gov.ph/resources/
issuances/philippine-cooperative-code-of-2008/republicact-9520
•
Valencia, E. and Roxas, G. (2009). Basic Accounting, 3rd
ed. Valencia Education Supply
•
Weygandt, J. et. al. (2012) Accounting Principles 10th ed.
John Wiley & Sons (Asia) Pte. Ltd.
INTRODUCTION ( 5 MINS)
1. Ask the learners whether they want to be in business. Then ask what business they want to put up and why.
2. Introduce the following learning objectives:
•
I will be able to identify the forms of business organizations by nature of ownership.
•
will be able to give examples of businesses in my community and identify their form.
•
I will be able to identify the advantages and disadvantages of the four forms of business organizations.
MOTIVATION (5 MINUTES)
1. Ask them the following questions:
How much is your daily allowance?
•
How much is your daily allowance?
•
Do you know that with your daily allowance you can own a company?
Teacher tip
2. Link the answers of the learners.
Tell them their daily allowance can be used to buy shares of stock of a corporation and that they
will become the owner of such a company”.
• Acknowledge the answers of the learners
and use the amounts as your basis in asking
the second question.
• Inform the learners that size of capital is not
the only basis of owning a corporation.
3. Inform them of the subject matter of your lecture.
INSTRUCTION (30 MINUTES)
1. Discuss sole/single proprietorship.
“Suppose you want to open your own sari-sari store that will need PHP10,000 to start and you used your PHP10,000 savings to start the said
business. You are the sole owner of the said sari-sari store. This type of business is called sole/single proprietorship.”
a. Ask what is their idea of a sole/single proprietorship.
Possible responses:
•
A form of business is owned by one person; the simplest, and the most common form of business organization
21
•
It is not separate from the owner. The business and the owner are inseparable
Inform the class how the Department of Trade
and Industry is the government agency that
regulates the trade names of sole/single
proprietorship businesses.
b. Discuss the advantages of sole/single proprietorship.
Possible responses:
•
The owner keeps all the profits.
•
The owner makes all the decisions.
•
It is easy to form and operate.
Teacher tip
Misconception:
c. Discuss the disadvantages of sole/single proprietorship.
•
The life of the business is limited to the life of the owner. Once the owner dies,
the business will cease to operate under the name of the proprietor.
•
The amount of capital is limited only by the wealth of the proprietor.
2. Introduce the concept of partnership by asking the following suggested questions:
“What if the needed amount to start your dream sari-sari store is PHP50,000 and you only have
PHP25,000 cash savings. You ask Juan, your friend if he is willing to invest his PHP25,000 and
become part owner of the sari-sari store. Assuming he agrees, what form of business organization
was created?”
a. Discuss partnerships
•
A form of business owned by two or more persons. The details of the
arrangement between the partners are outlined in a written document called
articles of partnership.
•
Profits are divided among partners based on their agreed sharing.
•
The owner is called a partner.
b. Discuss the advantages of a partnership
•
Higher capital because two or more persons will contribute to the common fund.
•
It is easy to operate like a sole/single proprietorship
22
Some learners may ask that in their community,
once a person dies the business is continued
by his relatives. Emphasize that upon death of
the old owner, the business legally ceases. The
one taking over is considered as the new
owner.
Ask learners to use actual names of their
friends. Other types of businesses other than a
sari-sari store may be used by asking the
learners.
Read the Civil Code of the Philippines Articles
1767 to 1867 to supplement your readings.
c. Discuss the disadvantages of a partnership
3.
Teacher tip
•
The profits are divided among the partners.
•
A partner can be held liable for the acts of the other partners.
•
In a lawsuit, the personal properties of the partners can be held beyond their
contributions and may be used to answer for any liability of the partnership.
Introduce the concept of a corporation by asking the following suggested questions:
“Assuming your dream is to open a grocery store and not just a sari-sari store but you will need
PHP1,000,000 to start the said business. You have only PHP25,000, your friend Juan has
PHP25,000, and your mother is willing to invest her PHP50,000, but still these are not enough to
start your dream grocery store. Where will you get the money to raise the PHP1 million? You may
consider setting up a corporation?”
Visit the Securities and Exchange Commission
(SEC) website or download the Corporation
Code of the Philippines to supplement your
readings.
Cite names of corporations in their locality or
ask the learners if they have any idea what a
corporation is before discussing the topic.
Download sample Articles of Incorporation to
be shown during the discussion.
a. Discuss corporations
•
A corporation is a business organized as a separate legal entity (artificial person) under the corporation law with ownership
divided into transferable shares of stocks
•
Emphasize that it is the law (Corporation Code of the Philippines) that creates a corporation.
•
The corporation begins its existence from the date the Articles of Incorporation is approved by the Securities and Exchange
Commission (SEC).
•
The SEC (Securities and Exchange Commission) is the government agency primarily tasked to regulate private corporations in
the Philippines.
•
The owners are called stockholders or shareholders.
•
The word ‘Corporation/Incorporation/Corp./Inc.’ appears in the name of the entity.
•
The voting rights of a shareholder is generally based on the percentage of ownership.
•
The management of the business is delegated by the shareholders to the Board of Directors
•
The ownership is divided into shares and the value of one share may be denominated at a smaller amount, for example at
PHP10 per share.
•
The proof of ownership is evidenced by a stock certificate.
At this point, the teacher will share a sample of a stock certificate and articles of incorporation.
23
b. Discuss the advantages of a corporation
•
Can easily raise additional funds by selling shares of stocks to the public.
•
Shareholders are not personally liable for the debts of the corporation. The extent of their liability is limited to their equity
(ownership) in the corporation.
c. Discuss the disadvantages of a corporation
•
It is relatively complicated to set up.
•
Subject to several legal restrictions as listed in the Corporation Code of the Philippines
4. Discuss the nature of cooperatives by asking the following suggested questions:
“Assuming all the mothers in your barangay decided to open a sari-sari store where all the members can buy in cash or in credit. Some
mothers were also taught how to sew dresses and bags as part of the project of the group. These bags are then sold to a certain company.
Aside from that, the organization provides seminars to the members on various topics involving mothers and their roles. At the end of the year,
the profits are distributed among the members based on their capital contribution. The amount of their purchases in the sari-sari store during
the year is also computed and they receive something out of the profit/surplus based on their purchases. This form of business organization is
called a cooperative.
a. Discuss cooperatives
•
A cooperative is a duly registered association of persons with a common bond of interest, voluntarily joining together to
achieve their social, economic and cultural needs.
•
The owners are called members who contribute equitably to the capital of the cooperative.
•
The members are expected to patronize their products and services.
•
The word ‘cooperative’ appears in the name of the entity.
•
This form of business organization is regulated by the Cooperative Development Authority (CDA).
The teacher may introduce the role of CDA as a government agency regulating the cooperatives.
b. Discuss the advantages of a cooperative
•
Enjoys certain tax exemption privilege
•
Promotes the concept of sharing resources
24
c. Discuss the disadvantages of a Cooperative
•
Limited distribution of surplus
•
Requires continuous education programs for members.
•
The members have active and direct participation in the business of the cooperative.
5. Summarize all the forms of business organizations by asking a learner to write on the board all the forms.
Possible Answers:
1. Sole / Single Proprietorship
2. Partnership
3. Corporation
4. Cooperatives
Ask the learner to give a brief description of each form and the advantage of creating such forms.
End your discussion by referring to the questions posed in the introduction/motivation .
“Your PHP10 daily allowance may be used to buy shares of stocks, thus making you an owner of a Corporation.”
PRACTICE (10 MINUTES)
Divide the class into four groups.
1. Assign each group a form of business organization.
2. Assign a group leader/reporter for every group.
3. Ask each group to list down at least three businesses in their locality or in the country
•
For every business, the learner will identify the business activities, products or services offered by each business.
•
The group may be asked to identify the owners of every businesses listed.
4. Ask the group leader or reporter to present the output of each group.
25
ENRICHMENT (5 MINUTES)
1. Post the blank matrix on the board. (see teaching materials below)
2. Ask a learner to fill-out the blank matrix on the board. Assign one learner per cell.
ITEM
Sole Proprietorship
Partnership
Corporations
1.
Number of Possible
Owners
2.
Management (who
manages the business)
3.
Termination of the
Business
4.
Government agency
assigned primarily to regulate
5.
Transfer of
Ownership
6.
Liability of Owners
EVALUATION (5 MINUTES)
1. Enumerate all the forms of business organizations by nature of ownership.
2. Differentiate a corporation from a partnership according to number of owners and their liabilities.
3. Differentiate a corporation from cooperative.
4. Give two example of corporations in the Philippines.
5. Give two examples of cooperatives in the Philippines.
26
Cooperatives
ITEM
Sole Proprietorship
1.
Number of Possible
Owners
Partnership
1 2 or more
Corporations
Cooperatives
At least 5
15 or more
2.
Management (who
manages the business)
Owner (but he may hire
somebody)
Partners (or they may hire
managers)
Board of Directors and
operating management
Board of Directors and
operating management
3.
Termination of the
Business
Death of the owner
Death of any partner or
withdrawal of a partner
As stated in the Articles of
Incorporation, not to exceed
50 years.
As stated in the Articles of
Cooperation, not to exceed
50 years.
4.
Government agency
In limited capacity, DTI
assigned primarily to regulate
In limited capacity, DTI
SEC
CDA
5.
Transfer of
Ownership
Sell the business (it’s a new
entity under a new owner)
Sell the business or interest
of a partner (consent of other
partners is necessary)
Sell stocks
Cannot transfer nor sell his
membership
6.
Unlimited ; other properties
not used in the business may
be held liable for the
obligations of the business
Generally unlimited; the
other properties of the
partners may be held liable
for the obligations of the
partnership.
Limited to the stock
investment of the
shareholder
Limited to the capital
contribution of the member
Liability of Owners
There are types of
partnerships that limit the
liability of the partners
27
Fundamentals of Accountancy, Business, and Management 1
60 MINS
Types of Business According to Activities
Content Standards
The learners demonstrate an understanding of the types of business according
to activities, particularly:
•
service business
•
merchandising business
•
manufacturing business
Performance Standards
The learners shall be able to differentiate the types of business according to
activities and make a list of businesses in their community according to their
activities.
Learning Competencies
The learners should compare and contrast the types of business according to
activities (ABM_FABM11-IIIb-13)
identify the advantages and business requirements of each type
(ABM_FABM11-IIIb-14)
Specific Learning Objectives
At the end of this lesson, the learners will be able to:
• review the types of business according to activities
• describe a service entity and give examples
• describe a merchandising entity and give examples
• describe a manufacturing entity and give examples
28
LESSON OUTLINE
Introduction
Review previous discussion
Motivation
Local Examples and Application
10
Instruction
Discussion of the subject matter
20
Practice
Easy-medium-hard questions
10
Enrichment
More local examples
5
Evaluation
Quiz
5
5
Materials
writing materials, school pads, projector and slides
Resources
Wild, J. (2009). Principles of Accounting 19th ed. McGraw Hill
Publishing
Haddock, M., Price, J., & Farina, M. (2012). College
Accounting: A Contemporary Approach 2nd Ed., New York:
McGraw-Hill/Irwin
INTRODUCTION ( 5 MINS)
Connect and/or review prerequisite knowledge:
•
Review the types of business organizations
•
Sole / Single proprietorship – owned by one person
•
Partnership – owned by partners (two or more persons)
•
Corporation – owned by shareholders
•
Emphasize that the types of business organizations differ on the presentation of the equity side but the accounting for assets and liabilities
are essentially the same
•
Tell the learners that this topic, types of business operations, differs in terms of the presentation of the statement of comprehensive income
(income statement) and the content statement of financial position (balance sheet)
MOTIVATION (10 MINS)
1. Give Local Example and Application
•
Ask the learners how the following earn profits:
•
Bruno’s Barber Shop
•
Clean Ko Place Mo Cleaning Services
•
Tutorial Services
•
Manila Hotel
•
Cynthia’s Food Vendor
•
Susan’s Roses Flower Shop
•
Wash Your Problem Laundry Shop
•
Bread Pit Bakery
•
Cut and Face Parlor
•
Fish Be With You Fish Shop
2. After checking their answers, emphasize that because of the nature of their operations, the presentation of their statement of
comprehensive income and the content of the statement of financial position may differ from each other ossible Answers
29
•
by providing services
•
by selling goods
INSTRUCTION (20 MINS)
Lecture
3 types of business organizations:
•
Service Business
This type of business offers professional skills, advice and consultations.
Examples: barber shops and beauty parlors, repair shops, banks, accounting and law firms
•
Merchandising Business
This type of business buys at wholesale and later sells the products at retail. They make a profit by selling
prices that are higher than their purchase costs. This type of business is also known as "buy and sell".
the merchandise or products at
Examples are: book stores, sari-sari stores, hardware stores
•
Manufacturing Business
This type of business buys raw materials and uses them in making a new product, therefore combining raw materials, labour and expenses into
a product for sale later on.
Examples are: shoe manufacturing businesses, car manufacturing plants
Additional information:
There are businesses that may be classified under more than one type of business. A bakery, for example, combines raw materials in making
loaves of bread (manufacturing), sells hot pan de sal (merchandising), and caters customers’ orders in small coffee table servings of ensaymada
and hot coffee (service).
30
PRACTICE (10 MINS)
Group work
Ask them to identify if it is a service, merchandising, manufacturing business or hybrid:
1. Provides services to customers
2. Sells goods to customers
3. Raw materials are available
4. Goods to be sold are purchased from a supplier
5. Goods to be sold are produced by the company itself
6. Supplies are used, no goods to be sold
7. Bakery
8. Barber shop
9. Cellphone store
10. Abenson appliances
Key Answers (1) service (2) either merchandising or manufacturing (3) manufacturing (4) merchandising (5) manufacturing (6) service (7)
manufacturing (8) service (9) merchandising (10) merchandising
ENRICHMENT (5 MINUTES)
Provide local examples. You can use the activity below.
1.
Ask the learners to think of five companies/stores who do service, merchandising and manufacturing
2.
Call on a learner and ask why those businesses were categorized as service, merchandising or manufacturing
EVALUATION (5 MINUTES)
Homework activity:
Ask the learners to look for a business that is either a service, merchandising or manufacturing business. Ask them to interview the owner by
asking the following questions. Pick someone from the class to discuss his findings.
31
Fundamentals of Accountancy, Business, and Management 1
120 MINS
Accounting Concepts and Principles
Content Standards
The learners demonstrate an understanding of accounting Concepts and
Principles
Performance Standards
The learners shall be able to identify generally accepted accounting principles
Learning Competencies
The learners shall be able to explain the varied accounting concepts and
principles (ABM_FABM11-IIIb c-15); solve exercises on accounting principles
as applied in various cases (ABM_FABM11-IIIb-c-16)
Specific Learning Objectives
At the end of this lesson, the learners will be able to enumerate the principles
of accounting; differentiate each principle; and, apply the accounting principle
in a business setting
LESSON OUTLINE
Introduction
Communicate learning objectives
10
Motivation
Real life situation
15
Instruction
Discussion
40
Practice
Exercises
40
Enrichment
More local examples
10
Evaluation
Homework
5
Materials
school supplies
Resources
Wild, J. (2009). Principles of Accounting 19th Ed. McGraw Hill
Publishing.
Haddocl, M., Proce, J., & Farina, M. (2012). College
Accounting: A Contemporary Approach, 2nd ed. New York:
McGraw-Hill/Irvin
Valencia, E.G. & Roxas, G.F. (2010). Basic Accounting 3rd ed.
Mandaluyong City, Philippines: Valencia Educational Supply.
32
INTRODUCTION (10 MINS)
Teacher tip
!
Suggested Introductory Statement :
Last time, we were able to learn that
Accounting is considered the
language of business. In order for
business entities to determine their
financial performance, accounting is
needed. There are different forms of
business entities according to its
organization and operations. A
business can be organized as a sole
proprietorship, a partnership or
corporation. A business can be
operated as a service, merchandising
and manufacturing entity. Sometimes
we want to determine our
performance compared to similar
companies, however, since there are a
lot of ways and assumptions to
present financial reports, we need to
have a generally accepted rule for
accounting.
Introduce the lesson by starting with a review of the last topic. You can use the suggested concept map and
statement below.
MOTIVATION (15 MINS)
Connect to a real life situation
1. Remind the learners that the topic revolves on possible violations of the principles and that
they need to be aware of it.
2. Hand out a copy of an article made specifically for this lesson
3. Let them read and answer the text quietly for 10 minutes.
33
You may use your own way to
introduce the topic.
The purpose of our lesson for this
session is for you to be able to
identify the different concepts and
principles of accounting and identify if
a specific situation follows or violates
an accounting principle.
Petness First Petshop
Juan dela Cruz opened his pet shop business called Petness First Petshop. He opened a bank account for his business and deposited
PHP500,000. The business earned PHP50,000 but he had doubts with the recorded expense of PHP60,000. He is not sure if he should include
the following items as expenses:
Salary expense
20,000
Rent expense
Utilities expense (at home)
Utilities expense (at the store)
10,000
15,000
10,000
Insurance expense
5,000
Withdrawals
10,000
TOTAL
60,000
4. Ask the students what they think should not be included as expenses. Then explain why.
Possible Responses :
Salary expense – it should be included since it is related to the operations of the business
Rent expense – it should be included since the rent is for the business
Utilities expense (home) – should not be included; it is a personal expense
Utilities expense (store) – should be included; it is an expense of the business
Insurance expense – should be included since the insurance is for the business
Withdrawals – should not be included since the withdrawal is for personal use
Follow up statement :
The activity is an application of the Business Entity Principle which is one of the most important principles in accounting. Other principles of
accounting will be discussed in the next section.
34
INSTRUCTION (40 MINS)
Give a lecture.
The following principles should be discussed. After each principle, give a practical example. Suggested examples are given below.
• Business entity principle – a business enterprise is separate and distinct from its owner or investor.
Examples :
o If the owner has a barber shop, the cash of the barber shop should be reported separately from personal cash.
o The owner had a business meeting with a prospective client. The expenses that come with that meeting should be part of the company’s
expenses. If the owner paid for gas for his personal use, it should not be included as part of the company’s expenses.
• Going concern principle – business is expected to continue indefinitely.
Example: When preparing financial statements, you should assume that the entity will continue indefinitely.
• Time period principle – financial statements are to be divided into specific time intervals.
Example :
o Philippine companies are required to report financial statements annually.
o The salary expenses from January to December 2015 should only be reported in 2015.
• Monetary unit principle – amounts are stated into a single monetary unit
Example :
o Jollibee should report financial statements in pesos even if they have a store in the
United States.
o IHOP should report financial statements in dollars even if they have a branch here in the Philippines
• Objectivity principle – financial statements must be presented with supporting evidence.
Example :
o When the customer paid Jollibee for their order, Jollibee should have a copy of the receipt to represent as evidence.
35
o When a company incurred a transportation expense, a voucher should be prepared as evidence.
• Cost principle – accounts should be recorded initially at cost.
Example :
o When Jollibee buys a cash register, it should record the cash register at its price when they bought it.
o When a company purchases a laptop, it should be recorded at the price it was purchased.
• Accrual Accounting Principle – revenue should be recognized when earned regardless of collection and expenses should be recognized when
incurred regardless of payment. On the other hand, the cash basis principle in which revenue is recorded when collected and expenses should
be recorded when paid. Cash basis is not the generally accepted principle today.
Example:
When a barber finishes performing his services he should record it as revenue. When the barber shop receives an electricity bill, it should
record it as an expense even if it is unpaid.
• Matching principle – cost should be matched with the revenue generated.
Example:
When you provide tutorial services to a customer and there is a transportation cost incurred related to the tutorial services, it should be
recorded as an expense for that period.
• Disclosure principle – all relevant and material information should be reported.
Example:
The company should report all relevant information.
• Conservatism principle – also known as prudence. In case of doubt, assets and income should not be overstated while liabilities and expenses
should not be understated.
Example: In case of doubt, expenses should be recorded at a higher amount. Revenue should be recorded at a lower amount.
36
• Materiality principle – in case of assets that are immaterial to make a difference in the financial statements, the company should instead record
it as an expense.
Example:
A school purchased an eraser with an estimated useful life of three years. Since an eraser is immaterial relative to assets, it should be recorded
as an expense.
PRACTICE (40 MINS)
A. Concept check. Use the following multiple choice questions for practice. Ask the students to answer the following multiple choice questions:
1. The accounting guideline that requires financial statement information to be supported by independent, unbiased evidence other than
someone's belief or opinion is the:
a. Business entity principle
b. Monetary unit principle
c. Going-concern principle
d. Cost principle
e. Objectivity principle
2. The principle that requires every business to be accounted for separately and distinctly from its owner or owners is known as the:
a. Objectivity principle
b. Business entity principle
c. Going-concern principle
d. Revenue recognition principle
e. Cost principle
3. The rule that requires financial statements to reflect the assumption that the business will continue operating instead of being closed or sold,
unless evidence shows that it will not continue, is the:
37
a. Going-concern principle
b. Business entity principle
c. Objectivity principle
d. Cost Principle
e. Monetary unit principle
4. To include the personal assets and transactions of a business's owner in the records and reports of the business would be in conflict with the:
a. Objectivity principle
b. Realization principle
c. Business entity principle
d. Going-concern principle
e. Revenue recognition principle
5. The objectivity principle:
a. means that information is supported by independent, unbiased evidence
b. means that information can be based on what the preparer thinks is true
c. means that financial statements should contain information that is optimistic
d. means that a business may not re-organize revenue until cash is received
6. Marian Mosely is the owner of Mosely Accounting Services. Which accounting principle requires Marian to keep her personal financial
information separate from the financial information of Mosely Accounting Services?
a. Monetary unit principle
b. Going-concern principle
c. Cost principle
d. Business entity principle
7. Which of the following accounting principles would require that all goods and services purchased be recorded at cost?
a. Going-concern principle
38
b. Continuing-concern principle
c. Cost principle
d. Business entity principle
Answers : E, B, A, B, A, D, C
B. Matching. Match the following words with their definition:
a. Going concern principle
e. Time period principle
h. Monetary unit principle
b. Objectivity principle
f. Cost principle
i. Accrual accounting principle
c. Matching principle
g. Disclosure principle
j. Conservatism principle
d. Materiality principle
___________________ 1. All relevant information should be included in the financial reports
___________________ 2. In case of doubt, assets and income should not be overstated.
___________________ 3. Assume that the company will continue indefinitely.
___________________ 4. All transactions should be supported by unbiased evidence.
___________________ 5. Expenses should be recorded in the period when the revenue is generated.
___________________ 6. Minimal costs incurred should be recorded as an expense.
___________________ 7. A Philippine company should report financial statements in pesos.
___________________ 8. A barber who performs services for a client should record revenue.
___________________ 9. Statement of Financial position should be recorded as of December 31, 2015.
___________________ 10. A company that purchases furniture should record it at its acquisition price.
Answers:
1. G
2. J
3. A
4. B
5. C
6. D
7. H
8. I
9. E
10. F
39
ENRICHMENT (10 MINS)
Provide local examples. You can use the activity below.
Accounting principles. Indicate which principles are violated
1. The owner-manager bought a computer for personal use. The invoice was given to the accountant who recorded it as an asset of the
business.
2. The statement of financial position of a company included an equipment purchased from Japan for 350,000 yen. It was reported at that
amount in the statement of financial position while all the other assets were reported in Philippine pesos.
3. No financial statements were prepared by Michael Go for his business. He explained that he will prepare the statements when he closes the
business, which he predicts to take place after 20 years.
4. Aside from owning a shoe store, Albert operates a canteen. The assets of the canteen are reported in the statement of financial position of
the shoe store.
5. Purchased a hammer at a cost of PHP500. This was recorded as an asset and expense to decrease its value by PHP50 per year for 10 years.
6. A food company ordered a machine needed in the assembly line of its production department. Upon order, the machine was immediately
listed as one of its assets.
Answers : (1) Business entity (2) Monetary unit (3) Time period (4) Business entity (5) Materiality (6) Objectivity
EVALUATION (5 MINS)
Homework activity:
1. Ask the learners to think of two real life examples for each principle discussed.
2. Ask the learners to interview a business owner and ask them about their accounting practices. The students should identify if there has been
any violation of the accounting principles.
40
Fundamentals of Accountancy, Business, and Management 1
60 MINS
The Accounting Equation
Content Standards
The learners demonstrate an understanding of the accounting equation.
Performance Standards
The learners shall be able to solve problems by applying the accounting
equation.
Learning Competencies
The learners shall be able to illustrate the accounting equation
(ABM_FABM11-IIIb-c-17); perform operations involving simple cases with the
use of the accounting equation (ABM_FABM11-IIIb-c-18)
Specific Learning Objectives
At the end of this lesson, the learners will be able to equate assets with
liabilities and equity solve problems using the accounting equation
LESSON OUTLINE
Introduction
Communicate learning objectives
10
Motivation
Real life situation
20
Instruction
Discussion
40
Practice
Exercises
20
Enrichment
More local examples
25
Evaluation
Homework
5
Materials
school supplies
Resources
Wild, J. (2009). Principles of Accounting 19th ed. McGraw Hill
Publishing
Haddock, M., Price, J., & Farina, M. (2012). College
Accounting: A Contemporary Approach, 2nd ed. New York:
McGraw-Hill/Irvin
Valencia, E.G.& Roxas, G.F. (2010). Basic Accounting 3rd ed.,
Mandaluyong City, Philippines: Valencia Educational Supply.
41
INTRODUCTION (10 MINS)
Communicate learning objectives
• Tell the learners the learning objectives of this chapter
• Understand the elements of the accounting equation
• Use the accounting equation to solve problems
• Give them an overview regarding the accounting equation
• That the accounting equation is Assets = Liabilities + Equity
• That for every transaction, the accounting equation should always be balanced.
• That Assets are resources owned by the business. Ask them to enumerate or give an example of Assets
• That Liabilities are obligations by the business. Ask them to enumerate or give an example of Liabilities
• Explain that Equity is the residual interest of the owner of the business. Meaning, any assets left after paying liabilities is the right of the
owner of the business.
• Explain that there are four elements that affect equity: (1) Investment; (2) Withdrawal; (3) Revenue, and; (4) Expenses.
MOTIVATION (20 MINS)
Connect to a real life situation.
1. Place the accounting equation at the board.
2. Ask the learners for tenexamples of business transactions
3. Prove that for every transaction the accounting equation should always balance.
INSTRUCTION (40 MINS)
Give a lecture. Illustrate how each transaction affects the accounting equation.
Illustration of the effects of the transaction in the accounting elements
42
Assets invested by the owner
July 1 - Paolo Reyes started a delivery service on July 1, 2013. The following transactions occurred during the month of July. He invested
PHP800,000 cash and Cars amounting to PHP200,000
!
Borrowings from the bank
July 2 – Reyes borrowed PHP100,000 cash from PNB for use in his business.
!
Asset purchased for cash
July 7 – Bought tables and chairs from Orocan and paid PHP45,000 cash
!
Assets purchased on account
July 15 – Various equipment were purchased on account from Fortune for PHP55,000
!
Cash withdrawal by the owner
43
July 18 – Reyes made a cash withdrawal of PHP5,000 for personal use
!
Payment of liability
July 20 – The account due to Fortune was paid in cash
!
44
The following table summarizes the effects of these transactions on the accounting equation
!
Determining profit through operation
•
Accrual basis of accounting vs Cash basis of accounting – accrual basis recognizes revenue when earned and recognizes expenses when
incurred
•
Under the expense recognition principle, expenses can be recognized either as: (1) matching; (2) systematic allocation, or; (3) direct
association.
•
Profit measures the performance of the company. If the revenue exceeds expenses, then it is a net profit; otherwise, it is a net loss.
Received cash for revenue earned
45
July 21 – A customer hired the services of Reyes. Cash of PHP15,000 was received from the customers.
!
Paid cash for expenses incurred
July 22 – Cash was paid for the following : gas and oil, PHP500 and car repairs, PHP1,000.
!
Revenue rendered on account
July 24 – Another customer hired the services of Reyes and promised to pay PHP16,000 on July 31.
!
Paid for expenses incurred
July 25 – Paid PHP500 for telephone bill.
!
Revenue earned with a downpayment, balance on account
46
July 27 – Another customer hired the services of Reyes. A bill was issued to them for PHP20,000, 50% of which was collected
Customer’s account collected in cash
July 30 – The customer on July 24 paid 50% of his account in cash.
!
Paid cash for expenses incurred
July 31 – Paid PHP10,000 for rental of office space, and salaries of PHP9,000
!
47
PRACTICE (25 MINUTES)
Concept check. Use the following question set for practice.
For each transaction, tell whether the assets, liabilities and equity will increase (I), decrease (D) or is not affected (NE).
!
48
Possible Answers:
!
ENRICHMENT (5 minutes)
Provide local examples. Use the activity below. Instead of giving the transaction, the activity below is in reverse. Let them describe the given
transaction.
Describe each transaction.
49
!
Answer Key:
1. The owner invested cash of PHP150,000 or the business earned PHP150,000 cash from providing services.
2. Purchased equipment at PHP20,000 for cash.
3. The owner withdrew cash of PHP112,500 or the business incurred PHP112,500 expenses and paid in cash.
4. The company purchased supplies on account.
5. The owner withdrew cash of PHP15,000 or the business incurred PHP15,000 expenses and paid in cash.
6. Paid liabilities worth PHP53,000.
7. The owner withdrew supplies worth PHP8,000 or the business used supplies worth PHP8,000.
EVALUATION (15 MINS)
Give the following questions as their assignment
Jerome Garcia started a new business and completed these transactions during August:
50
Aug.
1
Garcia invested PHP48,000 cash in the business.
1
Rented office space and paid PHP800 cash for the August rent.
3
Purchased exploration equipment for PHP22,000 by paying PHP12,000 cash and agreeing to pay the balance in 3 months.
5
Purchased office supplies by paying PHP1,500 cash.
6
Completed exploration work and immediately collected PHP420 cash for the work.
8
Purchased PHP1,350 of office equipment on credit.
15
Completed exploration work on credit in the amount of PHP8,000.
18
Purchased PHP700 of office supplies on credit.
20
Paid cash for the office equipment purchased on August 8.
24
Billed a client PHP2,400 for work completed; the balance is due in 30 days.
28
Received PHP5,000 cash for the work completed on August 15.
30
Paid the assistant’s salary of PHP1,100 cash for this month.
30
Paid PHP340 cash for this month’s utility bill.
30
Garcia withdrew PHP1,050 cash from the business for personal use.
Required
1. Arrange the following asset, liability, and equity titles in a table: Cash; Accounts Receivable; Office Supplies; Office Equipment; Exploration
Equipment; Accounts Payable; Jerome Garcia, Capital; Jerome Garcia, Withdrawals; Revenues; and Expenses.
2. Use additions and subtractions to show the effects of each transaction on the accounts in the accounting equation. Show new balances after
each transaction.
51
Fundamentals of Accountancy, Business, and Management 1
360 MINS
Types of Major Accounts
Content Standards
The learners demonstrate an understanding of the five major accounts, namely:
assets, liabilities, capital, income and expenses.
Introduction
Performance Standards
The learners shall be able to define, identify, and classify accounts according to
the five major types.
Learning Competencies
The learners shall be able to
•
•
•
Discuss the five major accounts (ABM_FABM11-IIId-e-19)
Cite examples of each type of account (ABM_FABM11-IIId-e-20)
Prepare a chart of accounts (ABM_FABM11-IIId-e-21)
LESSON OUTLINE
Communicate learning objectives
10
Motivation
Real life situation
10
Instruction
Discussion
Practice
Exercises
60
Enrichment
More local examples
35
Evaluation
Homework
240
5
Materials
writing materials, school pad, projector and Powerpoint
Specific Learning Objectives
At the end of this lesson, the learners will be able to:
• identify the account as assets, liabilities, capital, income or expenses
• cite an example of each type of account
• prepare a chart of accounts
Resources
Wild, J. (2009). Principles of Accounting 19th ed. McGraw Hill
Publishing
Haddock, M., Price, J., & Farina, M. (2012). College
Accounting: A Contemporary Approach, 2nd ed. New York:
McGraw-Hill/Irvin
Valencia, E.G.& Roxas, G.F. (2010). Basic Accounting 3rd ed.,
Mandaluyong City, Philippines: Valencia Educational Supply.
52
INTRODUCTION (10 MINS)
Connect and/or review prerequisite knowledge
•
•
Review the accounting equation. Ask them to differentiate the following:
•
assets – resources owned by the company
•
liabilities – debt owed by the company
•
equity – residual interest of the owners
Tell the learners that it is hard to record transactions using assets, liabilities and equity classification. The learners should use a
device to record the changes in the accounting equation. The device used to record changes in accounting equation is called the
Account.
MOTIVATION (10 MINS)
Teacher tip
Give local examples and applications:
Ask the learners how they understand assets, liabilities and equity by asking them to give examples of each.
Ask the learners on what they see in
the classroom as assets. Ask them to
enumerate.
Also ask them what they need to
purchase if they will be putting up a
business.
Lecture Proper
1. Introduce the types of major accounts: Assets, Liabilities, Owner’s Equity, Income and Expense.
•
Define Assets, Liabilities, Owner’s Equity, Income and Expense
•
Assets are the resources owned and controlled by the firm.
•
Liabilities are obligations of the firm arising from past events which are to be settled in the future.
•
Equity or Owner’s Equity are the owner’s claims in the business. It is the residual interest in the assets of the enterprise after
deducting all its liabilities.
•
Income is the increase in economic benefits during the accounting period in the form of inflows of cash or other assets or decreases
of liabilities that result in increase in equity. Income includes revenue and gains.
•
Expenses are decreases in economic benefits during the accounting period in the form of outflows of assets or incidences of
liabilities that result in decreases in equity.
53
2. Assets
Discuss the difference between Current vs. Non-Current Assets, and Tangible vs. Intangible Assets.
•
Current Assets are assets that can be realized (collected, sold, used up) one year after year-end date. Examples include Cash, Accounts
Receivable, Merchandise Inventory, Prepaid Expense, etc.
•
Non-current Assets are assets that cannot be realized (collected, sold, used up) one year after year-end date. Examples include Property,
Plant and Equipment (equipment, furniture, building, land), long term investments, etc.
•
Tangible Assets are physical assets such as cash, supplies, and furniture and fixtures.
•
Intangible Assets are non-physical assets such as patents and trademarks
Discuss the account titles used for Asset Accounts. Define each account and differentiate one from the other.
Current Assets
•
Cash is money on hand, or in banks, and other items considered as medium of exchange in business transactions.
•
Accounts Receivable are amounts due from customers arising from credit sales or credit services.
•
Notes Receivable are amounts due from clients supported by promissory notes.
•
Inventories are assets held for resale
•
Supplies are items purchased by an enterprise which are unused as of the reporting date.
•
Prepaid Expenses are expenses paid in advance. They are assets at the time of payment and become expenses through the passage of
time.
•
Accrued Income is revenue earned but not yet collected
•
Short term investments are the investments made by the company that are intended to be sold immediately
Non-Current Assets
•
Property, Plant and Equipment are long-lived assets which have been acquired for use in operations.
•
Long term Investments are the investments made by the company for long-term purposes
•
Intangible Assets are assets without a physical substance. Examples include franchise and copyright.
54
3. Liabilities
Liabilities are the debts and obligations of the company to another entity.
•
Discuss the differences of Current vs. Non-Current Liabilities.
Current Liabilities. Liabilities that fall due (paid, recognized as revenue) within one year after year-end date. Examples include Accounts
Payable, Utilities Payable and Unearned Income.
Non-current Assets are liabilities that do not fall due (paid, recognized as revenue) within one year after year-end date. Examples include
Notes Payable, Loans Payable, Mortgage Payable, etc.
•
Discuss the Account Titles used for Liability Accounts. Define each account and differentiate one from the other.
Current Liabilities
Accounts Payable are amounts due, or payable to, suppliers for goods purchased on
account or for services received on account.
Notes Payable are amounts due to third parties supported by promissory notes.
Accrued Expenses are expenses that are incurred but not yet paid (examples: salaries payable,
Unearned Income is cash collected in advance; the liability is the services to be performed
taxes payable)l
or goods to be delivered in the future.
Non-Current Liabilities
Loans Payable
Mortgage Payable
4. Owner’s Equity
•
Discuss what Owner’s Equity is.
Owner’s Equity is the residual interest of the owner from the business. It can be derived by deducting liabilities from assets.
•
Discuss the Account Titles used for Equity Account. Define each account and differentiate one from the other.
55
Capital is the value of cash and other assets invested in the business by the owner of the business.
Drawing is an account debited for assets withdrawn by the owner for personal use from the business.
5. Income
•
Discuss what Income is.
Income is the Increase in resources resulting from performance of service or selling of goods.
•
Discuss where Income increases and decreases in the accounting equation.
Income increases equity.
•
Give examples of Income Accounts.
Service revenue for service entities, Sales for merchandising and manufacturing companies
6. Expense
•
Discuss what Expense is.
Expense is the decrease in resources resulting from the operations of business
•
Discuss where Expense increases and decreases in the accounting equation.
Expenses decreases Equity in the accounting equation
•
Give examples of Expense Accounts
Salaries Expense, Interest Expense, Utilities Expense
II. Discuss Chart of Accounts.
The following is a sample lecture for setting up a Chart of Accounts:
•
A chart of accounts is a listing of the accounts used by companies in their financial records.
•
The chart of accounts helps to identify where the money is coming from and where it is going.
•
The chart of accounts is the foundation of the financial statements.
The following are the steps in the preparation of a basic chart of accounts:
1. Create two columns.
56
2. Prepare the assets first, then liabilities, then equity, then revenue and expenses.
3. List all assets, liabilities, equity, revenue and expenses account in the first column.
4. On the second column, choose an account code (discretion of the company).
5. On the third column, write the description for each account on when to use it.
An example of a chart of accounts is given below:
Assets
Account
Account Code
*may vary
Description
Cash
1000
Use for actual cash transactions
Accounts Receivable
1200
Use for customers who will pay in the future
Inventory
1300
Use for items held for sale
Prepaid Expenses
1400
Use for expenses paid in advance
Supplies
1500
Use for items to be used in the future
Office Equipment
1600
Use for equipment that are used in the office
Store Equipment
1700
Use for equipment that are used in the store
Land
1800
Use for land used in operations
Accounts Payable
2000
Use for the debts of the company
Notes Payable
2100
Use for promissory notes issued by the company
Salaries Payable
2200
Use for salaries to be paid in the future
Liabilities
Capital
Owner’s, Capital
3000
57
Owner’s, Withdrawal
4000
Service Revenue
5000
Use for earnings
Salaries Expense
6000
Use for salaries incurred, regardless of payment
Utilities Expense
6100
Use for electricity and water expenses incurred
PRACTICE (60 MINS)
Matching Type
Assets
Accounts Receivable
Intangible Assets
Liabilities
Notes Receivable
Property, Plant and Equipment
Owner’s Equity
Rent Expense
Cash
Prepaid Expense
____________ 1. It is the obligations of the company payable in money, goods or services.
____________ 2. These are non-current tangible assets.
____________ 3. These assets are identifiable, non-monetary assets without physical substance.
____________ 4. It is the claim of the owner also known as the capital.
____________ 5. It is the most liquid asset and is the medium of exchange for business transactions.
____________ 6. It is an expense for leased office space, equipment or assets rented from others.
____________ 7. Examples of this are cash, account receivable and prepaid expenses.
____________ 8. It is a written promise from the customer to pay his receivables on a certain future date.
ANSWERS: 1. Liabilities 2. Property, Plant and Equipment 3. Intangible Assets 4. Owner’s Equity 5. Cash
6. Rent Expense 7. Assets 8. Notes Receivable
58
ENRICHMENT (35 MINS)
Provide local examples. You can use the activity below. Identify where you classify the following items
Account Title
Current Asset
Non-Current Asset
Tangible
Intangible
Current Asset
Non-Current Asset
Tangible
Intangible
x
x
1 Account Receivable
2 Building
3 Cash
4 Computer Equipment
5 Copyrights
6 Delivery Truck
7 Furniture & Fixtures
8 Store Supplies
9 Inventories
10 Land
11 Notes Receivable
12 Office Supplies
13 Accrued Income
14 Prepaid Insurance
15 Prepaid Rent
Answers
Account Title
1 Account Receivable
2 Building
x
59
3 Cash
x
4 Computer Equipment
x
5 Copyrights
x
6 Delivery Truck
x
x
7 Furniture & Fixtures
x
x
x
x
8 Store Supplies
x
9 Inventories
x
10 Land
11 Notes Receivable
x
12 Office Supplies
x
13 Accrued Income
x
14 Prepaid Insurance
x
15 Prepaid Rent
x
x
X
EVALUATION (5 MINUTES)
Homework activity: You can choose any activity below
Activity 1
Indicate whether it is an increase (+), decrease (-), or no effect on the asset, liabilities and equity accounts.
Assets
Liabilities
Equity
1.
Investment of cash in the business
_______
_______
_______
2.
Purchase of computer equipment for cash
_______
_______
_______
3.
Billed a customer for services rendered
_______
_______
_______
4.
Paid salaries
_______
_______
_______
60
5.
Purchased office supplies on credit
_______
_______
_______
6.
Paid advertising expense
_______
_______
_______
7.
Paid rent in advance for 3 months
_______
_______
_______
8.
Received cash from customers on account
_______
_______
_______
9.
Withdrew cash for personal use
_______
_______
_______
10.
Invested land into the company
_______
_______
_______
Answers for Activity 1
Indicate whether it is an increase (+), decrease (-), or no effect on the asset, liabilities and equity accounts.
Assets
Liabilities
Equity
1.
Investment of cash in the business
___+____
__NE_____
___+____
2.
Purchase of computer equipment for cash
___NE____
__NE_____
___NE____
3.
Billed a customer for services rendered
___+____
__NE_____
___+____
4.
Paid salaries
___-____
__NE_____
___-____
5.
Purchased office supplies on credit
___+____
__+_____
___NE____
6.
Paid advertising expense
___-____
__NE_____
___-____
7.
Paid rent in advance for 3 months
___NE____
__NE_____
___NE____
8.
Received cash from customers on account
___+____
__NE_____
___+____
9.
Withdrew cash for personal use
___-____
__NE_____
___-____
10.
Invested land into the company
___+____
__NE_____
___+____
Activity 2
61
Identify if the account is an asset, liability, equity, income or expense and indicate its normal balance.
Account
Asset
Liabilities
Owner's Equity
1 Accounts
Receivable
2 Accumulated
Depreciation
3 Advertising
Expense
4 Bonds Payable
5 Building
6 Cash
7 De Jesus, Capital
8 De Jesus,
Drawing
9 Delivery Truck
10 Interest Payable
11 Inventories
12 Land
13 Mortgage Loans
14 Notes Payable
15 Notes Receivable
16 Office Supplies
17 Prepaid Expense
18 Rent Expense
62
Income
Expense
Balance
19 Salaries Expense
20 Salaries Payable
21 Service Fees
Income
22 Supplies Expense
23 Trading Securities
24 Unearned Income
25 Utilities Expense
Answers for Activity 2
Identify if the account is an asset, liability, equity, income or expense.
Account
Asset
1 Accounts
Receivable
X
2 Accumulated
Depreciation
X
Liabilities
Owner's Equity
3 Advertising
Expense
Expense
X
4 Bonds Payable
X
5 Building
X
6 Cash
X
7 De Jesus, Capital
X
8 De Jesus,
Drawing
X
9 Delivery Truck
Income
X
63
Balance
10 Interest Payable
X
11 Inventories
X
12 Land
X
13 Mortgage Loans
X
14 Notes Payable
X
15 Notes Receivable
X
16 Office Supplies
X
17 Prepaid Expense
X
18 Rent Expense
X
19 Salaries Expense
X
20 Salaries Payable
X
21 Service Fees
Income
X
22 Supplies Expense
X
23 Trading Securities X
24 Unearned Income
X
25 Utilities Expense
x
64
Fundamentals of Accountancy, Business, and Management 1
180 MINS
Books of Accounts
Content Standards
The learners demonstrate an understanding of the two major types of
accounts, namely, journal and ledger.
LESSON OUTLINE
Performance Standards
The learners demonstrate an understanding of the two major types of
accounts, namely, journal and ledger.
Learning Competencies
The learners shall be able to identify the uses of the two books of accounts
(ABM_FABM11-IIIf-22); illustrate the format of a general and special journals
(ABM_FABM11-IIIf-23); and, illustrate the format of a general and subsidiary
ledger (ABM_FABM11-IIIf-24)
Specific Learning Objectives
At the end of this lesson, the learners will be able to:
• identify the uses of the two books of accounts (journal and ledger) to
record business transactions.
• explain the use of general and special journals to record business
transactions
• discuss the use of general and subsidiary ledgers to record business
transactions.
65
Introduction
Communicate learning objectives
Motivation
Real life situation
Instruction
Discussion
Practice
Exercises
30
Enrichment
More local examples
15
Evaluation
Homework
20
5
10
100
Materials
columnar sheet or worksheet (two, three, and five columns)
Resources
General Journal Description Entries Example (n.d.) Retrieved
from http://www.accountingtools.com/general-journal
General Ledger (n.d.) Retrieved from http://
accountingtools.com/definition-general-ledger
Valencia, et.al. (2010). Basic Accounting 3rd ed. valencia
Educational Supply
INTRODUCTION (5 MINUTES)
Teacher tip
Introduce the following learning objectives:
•
I will be able to understand the uses of the two books of accounts (journal and ledger) in recording
business transactions.
•
I will be able to explain the use of the general and special journals to record business transactions.
•
I will be able to discuss the use of the general and subsidiary ledgers to record business transactions.
Require the learners to bring one
sheet of : two-column, 3- column
and five-column worksheets. These
can be purchased at any school
supplies store in your area.
MOTIVATION (10 MINUTES)
Review the learners by asking the definition of accounting.
“Accounting is the process of IDENTIFYING, RECORDING, and COMMUNICATING economic
events of an organization to interested users.” (Weygandt et.al.)
!
Ask the learners, “from the definition, where do we record the transactions that we have identified? What are the tools that we use to
document these transactions? How important are these records in accounting?”
Leave these questions unanswered. Inform the learners that you will ask these questions again after the discussion of the subject matter.
66
INSTRUCTION/DELIVERY/DISCUSSION (100 MINUTES)
Teacher tip
The two major types of books of accounts are journal and ledger.
1. Discuss the journal
Companies initially record transactions and events in chronological order (the order in which they occur).
Thus, the journal is referred to as the book of original entry. For each transaction the journal shows the
debit and credit effects on specific accounts.
Take note that the objective of this
chapter is for the learners to
appreciate the various tools used in
recording transactions. Actual
recording and use of these tools will
be discussed in ABM 2.
There are two types of journals, the general journal and the special journal.
GENERAL JOURNAL
The general journal is the most basic journal. Typically, a general journal has spaces for dates, account titles
and explanations, references, and two amount columns.
The journal makes several significant contributions to the recording process:
Teacher tip
•
It discloses in one place the complete effects of a transaction.
•
It provides a chronological record of transactions.
•
It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily
compared.
Shown below is an example of a general journal
General Journal
Date
Account Title and Explanation
Ref
67
Debit
Credit
As you illustrate the use of the
general journal please explain that
the accounting equation will be
maintained as the debit entry will be
accompanied by a credit entry. The
total debits should always equal total
credits.
The accounting equation will be
discussed in ABM1 Chapter 10
(Business Transactions)
Journalizing process
Teacher tip
Entering transaction data in the journal is known as journalizing. Companies make separate journal entries for
each transaction. A complete entry consists of:
There are available books of this
format that can be bought in a
bookstore. All the learners have to
do is to fill it up. They can use a twocolumn book for a general journal.
•
The date of the transaction which is entered in the Date column.
•
The debit account title (that is, the account to be debited) which is entered first at the extreme left margin
of the column headed “Account Titles and Explanation,” and the amount of the debit is recorded in the
Debit column.
•
The credit account title (that is, the account to be credited) which is indented and entered on the next line
in the column headed “Account Titles and Explanation,” and the amount of the credit is recorded in the
Credit column.
•
A brief explanation of the transaction which appears on the line below the credit account title. A space is
left between journal entries. The blank space separates individual journal entries and makes the entire
journal easier to read.
•
The column titled Ref. (which stands for Reference)which is left blank when the journal entry is made. This
column is used later when the journal entries are transferred to the ledger accounts.
Teacher tip
Review the topic on Chart of
Accounts. The account title to be
used in the column provided should
coincide with the titles that are listed
in the Chart of Accounts.
To illustrate the recording of transactions in the general journal, let us use the following transactions as an
example:
•
September 1, 2015 Mr. Ben Mabait invested PHP500,000 in a restaurant business by opening an account
with SuperBank.
•
September 5, 2015 purchased kitchen appliances for his business amounting to PHP100,000 by issuing a check.
•
September 6, 2015 started his operations a made a sales for that day amounting to PHP20,000.
68
We will now record the above transactions in the general journal.
Teacher tips
General Journal
Date
9/1/15
Account Title and Explanation
Ref
Cash
Debit
Credit
500,000
500,000
100,000
100,000
20,000
20,000
B. Mabait, Capital
To record investment of Mr. Ben Mabait
9/5/15
Kitchen Appliances
Cash
• It is important to use correct and
specific account titles in
journalizing. The main criterion is
that each title must appropriately
describe the content of the account.
• Some practitioner or CPA uses
“Description or Particulars” instead
of Account Titles and Explanation.
• Remind the learners that for every
journal entry the total debits and
credit should always be equal. If
not, the entry is erroneous.
To record purchase of kitchen appliances
9/6/15
Cash
Sales
To record sales for the day
Some entries involve only two accounts, one debit and one credit. An entry like these is considered a simple entry. Some transactions, however,
require more than two accounts in journalizing. An entry that requires three or more accounts is a compound entry. All of the transactions in the
above examples are simple entries. An example of a compound entry is the following:
On September 7, 2015, Mr. Mabait purchased a motorcycle costing PHP80,000. He pays PHP30,000 cash and agrees to pay the remaining
PHP50,000 on account (to be paid later). The compound entry is as follows:
69
General Journal
Date
9/7/15
Account Title and Explanation
Ref
Debit
Transportation Equipment
Cash
Accounts Payable
Credit
80,000 30,000
50,000
To record purchase of motorcycle by paying cash and
the balance on account
SPECIAL JOURNALS
Some businesses encounter voluminous quantities of similar and recurring transactions which may create congestion if these transactions are
recorded repeatedly in a single day or a month in the general journal. Take the case of our example above, if Mr. Mabait will record the sales
per day using the Official Receipt or Cash Sales Invoice issued, it would be unnecessary and impractical to credit “sales” account repeatedly. In
order to facilitate efficient and practical recording of similar and recurring transactions, a special journal is used.
The following are the commonly used special journals:
•
Cash Receipts Journal – used to record all cash that has been received
•
Cash Disbursements Journal – used to record all transactions involving cash payments
•
Sales Journal (Sales on Account Journal) – used to record all sales on credit (on account)
•
Purchase Journal (Purchase on Account Journal) – used to record all purchases of inventory on credit (or on account)
Cash Receipts Journal is used to record transaction involving receipt or collection of cash. The following illustrate the format of a cash receipts
journal:
Cash Receipts Journal
DATE
DESCRIPTION (PARTICULARS)
REF
Teacher tip
Debit
Credit
Credit
Credit
Cash
Sales
Account
Receivable
Sundry
70
The format may vary depending on
the nature of business and the
frequency of transactions.
•
The date of the transaction is entered in the date column.
•
A brief explanation of the transaction is entered in the description column.
•
The column titled Ref. (which stands for Reference) which is left blank when the journal entry is made. This column is used later when the
journal entries are transferred to the ledger accounts.
•
The Debit Cash column represents the amount of cash received for a particular transaction.
•
Major categories of receipts, such as cash sales and collection of accounts receivable are provided with separate columns. These
transactions are frequent and repetitive items, therefore a separate column is provided.
•
The column sundry is used for various miscellaneous and less regular items, such as capital investment, receipt of loan proceeds, among
others.
The source document for this journal is the Official Receipts or Cash Receipts issued by the business.
Cash Disbursements Journal (CDJ)
The cash disbursements journal is the opposite of the cash receipts journal. It is the journal where all cash payments are recorded. An
example of a cash disbursement journal is shown below:
Cash Disbursements Journal
DATE
•
DESCRIPTION (PARTICULARS)
REF
Check or Voucher
Number
The date of the transaction is entered in the date column.
71
Credit
Debit
Debit
Debit
Credit
Cash
Accounts Payable
Salaries
Supplies
Sundry
•
A brief explanation of the transaction is entered in the description column.
•
The column titled Ref. (which stands for Reference) which is left blank when the journal entry is made. This column is used later when the
journal entries are transferred to the ledger accounts.
•
The Check or Voucher number represents the identifying number of the check issued for the related cash payment. Most of the time, a
check or cash voucher accompanies the disbursement. The voucher number may be used as the alternative for this column.
•
The Debit Cash column represents the amount of cash received for a particular transaction.
•
Major categories of receipts, such cash sales and collection of accounts receivable are provided with separate columns. These transactions
are frequent and repetitive items, therefore a separate column is provided.
•
The column sundry is used for various miscellaneous and less regular items, such as capital investment, receipt of loan proceeds, among
others.
The source documents used to update this journal are the check voucher or cash voucher, cash receipts or official receipts from suppliers or
vendors.
Sales Journal (Sales on Account Journal)
The Sales Journal or Sales on Account Journal is used in recording several sales transactions on account. The source document for this
journal is the charge invoice or sales invoice (for credit transactions) to various customers or clients. An example of a sales journal is shown
below:
Sales Journal
DATE
DESCRIPTION (CUSTOMER NAME)
REF
72
Charge
Invoice or
Sales Invoice
No.
Debit
Credit
Accounts
Receivable
Sales
•
The date of the transaction is entered in the date column.
•
A brief explanation of the transaction is entered in the description column or the name of the customer.
•
The column titled Ref. (which stands for Reference) which is left blank when the journal entry is made. This column is used later when the
journal entries are transferred to the ledger accounts.
•
The Charge Invoice Number or Sales Invoice Number represents the identifying number of the source document issued to the customer
when the sale was made.
•
The Debit Accounts Receivable column represents the amount of the sale transactions indicated in the charge invoice.
•
The Credit Sales column represents the amount of the sale transactions indicated in the charge invoice.
The source document for this journal is the Charge Invoice issued by the business.
Purchase Journal (Purchases on Account Journal)
The Purchase journal or the Purchases on Account Journal is used to record recurring transactions of purchases on account. The source
documents for purchase journal are the invoices from the supplier of the company. An example of a Purchase Journal is shown below:
Purchase Journal
DATE
DESCRIPTION (SUPPLIER’S NAME)
REF
Charge Invoice or Sales
Debit
Credit
Invoice No. (from supplier) Purchase Accounts
s
Payable
•
The date of the transaction is entered in the date column.
•
A brief explanation of the transaction is entered in the description column or the name of the supplier
73
•
The column titled Ref. (which stands for Reference) which is left blank when the journal entry is made. This column is used later when the
journal entries are transferred to the ledger accounts.
•
The Charge Invoice Number or Sales Invoice Number represents the identifying number of the source document issued by the supplier
when the items, goods or merchandise were delivered to the company when the purchase was made.
•
The Debit Purchases column represents the amount of the goods purchases as indicated in the charge invoice from the supplier
•
The Credit Accounts Payable column represents the amount of the goods or items purchased on credit from the supplier. The amount is
indicated in the charge invoice issued by the supplier.
The source document for this journal is the charge invoice from the supplier or vendor.
2. Discuss the ledger
The ledger refers to the accounting book in which the accounts and their related amounts as recorded in the journal are posted periodically.
The ledger is also called the ‘book of final entry’ because all the balances in the ledger are used in the preparation of financial statements. This
is also referred to as the T-Account because the basic form of a ledger is like the letter ‘T’.
There are two kinds of ledgers, namely; the general ledger and the subsidiary ledgers.
GENERAL LEDGER
The general ledger (commonly referred by accounting professionals as GL) is a grouping of all accounts used in the preparation of financial
statements. The GL is a controlling account because it summarizes all the activities that have taken place as recorded in its subsidiary ledger.
The format of a general ledger is shown below:
General Ledger
Account: Cash
Date
Account No.: 1000
Item
Ref
Debit
74
Credit
Balance
•
The account portion refers to the account title for example: cash, accounts receivable.
•
The account number is an assigned number for each account title to facilitate ease in recording and cross-referencing.
•
The Date column identifies when the transaction happened.
•
The item represents the source journal and the nature of the transactions
•
The Reference identifies the page number of the general our special journal from which the information was taken.
•
The Debit and Credit columns are used in recording the amount of transactions from the general journal or special journal.
•
The Balance Column represents the running balance of the Account after considering the debit and credit amounts. If the running balance
amount is positive, the account has a debit balance whereas if it has a negative running balance, the accounts has a credit balance.
SUBSIDIARY LEDGER
A subsidiary ledger is a group of like accounts that contains the independent data of a specific general ledger. A subsidiary ledger is created or
maintained if individualized data is needed for a specific general ledger account. An example of a subsidiary ledger is the individual record of
various payables to suppliers. The total amount of these subsidiary ledgers should equal the balance in the Accounts Payable general ledger.
An example of a subsidiary ledgers are shown below:
Accounts Payable
Subsidiar Ledger
Vendor/Supplier: Joy Food Corporation
Address: Jose St, Sampaloc, Manila
Date
Item
Vendor No.: 201
Ref
Debit
Credit
Balance
•
The upper portion indicates the name and address of the vendor or supplier.
•
The vendor number is an assigned number for each vendor as reference in keeping the records of a supplier.
75
•
The Date column identifies when the transaction happened.
•
The description column describes the nature of transaction.
•
The Reference identifies the page number of the general our special journal from which the information was taken.
•
The Debit and Credit columns reflect the various effects of every transaction to the record of the supplier or vendor.
•
The Balance column provides the running balance of every supplier.
Take note that the total running balance for all subsidiary ledgers should equal the Accounts payable general ledger.
At the end of this lecture, go back to the following questions posed in the motivation part:
“Accounting is the process of IDENTIFYING, RECORDING, and COMMUNICATING economic
events of an organization to interested users.”
Ask the learners, “from the definition, where do we record the transactions that we have identified? What are the tools that we use to
document these transactions? How important are these records in accounting?”
PRACTICE (30 MINS)
Identify what special journal that is applicable for the following transactions:
1. Collected PHP10,000 from a customer in payment of his account.
Answer: Cash Receipts Journal
2. Bought 100 pieces of mugs to be sold in the store amounting to PHP1,500 on account.
Answer: Purchase Journal.
3. Sold five pieces of mugs to X, PHP320 cash.
Answer: Cash Receipts Journal (the learner may answer Sales Journal (SJ), correct them as this transaction is a cash sale, SJ is applicable
only to “ on account” transactions.
76
4. Sold two pieces of mugs to Y, PHP112 cash
Answer: Cash Receipts Journal
5. Purchased office supplies for cash, PHP500.
Answer: Cash Disbursement Journal (the learner may answer Purchase Journal (PJ). Correct them as this transaction is a cash purchase; PJ is
applicable only to “on account” transactions.
6. Paid PHP20,000 monthly rental.
Answer: Cash Disbursements Journal
7. Paid salary of staff, PHP15,000
Answer: Cash Disbursement Journal
8. Sold 100 pieces of mugs to Unicup, Inc., PHP5,600 on account.
Answer: Sales Journal
9. Sold 500 pieces of mugs to Bugsmore Corp. for PHP15,300 payable one month after delivery.
Answer : Sales Journal
10. Purchase on account 1,000 pieces of mugs for PHP12,400
Answer: Purchase Journal
Recitation
1. Differentiate General Ledger from a Subsidiary Ledger
Suggested Answer:
A subsidiary ledger contains the details supporting the balance in the general ledger account. For example, a subsidiary ledger is maintained
for all receivables from customers; the sum of balances per customer should equal the balance of Accounts Receivable Account in the general
ledger account.
2. Differentiate General Journal from a General Ledger
Suggested Answer:
Accounting transactions are first recorded in the general journal and in order of their occurrence. A general ledger contains a summary at the
account level of every transaction that a business has engaged in.
The general journal records all the transactions whereas the general ledger the effect of these journal entries to every account title.
The general journal is called the book of original entry while the general ledger is called the book of final entry.
77
Teacher tip
Exercise
Prior to this meeting, require the learners to bring two-column and three-column worksheets. Using these
columnar sheets, require the learners to prepare the format of general journal, cash receipts journal, cash
disbursement journal, sales journal, purchase journal, general ledger and subsidiary ledger. After
submission, the teacher will review if what they have prepared conforms to the format illustrated above.
Write comments or corrections if necessary and return to the learners. Discuss common errors committed.
ENRICHMENT (15 MINS)
Summarize the discussions made.
1. Types of transactions recorded in the cash receipts journal:
•
cash received from a charge (on account) customer
•
cash received from a charges (on account) customer less a cash discount
•
cash sales
•
cash received from sale of other assets.
•
all other transactions that require the issuance of a Cash receipt or Official Receipt document
2. A sales journal is used when two conditions are met:
•
merchandise is sold
•
the sale is on account
3. A cash disbursements journal (cash payments journal) is used to record the following transactions:
•
purchase of merchandise for cash
•
payment to creditor, vendors or suppliers
•
all cash payments
Ask the learners “how important are the journals and ledgers in accounting?”
78
Discuss the common errors or
mistakes encountered by the learners
and inform them of the correct way of
preparing the journals and ledgers.
If the learners have access to Microsoft Excel, the teacher may ask the learners to prepare the journals and ledger using the excel format.
EVALUATION (20 MINS)
QUIZ
1. Enumerate all special journals. (4 points)
Answers:
•
Cash Receipts Journal
•
Cash Disbursement Journal
•
Purchase Journal (Purchase Journal on account)
•
Sales Journal (Sales Journal on account)
2. Why do companies use special journals?
(or What are the advantages of using a special journal)(7 points)
Suggested Answer:
Special journals are designed to facilitate the process of journalizing and posting transactions. They are used for most frequent transactions in a
business. For example, in merchandising businesses, companies acquire merchandise from suppliers frequently. To avoid repetitive journal
entries for these transactions, a special journal (in this case: the purchase journal) is used.
3. Identify the appropriate special journal to be used for every source document listed below: (4 points)
•
Official Receipt issued by the company
Answer: Cash Receipts
•
Charge Invoice issued by the company
Answer: Sales Journal
•
Charge Invoice from a supplier
Answer: Purchase Journal
•
Official receipt from a supplier as proof of payment of account
Answer: Cash Disbursement Journal
79
Fundamentals of Accountancy, Business, and Management 1
720 MINS
Business Transactions and Their Analysis
as Applied to the Accounting Cycle of a
Service Business
Content Standards
The learners demonstrate an understanding of the business transactions and
their analysis, to include definition and nature of business transactions, types of
sources or business documents, and the rules of debits and credits.
Performance Standards
The learners shall be able to identify business and non-business transactions,
enumerate the types of business documents, recite the rules of debit and
credit, and apply these to simple cases.
Learning Competencies
The learners shall be able to
• describe the nature of business transactions and give examples
ABM_FABM11-IIIg-j-25
• identify the different types of business documents ABM_FABM11-IIIg-j-26
• analyze common business transactions using the rules of debit and credit
ABM_FABM11-IIIg-j-27
• solve simple problems and exercises in the analysis of business transactions
ABM_FABM11-IIIg-j-28
LESSON OUTLINE
Introduction
Communicating learning objectives
Review types of businesses
15
Motivation
Examples of Service Businesses
30
Instruction
Discussion
435
Practice
Problem Sets
150
Enrichment
Group Discussions
30
Evaluation
Quizzes
60
Materials
three-column worksheet, calculator
Resources
The Chart of Accounts. (n.d.). Retrieved from http://
www.accountingtools.com/chart-of-accounts-overview
Accounting Cycle (n.d.) Retrieved from http://
www.investopedia.com/terms/a/accounting-cycle.asp
Valencia, et.al. (2010). Basic Accounting 3rd ed. Valencia
Educational Supply
Weygandt, J. et.al (2012). Accounting Principles 10th ed.
John Wiley & Sons (Asia) Pte. Ltd.
80
INTRODUCTION (15 MINS)
Communicating learning objectives
Introduce the following learning objectives:
•
•
•
•
I will be able to describe the nature of a service business and give examples
I will be able to identify the different types of business documents
I will be able to prepare journal entries of business transactions in a service business.
I will be able to solve problems and exercises in the analysis of business transactions.
Review of types of businesses
Ask the learners to recall the discussion on types of businesses according to activities and ask them to
differentiate the following:
• service business
• merchandising business
• manufacturing business
Post/show the following pictures and ask the learners to identify the type of business according to the
activity shown.
Teacher tip
Ask the learners what the picture is before
asking them the type of activities.
Modify the activity by picking different
industries and showing service,
merchandising, and manufacturing
businesses in that industry.
1. car mechanic / repair - service
2. car parts store - merchandising
3. car making - manufacturing
81
MOTIVATION (30 MINS)
Examples of Service Businesses
Ask the learners to give examples of service businesses in their community.
Possible Answers:
•
•
•
•
•
•
barbershop
offices of practicing doctors, lawyers and other professionals
repairs of TV and other electrical equipment
auto repair shop
laundry shop
dressmaker
Review the discussion on five major accounts, namely: assets, liabilities, equity (capital), income,
expenses.
Assets are resources owned by a business.
Liabilities are claims against the assets of the business.
Equity (capital) is the claim of the owner or owners.
Income are increases in the equity or capital resulting from business activities entered into.
Expenses are decreases in the equity or capital resulting from business activities. It may include
assets or services consumed in the process of earning income
After the review, inform the students about the importance of understanding these accounts in
recording transactions involving service businesses.
•
•
•
•
•
Teacher tip
An understanding of these major accounts
is needed in the discussion of the subject
matter.
INSTRUCTION (420 MIN)
Discuss the nature of a service business
A service business provides a needed service for a fee. In general, service businesses actually have no
physical product sold to clients. Their services are designed to facilitate the work of clients and in return
are paid. Service businesses include salons or barbershops, laundry services, car repairs, medical
centers and services of professionals like lawyers and doctors. The revenue of a service business is
usually realized once the service has been substantially completed. Aside from the minor supplies, the
service business does not maintain a high level of inventory as compared to merchandising and
manufacturing businesses. In relatively small service businesses, all transactions are on cash payments.
This means sales are collected immediately while most expenses are paid outright in the form of cash
82
Teacher tip
Ask the learners to recall the discussion on
types of businesses according to activities
or checks. The typical financial transactions recorded for a service company include collecting a deposit
from the customer, providing the service and receiving payment.
Ask the learners to assist you in walking through the operations of certain service business. Use a repair
shop of TVs and other electrical appliances as an example. Ask the learners what events or transactions
usually occur in a repair shop.
Teacher tip
Ask the learners to recall the discussion on
types of businesses according to activities
Discuss the accounting cycle of a service business
THE ACCOUNTING CYCLE
1. Transactions
2. Journal Entries
3. Posting
4. Trial Balance
8. Closing the Books
7. Financial
Statements
6. Adjusting Journal
Entries
5. Worksheet
The accounting cycle is a continuous process of accumulating, summarizing and reporting financial
information. The steps include:
Step 1 - Transactions and/or Events
Identification and measurement of external transactions and internal events. At this stage, the
documents used by the business are analyzed whether it has financial impact or effect. Recall the rule
that only financial transactions are recorded and that the amount can be measured. These two
conditions must exist in order that a particular transaction is recognized or recorded. As defined,
financial transactions are those activities that change the value of an asset, liability or an equity.
Examples of financial transactions:
•
•
Receipt of cash from a client as advance payment to repair a computer. In this case (asset) will
increase. At the same time, the advances from client (liability) will also increase. The advances from
client is a liability because the business has the obligation to render future service to the client.
Payment of electric bill is a financial transaction. This will decrease the cash (asset) and reduce the
income of the business at the same time.
83
Teacher tip
In this chapter, the first four steps are
discussed. It is suggested that this figure is
posted on the board while discussing each
step discussed.
Examples of non-financial transactions:
•
•
•
Business Name & Business Address
VAT REG TIN: 000-000-000-000
hiring and termination of employees
recognition from the government as most outstanding business
death of owner
The information needed when recording transactions are taken from forms used to document
these transactions. In a typical service business, the following are the business documents
used:
1. Official Receipt or Cash Receipt
This document is used when a business receives money or a check. An Official Receipt or
Cash Receipt is a document that acknowledges that money or a check have been
received.
2. Charge Invoice or Sales Invoice
A charge invoice is a document used when a service has been rendered, but the client
will be billed only after a certain number of days from the date of service. Often, a
company will issue a statement of account to a customer, with the charge or sales invoice
attached. For example: in a laundry business, a customer may avail of the services of the
business. However, that customer and the owner of the business had a prior agreement
that all services availed by the customer will be paid only after 30 days. In this case, a
charge invoice is issued on the day the client availed of the services.
3. Check or Cash Voucher
The check voucher is a document used when a check is issued to pay a certain supplier or
vendor. For example, in a laundry business, for the payment of monthly electricity bills,
the business may pay either in cash or check. But the company must prepare a cash or
check voucher to support this payment. This document will serve as a record of payment
and, at the same time, as proof that payment has been made by the company.
SAMPLE OFFICIAL RECEIPT
Business Name & Business Address
SAMPLE SALES INVOICE
SAMPLE CHECK VOUCHER
84
Step 2 - Preparation of Journal Entries (journalization)
Teacher tip
Through the use of specialized journals (such as those for sales, purchases, cash receipts, and cash
disbursements) and the general journal, transactions and events are entered into the accounting
records. These are called the books of original entry.
Ask the learners for examples of assets,
liabilities and equity accounts as previously
discussed.
Debits and Credits are an integral part of the journalization process. In accounting, debits or credits are
abbreviated as DR and CR respectively.
Ask the learner to recall the previous
discussion on the different books of
accounts.
When to Debit and when to Credit: An increase in an asset account is called a debit and an increase in
a liability or equity account is called a credit. Likewise, if we decrease an asset account we credit that
account. On the other side of the equation, if we decrease a liability or equity account we debit those
accounts.
Rules on Debits and Credits
•
•
•
The name of the account to be debited is always listed first. The debited account is listed on the
first line with the amount in the left side of the register.
The credited account is listed on the second line and is usually indented. The credited amount is
recorded on the right side of the register.
The total amount of debit should always equal the total amount of credit.
Recall the discussion on the Chart of Accounts
Teacher tip
The Chart of Accounts is a listing of all account titles used in the business to record all the transactions.
It is arranged according to the order of their appearance in the financial statements. Refer to Table X
Review ABM1 Chapter 8 (Types of Major
Accounts)
85
TABLE X. SAMPLE CHART OF ACCOUNTS
ACCOUNT CODE
ACCOUNT TITLE
ACCOUNT CODE
Statement of Financial Position Accounts
ACCOUNT TITLE
Income Statement Accounts
1000
Cash
4000
Service Revenue
1200
Accounts Receivable
4100
Sales
1201
Allowance for Bad Debts
4101
Sales Returns and Allowances
1300
Inventory
4102
Sales Discounts
1400
Prepaid Expenses
4150
Interest Income
1500
Supplies
5000
Cost of Sales
1600
Office Equipment
5100
Purchases
1601
Accum Deprn - Off Eqpt
5101
Purchase Returns & Allowances
1650
Store Equipment
5102
Purchase Discounts
1651
Accum Deprn - Store Eqpt
5103
Freight In
1680
Transportation Equipment
6100
Salaries Expense
1681
Accum Deprn - Trans Eqpt
6150
Supplies Expense
1750
Building
6200
Utilities Expense
1751
Accum Deprn - Building
6220
Communication Expense
1800
Land
6250
Travel Expense
1900
Intangible Assets
6300
Rental Expense
2000
Accounts Payable
6350
Fuel Expenses
2100
Notes Payable
6400
Advertising Expense
2200
Accrued Expenses
6410
Delivery Expense
2201
Salaries Payable
6450
Commission Expense
2202
Utilities Payable
6500
Depreciation Expense
2300
Income Taxes Payable
6600
Taxes and Licenses
3000
Owner’s, Capital
6700
Interest Expense
3100
Owner’s, Withdrawal
86
Let us take the case of Pedro Matapang, a computer technician. Pedro decided to open his computer
repair shop on February 14, 2016, naming it Matapang Computer Repairs. Pedro knows that business
transactions should be separated from personal finances. Thus, he decided to invest PHP200,000 in this
business. He deposited the amount with Nation Bank.
Entry:
General Journal
Date
2/14/16
Account Title and Explanation
Ref
Debit
Credit
200,000
Cash
Matapang, Capital
200,000
To record the initial investment of owner P. Matapang
Notice that we have debited Cash, an asset account and credited Matapang, Capital, an equity
account.
February 15, 2016 - Pedro purchased one computer unit from XY Computer Store to be used for the
business. He issued check number 001 amounting to PHP25,000.
Entry:
General Journal
Date
2/15/16
Account Title and Explanation
Ref
Debit
Credit
25,000
Office Equipment
Cash
25,000
To record the purchase of one computer unit
Notice that the debit to office equipment increased the asset account and the credit to cash decreased
the asset account.
February 16, 2016 - Pedro hired Juana Magaling, an experienced secretary.
Entry: No entry. This is not a financial transaction.
87
Teacher tip
The teacher may change the names to
known personalities in their communities.
The teacher may add funny names to excite
the class.
February 17, 2016 – Repaired the computer of Jean and collected PHP10,000
Teacher tip
General Journal
Date
2/17/16
Account Title and Explanation
Ref
Debit
Credit
10,000
Cash
Service Revenue
10,000
To record receipt of cash from customer
February 18, 2016 – Repaired Mike’s computer. However, Mike will pay PHP15,000 on March 18, 2016
General Journal
Date
2/18/16
Account Title and Explanation
Ref
Accounts Receivable
Debit
Credit
15,000
15,000
Service Revenue
To record services rendered to a customer on account
February 19, 2016 – Pedro purchased Office Supplies from MM Merchandise amounting to PHP5,000
on account. Pedro will pay this on March 30, 2016.
General Journal
Date
2/19/16
Account Title and Explanation
Ref
Debit
Credit
5,000
Supplies Expense
Accounts Payable
5,000
To record purchase of office supplies on account
February 25, 2016 – Paid the salary of Juana amounting to PHP4,000
General Journal
Date
2/25/16
Account Title and Explanation
Ref
Credit
4,000
Salaries Expense
Cash
To record payment of salary of Juana
Debit
4,000
88
The teacher may change the names to
known personalities in their communities.
The teacher may add funny names to excite
the class.
Journal Entries in a Corporate Set-up
The example above assumed that the business is a sole proprietorship. How are transactions recorded if
the owner of the business is a Corporation? Basically, the same entries are made, except for transactions
affecting capital or equity accounts. To illustrate, let us take the following case:
Sweeper Corporation was established to provide janitorial services to clients for a fee. The corporation
issued 5,000 shares of common stock, at PHP100 par value to shareholders. The issue price paid by the
shareholders on January 3, 2016 equal the par value. The entry to record this transaction is:
General Journal
Date
1/3/16
Account Title and Explanation
Ref
Debit
Credit
500,000
Cash
Share Capital - Common
500,000
To record issuance of 5,000 shares at par value of Php100
In the above example, if the issue price is PHP120 per share, what is the entry?
General Journal
Date
1/3/16
Account Title and Explanation
Ref
Debit
Credit
600,000
Cash
Share Capital - Common
500,000
Share Premium - Common
100,000
To record issuance of 5,000 shares at Php120 per share, Php100 par value
89
Step 3 – Posting
Teacher tip
The summary (in specialized journals) or individual transactions (in the general journal) are then posted
from the journals to the general ledger (and subsidiary ledgers). Nothing should ever get posted to the
ledgers without first being entered in a journal.
Recall the discussion on the general ledger
ABM1 – Chapter 9 (Books of Accounts)
Recall the lesson on the general ledger. We will now post the previous transactions of Pedro to the
general ledger. For purposes of discussion, we will be using the three-column ledger.
General Ledger
Account: Cash
Account No.: 1000
Date
Item
Ref
Debit
Credit
200,000
2/14/2016
Investment of Owner
2/15/2016
Purchase of Computer
2/17/2016
Repair Income - Jean
2/25/2016
Payment of Juana salary
Balance
200,000
25,000
10,000
175,000
185,000
4,000
181,000
General Ledger
Account: Accounts Receivable
Date
2/18/2016
Account No.: 1200
Item
Ref
Repair Income - Mike
Debit
Credit
Balance
15,000
15,000
General Ledger
Account: Office Equipment
Date
2/15/2016
Account No.: 1600
Item
Ref
Purchase of Computer
Debit
Credit
Balance
25,000
25,000
General Ledger
Account: Accounts Payable
Date
2/19/2016
Account No.: 2000
Item
Ref
Debit
Purchase - office supplies
Credit
5,000
90
Balance
5,000
General Ledger
Teacher tip
Account: Matapang Capital
Date
2/14/2016
Account No.: 3000
Item
Ref
Debit
Credit
200,000
Investment of Owner
Balance
200,000
General Ledger
Account: Service Revenue
Date
Account No.: 4000
Item
Ref
Debit
Credit
Balance
2/17/2016
Repair Income - Jean
10,000
10,000
2/18/2016
Repair Income - Mike
15,000
25,000
General Ledger
Account: Supplies Expense
Date
2/19/2016
Account No.: 6150
Item
Ref
Purchase - office supplies
Debit
Credit
Balance
5,000
5,000
General Ledger
Account: Salaries Expense
Date
2/2/5/16
Account No.: 6100
Item
Payment of Juana’s salary
Ref
Debit
4,000
Credit
Balance
4,000
Step 4 - Unadjusted Trial Balance
At the end of an accounting period (for example, one month or one year) the working trial balance is
prepared. This involves copying each account name and account balance to a worksheet (working trial
balance). The resulting first two columns of the worksheet are called the unadjusted trial balance.
In the preparation of the unadjusted trial balance, the balances in all the general ledgers at the end of
the reporting date are forwarded to the appropriate column. The unadjusted trial balance for the
transactions in our example from Step 3 is the following:
91
Recall the discussion on the general ledger
ABM1 – Chapter 9 (Books of Accounts)
MATAPANG COMPUTER REPAIRS
Unadjusted Trial Balance
February 29, 2016
Account Title
Teacher tip
Debit
This is the end of the first four steps. The
next four steps will be discussed in Chapter
11.
Credit
Balance Sheet Accounts
Cash
181,000
Accounts Receivable
15,000
Office Equipment
25,000
5,000
Accounts Payable
Matapang, Capital
200,000
Income Statement Accounts
Service Revenue
25,000
Supplies Expense
5,000
Salaries Expense
4,000
230,000
230,000
Notice that all asset accounts are presented first, followed by liabilities, equity (or capital account),
income accounts and lastly, expenses accounts.
92
Review of the Accounting Equation
The basic accounting equation is what drives double-entry bookkeeping. The equation reflects the
accounts reported in the balance sheet. The basic accounting equation is as follows:
ASSETS = LIABILITIES + OWNERS' EQUITY
This is a very simple algebraic equation that reflects how the assets of an entity must be supported by
either debt or equity. As in algebra, if we add or subtract something from one side of the equation we
must add or subtract the same amount from the other side. For example, if we were to increase cash
(an asset) we might have to increase note payable (a liability account) so that the basic accounting
equation remains in balance.
ASSETS = LIABILITIES + OWNERS' EQUITY
PHP 500 = PHP 500
.
Applying, the formula to our transactions in Step 3 above, the effects of these transactions to the
equation are shown below:
DATE
TRANSACTIONS
ASSETS
=
LIABILITIES
+200,000
+
EQUITY
+200,000
2/14/2016
Investment of Owner, Pedro Matapang
2/15/2016
Purchase of computer
+25,000
-25,000
2/17/2016
Repair the computer of customer Jean
and collected the payment
+10,000
+10,000
2/18/2016
Repair the computer of Mike on account
+15,000
+15,000
2/19/2016
Purchase of office supplies on account
2/25/2016
Payment of salary of Juana
+5,000
-4,000
-5,000
-4,000
Notice that at all times, the effects of the transaction to the right and left side of the formula should be
equal. If not, the journal entry is erroneous.
93
PRACTICE (150 MIN)
Practice Set 1
Mr. Laban Deyro opened his laundry business in Iloilo City on January 2, 2016. The following transactions
occurred during the month of January 2016:
DATE
TRANSACTIONS
1/2/16
Invested PHP500,000 to his business. The trade name of the business was “MR. LABANDERO”
1/3/16
Hired Allan and Allie who will manage his business
1/4/16
Collections from various customers for the day - PHP3,000
1/5/16
Purchase store supplies from Labada Store - PHP10,000
1/7/16
Collections from various customers for the day - PHP8,000
1/8/16
MR. LABANDERO entered into an exclusive contract with Sikat Hotel where the business will do all the
laundry of the hotel.
1/9/16
Sikat Hotel availed the services of MR. LABANDERO amounting to PHP15,000. Payment will be made on
January 20, 2016.
1/10/16 Collections from various customers for the day - PHP12,000
1/12/16 Purchase a washing machine amounting to PHP50,000
1/15/16 Collections from various customers for the day - PHP20,000
1/19/16 Paid electricity bill for the month amounting to PHP18,000
1/20/16 Received payment from Sikat Hotel amounting to PHP15,000
1/21/16 Paid salaries of Allan and Allie - PHP15,000
1/22/16 Mr. Laban Deyro needed money for the hospitalization of his son. He withdrew PHP18,000 from the business.
1/25/16 Paid airfare ticket of PHP1,500 for the travel of Mr. Deyro to Manila to negotiate a contract with Sosyal Hotel
1/26/16 Paid taxes to the City of Iloilo, PHP4,000
1/27/16 Purchased office supplies amounting to PHP12,500
1/28/16 Collections from various customer for the day - PHP5,000
1/29/16 Sosyal Hotel availed the services of MR. LABANDERO amounting to PHP15,000 payable on Feb 25, 2016.
94
Required Tasks
1. Prepare the general
journal entries for the
above transactions (ignore
giving explanations after
every entry)
2. Post the following
transactions to the general
ledger.
3. Prepare the unadjusted
trial balance as of January
30, 2016
Practice Set 2
On June 1, Maya Cruz opened the Ganda Beauty Salon. During the first month, the
following selected transactions occurred:
Required Task
Using the following format, identify the effects of
above transactions to the accounting equation:
1. Deposited PHP5,000 cash in the City Bank in the name of the business
2. Paid PHP800 cash for beauty supplies
ASSETS = LIABILITIES + OWNERS' EQUITY
3. Purchased equipment at a cost of PHP12,000 paying PHP2,000 in cash and the
balance on account
Example:
4. Received PHP1,200 cash for services rendered
ASSETS = LIABILITIES + OWNERS' EQUITY
+200 = + 200
.
5. Paid PHP500 cash as a salary to a beautician
6. Withdrew PHP400 cash for personal expenses
ENRICHMENT (30 MIN)
Compound Journal Entry
What has been discussed in the above illustration required the learners to prepare a simple journal entry. A
simple journal entry has one account title on the debit side and one account title on the credit side. However,
there are instances where in one particular transaction, two or more accounts on either the debit or credit
side are affected. In this case, the business may prepare a compound journal entry. A compound journal entry
combines one or more accounts on the debit side or the credit side.
To illustrate, assume that Jose Magalang decided to open a
barbershop business in Makati City. He invested his old computer and
PHP25,000 for this venture with a fair value of PHP15,000 to start the
business. Notice that two account titles, Office Equipment and Cash,
were debited in this entry.
2/17/16
Account Title and Explanation
General Journal
Ref
Debit
Office Equipment
15,000
Cash
25,000
J. Magalang Capital
Ask the learners to differentiate a
simple entry from a compound entry
after the discussion of this part.
On September 7, 2016, Jose purchased various store equipment to be
used in the business. The total cost of the equipment is PHP150,000.
The supplier required Jose to pay 30% as down payment, with the
balance payable 30 days after. Notice that you have two account
titles, Cash and Accounts Payable, affected on the credit side.
General Journal
Date
Teacher Tip
Credit
Date
2/17/16
Account Title and Explanation
Store Equipment
Cash
40,000
95
Accounts Payable
Ref
Debit
Credit
150,000
45,000
105,000
Group Discussion
Group the learners into three and ask them to think of a service business. After coming up with a service business, ask the learners to list down
all transactions possible in their business. Require them to present their output in class.
EVALUATION (60 MIN)
Quiz
Indicate in each independent case
whether the account is to be debited
(DR) or to be credited (CR)
1. Increase in Accounts Payable
2. Decrease in Capital account
3. Increase in Service Revenue
4. Increase in Cash
5. Decrease in Accounts Receivable
6. Increase in Salaries Expense
7. Increase in Office Equipment
8. Increase in unpaid Salaries
9. Increase in Owner’s drawing
account
10. Increase in Interest Income
Prepare the entries to record the following independent transactions
with explanations.
1. On Jan 4, 2016, received PHP20,000 from a customer in payment
for services rendered.
2. Payment to X Supplier amounting to PHP4,000 for office supplies
purchased on Jan 3, 2016.
3. Maria invested PHP60,000 on Jan 18, 2016 to start a barbershop
in Iligan City.
4. On Jan 3, 2016 paid PHP10,000 rental amount for the month of
Jan 2016,.
5. On Jan 15, 2016, Peter Pawn withdrew PHP30,000 from his
business to pay for the tuition of his son.
6. Collected PHP20,000 of the accounts receivable from Malakas
Company on Jan 17, 2016.
7. Paid the salary of the office secretary amounting to PHP15,000 on
Jan 18, 2016.
8. Purchased office equipment worth PHP20,000 by paying 40%
down payment and the balance on account.
9. Paid PHP2,000 of the accounts payable on Jan 28, 2016.
10. Rendered services to clients on Jan 18, 2016 amounting to
PHP15,600.
96
Fill up the missing amount for
each.
1. Asset = 120,000
Liabilities = 15,000
Equity = ?
2. Asset = ?
Liabilities = 18,250
Equity = 98,360
1,000,000
3. Asset =
Liabilities = 370,000
Equity = ?
=
780,508
4. Asset
Liabilities = ?
Equity =
619,000
Fundamentals of Accountancy, Business, and Management 1
720 MINS
Business Transactions and Their Analysis
as Applied to the Accounting Cycle of a
Service Business
Content Standards
The learners demonstrate an understanding of the accounting cycle of a
service business.
Performance Standards
The learners shall be able to identify business and non-business transactions,
enumerate the types of business documents, recite the rules of debit and
credit, and apply these to simple cases.
Learning Competencies
The learners shall be able to
• describe the nature of transactions in a service business
ABM_FABM11-Iva-d-29
• record transactions of a service business in the general journal
ABM_FABM11-IVa-d-30
• posts transactions in the ledger ABM_FABM11-IVa-d-31
• prepare a trial balance ABM_FABM11-IVa-d-32
• prepare adjusting entries ABM_FABM11-IVa-d-33
• complete the accounting cycle ABM_FABM11-IVa-d-34
LESSON OUTLINE
Introduction
Communicating learning objectives
Review types of businesses
Motivation
Examples of Service Businesses
Instruction
Discussion
Practice
Problem Sets
80
Enrichment
Group Discussions
60
Evaluation
Quizzes
60
Materials
12-column worksheet
Resources
The Chart of Accounts. (n.d.). Retrieved from http://
www.accountingtools.com/chart-of-accounts-overview
Accounting Cycle. (n.d.). Retrieved from http://
www.investopedia.com/terms/a/accounting-cycle.asp
Valencia, et.al. (2010). Basic Accounting 3rd ed. Valencia
Educational Supply.
Weygandt, J. et. al. (2012). Accounting Principles 10th ed.
John Wiley & Sons (Asia) Pte. Ltd.
97
30
5
485
INTRODUCTION (30 MINS)
Teacher tip
This is a continuation of the previous
chapter. A review of the discussions on the
previous chapter is necessary.
Communicating learning objectives
Introduce the following learning objectives:
•
•
•
•
•
•
I will be able to give examples of transactions in a service business.
I will be able to record the transactions of a service business in the general journal.
I will be able to post transactions from the general journal to the general ledger.
I will be able to prepare a trial balance.
I will be able to prepare adjusting entries.
I will be able to explain the accounting cycle of a service business
Review of previous topics
Show the accounting cycle and ask learners what they have retained from the previous chapter.
THE ACCOUNTING CYCLE
1. Transactions
2. Journal Entries
3. Posting
4. Trial Balance
8. Closing the Books
7. Financial
Statements
6. Adjusting Journal
Entries
5. Worksheet
Review the first four steps in the accounting cycle that were previously discussed.
• Step 1- Transactions and/or Events: Identification and measurement of external transactions and
internal events
• Step 2 - Preparation of Journal Entries (Journalization): Business transactions are recorded in the
journals using debits and credits.
• Step 3 – Posting: Posting of journal entries to general ledgers.
• Step 4 - Unadjusted Trial Balance: Preparation of unadjusted trial balance
98
Teacher tip
The teacher may ask the learner to draw the
accounting cycle, rather than posting it. If
necessary, correct the drawing of the
learner.
MOTIVATION (5 MINS)
Teacher tip
Examples of Service Businesses
Ask a learner to give examples of a service business. Acknowledge all possible answers and correct
them if necessary. Get one example of a service business from those enumerated by the learner. Ask
the learners to imagine the possible transactions that may occur in that particular business.
To illustrate Figure 1, the teacher may buy a
one-piece 12-column worksheet from a local
school supplies store. The teacher will then
simply copy the column headings in Figure
1 onto the worksheet. Show this worksheet
to the learners.
Relate the answers of the learners to the subject matter of this chapter.
INSTRUCTION (485 MIN)
Discuss Steps 5 to 8 of the Accounting Cycle
THE ACCOUNTING CYCLE
1. Transactions
2. Journal Entries
3. Posting
4. Trial Balance
Teacher tip
Retain the accounting cycle on the board/
wall while each step is being discussed.
8. Closing the Books
7. Financial
Statements
6. Adjusting Journal
Entries
5. Worksheet
Step 5 - Worksheet
This step is simply about plotting the items in the unadjusted trial balance on the worksheet.
In a manual accounting system, a worksheet is a large columnar sheet of paper specifically designed to
conveniently arrange all the accounting information required at the end of a period. The worksheet is
used to check whether ledger accounts are balanced and adjusted. The satisfactory completion of a
worksheet provides assurance that all the details of the end-of-period accounting procedures were
properly brought together. The worksheet serves as the source in the preparation of financial
statements and other closing and adjusting entries.
The body of the worksheet contains five pairs of money columns. A sample of a worksheet is shown
below:
99
Teacher tip
To illustrate Figure 1, the teacher may buy a
one-piece 12-column worksheet from a local
school supplies store. The teacher will then
simply copy the column headings in Figure
1 onto the worksheet. Show this worksheet
to the learners.
Name of the Company
Worksheet
For the period (monthy/year) ended
_________, 20__
Unadjusted Trial
Balance
Adjustments
Adjusted Trial
Balance Position
Statement of Income Statement of
Financial
DR
DR
DR
DR
CR
CR
Statement of Financial Position Accounts
Cash
Accounts Receivable
Inventory
Office Equipment
Accum Deprn - Off Eqpt
Land
Intangible Assets
Accounts Payable
Owner’s, Capital
Owner’s, Withdrawal
Income Statement Accounts
Sales
Sales Returns and Allowances
Sales Discounts
Interest Income
Purchases
Purchase Returns and Allowances
Purchase Discounts
Freight In
Salaries Expense
Supplies Expense
Utilities Expense
100
CR
CR
DR
CR
Recall our example in Chapter 10, about Pedro Matapang who
started his Matapang Computer Repairs business on February 14,
2016. The following transactions transpired in February 2016:
1. February 14, 2016 - Pedro Matapang invested PHP200,000 into
his Matapang Computer Repair business.
2. February 15, 2016 - Pedro purchased one computer unit from
XY Computer Store to be used for his business. He issued check
number 001 amounting to PHP25,000.
3. February 16, 2016 - Pedro hired Juana Magaling, an
experienced secretary.
4. February 17, 2016 – Repaired the computer of Jean and
collected PHP10,000.
5. February 18, 2016 – Repaired the computer of Mike; however,
Mike will pay PHP15,000 only on March 18, 2016.
6. February 19, 2016 – Pedro purchased Office Supplies from MM
Merchandise amounting to PHP5,000 on account. Pedro will
pay this on March 30, 2016.
7. February 25, 2016 – Paid the salary of Juana amounting to
PHP4,000.
General Journal
Date
2/14/16
Account Title and Explanation
Cash
Ref
Debit
Credit
200,000
200,000
Matapang, Capital
To record the initial investment of owner
P. Matapang
2/15/16
Office Equipment
25,000
Cash
25,000
To record the purchase of 1 computer
unit
2/17/16
Cash
10,000
10,000
Service Revenue
To record receipt of cash from customer
2/18/16
Accounts Receivable
15,000
Service Revenue
15,000
To record services rendered to a
customer on account
The entries to record the above transactions are on the right:
2/19/16
Supplies Expense
5,000
5,000
Accounts Payable
To record purchase of office supplies on
account
2/25/16
Salaries Expense
Cash
To record payment of salary of Juana
101
4,000
4,000
Recall that after posting to the general ledger, the unadjusted trial balance was:
Teacher tip
The business of Pedro Matapang will be
used throughout the discussion of this
subject matter so that the teacher will find it
easy to trace the transactions and complete
the accounting cycle of a service business.
MATAPANG COMPUTER REPAIRS
Unadjusted Trial Balance
February 29, 2016
Account Title
Debit
Credit
Balance Sheet Accounts
Cash
181,000
Accounts Receivable
15,000
Office Equipment
25,000
5,000
Accounts Payable
Matapang, Capital
200,000
Income Statement Accounts
25,000
Service Revenue
Supplies Expense
5,000
Salaries Expense
4,000
230,000
230,000
This now represents the first two money columns in the worksheet.
Step 6 – Adjusting Entries
At the end of the accounting period, some accounts in the general ledger would require updating. The
journal entries that bring the accounts up to date are called adjusting entries. One purpose of adjusting
entries is for income and expenses to be reported in the correct period.
Adjusting entries ensure that both the revenue recognition and matching principles are followed.
Prior to your lecture, recall the previous discussion on accounting principles and concepts, specifically
the matching principle.
102
Revenue Recognition – accounting standards require that revenue is recognized when it is earned and the amount
can be measured reliably. To illustrate:
•
Assume that you are preparing the financial statements for Feb 2016. Matapang Computer Repairs rendered
services amounting to PHP25,000 for the repair of the computer units of Mr. Tamad on Feb 26, 2016. However,
the payment for these services of Matapang will be made on Mar 15, 2016.
Question: when should you recognize the PHP25,000 as revenue or income, in February or March? Applying the
revenue recognition principle, it should be reported as revenue for February 2016.
•
Assume that you are preparing the financial statements for February 2016. On February 28, 2016, Matapang
Repairs received payment from Mr. Tamad amounting to PHP25,000. This payment is for the repair of the
computer units of Mr. Tamad on March 5, 2016.
Question: when should you recognize the PHP25,000 as revenue or income, in February or March? Applying the
revenue recognition principle, it should be reported as revenue in March 2016. Take note that since the service
will be rendered in March, the revenue should also be earned in March. What about February 2016? The amount
is recorded as a liability because Matapang Repairs has the obligation to render this service in the future.
Matching Principle - this principle directs a business to report an expense on its income statement within the same
period as its related income. To illustrate:
•
Assume that you are preparing the financial statements for February 2016. The business gives a commission of
10% service income to its employees. The commission is paid the following month. On February 2016, the total
service income for the month is PHP100,000. Thus, the employees are entitled to a commission of PHP10,000.
This amount will be paid on March 12, 2016. Question: when should the commission expense be recorded in the
book of accounts of the business, in March or in February? Applying the matching principle, the answer is in
February.
Adjusting entries are made at the end of each accounting period. Adjusting entries make it possible to report correct
amounts on the statement of financial position and on the income statement. All adjusting entries affect at least one
income statement account and one statement of financial position account. Thus, an adjusting entry will always
involve an income or an expense account and an asset or a liability account. There are five basic sources of adjusting
entries:
1.
2.
3.
4.
5.
Depreciation expense
Deferred expenses or prepaid expenses
Deferred Income or unearned income
Accrued expenses or accrued liabilities
Accrued income or accrued assets
103
Teacher tip
The revenue recognition and
matching principle were
discussed in ABM 1 Chapter
6 (Accounting Concepts and
Principles)
#1 Depreciation. Depreciation is a method of allocating the cost of an asset to an expense over the
accounting periods that make up the asset’s useful life. Examples of assets subject to depreciation are:
Store, Office, Building, and Transportation equipment. These types of assets lose their ability to provide
useful service as time passes. Depreciation can also be referred to as the decrease in the usefulness of
these types of assets. Take note that Land is not subject to depreciation because the value of land
mostly increases as time passes.
Teacher tip
Ask the learners what is the entry to record
the acquisition of the vehicle.
Answer:
Transportation Eqpt - 50,000
Cash or Accounts Payable - 50,000
Exercise on Adjusting entries to record Depreciation
Recall that Matapang acquired office equipment on February 15, 2016 for his repair shop business. The
cost of the equipment is PHP25,000. It was estimated to have a useful life of five years. It is estimated
that after five years, the office equipment can be sold at a scrap value of PHP1,000. The company uses
the straight line method of depreciation.
Depreciation is a means of allocating the cost of an asset to an expense over the accounting period
that will benefit the use of the asset. In the exercise above, the equipment will be used by Matapang
for five years. Proper accounting procedures dictates that the cost of PHP25,000 should be spread over
five years.
There are several methods or formulas to compute the amount of depreciation. The simplest is the
straight line method. The formula is Annual Depreciation : ( Acquisition Cost – Salvage or Residual
Value) / Useful Life. Applying this formula to the exercise:
Annual Depreciation = (25,000-1,000) / 5
= PHP4,800
If the accounting period being reported by Matapang is for the month ending February 29, 2016, the
adjusting entry to record this depreciation in the books of Matapang is:
General Journal
Date
2/29/16
Account Title and Explanation
Ref
Debit
Credit
200
Depreciation Expense
Accumulated Depreciation-Office Eqpt
200
The depreciation expense of PHP200 was derived by computing the monthly depreciation of PHP400
(Annual Depreciation of PHP4,800/12 months) and multiplying the PHP400 by one-half since the
equipment was acquired in the middle of February.
104
Teacher tip
There are other methods of depreciation,
but straight line is the simplest and easiest
to apply. Tell the learners that the other
depreciation methods will be discussed in
higher accounting subjects.
#2 Deferred Expenses or Prepaid Expenses. These are items that have been initially recorded as
assets but are expected to become expenses over time or through the operations of the business.
Exercise - Adjusting entries to record deferred expenses or prepaid expenses
Recall that on February 19, 2016 Matapang purchased PHP5,000 worth of office supplies on account.
By the end of the month, PHP2,000 worth of these supplies are still unused.
The February 19, 2016 entry to record the purchase on the account of office supplies was already
posted to the general ledger and included in the balances, as shown in the unadjusted trial balance
above. The entry was shown only for illustration purposes.
Teacher tip
In higher accounting subjects, this approach
is referred to as the expense method of
recording, where the expense account is
initially used to record the transaction.
General Journal
Date
2/19/16
Account Title and Explanation
Ref
Debit
Supplies Expense
Credit
5,000
5,000
Accounts Payable
To record the purchased of office supplies on account
2/29/16
Supplies
2,000
2,000
Supplies Expense
To set-up the value of unused supplies
The “Supplies” account debited on February 29, 2016 above is an asset account and represents the
value of supplies unused as of the end of February 2016. If these journal entries are posted to the
general ledger, the following should be the balance of each account:
Account Title
Supplies
Debit
2,000
Accounts Payable
Supplies Expense
Credit
5,000
3,000
105
Teacher tip
In higher accounting subjects, this approach
is referred to as the asset method of
recording, where the asset account is
initially used to record the transaction.
The alternative entries to record the above transactions are:
General Journal
Date
2/19/16
Account Title and Explanation
Ref
Debit
Supplies
Credit
5,000
5,000
Accounts Payable
To record the purchased of office supplies
2/29/16
Supplies Expense
3,000
3,000
Supplies
To set up the value of unused supplies
If these entries are posted in the general ledger, the following should be the balances of each account:
Account Title
Supplies
Debit
2,000
5,000
Accounts Payable
Supplies Expense
Credit
3,000
Notice that even with the different approaches in recording the transactions in the journal entries, the
balances in the general ledger will always be the same whether you used the first approach or the
second approach.
106
#3 Deferred Income or Unearned Income. These are items that have been initially recorded as
liabilities but are expected to become income over time or through the operations of the business.
Exercise – Adjusting entries to record deferred or unearned income
On February 15, 2016 Matapang entered into a contract with Makisig to maintain the computers of
Makisig for two months starting on February 15, 2016 up to April 15, 2016. On the same date, Makisig
paid the total contract amount of PHP40,000 in full. The entries to record and adjust the books are:
In the February 29, 2016 entry above, as of end of February 2016, Matapang has already earned the
service revenue for the first 15 days, thus an adjusting entry is recorded.
Teacher tip
The “Unearned Service Revenue” account
was not included in the Chart of Accounts
illustrated in ABM1 Chapter 8 (Types of
Major Accounts). Additional account titles
maybe added to this chart if the need
arises. Unearned Service Revenue will fall
under the liabilities classification. For future
purposes, assign account code 2400 for
this.
General Journal
Date
2/15/16
2/29/16
Account Title and Explanation
Ref
Debit
Cash
Unearned Service Revenue
To record receipt of full payment for the two-month
service contract with Makisig
40,000
Unearned Service Revenue
Service Revenue
To record service income earned from Feb 15-29,
2016; P40,000 x (1/2 month /2 months)
10,000
Credit
40,000
10,000
#4 Accrued Expenses or Accrued Liabilities. These are items of expenses that have been incurred
but have not been recorded and paid.
Exercise – Adjusting entries to record Accrued expenses or accrued liabilities
On February 29, 2016, Matapang received the electric bill for the month of February amounting to
PHP3,800. Matapang will pay this bill on March 2016.
The electric bill represents the cost of electricity used (or incurred) for February. Although the said bill is
still unpaid and thus was not recorded, the matching principle and accrual basis of accounting dictates
that the same should be recorded in February. Otherwise, your expense will be understated and thus
the company will be reporting an overstated income (or an erroneous income). Needless to say,
erroneous information may lead to wrong decisions.
The entry to record the accrual of this expense is:
107
Teacher tip
In this case, the teacher may emphasize the
value of generating accurate information for
the users of accounting information. The
wrong information may lead to wrong
decisions. Emphasize also that one of the
reasons for adjusting entries is to reflect the
correct information in the financial
statements.
In higher accounting this is commonly
referred to as the accrual process.
General Journal
Date
2/29/16
Account Title and Explanation
Ref
Utilities Expense
Utilities Payable
To accrue the cost of electricity incurred for the
month of February.
Debit
Credit
3,800
3,800
#5 Accrued Income or Accrued Assets
These are income items that have been earned but have not been recorded and paid by the customer.
In short, these are receivables of the business.
Exercise – Adjusting entries to record accrued income or accrued assets
On February 28, 2016, Matapang repaired the computer of Pedro for PHP15,000. Pedro was on an outof-town trip so he could not pay Matapang . He told Matapang that he will pay for their services on
March 1, 2016.
Matapang has already earned the PHP15,000 but was not paid as of the end of February 2016.
Therefore, an income should be properly recognized in February 2016 for this transaction. The entry to
record this is:
General Journal
Date
2/29/16
Account Title and Explanation
Ref
Accounts Receivable
Service Income
To accrue the cost of electricity incurred for the
month of February.
Debit
Credit
15,000
15,000
108
Teacher tip
In this case, the teacher may emphasize the
value of generating accurate information for
the users of accounting information. The
wrong information may lead to wrong
decisions. Emphasize also that one of the
reasons for adjusting entries is to reflect the
correct information in the financial
statements.
In higher accounting this is commonly
referred to as the accrual process.
Enter all adjustments to the worksheet:
Matapang Computer Repairs
Worksheet
For the month ending February 29, 2016
Unadjusted Trial Balance
Adjustments
DR
DR
CR
Adjusted Trial Balance
Position
CR
DR
CR
Balance Sheet Accounts
Cash
Accounts Receivable
221,000
221,000
15,000
Supplies
Office Equipment
15,000
30,000
2,000
2,000
25,000
25,000
Accum. Deprn-Off Eqpt
200
Accounts Payable
200
5,000
5,000
3,800
Utilities Payable
40,000
Unearned Service Revenue
Matapang, Capital
3,800
10,000
30,000
200,000
200,000
Income Statement Accounts
25,000
Service Revenue
Supplies Expense
5,000
Salaries Expense
4,000
2,000
50,000
3,000
4,000
Utilities Expense
Depreciation Expense
270,000
25,000
270,000
3,800
3,800
200
200
31,000
31,000
289,000
289,000
Note: The entry to record the receipt of PHP40,000 from Makisig on February 15, 2016 was reflected in the unadjusted trial balance columns.
109
Step 7 - Preparation of the Financial Statements.
Worksheet
Using the information from the worksheet, the financial statements are
prepared.
For the month ending February 29, Adjusted Trial
Income
2016
Balance
Statement
DR
CR
DR
CR
Balance Sheet Accounts
Cash
221,000
Accounts Receivable
30,000
2,000
Supplies
Office Equipment
25,000
200
Accum. Deprn-Off Eqpt
5,000
Accounts Payable
Utilities Payable
3,800
30,000
Unearned Service Revenue
200,000
Matapang, Capital
The following are the financial statements to be prepared:
1. Statement of Financial Position (SFP) - Also known as the balance sheet. This
statement includes the amounts of the company’s total assets, liabilities and
owner’s equity which in totality provides the financial position of the
company on a specific date.
2. Statement of Comprehensive Income (SCI) – Also known as the income
statement. Contains the results of the company’s operations for a specific
period of time. This can be prepared on a monthly, quarterly or yearly basis.
3. Statement of Changes in Equity (SCE) - This statement is prepared prior to
preparation of the Statement of Financial Position in order to obtain the
ending balance of the equity to be used in the SFP. All changes, whether
increases or decreases to the owner’s interest on the company during the
period, are reported here.
4. Cash Flow Statement - Provides an analysis of inflows and/or outflows of
cash from/to operating, investing and financing activities.
Income Statement Accounts
Service Revenue
Supplies Expense
Salaries Expense
Utilities Expense
Depreciation Expense
50,000
3,000
4,000
3,800
200
50,000
3,000
4,000
3,800
200
11,000
Net Income
The income statement is prepared first so that net income can then be recorded
in the statement of changes in equity. The statement of changes in equity is then
Matapang Computer Repairs
prepared to determine the ending balance of equity or capital account. Once the
Statement of Comprehensive Income
ending balance is determined, the statement of financial position is prepared. The
For the month ended February 29, 2016
cash flow statement is prepared last. Based on the worksheet on the right, the
SERVICE REVENUE
income statement of Matapang for February 2016 should appear as follows:
50,000
39,000
50,000
LESS: EXPENSES
Supplies Expense
3,000
Salaries Expense
4,000
Utilities Expense
3,800
Depreciation Expense
110
200
Total Expenses
11,000
NET INCOME
39,000
Step 8 - Journalize the Closing Journal Entries
The income, expense, withdrawal (equity) accounts are called temporary accounts or nominal accounts. They are called temporary because they
accumulate the transactions of only one accounting period. At the end of this accounting period, the changes in owner’s equity accumulated in
these temporary accounts are transferred into the owner’s capital account. This process serves two purposes: (1) to update the balance of the
owner’s capital; and (2) it returns the balance of the temporary accounts to zero, so that they are ready to measure the income, expenses and
drawings of the next accounting period again. The owner’s capital account and other statement of financial position accounts are referred to as
permanent or real accounts because their balances continue to exist beyond the current accounting period. Closing the books is the process of
transferring the balances of the temporary accounts to the owner’s permanent capital account.
The closing journal entries should consist of the following:
All of the nominal revenue accounts should be closed to the income summary account by a Debit to revenue and a Credit to income
summary.
• All of the nominal expense accounts should be closed to the income summary by a Credit to expense and a Debit to income summary.
• The balance in the income summary account should now reflect the net income for the accounting period. The next journal entry should
close the income summary account to the equity or capital account. If there is a net profit this entry will be a Debit to income summary and
a Credit to owner’s capital account.
• Once the closing journal entries have been entered into the general journal, the information should be posted to the general ledger. When
this is accomplished, all of the nominal accounts in the general ledger should have zero balances. To double check on this, we should
prepare another trial balance based on the new balances in the general ledger. If we have any nominal accounts with positive balances, a
mistake was made along the way and will need to be corrected before proceeding to the next accounting period.
To illustrate:
•
General Journal
Date
2/29/16
Account Title and Explanation
Ref
Debit
Service Revenue
Income Summary
To close nominal revenue accounts
50,000
Income Summary
Supplies Expense
Salaries Expense
11,000
Credit
50,000
3,000
4,000
3,800
Utilities Expense
Depreciation Expense
200
111
After the above entries, the balance for these accounts are:
Supplies Expense
Salaries Expense
Utilities Expense
Debit
Credit
Debit
Credit
Debit
Credit
Debit
Credit
PHP3,000
PHP3,000
PHP4,000
PHP4,000
PHP3,800
PHP3,800
PHP200
PHP200
PHP 0
PHP 0
Depreciation Expense
PHP 0
Revenue Accounts
Income Summary
Debit
Debit
Credit
Credit
PHP50,000 PHP50,000
PHP11,000 PHP50,000
PHP 0
PHP39,000
PHP 0
Notice that the ending balance of the Income Summary Account amounting to PHP39,000 credit represents the net income for the period of
Matapang. The balance of the Income Summary Account is then closed to the Capital Account by this entry:
General Journal
Date
Account Title and Explanation
Ref
Debit
Credit
39,000
Income Summary
Matapang, Capital
39,000
PRACTICE (80 MIN)
Exercise 1
Spencer Company has a fiscal year-end of June 30th.
The following adjusting journal entries must be
prepared in order to bring the accounting records up
to date for the preparation of year-end financial
statements.
General Journal
Date
6/30/016
6/30/16
Interest on notes payable of PHP400 is accrued.
Fees earned but unbilled total PHP1,400.
Salaries earned by employees of PHP700 have not
been recorded.
Bad debt expense for year is PHP900.
Each adjustment is journalized (using general journal
format) as follows:
6/30/16
6/30/16
Account Title and Explanation
Interest expense
Interest payable
To accrue interest on note payable through June 30, 2016
Accounts receivable
Service revenue
To record service revenue for services unbilled at year-end
Salaries expense
Salaries payable
To accrue salaries through June 30, 2016.
Bad debt expense
Allowance for doubtful accounts
To record bad debt expense for the year-ended June 30,
2016.
112
Debit
Credit
PHP400
PHP400
PHP1,400
PHP1,400
PHP700
PHP700
PHP900
PHP900
Exercise 2 (Depreciation)
Compute the depreciation expense for the following independent cases. Use the straight line method of depreciation.
1. Pedro Reyes purchased a delivery vehicle on January 1, 2016 amounting to PHP250,000. It is estimated that the vehicle will be useful for 10
years. The vehicle can be sold for PHP10,000 at the end of its useful life. If the accounting period being reported by Pedro is one (1) year
from January – December 2016, how much is the depreciation expense?
Solution:
Annual Depreciation = (Acquisition Cost – Salvage or Residual Value) / Useful Life
Annual Depreciation = (250,000 -10,000) / 10
Answer = PHP24,000
2. Pedro Reyes purchased a delivery vehicle on April 1, 2016 amounting to PHP250,000. It is estimated that the vehicle will be useful for 10
years. The vehicle can be sold for PHP10,000 at the end of its useful life. If the accounting period being reported by Pedro is one (1) year
from January-December 2016, how much is the depreciation expense?
Solution:
Annual Depreciation = (Acquisition Cost – Salvage or Residual Value) / Useful Life
Annual Depreciation = (250,000 -10,000) / 10
Annual Depreciation = PHP 24,000
Multiply the Annual Depreciation of PHP24,000 to the number of months in used/12, thus 24,000 x (9/12)
Where the ‘9’ represents the number of month from April to December.
Answer = PHP18,000
3. Pedro Reyes purchased a delivery vehicle on January 1, 2016 amounting to PHP250,000. It is estimated that the vehicle will be useful for 10
years. The vehicle can be sold for PHP10,000 at the end of its useful life. If the accounting period being reported by Pedro is one (1) month
(January 2016), how much is the depreciation expense for the month?
Solution:
Annual Depreciation = (Acquisition Cost – Salvage or Residual Value) / Useful Life
Annual Depreciation = (250,000 -10,000) / 10 = P24,000
Answer = PHP24,000 / 12 = PHP2,000 for January 2016
113
Exercise 3
For each of the following items, write the journal entry first (if one is needed) to record the transactions; and then the adjusting entry, if any is
required, for the end of the accounting year of Ron Car Rental Company on December 31, 2016.
1. On December 1, borrowed PHP300,000 cash from Nation Bank by issuing a promissory note with an interest of 12% per annum payable in
three months.
Answer:
Journal Entry
Cash
Note Payable
Adjusting Entry
300,000
300,000
Hint: when a promissory note is issued to support a
borrowing, the note payable account is used.
Interest Expense
Interest Payable (or Accrued Expense) Computed as:
PHP300,000 x 12% x (1/12)
3,000
3,000
Hint: the formula to compute interest is Principal x Interest Rate x Time
In the above situation, the amount of interest to be accrued on December 31 is good for one month only (covering Dec 1 to Dec 31, 2016)
2. On December 1, paid rental for six months beginning December 1, 2016 to May 31, 2017, at PHP3,000 per month.
Answer:
Journal Entry
Rental Expense
Cash
Adjusting Entry
18,000
18,000
Hint: the amount of advance rental paid was for six
month (P3,000/month x 6 months)
Prepaid Expenses
Rental Expense
15,000
15,000
Hint: the amount of prepaid expenses is the 5 month rental after December 31, 2016 (that is from
January 2017 to May 2017), thus P3,000 per month x 5 months is P15,000. The PHP15,000 becomes an
asset of the company as of December 31, 2016 but will be expensed the following accounting year.
3. On December 31, 2016, received telephone bills for the month December amounting to PHP5,600. The bill will be paid on January 2017.
Answer:
Adjusting Entry
Utilities Expense
5,600
Utilities Payable
5,600
114
ENRICHMENT (60 MIN)
Teacher tip
Kay Travel was organized on September 1, 2016. Assume that the accounts are closed and financial
statements are prepared each month. The company occupies rented office space but owns office
equipment estimated to have a useful life of 10 years from date of acquisition, September 1, 2016. The
unadjusted trial balance for Kay at November 30, 2016 is shown below:
Unadjusted Trial Balance
Account Title and Explanation
Debit
Credit
Cash
1,750
Accounts Receivable
1,210
Office Equipment
4,800
Accum. Deprn-Off Eqpt
80
Accounts Payable
1,640
Kay, Capital
7,490
Kay, Withdrawal
500
4,220
Service Revenue
Advertising Expense
Salaries Expense
Rent Expense
800
3,600
770
13,430
13,430
Additional Information:
The rent expense amounting to PHP770 covers rental for the month of November and December 2016
Instructions:
1.
2.
3.
4.
Prepare the adjusting entries necessary for the above problem
Prepare an adjusted trial balance
Prepare an income statement ending November 30, 2016
Prepare closing entries
115
This problem will result to a net loss,
meaning expenses will exceed the income.
This will teach the learner the effect of net
loss on the capital or equity account. Also,
this problem deals with prepayments.
Solution:
Adjusting Entries:
General Journal
Date
Account Title and Explanation
Ref Debit Credit
Statement of
Comprehensive Income:
385
Prepaid Expenses
Rental Expense
385
LESS: EXPENSES
40
Depreciation Expense
Accumulated Deprn – Office Eqpt
KAY TRAVEL
Statement of Comprehensive Income
For the month ended November 30, 2016
SERVICE REVENUE
4,220
Advertising Expense
40
800
Salaries Expense
3,600
385
Rental Expense
Adjusted Trial Balance:
Total Expenses
Adjusted Trial Balance
Account Title
Cash
Accounts Receivable
Prepaid Expenses
Office Equipment
Accum. Deprn-Off Eqpt
Accounts Payable
Kay, Capital
Kay, Withdrawal
Service Revenue
Advertising Expense
Salaries Expense
Rent Expense
Depreciation Expense
40
Depreciation Expense
Debit
NET LOSS
Credit
1,750
1,210
385
4,800
(605)
Closing Entries:
General Journal
Date
120
1,640
7,490
2/29/16
500
4,220
800
3,600
385
40
13,470
4,825
13,470
Account Title and Explanation
Ref
Debit
Service Revenue
Income Summary
To close nominal revenue accounts
4,220
Income Summary
Advertising Expense
Salaries Expense
Rental Expense
Depreciation Expense
To close the expense accounts
Kay, Capital
Kay, Withdrawal
4,825
Credit
4,220
800
3,600
385
40
500
500
To close the withdrawal account
Kay, Capital
Income Summary
116
To close the income summary account
605
605
EVALUATION (60 MIN)
Problem 1. Evergreen Laundry carried out the following transactions during May. Which of these
transactions represented expenses in May? Explain.
1. Paid an attorney PHP500 for legal services rendered in April.
Answer: This is an April expense because it was incurred in April although payment was made in May.
2. The owner withdrew PHP1,600 from the business for personal use.
Answer: Not an expense. This should be recorded as a withdrawal made by the owner. Owner’s withdrawals are considered
separate from the transactions of the business. The learner may use the business entity principle as reason.
Teacher tip
Require the learners to show their
supporting computations. By showing
their computations, you will be assured
that the learners know what they are
doing and to prevent them from copying
other learners’ work.
3. Purchased a copying machine for PHP25,000 cash. The machine has a useful life of 25 months.
Answer: Part of the cost of the machine is an expense for May (depreciation) of PHP25,000/25 months which is PHP1,000 per
month. The machine will benefit more than one accounting period.
4. Paid PHP450 gasoline for the delivery truck used in business during May.
Answer: This is a May expense incurred during the month.
5. Paid salaries of employees for time worked during May - PHP3,000.
Answer: An expense of May incurred during the month.
Problem 2. On April 1, 2016, Mar Cruz, a lawyer, opened his own legal practice. The
business adjusts and closes its accounts at the end of each month. The following trial
balance was prepared after one month of operations. More information:
No interest has yet been paid on the note payable. Accrued interest at April 30
amounts to PHP200.
• Salaries earned by the office staff but not yet recorded or paid amounted to PHP970
by April 30.
• Many clients are asked to make advance payment for legal services to be rendered in
future months. These advances are credited to the Unearned Service Revenue
account once received. During April, PHP5,020 of these advances were earned by
the business.
• Office supplies on hand by April 30 amounted to PHP400.
• The office equipment was purchased on April 1 and is being depreciated over an
estimated useful life of 10 years with no residual value.
Instructions:
•
1. Prepare the adjusting entries for April 30.
2. Prepare a statement of income for April 2016.
117
Unadjusted Trial Balance
Account Title and Explanation
Cash
Accounts Receivable
Prepaid Expenses
Supplies
Office Equipment
Accum. Deprn-Off Eqpt
Notes Payable
Interest Payable
Unearned Service Revenue
Cruz, Capital
Cruz, Withdrawal
Service Revenue
Supplies Expense
Salaries Expense
Debit
Credit
10,060
0
7,800
1,460
26,400
0
16,000
15,020
20,000
3000
1,580
2,680
1,200
52,600
52,600
Suggested solution:
General Journal
Date
Account Title and Explanation
Ref
Debit
Interest Expense
Accrued Expense (Interest Payable)
200
Salaries Expense
Salaries Payable
970
Credit
200
LAW OFFICE OF MAR CRUZ
Statement of Comprehensive Income
For the month ended April 30, 2016
SERVICE REVENUE
6,600
LESS: EXPENSES
Unearned Service Revenue
Service Revenue
970
5,020
5,020
Supplies
Supplies Expense
400
Depreciation Expense
Accum Deprn – Office Eqpt
220
400
220
118
Supplies Expense
2,420
Salaries Expense
2,170
Interest Expense
200
Depreciation Expense
220
Total Expenses
5,010
NET INCOME
1,590
Fundamentals of Accountancy, Business, and Management 1
Accounting Cycle of a
Merchandising Business
Content Standards
The learners demonstrate an understanding of the accounting cycle of a
merchandising business to include the following:
1080 MINS
LESSON OUTLINE
Introduction
Communicate learning objectives.
Review some topics in Chapter 10-11
15
Motivation
Examples of Merchandising Business
5
Instruction
Discussion on periodic inventory system
380
Practice
Problem Sets
300
Enrichment
Perpetual inventory system and cost flow 240
consumptions
Quizzes
•
journalizing of transactions using the general and special journals, namely:
sales, purchase, cash receipts and cash payments journals.
•
posting to the general and subsidiary ledgers
•
preparation of trial balance.
•
adjusting entries to include pre payments, accrual and deferral
Evaluation
•
worksheet preparation
•
completing the accounting cycle of a merchandising business
Resources
• Financial Accounting. Merchandising Operations (n.d.)
Retrieved from http://www.youtube.com/watch?
v=ySVzjrPh-J4
Performance Standards
The learners shall be able prepare journal entries, post to the ledger, prepare
the trial balance, worksheet and adjusting entries, and complete the
accounting cycle of a merchandising business.
119
140
•
The Chart of Accounts. (n.d.). Retrieved from http://
www.accountingtools.com/chart-of-accounts-overview
•
Accounting Cycle. (n.d.). Retrieved from http://
www.investopedia.com/terms/a/accounting-cycle.asp
•
Nickolas, Steven. What is the distinction between Free on
Board (FOB) shipping point and destination? (n.d).
Retrieved from http://www.investopedia.com/ask/
answers/052515/what-distinction-between-free-boardfob-shopping-point-and-destination.asp
•
Valencia, et.al. (2010). Basic Accounting 3rd ed. Valencia
Educational Supply.
•
Weygandt, J. et. al. (2012). Accounting Principles 10th ed.
John Wiley & Sons (Asia) Pte. Ltd.
Learning Competencies
The learners shall be able to:
•
describe the nature of transactions in a merchandising business (ABM_FABM11-IVe-j-35);
•
record transactions of a merchandising business in the general and special journals (ABM_FABM11-IVe-j-36);
•
post transactions in the general and subsidiary ledgers (ABM_FABM11-IVe-j-37);
•
prepare a trial balance (ABM_FABM11-IVe-j-38);
•
prepare adjusting entries (ABM_FABM11-IVe-j-39);
•
complete the accounting cycle of a merchandising business (ABM_FABM11-IVe-j-40);
•
prepare the statement of cost of goods sold and gross profit (ABM_FABM11-IVe-j-41)
Specific leaning Outcomes
At the end of this lesson, the learners will be able to:
•
describe the nature of a merchandising business and give examples
•
record transactions of a merchandising business in the general and special journals
•
discuss the importance and use of a trial balance
•
prepare adjusting entries
•
understand the accounting cycle of a merchandising business
•
prepare a statement of cost of goods sold and gross profit
120
INTRODUCTION (15 MINS)
Communicating learning objectives
Introduce the following learning objectives:
•
•
•
•
•
•
I will be able to describe the nature of a merchandising business and give examples
I will be able to record transactions of a merchandising business in the general and special journals
I will be able to appreciate the use of a trial balance
I will be able to prepare adjusting entries
I will be able to understand the accounting cycle of a merchandising business
I will be able to prepare a statement of cost of goods sold and gross profit
Review the types of business according to activities and ask the learners to differentiate from each
other.
• service business
• merchandising business
• manufacturing business
Teacher tip
The accounting cycle for a service business
is the same with that of a merchandising
business.
Ask the learners to recall the discussion on the accounting cycle of a service business. Ask the learners to recall and narrate the accounting
cycle. As a review, show the following picture:
121
MOTIVATION (5 MINS)
Teacher tip
Ask the learners if they want to start a merchandising company. Engage them in a discussion related to
the merchandising business that they want. Ask the learners what are the possible activities or
transactions in a merchandising business set-up.
To illustrate Figure 1, the teacher may buy a
one-piece 12-column worksheet from a local
school supplies store. The teacher will then
simply copy the column headings in Figure
1 onto the worksheet. Show this worksheet
to the learners.
Possible answers:
•
buying of stocks or items for resale
•
payment of expenses related to operations
•
purchase of equipment
•
obtaining a loan to finance the business
•
investment of owners
Ask the learners of any merchandising business in their community.
Possible answers:
•
supermarkets
•
pharmacies
•
grocery stores
.
INSTRUCTION (485 MIN)
Nature and examples of merchandising company.
Teacher tip
Discuss some important concepts and terms involving the merchandising business
A merchandising company is an enterprise that buys and sells goods to earn a profit.
122
Ask the learners to recall the discussion on
types of businesses according to activities.
Ask the learners to give you examples of merchandising businesses in their communities. For examples:
•
Mercury Drug
•
Puregold
•
ACE Hardware
•
grocery stores
Merchandise (or merchandise inventory) refers to goods that are held for sale to customers in the
normal course of business. This includes goods held for resale. For example:
•
Candies, canned goods, noodles sold at a grocery stores
•
Juice, biscuits sold in a grocery store
•
Medicines sold in a pharmacy
Teacher tip
The learners may think that merchandise
inventory is only used to refer to small
items. To a car dealer, a car is part of the
merchandise inventory.
If a grocery store decided to sell an old computer used in the office, this would not be merchandise
because grocery stores do not normally sell computers and the store is simply selling off old office
equipment. But a computer would be merchandise for a computer store who resells computer units.
Merchandise for one firm may be a fixed asset (or property and equipment) for another.
In another example, a pharmacy decided to sell a table used in their display area. This table is not
merchandise of a pharmacy. However, to a retail furniture store a table is merchandise because the
business of a furniture store involves the buying and selling of tables.
Teacher tip
A merchandiser’s primary source of revenue is sales revenue or sales.
Expenses for a merchandising company are divided into two categories:
1. Cost of goods sold (COGS) – the total cost of merchandise sold during the period; and
2. Operating expenses (OP) - expenses incurred in the process of earning sales revenue that are
deducted from gross profit in the income statement. Examples are sales salaries and insurance
expenses.
123
There are furniture stores who manufacture
their own products being sold. These
furniture stores are manufacturing
businesses and not merchandising
businesses. In the example given,
emphasize the word ‘retail’.
Gross profit (GP) is equal to Sales Revenue less the Cost of Goods Sold.
Income measurement process for a merchandiser follows as:
Sales
-
COGS
=
Gross Profit
-
Operating Exp.
=
Net Income (Loss)
The Operating Cycles for a merchandiser:
Merchandising Company operating cycle (cash to cash) involves:
1. buy merchandise inventory
2. sell inventory
3. obtain Accounts Receivable
4. receive cash
JOURNALIZING THE TRANSACTIONS IN A MERCHANDISING BUSINESS
Teacher tip
Prior to the discussion on the journal entries, recall the first step in the accounting cycle discussed in
previous chapters (specifically Chapter 10) on financial and non-financial transactions.
Recall the discussion on Chapter 9 (Books of
Accounts).
In step 1, transactions are identified and measured. At this stage, the documents used by the business
are analyzed to see whether these transactions have financial impact or effect. Recall the rule that only
financial transactions are recorded and that the amount can be measured. These two conditions must
exist in order for a particular transaction to be recognized or recorded. As defined, financial
transactions are those activities that change the value of an asset, liability or equity.
Step 2 is the Preparation of Journal Entries (Journalization)
A merchandising company may use special and general journals to record its transactions.
SPECIAL JOURNALS
Some businesses encounter voluminous quantities of similar and recurring transactions, which may create congestion if these transactions are
recorded repeatedly in a single day or monthly in the general journal. The use of special journals will eliminate this problem.
124
The following are the commonly used special journals:
Teacher tip
The perpetual inventory system will be
discussed in the “enrichment” portion of
this guide.
1. Cash Receipts Journal –used to record all cash that had been received
2. Cash Disbursements Journal –used to record all transactions involving cash payments
3. Sales Journal (Sales on Account Journal) –used to record all sales on credit (on account)
4. Purchase Journal (Purchase on Account Journal) –used to record all purchases of inventory on credit (or on account)
INVENTORY SYSTEMS
Maintaining inventory items is a unique set-up in a merchandising business. There are two methods of accounting for inventory, namely:
Perpetual Inventory System and Periodic Inventory System.
Merchandising entities may use either of the following inventory systems:
1. Perpetual System — Detailed records of the cost of each item are maintained, and the cost of each item sold is determined from records
when the sale occurs. For example, a car dealership has separate inventory records for each vehicle.
•
Record purchase of Inventory.
•
Record revenue and record cost of goods sold when the item is sold.
•
At the end of the period, no entry is needed except to adjust inventory for losses, etc.
2. Periodic System — Cost of goods sold is determined only at the end of an accounting period. This system involves:
•
Record purchase of Inventory.
•
Record revenue only when the item is sold.
•
At the end of the period, you must compute cost of goods sold (COGS):
1. Determine the cost of goods on hand at the beginning of the accounting period (Beginning Inventory = BI),
2. Add it to the cost of goods purchased (COGP),
3. Subtract the cost of goods on hand at the end of the accounting period
4. (Ending Inventory = EI) illustrated as follows:
BI
+
COGP
= Cost of goods available for sale
125
-
EI
=
COGS
Additional Considerations:
•
Perpetual systems have traditionally been used by companies that sell merchandise with high unit values such as automobiles, furniture, and
major home appliances. With the use of computers and scanners, many companies now use the perpetual inventory system.
•
The perpetual inventory system is named because the accounting records continuously — perpetually —show the quantity and cost of the
inventory that should be on hand at any time. The periodic system only periodically updates the cost of inventory on hand.
•
A perpetual inventory system provides better control over inventories than a periodic inventory, since the records always show the quantity
that should be on hand. Then, any shortages from the actual quantity and what the records show can be investigated immediately.
Note: The periodic inventory system will be used in all illustrations of this chapter while the perpetual system will be included in the
“enrichment” portion of this guide.
PERIODIC INVENTORY SYSTEM
Recording purchases and related transactions under the Periodic Inventory System
PURCHASES OF MERCHANDISE: PERIODIC SYSTEM
1. When merchandise is purchased for resale to customers, the account, Purchases, is debited for the cost of goods purchased.
2. Like sales, purchases may be made for cash or on account (credit).
3. The purchase is normally recorded by the purchaser when the goods are received from the seller.
•
Each credit purchase should be supported by a purchase invoice.
•
A purchase invoice received by the buyer is actually a sales invoice or a charge invoice prepared by the supplier or vendor.
•
Note that only purchases of merchandise are debited to the ‘Purchase’ account. Acquisition (purchases) of other assets: supplies,
equipment, and similar items are debited to their respective accounts.
TO ILLUSTRATE:
Magaling Computer Store started its operations on January 2, 2016. The store is located in Sikat Mall in Bicol. The owner invested
PHP500,000 to start the business. On January 3, 2016, Magaling purchased 20 units of computers on account for PHP10,000 each. Upon
delivery of the units, the supplier, Delta, Inc., issued Charge Invoice No. 145 to Magaling.
126
Entry :
General Journal
Date
1/3/16
Account Title and Explanation
Ref
Debit
Credit
200,000
Purchases
Accounts Payable
200,000
To record purchase of 20 units of computers at
PHP10,000 per unit from Delta, Inc. as per Charge
Invoice 145.
PURCHASE RETURNS AND ALLOWANCES
•
A purchaser may find the merchandise received to be unsatisfactory because the goods are:
•
damaged or defective
•
of inferior quality
•
not in accord with the purchaser’s specifications
•
The purchaser initiates the request for a reduction of the balance due through the issuance of a debit memorandum. The debit
memorandum is a document issued by a buyer to inform a seller that the seller’s account has been debited because of unsatisfactory goods.
•
A return of the merchandise (a deduction from the purchase price when unsatisfactory goods are kept) is shown by the entry where
Accounts Payable is debited and Purchase Returns and Allowances is credited to show that the purchaseswas reduced with a return or an
allowance.
•
The Purchase Returns and Allowances account is a “contra purchases” account when merchandise is returned to a supplier.
TO ILLUSTRATE:
Out of the 20 computer units purchased last January 3, 2016, it was found after inspection on the same day that one unit was damaged during
shipment. Magaling issued a debit memorandum (DM 01) and informed the supplier that it will return the one damaged item.
127
Entry :
Teacher tip
General Journal
Date
Account Title and Explanation
1/3/16
Ref
Accounts Payable
Debit
Credit
Use the same business as your example for
all the discussions throughout this chapter.
10,000
10,000
Purchase Returns and Allowances
To record return of 1 unit of computers worth
PhP10,000 from Delta, Inc. as per DM 01
Teacher tip
ACCOUNTING FOR FREIGHT COSTS
The sales agreement should indicate whether the seller or the buyer is to pay the cost of
transporting the goods to the buyer’s place of business. The two most common arrangements for
freight costs are FOB SHIPPING POINT AND FOB DESTINATION.
Direct the students to used account titles
listed in the chart of accounts presented in
Chapter 8.
FOB Shipping Point:
•
Goods placed free on board (FOB) the carrier by seller.
•
Buyer pays freight costs.
Teacher tip
•
Freight-In is debited if buyer pays freight.
•
Cash is credited if the goods come on cash on delivery (COD), for example, and was paid
immediately. Accounts Payable would be credited if on account.
•
Ownership over the goods is transferred to the buyer once it is out of the premises of the
seller.
Direct the students to used account titles
listed in the chart of accounts presented in
Chapter 8.
Use ‘inventory’ or ‘merchandise inventory’
interchangeably.
FOB Destination
•
Goods placed free on board (FOB) at buyer’s business.
•
Seller pays freight costs.
•
Delivery Expense is debited if seller pays freight on outgoing merchandise to a buyer. This is an operating expense to the seller.
•
Ownership over the goods is transferred to the buyer once the goods are delivered and received by the buyer.
128
TO ILLUSTRATE:
Assume the supplier of Magaling is based in Manila. In order to bring the 20 computer units to Bicol, it will cost PHP3,000 to deliver the goods.
If the terms is FOB Shipping Point, the entry to record, assuming Magaling paid the common carrier in cash on January 4, 2016 is :
Entry:
General Journal
Date
Account Title and Explanation
1/4/16
Ref
Debit
Credit
3,000
Freight-In
Cash
To record freight costs for the purchase of 20 units of
computers
3,000
If the terms is FOB Destination, no entry is recorded in the books of Magaling. The PHP3,000 will be paid by the seller, in this case Delta, Inc.
PURCHASE DISCOUNTS:
•
Credit terms (specify the amount of cash discount and time period during which a discount is offered) may permit the buyer to claim a cash
discount for the prompt payment of a balance due. If the credit terms show 2/10, n/30 means a 2% discount is given if paid within 10 days
(called the discount period); otherwise, the invoice is due in 30 days.
•
The buyer calls this discount a purchase discount.
•
A purchase discount is normally based on the invoice cost less returns and allowances, if any.
TO ILLUSTRATE
The credit terms for the purchase of 20 computer units (total cost PHP200,000) is 2/10, n/30. This means that if Magaling pays on or before
January 13, 2016, it is entitled to a 2% discount, otherwise Magaling will have to pay the full amount on or before February 4, 2016 (30 days
after purchase). On January 10, 2016, Magaling paid the account in full with Delta.
Entry:
General Journal
Date
Account Title and Explanation
1/10/16
Accounts Payable
Purchase Discount
Cash
To record full payment of Delta, Charge Invoice No.
129
145 with 2% discount computed as PhP200,000 x 2%
Ref
Debit
Credit
200,000
4,000
196,000
Assuming that instead of paying on January 10, 2016, Magaling paid on February 4, 2016, thus forfeiting the 2% discount, the entry to record
is:
General Journal
Date
2/4/16
Account Title and Explanation
Ref
Debit
Accounts Payable
Purchase Discount
To record full payment of Delta, Charge Invoice No. 145
Credit
200,000
200,000
Recording of sales and related transactions under the Periodic Inventory System
SALES TRANSACTIONS: REVENUE ENTRIES FOR A MERCHANDISER
•
Revenues are reported when earned in accordance with the revenue recognition principle, and in a merchandising company, revenues are
earned when the goods are transferred from seller to buyer.
•
All sales should be supported by a document such as a cash register tape (to provide evidence of cash sales) or cash receipt, or office
receipt for cash sales, and charge invoice for credit sales, or sales on account.
•
One entry is made with each sale:
Debit — Accounts Receivable (if a credit sale) or Cash (if a cash sale) which increases assets for the sales amount
Credit — Sales which increases revenues
•
The sales account is credited only for sales of goods held for resale. Sales of assets not held for resale (such as equipment, buildings, land,
etc.) are credited directly to the asset account.
TO ILLUSTRATE :
For the month of January, Magaling made the following sale:
1/10/2016 Official Receipt (OR) No. 001 Sold two units for cash to Marie Cruz for PHP36,000 (PHP18,000 per unit), FOB Destination
1/15/2016 Charge Invoice (ChI) No. 001 Sold five units on account to Rafael Reyes for PHP97,500 (PHP19,500 per unit) with terms 3/10, n/
30, FOB Shipping Point
130
Entry:
General Journal
Date
1/10/16
Account Title and Explanation
Ref
Debit
Teacher tip
Credit
36,000
Cash
Sales
To record OR No. 001 cash sale - Marie Cruz
36,000
Inform the students that sometimes it is
best to avail of the discount because this
will lower the cost and therefore increase
the profit of the business.
General Journal
Date
1/15/16
Account Title and Explanation
Ref
Debit
When the learners ask why companies do
not avail of discounts, say that there are
times when companies do not have
sufficient cash to settle the liability.
Credit
97,500
Accounts Receivable
Sales
To record Charge Invoice No. 001 Rafael Reyes on
account with terms 3/10, n/30
97,500
FREIGHT TERMS: FOB DESTINATION — SELLER PAYS FREIGHT
•
An entry is made when seller pays the freight to deliver goods to a customer or buyer. If the buyer
will pay for the freight, no entry is made.
•
Debit — Delivery Expense and credit — Cash or Accounts Payable
Teacher tip
Review the discussion on Chapter 6
(Accounting Concepts and Principles) about
revenue recognition principle.
TO ILLUSTRATE:
On January 10, 2016 Magaling paid MM Express, PHP500 to deliver the two units to Marie Cruz.
General Journal
Date
1/10/16
Account Title and Explanation
Ref
Debit
Credit
500
Delivery Expense
Cash
To record full payment of Delta Charge Invoice No. 145
500
Take note that no entry will be made regarding the sale to Rafael Reyes since the term is FOB Shipping Point.
131
SALES RETURNS AND ALLOWANCES:
•
Sales Returns result when customers are dissatisfied with merchandise and are allowed to return the goods to the seller for credit or a
refund.
•
Sales Allowances result when customers are dissatisfied, and the seller allows a deduction from the selling price.
•
To grant the return or allowance, the seller prepares a credit memorandum to inform the customer that a credit has been made to the
customer’s account receivable.
•
Sales Returns and Allowances is a contra revenue account to the Sales account. A contra account is a reduction to a particular account.
•
A contra account is used, instead of debiting sales, to disclose the amount of sales returns and allowances in the accounts.
•
This information is important to management as excessive returns and allowances suggest inferior merchandise, inefficiencies in filling
orders, errors in billing customers, and mistakes in delivery or shipment of goods.
•
The normal balance of Sales Returns and Allowances is a debit.
•
One entry is made with each sales return and allowance:
The entry to record the sales return or allowance:
•
Debit — Sales Return and Allowances which decreases revenues for the amount of the sale
•
Credit — Accounts Receivable (if a credit sale) or Cash (if a cash sale) which decreases assets
TO ILLUSTRATE:
On January 16, 2016, Rafael Reyes returned one unit of the computers purchased last January 15, 2016 under Charge Invoice 001. The unit
returned was in good condition. However, Rafael Reyes returned the unit because it is one unit more than what they need. The return was
approved and accepted by Magaling. The price will be deducted from the account of Rafael Reyes.
Entry:
General Journal
Date
1/10/16
Account Title and Explanation
Ref
Debit
Credit
19,500
Sales Return & Allowances
Accounts Receivable
To record return of one unit of computers from Rafael
Reyes under Charge Invoice 001
19,500
132
SALES DISCOUNTS
1. A sales discount is the offer of a cash discount to encourage customers to pay the balance at an earlier date.
2. An example of a discount term is commonly expressed as: 2/10, n/30, which means that the customer is given 2% discount if payment is
made within 10 days. After 10 days there is no discount, and the balance is due in 30 days.
3. Sales Discounts is a contra revenue account with a normal debit balance.
TO ILLUSTRATE:
Assume that Magaling purchased on cash, five units of computers at PHP10,000 per unit from a supplier on January 17, 2016. These units
were subsequently sold to Jun Cruz on January 18, 2016 under Charge Invoice (ChI) No. 002 amounting to PHP90,000 (PHP18,000 per unit)
with terms 2/10, n/30, FOB Shipping Point. On January 23, 2016, Cruz paid the said account in full.
General Journal
Date
1/17/16
1/18/16
1/23/16
Account Title and Explanation
Ref
Debit
Purchases
Cash
To record purchased on cash five units of computers
50,000
Accounts Receivable
Sales
To record sales on account under Charge Invoice No.
002 to Jun Cruz with terms 2/10, n/30
90,000
Cash
88,200
Credit
50,000
90,000
Sales Discount
1,800
Accounts Receivable
90,000
To record collection of accounts receivable from Jun
Cruz net of 2% sales discount
Notice in the entry on January 23, 2016 that the cash received from Jun Cruz was net of the 2% discount because he made the payment within
the discount period. Take note that the discount period in this case was from January 19, 2016 to January 28, 2016 (10 days).
133
What If Jun Cruz paid the account on January 30, 2016 instead of January 23, 2016? The entry would be:
Teacher tip
General Journal
Date
Account Title and Explanation
Ref
1/30/16
Cash
Accounts Receivable
To record collection of accounts receivable from Jun Cruz
Debit
Credit
90,000
90,000
The amount indicated here is not connected
with the journal entries prepared above.
This is for illustration purposes only.
Determining Cost of Goods Sold under Periodic Inventory System
The Cost of Goods Sold under the periodic inventory system is determined at the end of the period (monthly or yearly) by a short
computation, as follows:
Cost of goods sold:
Merchandise Inventory, Beginning
100,000
250,000
Purchases
Less: Purchases returns and allowances
5,000
Purchases discounts
2,000
7,000
Net purchases
243,000
6,000
Add: Freight in
Cost of goods purchased
249,000
Cost of goods available for sale
349,000
Merchandise Inventory, Ending
118,570
230,250
Cost of goods sold
In a periodic inventory system, separate ledger accounts are maintained for various items composing the cost of goods sold (Purchases,
Purchase Returns & Allowances, Freight-In, Purchase Discounts). At the end of the accounting period, a physical count of inventory is necessary
to establish the ending balance of the inventory.
134
PRACTICE (300 MINS)
COMPLETE ACCOUNTING CYCLE FOR A MERCHANDISING BUSINESS
Agila Merchandising, owned by Lito Agila, sells ready-to-wear shirts and dresses to its customers. It started its operations on January 1, 2016.
The company issues the following documents :
•
Official Receipts - for all cash collections
•
Charge Sales Invoice – for all sales on account
•
Check Voucher – for all cash disbursements
Step 1 & 2 –Understanding and Journalizing the transactions
For the month of January 2016, the special journals of Agila are shown below:
Sales Journal
DATE
DESCRIPTION (CUSTOMER
NAME)
Charge Invoice or Sales Invoice
No.
Debit
Credit
Accounts Receivable
Sales
1/5/2016
Dax
1
2,102
2,102
1/7/2016
Marie
2
3,060
3,060
1/9/2016
Astro
3
1,475
1,475
CANCELLED
4
1/11/2016
PNSC
5
8,960
8,960
1/15/2016
PECO
6
7,125
7,125
1/16/2016
Ipedcare
7
4,560
4,560
1/19/2016
Te
8
1,250
1,250
135
1/21/2016
Joshua
9
3,125
3,125
1/22/2016
Joseph
10
4,510
4,510
1/24/2016
Jesper
11
2,080
2,080
1/28/2016
Nelcie
12
1,180
1,180
1/29/2016
Ryan
13
900
900
1/30/2016
Arlen
14
3,450
3,450
1/30/2016
Art
15
1,478
1,478
45,255
45,255
Total for January 2016
CASH RECEIPTS JOURNAL
DATE
DESCRIPTION
(PARTICULARS)
Official Receipt
No.
Debit
Credit
Credit
Debit
Cash
Sales
Account
Receivable
Sales Discount
1/2/2016
Ana
1
1,000
1,000
1/4/2016
Maria
2
1,890
1,890
1/6/2016
Peter
3
1,289
1,289
1/7/2016
Jun
4
3,456
3,456
1/7/2016
Karen
5
1,290
1,290
1/8/2016
Jane
6
3,876
3,876
1/8/2016
May
7
4,561
4,561
1/10/2016
April
8
5,600
5,600
1/15/2016
PNSC
9
8,060
1/16/2016
Ana
10
4,235
136
8,960
4,235
900
1/17/2016
Juan
11
2,010
2,010
1/21/2016
Rafael
12
3,410
3,410
1/22/2016
Ray
13
893
893
1/23/2016
Te
14
1,250
1/24/2016
Geo
15
3,452
1/24/2016
Dax
16
2,102
1/25/2016
Angela
17
1,000
1,000
1/29/2016
Clyde
18
345
345
1/30/2016
Joseph
19
4,000
Total
1,250
3,452
2,102
53,719
38,307
4,510
510
16,822
1,410
PURCHASE JOURNAL
Date
Account Title and Explanation
Ref
1/2/2016 XYS Clothing
1/10/2016 RTW Super Store
1/29/2016 Dresses Unlimited
Total
Charge Invoice or Sales Invoice
No. (from supplier)
Debit
228,560
133,070
98,120
459,750
SI 102
SI611
SI341
Credit
228,560
133,070
98,120
459,750
CASH DISBURSEMENTS JOURNAL
DATE
DESCRIPTION (PARTICULARS)
Check or
Voucher
No.
CREDIT
DEBIT
Cash
Accounts
Payable
1/2/16
St Realty Rental for Jan-Feb 2016
CV01
10,000
1/5/16
Del Supplies- office supplies
CV02
3,500
DEBIT
Salaries
Exp
DEBIT
DEBIT
DEBIT
CREDIT
Supplies
Exp
Advertising
Exp
Rental
Exp
Purch Disct
10,000
3,500
137
1/15/16
XYS Clothing- payment of
account
CV03
220,000
1/16/16
Jean Guzman-salary Jan 1-15,
2016
CV04
7,500
1/16/16
Sonic Promo-Advertising
CV05
4,800
1/25/16
Goldmic Supplies
CV06
1,990
TOTAL
254,290
228,560
8,560
7,500
4,800
1,990
228,560
14,000
5,490
4,800
10,000
8,560
In addition to the above special journals, the company maintains a general journal. The General Journal had the following entries for January
General Journal
Date
1/2/16
1/2/16
Account Title and Explanation
Ref
Debit
Cash
Agila, Capital
To record initial investment of Agila
500,000
Transportation equipment
150,000
Credit
500,000
Additional Information:
•
The delivery vehicle purchased in January 2, 2016 is estimated to be useful for 10 years with no residual or salvage value.
•
A physical count of merchandise inventory was conducted on January 30, 2016. The cost of the inventory on hand was PHP438,700.
•
On January 30, 2016, Agila received a statement of account from Gus Oil Center reflecting a total bill of PHP2,180, representing fuel
purchases on January 2016 that were still unpaid as of the said date.
Step 3 – Posting to the General Ledger. From the summary of transactions in the special journals and general journals, the entries will now
be posted in each general ledger account:
GENERAL LEDGER
Account: Cash
Account No. : 1000
138
Date
1/2/16
Item
Ref
Investment of owner
Debit
Credit
Balance
500,000
500,000
150,000
Purchase of Vehicle
350,000
53,719
From the Cash receipts Journal
403,719
From the Cash Disbursement Journal
254,290
149,429
GENERAL LEDGER
Account: Accounts Receivable
Date
Account No. : 1200
Item
Ref
From the Sales Journal
Debit
Credit
Balance
45,255
45,255
From the Cash Receipts Journal
16,822
28,433
GENERAL LEDGER
Account: Transportation Equipment
Date
Account No. : 1680
Item
Ref
Debit
Credit
Balance
150,000
General Journal - Purchase of vehicle
150,000
GENERAL LEDGER
Account: Accounts Receivable
Date
Account No. : 2000
Item
Ref
Debit
From the Purchase Journal
Credit
Balance
459,750
228,560
From the Cash Disbursements Journal
139
(459,750)
(231,190)
GENERAL LEDGER
Account: Agila, Capital
Date
Account No. : 3000
Item
Ref
Debit
Credit
Balance
500,000 ( 500,000)
Initial Investment – Gen Journal
GENERAL LEDGER
Account: Sales
Account No. : 4100
Date
Item
Ref
Debit
Credit
Balance
From the Sales Journal
45,255
( 45,255)
From the Cash Receipts Journal
38,307
(83,562)
GENERAL LEDGER
Account: Sales Discounts
Date
Account No. : 4102
Item
Ref
Debit
Credit
Balance
1,410
From the Cash Receipts Journal
1,410
GENERAL LEDGER
Account: Purchases
Date
Account No. : 5100
Item
Ref
From the Cash Receipts Journal
Debit
459,750
140
Credit
Balance
459,750
GENERAL LEDGER
Account: Purchase Discount
Date
Account No. : 5102
Item
Ref
Debit
Credit
Balance
8,560
From the Cash Disbursement Journal
(8,560)
GENERAL LEDGER
Account: Salaries Expense
Date
Account No. : 6100
Item
Ref
Debit
Credit
Balance
14,000
From the Cash Disbursement Journal
14,000
GENERAL LEDGER
Account: Supplies Expense
Date
Account No. : 6150
Item
Ref
From the Cash Disbursement Journal
Debit
Credit
Balance
5,490
5,490
GENERAL LEDGER
Account: Adveertising Expense
Date
Account No. : 6400
Item
Ref
From the Cash Disbursement Journal
Debit
Credit
Balance
4,800
4,800
GENERAL LEDGER
Account: Rental Expense
Date
Account No. : 6300
Item
Ref
Debit
10,000
From the Cash Disbursement Journal
141
Credit
Balance
10,000
Step 4 & 5– Prepare the unadjusted trial balance, and preparation of worksheet. The balances in the general ledger for each account will be
extended to the first two money columns of the worksheet. The unadjusted trial of Agila is:
AGILA MERCHANDISING
Worksheet
For the month ending January 30, 2016
ACCOUNT TITLE
Unadjusted Trial Balance
DEBIT
CREDIT
Balance Sheet Accounts
Cash
Accounts Receivable
Merchandise Inventory
Transportation Equipment
Accum. Deprn-Off Eqpt
149,429
28,433
0150,000
0
Accounts Payable
231,190
Agila, Capital
500,000
Income Statement Accounts
Sales
Sales Discounts
Purchases
83,562
1,410
459,750
8,560
Purchase Discount
Salaries Expense
14,000
142
Supplies Expense
5,490
Advertising Expense
4,800
10,000
Rental Expense
0
Depreciation Expense
823,312
823,312
Step 6 – Prepare adjusting entries. Recall in Chapter 11, the five basic sources of adjusting entries:
1. Depreciation expense
2. Deferred expenses or prepaid expenses
3. Deferred income or unearned Income
4. Accrued expenses or accrued liabilities
5. Accrued income or accrued assets
Identify transactions in the books of Agila that will require adjustments:
•
Depreciation of transportation equipment purchased on January 2, 2016
Monthly Depreciation = (Cost – Salvage or Residual Value) / 120 months
= (150,000-0) / 120
=
Adjusting entry :
•
1,250
Depreciation Expense
1,250
Accum. Deprn- Transpo Eqpt
1,250
Deferred or Prepaid Expenses
In the cash disbursement journal, the rental payment made on January 2, 2016 is for the month of January and February 2016 amounting to
PHP10,000. The entire amount was charged to rental expense which is not proper because one half (1/2) of the said payment is considered as
an advance payment of rental. Thus, an asset should be recognized. The adjusting entry is:
143
Prepaid Expenses
5,000
Rental Expense
5,000
Note: With this entry, the correct rental expense of PHP5,000 and a prepaid expense of PHP5,000 ( an asset account) are recognized.
•
Accrued Expenses
On January 30, 2016, fuel expenses incurred amounting to PHP2,180 should be recorded as an expenses and liability. The entry to adjust is:
Fuel Expenses
2,180
Accrued Expenses
2,180
AGILA MERCHANDISING
Worksheet
For the month ending January 30, 201
Unadjusted Trial Balance
ACCOUNT TITLE
DEBIT
CREDIT
Adjustments
DEBIT
Adjusted Trial Balance
CREDIT
DEBIT
CREDIT
Balance Sheet Accounts
Cash
149,429
149,429
-
28,433
28,433
-
-
-
Accounts Receivable
Merchandise Inventory
5,000
Prepaid Expenses
Transportation Equipment
150,000
Accum. Deprn-Off Eqpt
Accounts Payable
1,250
231,190
2,180
Accrued Expenses
144
5,000
-
150,000
-
-
1,250
-
231,190
-
2,180
Agila, Capital
500,000
Income Statement Accounts
83,562
Sales
Sales Discounts
Purchases
-
500,000
-
-
-
83,562
-
1,410
1,410
-
459,750
459,750
-
8,560
Purchase Discount
8,560
-
Salaries Expense
14,000
14,000
-
Supplies Expense
5,490
5,490
-
Advertising Expense
4,800
4,800
-
5,000
-
Rental Expense
10,000
5,000
Depreciation Expense
1,250
1,250
-
Fuel Expenses
2,180
2,180
-
823,312
823,312
8,430
8,430
826,742
826,742
Step 7 - Preparation of Financial Statements. The first statement prepared is the income statement. All income statement accounts are
extended to the appropriate column. Using the periodic inventory system, the beginning balance of merchandise inventory account is also
extended to the debit side, while the result of the physical count to determine the ending inventory is reflected on the credit side. The total
debit and total credit are determined and if credit balance is higher than the debit side, the difference is added to the debit side. The
difference is actually the income for the period. However, if the total debit side exceeds the total credit side, the difference is added to the
credit side and this is the net loss of the business. The statement of financial position is then prepared. All assets, liabilities and equity
accounts are extended. The ending merchandise inventory is extended to the debit side.
The worksheet for these two financial statements are presented below:
145
AGILA MERCHANDISING
Worksheet
For the month ending January 30, 2016
Adjusted Trial Balance
DEBIT
Income Statement
CREDIT
DEBIT
Statement of Financial Position
CREDIT
DEBIT
CREDIT
Balance Sheet Accounts
Cash
Accounts Receivable
Merchandise Inventory
Prepaid Expenses
Transportation Equipment
149,429
-
149,429
-
28,433
-
28,433
-
-
-
5,000
-
5,000
-
150,000
-
150,000
-
438,700
438,700
Accum. Deprn-Off Eqpt
-
1,250
-
1,250
Accounts Payable
-
231,190
-
231,190
Accrued Expenses
-
2,180
-
2,180
Agila, Capital
-
500,000
-
500,000
-
-
Income Statement Accounts
-
-
Sales
-
Sales Discounts
Purchases
Purchase Discount
83,562
83,562
-
1,410
-
1,410
-
459,750
-
459,750
-
-
-
8,560
8,560
Salaries Expense
14,000
-
14,000
-
Supplies Expense
5,490
-
5,490
-
146
Advertising Expense
4,800
-
4,800
-
Rental Expense
5,000
-
5,000
-
Depreciation Expense
1,250
-
1,250
-
Fuel Expenses
2,180
-
2,180
-
493,880
Net Income
36,942
826,742
826,742
530,822
————————>
530,822
530,822
771,562
The proper format of the income statement and the schedule of cost goods sold of Agila for January 2016 are presented below:
AGILA MERCHANDISING
Schedule of Cost of Goods Sold
For the month ended January 30, 2016
Merchandise Inventory, Beginning
-0-
Add: Purchases
459, 970
Less: Purchase Discount
8, 560
——————————-
Cost of Goods Available for Sale
451, 190
Less: Merchandise Inventory, Ending
(438, 700)
——————————-
Cost of Goods Sold
12,490
——————————147
36,942
771,562
AGILA MERCHANDISING
Teacher tip
Income Statement
For the month ended January 30, 2016
GROSS SALES
83,562
Less: Sales Discounts
(1,410)
Remind the learners that the
Merchandise Inventory, Ending
is established by conducting a
physical count at the end of
the reporting date. In the
periodic inventory system,
physical count is a must.
———————————
NET SALES
82,152
Less: Cost of Goods Sold (see above schedule)
(12,490)
———————————
GROSS PROFIT
69, 662
LESS: EXPENSES
Salaries Expense
14,000
Salaries Expense
5, 490
Advertising Expense
4,800
Rental Expense
5,000
Depreciation Expense
1, 250
Fuel Expense
2, 180
——————————-
Total Expense
32, 270
——————————-
NET INCOME
36, 942
——————————
Step 8 – Closing Entries. The closing journal entries consist of the following:
•
All of the nominal revenue accounts should be closed to the income summary account by a Debit to revenue and credit to income summary.
•
All of the nominal expense and cost of goods sold accounts should be closed to the income summary by a Credit to expense and a debit to
income summary.
148
•
The Merchandise Inventory, Beginning is closed to Income summary account by a debit to Income Summary and a credit to Merchandise
Inventory.
•
The Merchandise Inventory, Ending is set up in the books by a debit to Merchandise Inventory, Ending and a credit to Income Summary.
The amount that will be used is the result of the physical count.
•
The balance in the income summary account should now reflect the net income for the accounting period. The next journal entry should
close the income summary account to the equity or capital account. If there is a net profit this entry will be a debit to income summary and a
credit to owner’s capital account.
Once the closing journal entries have been entered into the general journal, the information should be posted to the general ledger. When this
is accomplished, all of the nominal accounts in the general ledger should have zero balances. To double check on this, we prepare another trial
balance based on the new balances in the general ledger. If we have any nominal accounts with positive balances, a mistake was made along
the way and will need to be corrected before proceeding to the next accounting period.
The closing entries of Agila are:
Teacher tip
GENERAL JOURNAL
DATE
ACCOUNT TITLE AND EXPLANATION
1/30/16
Sales
REF
DEBIT
No closing entry was made for the
Merchandise Inventory, Beginning
because it was the first month of
operations and the inventory
beginning has zero value.
CREDIT
83, 562
1,410
Sales Discounts
Income Summary
82,152
To close nominal revenue accounts
Income Summary
483,910
Purchase Discount
8,560
Purchases
459,750
14,000
Salaries Expense
149
Supplies Expense
5,490
Advertising Expense
4,800
Rental Expense
5,000
Depreciation Expense
1,250
Fuel Expense
2,180
To close nominal expense and cost of goods
sold account accounts
438,700
Merchandise Inventory, Ending
Income Summary
438,700
To set up merchandise inventory ending
After these entries, the income summary account has a balance of:
Total Credits (82,152 + 438,700)
=
520,852
Total
=
83,910
Debit
Net (credit balance)
36,942
The last closing entry is to close the balance of income summary to the capital account:
GENERAL JOURNAL
DATE
ACCOUNT TITLE AND EXPLANATION
1/30/16
Income Summary
REF
DEBIT
CREDIT
36, 942
36, 942
Agila, Capital
150
Teacher tip
The net credit balance of the
income summary is equal to the
net income as computed.
Inform the students that the net
income will result to an increase in
capital of the owner.
ENRICHMENT (80 MINS)
Teacher tip
As mentioned above, there are two methods in accounting for inventory: the periodic inventory system
and perpetual inventory system.
PERPETUAL INVENTORY SYSTEM
To avoid confusion, discuss periodic and
perpetual separately. Afterwards, compare
these two systems.
Notice that all the examples used under the
perpetual method are the same with the
periodic method presented above.
Recording Purchases and related transactions under the Perpetual Inventory System
PURCHASES OF MERCHANDISE: PERPETUAL SYSTEM
•
When merchandise is purchased for resale to customers, the account, Merchandise Inventory, is debited for the cost of goods purchased.
•
Like sales, purchases may be made for cash or on account (credit).
•
The purchase is normally recorded by the purchaser when the goods are received from the seller.
•
Each credit purchase should be supported by a purchase invoice.
•
A purchase invoice received by the buyer is actually a sales invoice or a charge invoice prepared by the supplier or vendor.
•
Note that only purchases of merchandise are debited to Merchandise Inventory. Purchases of other assets: supplies, equipment, and
similar items) are debited to their respective accounts.
TO ILLUSTRATE: Magaling Computer Store started its operations on January 2, 2016. The store is located in Sikat Mall in Bicol. The owner
invested PHP500,000 to start the business. On January 3, 2016, Magaling purchased 20 computer units on account for PHP10,000 each. Upon
delivery of the units, the supplier Delta, Inc. issued a Charged Invoice No. 145 to Magaling.
Entry:
GENERAL JOURNAL
DATE
ACCOUNT TITLE AND EXPLANATION
1/3/16
Inventory (Merchandise Inventory)
REF
DEBIT
CREDIT
200,000
Accounts Payable
200,000
To record purchase of 20 units of computers at PHP10,000 per unit
from Delta Inc., as per Charge Invoice 145
151
PURCHASE RETURNS AND ALLOWANCES
•
A purchaser may be dissatisfied with merchandise received because the goods are:
•
damaged or defective
•
of inferior quality
•
not in accordance with the purchaser’s specifications
•
The purchaser initiates the request for a reduction of the balance due through the issuance of a debit memorandum. The debit
memorandum is a document issued by a buyer to inform a seller that the seller’s account has been debited because of unsatisfactory goods.
•
A return of the merchandise (a deduction from the purchase price when unsatisfactory goods are kept) is shown by the entry where
Accounts Payable is debited and Merchandise Inventory is credited to show that the cost of the Merchandise Inventory is reduced with a
return or an allowance.
TO ILLUSTRATE:
Out of the 20 units of the computers purchased last January 3, 2016, it was found out after inspection on the same day that one unit was
damaged during shipment. Magaling issued a debit memorandum (DM 01) and informed the supplier that it will return the one damaged unit.
Entry :
GENERAL JOURNAL
DATE
ACCOUNT TITLE AND EXPLANATION
1/3/16
Accounts Payable
REF
DEBIT
CREDIT
10,000
Inventory
10,000
To record return of 1 unit computer, PHP10,000 unit from Delta, Inc.
as per DM 01
ACCOUNTING FOR FREIGHT COSTS
The sales agreement should indicate whether the seller or the buyer is to pay the cost of transporting the goods to the buyer’s place of
business. The two most common arrangements for freight costs are FOB SHIPPING POINT AND FOB DESTINATION.
152
FOB Shipping Point
Goods placed free on board (FOB) the carrier by seller.
•
•
Buyer pays freight costs.
•
Merchandise Inventory is debited if buyer pays freight.
•
Cash is credited if the goods come on cash on delivery (COD), for example, and was paid immediately. Accounts Payable would be
credited if on account.
Ownership over the goods is transferred to the buyer once it is out of the premises of the seller.
FOB Destination
•
Goods placed free on board (FOB) at buyer’s business.
•
Seller pays freight costs.
•
Delivery Expense is debited if seller pays freight on outgoing merchandise to a buyer which is an operating expense to the seller.
•
Ownership over the goods is transferred to the buyer once the goods are delivered and received by the buyer.
TO ILLUSTRATE:
Assuming the supplier of Magaling is based in Manila and in order to bring the 20 computer units to Bicol it will cost PHP3,000 to deliver the
goods.
1. If the terms is FOB Shipping Point, the entry to record, assuming Magaling paid in cash the common carrier on January 4, 2016 is :
Entry:
GENERAL JOURNAL
DATE
ACCOUNT TITLE AND EXPLANATION
1/4/16
Inventory
REF
DEBIT
CREDIT
3,000
3,000
Cash
To record freight costs for the purchase of 20 units computer
153
2. If the terms is FOB Destination, no entry is recorded in the books of Magaling. The PHP3,000 will be paid by the seller, in this case Delta,
Inc.
PURCHASE DISCOUNTS:
•
Credit terms (specify the amount of cash discount and time period during which a discount is offered) may permit the buyer to claim a cash
discount for the prompt payment of a balance due. If the credit terms show 2/10, n/30 means a 2% is discount is given if paid within 10
days (called the discount period); otherwise the invoice is due in 30 days.
•
The buyer records this discount as a reduction to Merchandise Inventory.
•
A purchase discount is normally based on the invoice cost less returns and allowances, if any.
TO ILLUSTRATE
The credit terms for the purchased of 20 computer units (total cost PHP200, 000) is 2/10, n/30. This means that if Magaling pays on or before
January 13, 2016, it is entitled to a 2% discount. Otherwise, they will have to pay the full amount on or before February 4, 2016 (30 days after
purchase). On January 10, 2016, Magaling paid in full the account with Delta.
Entry:
GENERAL JOURNAL
DATE
ACCOUNT TITLE AND EXPLANATION
1/10/16
Accounts Payable
REF
DEBIT
CREDIT
200,000
4,000
Merchandise Inventory
196,000
Cash
To record full payment of Delta Charge Invoice No. 145 with 2%
discount computed as PHP200,000 x 2%
Assuming that instead of paying on January 10, 2016, Magaling paid on February 4, 2016, thus forfeiting the 2% discount, the entry to record
is:
154
GENERAL JOURNAL
DATE
ACCOUNT TITLE AND EXPLANATION
2/4/16
Accounts Payable
REF
DEBIT
CREDIT
200,000
200,000
Cash
To record full payment of Delta Charge Invoice No. 145
Recording of Sales and related transactions under the Perpetual Inventory System
SALES TRANSACTIONS: REVENUE ENTRIES FOR A MERCHANDISER
•
Revenues are reported when earned in accordance with the revenue recognition principle; and in a merchandising company, revenues are
earned when the goods are transferred from seller to buyer.
•
All sales should be supported by a document such as a cash register tape (provide evidence of cash sales) or cash receipt or office receipt
for cash sales, and charge invoice for credit sales or sales on account.
•
Two entries are made with each sale:
•
•
•
The first entry records the sale:
•
Debit — Accounts Receivable (if a credit sale) or Cash (if a cash sale) which increases assets for the sales amount
•
Credit — Sales which increases revenues
The second entry records the cost of the merchandise sold:
•
Debit — Cost of Goods Sold which increases expenses
•
Credit — Merchandise Inventory which decreases assets
The sales account is credited only for sales of good held for resale. Sales of assets not held for resale (such as equipment, buildings, land,
etc.) are credited directly to the asset account.
TO ILLUSTRATE :
Assume that no freight costs were incurred when the 20 computer units were purchased.
155
For the month of January, Magaling made the following sale:
1/10/2016 Official Receipt (OR) No. 001 Sold two units for cash to Marie Cruz for PHP36, 000 (PHP18,000 per unit), FOB Destination
1/15/2016 Charge Invoice (ChI) No. 001 Sold five units on account to Rafael Reyes for PHP97,500 (PHP19,500 per unit) with terms 3/10, n/
30, FOB Shipping Point.
Entry:
GENERAL JOURNAL
DATE
1/10/16
ACCOUNT TITLE AND EXPLANATION
REF
DEBIT
Cash
CREDIT
36,000
36,000
Sales
Cost of Goods Sold
20,000
Inventory
20,000
To record OR No. 001 cash sale-Marie Cruz
GENERAL JOURNAL
DATE
1/15/16
ACCOUNT TITLE AND EXPLANATION
REF
DEBIT
Accounts Receivable
CREDIT
97,500
Sales
97,500
50,000
Cost of Goods Sold
Inventory
50,000
To record Charge Invoice No. 001 Rafael Reyes on
account with terms 3/10, n/30
156
FREIGHT TERMS: FOB DESTINATION — SELLER PAYS FREIGHT
• An entry is made when seller pays the freight to deliver goods to a customer or buyer. If the buyer will pay for the freight, no entry is made.
• Debit — Delivery Expense and credit — Cash or Accounts Payable.
TO ILLUSTRATE:
On January 10, 2016 Magaling paid MM Express, PHP500 to deliver the two units to Marie Cruz.
GENERAL JOURNAL
DATE
1/10/16
ACCOUNT TITLE AND EXPLANATION
REF
DEBIT
Delivery Expense
CREDIT
500
500
Cash
To record full payment of Delta Charge Invoice No. 145
Take note that no entry will be made as to the sale to Rafael Reyes since the term is FOB Shipping Point.
SALES RETURNS AND ALLOWANCES:
•
Sales Returns result when customers are dissatisfied with merchandise and are allowed to return the goods to the seller for credit or a
refund.
•
Sales Allowances result when customers are dissatisfied, and the seller allows a deduction from the selling price.
•
To grant the return or allowance, the seller prepares a credit memorandum to inform the customer that a credit has been made to the
customer’s accounts receivable.
•
Sales Returns and Allowances is a contra revenue account to the Sales account. A contra account is a reduction to a particular account.
•
A contra account is used, instead of debiting sales, to disclose in the accounts the amount of sales returns and allowances.
•
This information is important to management, as excessive returns and allowances suggest inferior merchandise, inefficiencies in filling
orders, errors in billing customers, and mistakes in delivery or shipment of goods.
•
The normal balance of Sales Returns and Allowances is a debit.
•
Two entries are made with each sale return and allowance:
•
The first entry records the sales return or allowance:
157
•
•
Debit —Sales Return and Allowances which decreases revenues for the amount of the sale
•
Credit — Accounts Receivable (if a credit sale) or Cash (if a cash sale) which decreases assets
The second entry records the increase in Merchandise Inventory:
•
Debit — Merchandise Inventory which increases assets
•
Credit — Cost of Goods Sold which decreases expenses
TO ILLUSTRATE:
On January 16, 2016, Rafael Reyes returned one unit of the computers purchased last January 15, 2016 under Charge Invoice 001. The unit
returned was in good condition. However, Rafael Reyes returned the unit because it is one unit more than what they need. The return was
approved and accepted by Magaling. The price will be deducted from the account of Rafael Reyes.
Entry:
GENERAL JOURNAL
DATE
1/16/16
ACCOUNT TITLE AND EXPLANATION
REF
DEBIT
Sales Return and Allowances
CREDIT
19,500
Accounts Receivable
19,500
Merchandise Inventory
10,000
Cost of Goods Sold
10,000
To record return of one unit computer from Rafael Reyes
under Charge Invoice No. 001
SALES DISCOUNTS
1. A sales discount is the offer of a cash discount to a customer to encourage them to pay the balance at an earlier date.
2. An example of a discount term is commonly expressed as: 2/10, n/30, which means that the customer is given 2% discount if payment is
made within 10 days. After 10 days there is no discount, and the balance is due in 30 days.
158
3. Sales Discounts is a contra revenue account with a normal debit balance.
TO ILLUSTRATE:
Assume Magaling purchased five units of computers on cash for PHP10,000 per unit from a supplier on January 17, 2016 that were
subsequently sold to Jun Cruz on January 18, 2016 under Charge Invoice (ChI) No. 002 amounting to PHP90,000 (PHP18,000 per unit) with
terms 2/10, n/30, FOB Shipping Point. On January 23, 2016, Cruz paid the said account in full.
GENERAL JOURNAL
DATE
ACCOUNT TITLE AND EXPLANATION
1/17/16
Inventory
REF
DEBIT
CREDIT
50,000
Cash
50,000
To record five units of computers purchased on cash
1/18/16
Accounts Receivable
90,000
90,000
Sales
Cost of Goods Sold
50,000
50,000
Inventory
To record sales on account under Charge Invoice No. 002 to Jun Cruz with terms
2/10, n/30
1/23/16
88,200
Cash
Sales Discount
1,800
90,000
Accounts Receivable
To record collection of accounts receivable from Jun Cruz, net of 2% sales discount
159
Notice in the entry on January 23, 2016 that the cash received from Jun Cruz was net of the 2% discount because he made the payment within
the discount period. Take note that the discount period in this case is from January 19, 2016 to January 28, 2016 (10 days).
What If Jun Cruz paid the account on January 30, 2016 instead of January 23, 2016? The entry should be:
GENERAL JOURNAL
DATE
ACCOUNT TITLE AND EXPLANATION
1/23/16
Cash
REF
DEBIT
CREDIT
90,000
Accounts Receivable
90,000
To record collection of accounts receivable from Jun Cruz.
Determining Cost of Goods Sold under the Perpetual Inventory System
The Cost of Goods Sold under the perpetual inventory system is determined by getting the running balance in the general ledger of the
account. Recall the previous discussion on posting the journal entries to the general ledger. At any point in time, you can determine the
cumulative cost of goods sold under the perpetual inventory system because in this system a separate general ledger for “Cost of Goods Sold”
is maintained.
THE FLOW OF INVENTORY COSTS
Under the periodic inventory system, physical count is necessary to determine the ending balance of merchandise inventory. After the count,
the costs of these inventory items will be computed. There are instances that the unit prices for merchandise purchased are different. Consider
this scenario:
Geo San is in the business of buying and selling canned sardines. On January 2016, Geo had the following transactions:
1/1/16
Merchandise inventory on hand 1,000 cans @ PHP10/can
1/10/16
Purchased 5,000 cans @ PHP11 /can
55,000
1/20/16
Purchased 4,000 cans @ PHP12/can
48,000
Total
PhP 10,000
PhP 113,000
160
During the month of January the total sales in units is 7,000. Therefore, the ending inventory in units is 3,000 cans of sardines
(1,000+5,000+4,000-7,000). The problem now is the unit cost that will be used to determine the value of the ending inventory. This is where
the cost flow assumption is needed.
The two most commonly used cost flow assumptions are:
•
Average Cost
Using the above example, average unit cost is simply computed by dividing the total cost (PHP113,000) by total quantities (1,000+5,000+4,000)
11,000. Average unit cost is PHP11.30
The cost of merchandise inventory ending is 3,000 x PHP11.30 = PHP33,900
•
First in, First Out (FIFO)
As the name implies, FIFO involves the assumption that goods sold are the first units that were purchased - that means the oldest goods on
hand. Thus, the remaining inventory is comprised of the most recent purchases.
Applying this to the problem above, the 7,000 units sold were taken from:
1,000 @ PHP10
5,000 @ PHP11
1,000 @ PHP12
———————7,000 units
Therefore, the ending inventory will come from the January 20 purchases: 3,000 @ PHP12 = PHP36,000
EVALUATION (30 MINS)
1. A company had the following transactions during December:
•
Sold merchandise on credit for PHP5,000, terms 3/10, n/30. The items sold had a cost of PHP3,500.
•
Purchased merchandise for cash, PHP720.
161
•
Purchased merchandise on credit for PHP2,600, terms 1/20, n/30.
•
Issued a credit memorandum for PHP300 to a customer who returned merchandise purchased on November 29. The returned items had a
cost of PHP210.
•
Received payment for merchandise sold on December 1.
•
Received a credit memorandum for the return of faulty merchandise purchased on December 4 for PHP600.
•
Paid freight charges of PHP200 for merchandise ordered last month (FOB shipping point).
•
Paid for the merchandise purchased on December 4, less the portion that was returned.
•
Sold merchandise on credit for PHP7,000, terms 2/10, n/30. The items had a cost of PHP4,900.
•
Received payment for merchandise sold on December 24.
Required:
Prepare the general journal entries to record these transactions using a perpetual inventory system. (Record all purchases initially at the gross
invoice amount)
Suggested Solution:
Accounts Receivable
5,000
Sales
5,000
Cost of Goods Sold
3,500
Merchandise Inventory
3,500
Merchandise Inventory
720
Cash
720
162
Merchandise Inventory
2,600
Accounts Payable
2,600
Sales Returns and
Allowances
300
Accounts Receivable
300
Merchandise Inventory
210
Cost of Goods Sold
210
Cash
4,850
Sales Discounts
150
Accounts Receivable
5,000
Accounts Payable
600
Merchandise Inventory
600
Merchandise Inventory
200
Cash
200
Accounts Payable
2,000
163
Merchandise Inventory
(PHP2,000 x .01)
20
Cash
1,980
Accounts Receivable
7,000
Sales
7,000
Cost of Goods Sold
4,900
Merchandise Inventory
4,900
Cash
6,860
Sales Discounts
140
Accounts Receivable
7,000
2. The following data was taken from ledger account balances and supplementary data for the XYZ Company.
PHP 20,000
Merchandise inventory, beginning
23,000
Merchandise inventory, ending
215,000
Purchases
Purchases discounts
6,000
Purchases returns and allowances
3,000
400,000
Sales
164
Sales discounts
3,200
Sales returns and allowances
1,800
Freight-in
10,000
Required:
Show the computation, in proper format, of net sales, cost of goods sold, and gross profit for the year ended December 31, 2016.
Suggested Solution:
XYZ COMPANY
Income Statement
For the Year Ended December 31, 2016
Revenue from sales:
Gross sales………………………………………
PHP400,000
Less: Sales discounts ………………………….
PHP 3,200
Sales returns and allowances……….
1,800
Net sales…………………………………………
395,000
Cost of goods sold:
Merchandise inventory, 1/1/16………………..
20,000
Purchases………………………………………..
Less: Purchase discounts……………………….
5,000
PHP215,000
PHP6,000
0
165
Purchase returns and allowances………
3,000
9,000
Net purchases …………………………………
206,000
Add Freight-in …………………………………
10,000
Cost of goods purchased………………………
216,000
Goods available for sale………………………..
236,000
23,000
Merchandise inventory, 12/31/16……………
213,000
Cost of goods sold………………………………………
Gross profit from sales……………………………………
P182,000
ADDITIONAL PRACTICE SETS
Practice Set 1
Listed below are some of the accounts relating to the income of Leather Plus (owned by Abner Bravo) for the three month period ended March
31, 2016:
Sales
Sales Returns and Allowances
Sales Discounts
Purchases
Purchase Returns and Allowances
Supplies Expense
Salaries Expense
500,000 Merchandise Inventory, beginning
15,000 Merchandise Inventory, Ending
7,800 Purchase Discounts
302,000 Freight-In
4,9000 Rental Expense
1,200 Delivery Expense
18,000 Utilities Expense
166
170,100
165,000
1,800
5,000
5,000
2,100
8,000
Instructions:
1. Prepare a schedule of cost of goods sold for the three-month period ended March 31, 2016.
2. Prepare a statement of income for the period ended March 31, 2016.
3. Prepare closing entries.
Suggested Answers:
Leather Plus
Schedule of Costs of Goods Sold
For the three-month period ended March 31,
2016
Merchandise Inventory, Beg
170,100
Add: Net Purchases
Purchases
Less: Purch Returns & Allow
Purch Discounts
Add: Freight-In
302,000
(4,900)
(1,800)
—————-
295,300
5,000
——————-
Cost of Goods Available for Sale
Less; Merchandise Inventory, End
Cost of Goods Sold
470,400
(165,000)
——————
305,400
———————
167
Leather Plus
Income Statement
For the three-month period ended March 31, 2016
Gross Sales
500,000
Less: Sales Returns & Allow
(15,000)
Sales Discounts
Net Sales
Less: Cost of Goods Sold
Gross Profit
(7,800)
——————
477,200
305,400
——————
171,800
Less: Expenses
Supplies Expense
1,200
Salaries Expense
18,000
Rental Expense
5,000
Delivery Expense
2,100
Utilities Expense
8,000
——————
Total Expenses
34,300
——————
Net Income
137,500
—————-
168
CLOSING ENTRIES
500,000
Sales
15,000
Sales Returns & Allow
7,800
Sales Discounts
477,200
Income Summary
Income Summary
334,600
Purchase Returns & Allow
4,900
Purchase Discounts
1,800
Purchases
302,000
Freight-In
5,000
Supplies Expense
1,200
Salaries Expense
18,000
Rental Expense
5,000
Delivery Expense
2,100
Utilities Expense
8,000
Income Summary
170,100
170,100
Merchandise Inventory, Beg
Merchandise Inventory, End
165,000
165,000
Income Summary
169
137,500
Income Summary
137,500
Bravo, Capital
Practice Set 2
Canto Merchandising sells facsimile, copiers and other types of office equipment. Transactions during the month of September 2016 are as
follows:
Sept 1
Purchased five units of copiers on account from Machina Corp at a cost of PHP8,000 per unit. Payment is due 30 days after.
Borrowed from Nation Bank, PHP50,000 at 10% interest per annum due in three months . Canto issued a promissory note for this
borrowing.
Paid one –year insurance covering the period Sept 1, 2016 – August 31, 2017 for PHP24,000
Sept 2
Purchased 10 units of facsimile machines on cash from Tiktac Corp for a total price of PHP20,000.
Sept 7
Sold three units of copiers to Jane Nay on account for a total amount PHP45,000. The terms of the sale is 2/10, n 30.
Sept 10
Paid PHP5,600 for office supplies
Sept 14
Collected from Jane Nay the full amount relating to September 7 sales.
Sept 15
Paid PHP10,000 salaries of office staff
Sept 20
Sold on cash, two units of facsimile machines to Juan for PHP5,000
Sept 30
Purchased delivery truck worth PHP300,000 with an estimated useful life of 10 years with no residual value. Canto paid PHP200,000 cash
and balance payable 30 days after.
Instructions:
1.
Prepare journal entries to record the above transactions, assuming Canto uses periodic inventory system.
2.
Prepare necessary adjusting entries on September 30, 2016.
170
Sept 1
Purchases
40,000
Accounts Payable
Sept 1
40,000
Cash
50,000
Notes Payable
Sept 1
50,000
Insurance Expense
24,000
Cash
Sept 2
24,000
Purchases
20,000
Cash
Sept 7
20,000
Accounts Receivable
45,000
Sales
Sept 10
45,000
Supplies Expense
5,600
Cash
Sept 14
5,600
Cash
44,100
Sales Discount
900
Accounts Receivable
Sept 15
45,000
Salaries Expense
10,000
Cash
Sept 20
10,000
Cash
5,000
Sales
Sept 30
5,000
Transportation Equipment
300,000
Cash
200,000
171
Accounts Payable
100,000
Adjusting entries:
1. Prepaid Expense
22,000
Insurance Expense
22,000
Hint: learner may use Prepaid Insurance instead of Prepaid Expense . Expense should be PHP2,000 for September (PHP24,000/12months)
Alternative solution:
If the entry to record 9/1/16 was:
Prepaid Expenses
24,000
Cash
Adjusting entry should be:
24,000
Insurance Expense
2,000
Prepaid Expense
2,000
2. Accrual of interest on 9/1/16 borrowing:
Interest Expense
416.67
Accrued Expenses (Interest Payable)
Computation: PHP50,000 x 10% x 1/12; for one month only
172
416.67
Biographical Notes
JOSELITO G. FLORENDO
Team Leader
CHRISTOPHER B. HONORARIO
Writer
Mr. Joselito Florendo is Vice President for Planning and Finance
at the University of the Philippines System. He also serves as an
assistant professor of business courses at the Cesar E.A. Virata
School of Business in UP Diliman. He has served multiple duties
and responsibilities in the institution as a former Assistant Vice
President for Planning and Finance, Executive Director of the UP
Provident Fund, Director of the University’s Budget Office, Chief
Accountant of the University’s Accounting Office, Assistant
Executive Director of the UP Foundation, Director of UP Diliman’s
Business Concessions Office and Chair of the Department of
Accounting and Finance at the Virata School of Business.
Atty. Christopher Honorario is an Assistant Professor 5 under the
College of Management of the University of the Philippines Visayas. He specializes in the following subjects: Financial
Accounting, Managerial Accounting, Auditing and Design of
Accounting Information Systems. He graduated with a Bachelor
of Science in Accountancy at UP Visayas in1999 and then fulfilled
his Masters of Management in the same university in 2005.
Furthermore, he accomplished his Bachelor of Laws at the
University of Iloilo in 2012 and was admitted to the Bar two years
later. Atty Honorario also passed the Certified Public Accountant
Licensure Exam in the year 1999.
Vice President Florendo completed his International Master’s in
Small and Medium Enterprises in 2005 at the Asia-Europe
Institute of the University of Malaya in Kuala Lumpur, Malaysia
(with distinction). He obtained his Bachelor of Science in Business
Administration and Accountancy degree, cum laude, in 1992 at
University of the Philippines Diliman and ranked 15th in the May
1994 Certified Public Accountants Licensure Examination.
VP Florendo actively conducts seminars and workshops in
accounting and finance for various public and private, local and
international organizations. He was recently awarded the
Deloitte-FINEX Most Outstanding Finance Educator of the
Philippines for the year 2014-2015.
CARLSBERG S. ANDRES
Writer
Mr. Carlsberg Andres has been a College Professor at the
University of Santo Tomas since 2008. His education background
includes a Bachelor of Science in Accountancy from UST and a
Masters of Science in Finance from the University of the
Philippines - Diliman. Mr. Andres is proficient in multiple business
disciplines such as financial modelling, quantitative methods,
financial reporting & analysis, investment management, and
financial risk management to name a few. In addition to his
academic achievements, he also has experience using software
platforms such as Quickbooks, Peachtree, and Xero accounting
system.
ARTHUR P. BARRIDO, JR.
Writer
Prof. oArthur Barrido works as a professor of accounting and
finance at the College of Management in the University of the
Philippines Visayas. His areas of expertise include Financial
Accounting/Management Accounting, and Financial
Management/Investment Management. Prof. Barrido graduated
from UP Visayas with a Bachelor of Science in Business
Administration major in Accounting and Master of Management
Business Management. In addition, he became a Certificate
Public Accountant in 1988. He has been an integral member of
UP Visayas as a Faculty since 1993, Investment Officer since
2001, and Chairperson (Department of Accounting) since 2009.
DANIEL VINCENT H. BORJA, PH.D.
Technical Editor
Dr. Daniel Vincent Borja is Associate Professor at the Cesar E.A.
Virata School of Business, University of the Philippines Diliman.
He is currently the Chairperson of the Department of Accounting
and Finance and the Investment Officer of the University of the
Philippines System. He earned his Bachelor of Science in
Business Administration and Accountancy (cum laude), MS
Finance, MS Management and PhD in Business Administration
degrees from the University of the Philippines Diliman. He was an
EGIDE scholar of the French Embassy in Manila to Angers,
France. He was also part of the Asialink project on Banking and
Finance sponsored by the European Commission to do research
in Poitiers, France. Aside from teaching, Prof. Borja also conducts
training programs and seminars for various institutions in
industries such as banking, utilities, telecommunications,
property, hospitals, government institutions, and non-profit
organizations.
FERMIN J. VILLEGAS
Copyreader
Mr. Fermin Villegas worked as a Freelance Senior Copywriter for
Ogilvy and Manther Philippines. He has more than ten years of
extensive work experience as a copywriter for other companies
such as BCD Pinpoint Direct Marketing, Espresso DesignComm,
and Lowe Philippines. Mr. Villegas graduated from the University
of the Philippines Diliman with a degree in B.S. Chemistry and a
CTA on Theater Arts. He has also garnered multiple awards and
recognitions in the field of advertising, such as finalist for the
2002 Caples Awards, 3rd prize for the 2004 Caples Awards, Silver
for the 2006 Araw Values Awards, and Bronze for the 2009 Ad
Congress.