INTRODUCTION TO ACCOUNTING
d.
HISTORY OF ACCOUNTING
Year
Description
Ancient accounting records found in
2500 BC
civilizations of Egypt, Rome, Greece, and
Mesopotamia
Creation of alphabet with accounting to
1000 BC
facilitate barter between Phoenicians and
Egyptians
500 BC
Invention of Abacus
423 BC
Birth of Auditing
Businesses are required to keep
1200 - 1493
accounting records
Luca Pacioli wrote the book “Summa de
1494
arithmetica, geometria, proportioni et
proportionalita”
1500 - 1700
Financial and Managerial Accounting
1700 - 1900
Industrial revolution and the CPAs
1920 - 1940
US GAAP was developed
Accounting and technology; collaboration
1940 - PRESENT
among AICPA, FASB and SEC
Financial Accounting
Historical in Nature
Follows GAAP
Reports are Holistic
Reports are for General-Purpose
Focuses in Accounting and
Finance
Focuses in the process of
preparing the Financial
Statements
Precision
2.
Luca Pacioli
Is a Franciscan friar and a celebrated mathematician who is
generally associated with the double-entry bookkeeping.
HISTORY OF DEBIT AND CREDIT
Theory
Dr.
Debere
1st theory
To Owe
(Latin)
In Havere (Receive)
2nd theory
Debtor
(English)
Cr.
3.
Credere
To Entrust
In Dare (Give)
Creditor
DEFINITION OF ACCOUNTING
1. American Standards Council (ASC)
It is a service activity. Its function is to provide quantitative
information, primarily financial in nature, about economic
entities that is intended to be useful in making economic
decisions.
2. American Accounting Association (AAA)
It is the process of identifying, measuring and
communicating economic information to permit informed
judgements and decisions by users of the information.
3. American Institute of Certified Public Accountants (AICPA)
It is an art of recording, classifying, summarizing in a
significant manner and in terms of money, transactions,
and events which are, in part at least, of a financial
character, and interpreting the results thereof.
BRANCHES OF ACCOUNTING
1. Business Accounting (Enterprise or Commercial Accounting)
a. Financial Accounting
It is concerned with general purpose financial
statements.
b. Managerial Accounting
It refers to processing or preparation of special
purpose financial reports for management needs.
c. Cost Accounting
It is the branch of accounting which helps the
company in determining and exercising control over
the cost of the manufactured product or service by
the company.
Tax Accounting
It is based on the enacted tax laws. It includes the
preparation of tax returns and the consideration of
the tax consequences of business transactions.
4.
Managerial Accounting
Deals with the Future
Does not follow GAAP
Reports are Segmentized
Reports are for Management
use only
Multidisciplinary, also deals
with other areas of
Knowledge and Disciplines
Focuses in the usefulness of
preparing the Financial
Statements
Timeliness
Not-for-profit Accounting
a. Government Accounting
It is the process of analyzing, recording, classifying,
summarizing, and communicating all transactions
involving state funds and properties.
b. Institutional Accounting
It is the accounting for non-profit entities including
NGOs.
Auditing
a. External Auditing
It is the independent examination intended to
support the expression of an impartial expert opinion
on the fairness of the financial statements.
b. Internal Auditing
It is an independent, objective assurance and
consulting activity designed to add value and improve
an organization’s operations. It helps an organization
by bringing a systematic, disciplined approach to
evaluate and improve the effectiveness of risk
management, control, and governance processes.
c. Forensic Accounting
It is defined by Horty as the science that deals with
the relation and application of finance, accounting,
tax and auditing knowledge to analyze, investigate,
inquire, test and examine matters in civil law, criminal
law and jurisprudence in an attempt to obtain the
truth from which to render an expert opinion.
Fiduciary Accounting
a. Estate Accounting
It is the handling of accounts for fiduciaries who wind
up the affairs of a dead person.
b. Trust Accounting
It is the handling of accounts for fiduciaries who
determine that customer’s money are held for the
purpose contracted by the customer and its
management.
c. Receivership Accounting
It is the handling of accounts for a fiduciary appointed
to take charge of a financially unstable business
pending its disposition or the attainment of an
imposed objective.
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FINANCIAL ACCOUNTING VS FINANCIAL AUDITING
Financial Accounting
Financial Auditing
Facilitates the management
assertions on the financial
statements presentation based
on the Philippine Financial
Reporting Standards (PFRS).
Examines these compliant
financial statements with PFRS
using the Philippine Auditing
Standards (PSA).
In practice, it is observed that when financial accounting stops, then
financial auditing begins.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
Generally Accepted Accounting Principles
Are uniform set of accounting rules, procedures, practices and
standards that are followed in preparing the accountant’s
report (Financial Statements).
1.
2.
3.
4.
5.
Cost Principle
This principle requires that assets should be recorded at
original or acquisition cost.
Objectivity Principle
This principle requires that accounting records should be
based on reliable and verifiable data as evidence of
transactions.
Matching Principle
This is the combined concept of revenue recognition and
expense recognition principles. Revenue should be
recognized when earned and corresponding expense
should be recognized when incurred during the same
period as the revenue is earned.
Consistency Principle
This principle requires that accounting methods and
procedures should be applied on a uniform basis from
period to period to achieve comparability in the financial
statements.
Adequate Disclosure Principle
This principle requires that financial statements should be
free from any material misstatement; that if there is any,
proper disclosure should be made.
LIMITATIONS OF ACCOUNTING
o It permits alternative treatments.
o It does not provide timely information.
o It is designed to supply past information.
o It is influenced by personal judgement.
o It ignores important non-monetary information.
o It does not provide detailed analysis.
o It does not disclose the present value of the business.
FIELDS OF SPECIALIZATION IN THE ACCOUNTING PROFESSION
CPAs may choose in any of the four (4) sectors, namely:
1. Public Practice
CPAs are engaged in practicing their profession as
individual practitioner or those who joined an accounting/
auditing/ consulting firm who will provide services to the
general public for a fee.
SGV, P&A, KPMG, ISLA LIPANA, RT&Co, and the like.
2. Commerce and Industry
CPAs are employed in the private firms working as
controller, chief accountant, budget officer and such other
related jobs in the banks, manufacturing, merchandising,
and service entities.
BDO, NESTLÉ, P&G, SM, ISUZU, PAL, and the like.
3. Government
CPAs who work in government offices or public enterprise.
4.
COA, BIR, DBM, DOF, BOT, and the like.
Education
CPAs in the teaching profession including academic
administrators.
USC, UP, DLSU, UST, UE, and the like.
Philippine Institute of Certified Public Accountants (PICPA)
Is a duly recognized national professional organization of CPAs
in the Philippines.
It was in 1994 that PICPA entered into a Memorandum of
Agreement (MOA) with the four (4) sectoral organizations,
namely:
o Association of CPAs in Public Practice (ACPAPP)
o Association of CPAs in Commerce and Industry (ACPACI)
o Association of CPAs in Education (ACPAE)
o Government Association of CPAs (GACPA)
FORMS OF BUSINESS ORGANIZATION
1. Sole Proprietorship
It is the simplest form of business owned and managed by
only one person called sole proprietor.
That is why, the vast majority of small businesses begin
their existence as sole proprietorship.
2. Partnership
It is owned and operated by at least 2 or more persons
called partners who bind themselves to contribute money,
property, or industry to a common fund, with the intention
of dividing the profits among themselves.
3. Corporation
It is an artificial being created by the operation of law,
having the rights of succession and its powers, attributes,
and properties expressly authorized by law or incident to
its existence (sec. 2, corporation code).
The owner is called a stockholder or shareholder.
4. Cooperative
It is a duly registered association of persons, with a
common bond of interest, who have voluntarily joined
together to achieve a lawful common or social or
economic end, making equitable contributions to the
capital required and accepting fair share of the risks and
benefits of the undertaking in accordance with universally
accepted cooperative principles.
TYPES OF BUSINESS ACTIVITIES
1. Service
Service firms are those that perform services for a fee such
as consulting firms, law firms, hospitals, funeral parlors,
hotels, beauty salons, printing press and recruitment
agencies.
2. Merchandising
Merchandising firms (otherwise known as trading firms) are
those that will buy and sell merchandise or goods that are
in salable form to its customers such as car dealers,
department stores, hardware, drugstore, sari-sari store
and supermarkets.
3. Manufacturing
Manufacturing firms are those that buy raw materials,
convert them into finished products and then sell the
manufactured products to other companies or to its
individual customers such as paper mills, car
manufacturers, steel mills and soft drinks company.
4. Agri-Business
Is a large-scale business operation that involves the
production, processing, and distribution of agricultural
products and the manufacture of farm machinery,
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5.
6.
equipment and supplies. It is a business that earns most or
all of its revenues from agriculture.
It includes farming and contract farming, wholesale and
retail distribution of farm supplies and equipment as well
as agri-tourism farming.
Aqua-Culture (or Aqua-Farming)
Is the farming of aquatic organisms such as fish and
aquatic plants.
It includes fish farming, shrimp farming, oyster farming,
alga culture such as seaweed farming, and the cultivation
of ornamental fish.
Hybrid
Is the combination of more than one type of activity.
REGISTERING A BUSINESS NAME
Business Name
Is a name used in business transactions other than the real
names of persons and judicial entities.
When you put up a business, you must think about what you
want to call it. You cannot simply call your business any name
that appeals to you as there are rules and regulations to be
followed regarding the form and use of certain words and
phrases in business names.
There is a need to register business names with the Department
of Trade and Industry (DTI) to protect both the consumers and
business owners. This will enable you to identify the name and
address of the establishment as well as the identity of the
owner. Consumers are assured of fair trade transactions as they
are provided with a mechanism to trace essential information
about the firm and its owner.
Guidelines to Register
o Applicant should be at least 18 years old.
o Registration is good for five (5) years from the date of its
original registration, after which the registration should be
renewed.
o In the event of loss of the certificate of business name
registration, an affidavit of loss must be submitted.
o A business name once approved cannot be changed; otherwise
it will require a new registration.
o The business name can still be renewed within three (3) months
after the expiration date. Renewal made after this period shall
pay a surcharge.
o Failure to renew within the six (6) month period after the
expiration date will result to automatic cancellation of business
name from the database.
o An application to register the cancelled business name will be
considered as original and will be approved if there is no such
similar or confusingly similar name already registered.
R.A. 3883
The law governing the registration of business name
As amended by R.A. 41476 and R.A. 863
Otherwise known as Business Name Law
THE ACCOUNTING SETTING BODIES
Accounting Standards Council (ASC)
Was created by the Philippine Institute of Certified Public
Accountants (PICPA) in November 1981 to establish GAAP in the
Philippines.
Financial Reporting Standards Council (FRSC)
Is the successor of the Accounting Standards Council (ASC)
whose main function is to establish Generally Accepted
Accounting Principles (GAAP) in the Philippines.
-
FRSC was established by the Board of Accountancy (BOA) in
2006 under the implementing rules and regulations of the
Philippine Accountancy Act of 2004 (R.A. 9298).
The FRSC carries on the decision made by the ASC to converge
Philippine Accounting Standards (PAS) with standards issued by
the International Accounting Standards Board (IASB).
The FRSC consists of a chairman and members who are
appointed by BOA including representatives from BOA,
Securities and Exchange Commission (SEC), Bangko Sentral ng
Pilipinas (BSP), Financial Executives Institute of the Philippines
(FINEX), and PICPA. It is financially supported by PICPA
Foundation, INC.
IFRS and IFRIC
Since the Philippine Accounting Standards include international
accounting, FRSC monitors the technical activities of the IASB
and issues invitations to comment on exposure drafts of
proposed International Financial Reporting Standards (IFRS) and
International Financial Reporting Interpretations Committee
(IFRIC) of IASB.
When these IFRS and IFRIC are finalized, these will be issued as
Philippine Financial Reporting Standards (PFRS) and as
Philippines Interpretations Committee (PIC) respectively.
Philippines Interpretations Committee (PIC)
The role of PIC is to issue implementation guidance on PFRS.
FRSC appoints the PIC members which include accountants in
public practice, regulatory bodies, the academe, and users of
financial statements.
PIC was formed by FRSC in August 2006 which supersedes the
interpretation committee created by the ASC in 2000.
International Accounting Standards Board (IASB)
The IASB has the sole responsibility for setting International
Financial Reporting Standards (IFRS).
IASB is an independent accounting standard-setter based in
London, United Kingdom.
IASB’s parent entity is the International Accounting Standards
Committee (IASC) foundation, a non-for-profit corporation
incorporated in the state of Delaware, USA in March 2001.
IMPORTANCE OF ETHICS IN ACCOUNTING
Historical records show that accountants played important roles
in ancient civilizations, including making major contributions to
the development of writing, currency, and banking.
Although accurate financial record keeping is the primary
purpose of accounting, many people consider ethics in
accounting to be equally important.
Ethics play a vital role in accounting because of the trust a client
places with an accountant.
Ethics are important to any business, creating trust and
customer confidence.
Accountants should make decision without regard to their own
personal gain as the “heart of ethics” is considering the
interests of others.
Ethics
Are the standards of conduct by which one’s actions are judged
as right or wrong, honest or dishonest, fair or not fair.
Accounting Ethics
Refer to the ethical management of money, resources and
people.
PROBLEM OF ETHICS IN ACCOUNTING
Accounting is a career field where high ethics and morals are
important character traits for individuals. Poor accounting ethics can
lead companies into bankruptcy from improperly reported financial
information.
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1.
2.
3.
4.
5.
Fraud
Accountants with poor ethical standards may conduct
fraudulent activities, such as overbilling clients or delaying
vendor payments. Most fraud cases involve hiding cash for
internal purposes.
Embezzlement
Accountants may embezzle from their employers when
given too much responsibility and little oversight. These
situations give accountants more control than necessary
and the ability to mislead their employers on financial
information.
False Information
Some companies employ accountants who have the ability
to manipulate financial transactions into positive company
results.
Tax Evasion
Some accountants create illegal tax shelters to hide
company’s income. Companies use these shelters to evade
tax.
Personal Loss
Poor accounting ethics can cause great personal damage in
addition to business problems. Accountants found guilty of
manipulating financial information are sent to jail, creating
difficult situations for the accountant’s family members.
NATURE OF THE CONCEPTUAL FRAMEWORK
To eliminate a variety differences between International
Financial Reporting Standards and U.S. GAAP, they have agreed
to work jointly on the so called IASB-FASB convergence project
and entered into a Memorandum of Understanding on
convergence in 2002.
On September 28, 2010, they have completed the first phase of
their joint project to develop a common and an improved
conceptual framework.
Its objective is to create a sound foundation for future
accounting standards that are principle-based, internally
consistent and internationally converged.
The revised conceptual framework eventually replaced IASBFASB frameworks and result in a common basis for both
standard-setters, which eliminated the risk of reaching different
conclusions about similar or even identical issues and events.
Conceptual Framework
Sets out the concepts that underlie the preparation and
presentation of financial statements for external users.
IASB uses the conceptual framework to develop IFRS.
The conceptual framework focuses on the reporting entity,
elements of financial statements (including recognition and
derecognition), measurement, presentation and disclosure.
It is not a Philippine Financial Reporting Standards (PFRS) and
hence does not define standards for any particular
measurement or disclosure issue.
In those cases where there is a conflict, the requirements of the
PFRS prevail over those of the framework.
The framework is concerned with general purpose financial
statements including consolidated financial statements.
Special purpose financial reports, and computations prepared
for tax purposes are outside the scope of this framework.
It applies to the financial statements of all commercial,
industrial, and business reporting entities, whether in public or
in the private sectors.
PURPOSES OF THE CONCEPTUAL FRAMEWORK
o Assist the Financial Reporting Standards Council (FRSC) in the
development of future FRS and in its review of existing PAS.
o
o
o
o
Assist preparers of financial statements in applying PFRS and in
dealing with topics that have yet to form the subject of a PFRS.
Assist auditors in forming opinion as to whether financial
statements conform with PFRS.
Assist users of financial statements in interpreting the
information contained in financial statements prepared in
conformity with PFRS.
Provide those who are interested in work of FRSC with
information about its approach to the formulation of PFRS.
COMPONENTS OF THE REVISED CONCEPTUAL FRAMEWORK
The framework deals with:
o The objective of financial reporting
o The qualitative characteristics of useful information
o The reporting entity
o The definition, recognition, and measurement of the elements
from which financial statements are constructed
o Concepts of capital and capital maintenance
OBJECTIVE OF FINANCIAL REPORTING
The objective of general purpose financial reporting is to provide
financial information about the reporting entity that is useful to
existing and potential investors, lenders and other creditors in
making decisions about providing resources to the entity.
USERS OF ACCOUNTING INFORMATION
1. Investors
They need information to help them determine whether
they should buy, hold or sell. Stockholders are also
interested in information which enables them to assess
the ability of the enterprise to pay dividends.
2. Lenders
They are interested in information which enables them to
determine whether their loans and interest thereon will be
paid when due.
3. Suppliers and other Trade Creditors
These users are interested in information which enables
them to determine whether amounts owing to them will
be paid on maturity.
4. Employees
They are interested in information about the stability and
profitability of the enterprise. They are interested in
information which enables them to assess the ability of the
enterprise to provide remuneration, retirement benefits
and employment opportunities.
5. Customers
They have an interest in information about the
continuance of an enterprise especially when they have
long-term involvement with or are dependent on the
enterprise.
6. Government and their Agencies
These users require information to regulate the activities
of the enterprise, determine taxation policies and as a
basis for national income and similar statistics.
7. Public
Enterprises affect members of the public in a variety of
ways.
For example, enterprises make substantial contributions to
the local economy in many ways including the number of
people they employ and their patronage of local suppliers.
Financial statements may assist the public by providing
information about the trends and recent developments in
the prosperity of the enterprise and the range of its
activities.
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In reality, however, financial statements are strictly held confidential
among management, investors and government agencies, and
seldom that lenders and other trade creditors are being furnished
with copies.
d.
QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION
Qualitative Characteristics
Are the attributes that make the information provided in
financial statements useful to users.
The revised framework distinguishes between two (2) types of
qualitative characteristics that necessary to provide useful financial
information:
1.
2.
Fundamental Qualitative Characteristics
a. Relevance
To be useful, information must be relevant in which it
is capable of influencing the decisions of capital
providers by helping them evaluate past, present, or
future events or confirming, or correcting their past
evaluations.
b. Faithful Representation
It implies that financial information represents
faithfully the economic phenomenon that it purports
to represent or could reasonably be expected to
represent.
Financial information that faithfully represents
economic phenomenon has three (3) characteristics:
o Completeness
o Neutral
o Free From Errors
Prudence is the inclusion of a degree of caution in the
exercise of judgement needed in making the
estimates required under conditions of uncertainty,
such that assets or income are not overstated and
liabilities or expenses are not understated.
This is popularly known as Conservatism, where
alternatives exist, the alternative, which has the least
favorable effect on equity, should be chosen.
Enhancing Qualitative Characteristics
a. Comparability
It refers to the ability to identify similarities and
differences among items, both between different
periods within a set of financial statements and
across different reporting entities. Consistent
application of methods to prepare financial
statements help to achieve comparability.
Two types:
o Intra-comparability (horizontal comparability)
o Inter-comparability (dimensional comparability)
b. Timeliness
This means that the information must be available
when the users need it. However, rather than
stressing the balance between timely reporting and
reliable information, the revised framework refers
more broadly to timeliness as being able to influence
decision makers.
c. Understandability
It is the quality of information that enables users to
comprehend its meaning and likewise enables users
who have a reasonable knowledge of business and
economic and financial activities and financial
reporting, and who study with reasonable diligence to
comprehend the information.
Verifiability
It helps assure users that information represents
faithfully the economic phenomena that it purports
to represent. Financial information is verifiable when
it enables knowledge and independent observers to
research a consensus on whether a particular
depiction of an event or transaction is a faithful
representation.
BASIC ACCOUNTING ASSUMPTIONS
Accounting Assumption
Is a basic notion that serves as the understructure of accounting
in order to prevent misunderstanding of the use of the financial
statements.
1.
2.
3.
4.
5.
Going Concern
It is an underlying assumption. Thus, the financial
statements presume that an entity will continue in
operation indefinitely or, if that presumption is not valid,
disclosure and a different basis of reporting are required.
Accounting Entity (Separate Entity)
This assumes that from the accounting point of view, the
business is considered as an entity that is separate and
distinct from the owner or management.
Time-Period
This assumes that the life of the business is divided into
equal periods wherein at the end of each period, financial
statements are prepared.
This explains why financial statements are prepared and
communicated to the owner of the business or various
users/ decision-makers periodically. It can be a period of:
o 1 month (monthly basis)
o 3 months (quarterly basis)
o 6 months (semi-annual basis)
o 12 months (annual basis)
Annual accounting periods:
a. Calendar year
Jan. 1 to Dec. 31
b. Fiscal year
st
The period will begin on the 1 day of any month
of the year except January and will end on the
last day of the twelfth month completing the
one year period.
c. Natural Business year
It is a twelve-month period that ends on any
month when the business month is at the lowest
or experiencing slack season.
Unit of Measure
This assumes that the quantitative information is
expressed in numbers and in terms of money.
Accrual Basis
This assumes that an income is earned regardless of when
cash is received; and an expense is incurred regardless of
when cash is paid.
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ELEMENTS OF FINANCIAL STATEMENTS
Financial statements portray the financial effects of transactions and
other events by grouping them into broad classes according to their
economic characteristics:
1. Financial Position
The elements directly related to the measurement of financial
position:
a. Assets
These are the resources controlled by the entity as a
result of past events and from which future economic
benefits are expected to flow to the entity.
b. Liabilities
These are the financial obligations of an entity arising
from past events, the settlement of which is expected
to result in an outflow from the entity of resources
embodying economic benefits.
c. Equity or Capital
It is the residual interest in the assets of an entity
after deducting all its liabilities. In other words,
whatever is left, that belongs to the owner of a
business.
2. Financial Performance
The elements directly related to the measurement of financial
performance:
a. Income
It is the increase in economic benefit during the
accounting period in the form of inflow or increase in
asset or decrease in liability that results in increase in
equity, other than contribution from equity
participants.
b. Expense
It is the decrease in economic benefit during the
accounting period in the form of outflow or decrease
in asset or increase in liability that results in decrease
in equity, other than distribution to equity
participants.
Recognition of Expense
Expense is recognized in the income statement when the
decrease in the future economic benefit related to a decrease
in asset or an increase in liability has arisen and can be
measured reliably.
Expense Recognition Principle Include:
a. Matching Principle
Expense is recognized in the income statement on the
basis of a direct association between costs incurred
and the earning of specific items of income.
b. Systematic and Rational Allocation
Expense is recognized in the income statement when
economic benefits are expected to arise over several
accounting periods and the association with income
can be broadly or indirectly determined.
c. Immediate Recognition
Expense is recognized immediately in the income
statement when expenditure produces no future
economic benefits or when, and to the extent that,
future economic benefits do not qualify, or cease to
qualify, for recognition in the statement of financial
position as an asset.
MEASUREMENT OF ELEMENTS OF FINANCIAL STATEMENTS
Measurement
Is the process of determining or assigning monetary amounts at
which the elements of the financial statements are to be
recognized and reported.
RECOGNITION OF ELEMENTS OF FINANCIAL STATEMENTS
Recognition
Is the process of incorporating in the statement of financial
position or income statement an item that meets the definition
of an element and satisfies the criteria for recognition.
An item that meets the definition of an element should be
recognized if:
o It is probable that any future economic benefit associated with
the item will flow to or from the entity; and
o The item has a cost or value that can be measured reliably.
Recognition of Asset
An asset is recognized in the statement of financial position
when it is probable that the future economic benefit will flow to
the entity and the asset has a cost or value that can be
measured reliably.
Recognition of Liability
A liability is recognized in the statement of financial position
when it is probable than an outflow of resources embodying
economic benefits will result from the settlement of a present
obligation and the amount at which the settlement will take
place can be measured reliably.
Recognition of Income
Income is recognized in the income statement when the
increase in the future economic benefit related to an increase
in asset or decrease in liability has arisen and can be measured
reliably.
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ACCOUNTING EQUATION AND THE DOUBLE ENTRY SYSTEM
Assets = Liabilities + Equity
Debit
Value received
Left-hand side
Service
Income
Credit
Value parted with
Right-hand side
Merchandising
Sales
Cost of Goods Sold
Operating Expenses
Expense
Cash
Normal Balance = Increases the value of an account
Unrestricted
Current Asset
Restricted
Non-Current Asset
Assets
Accrued Income
(Receivables)
Deferred Expenses
(Prepaid Expenses)
Liabilities
Accrued Expenses
(Payables)
Deferred Income
(Unearned Income)
T-Account
Assets
Expenses
Drawings
Liabilities
Equity/Capital
Contra-Assets
Income
= Real/Permanent Accounts
= Nominal/Temporary Accounts
TRANSACTION ANALYSIS OF A SERVICE ENTITY
Asset
Liability
Equity
↑
NE
↑
↑↓
↑
NE
1.
Cash investment by owner
2.
Purchase of equipment with downpayment; balance on account
3.
Payment of monthly rental
↓
NE
↓
4.
Received a bill for news advertisement
NE
↑
↓
5.
Paid the annual insurance premium in advance
↑↓
NE
NE
6.
Purchased laundry supplies on account
↑
↑
NE
7.
Payment of wages
↓
NE
↓
8.
Rendered laundry services with downpayment
↑
NE
↑
9.
Partial payment of accounts
↓
↓
NE
10. Received cash in advance for laundry services not yet rendered
↑
↑
NE
11. Payment of electricity
↓
NE
↓
12. Withdrawn cash for personal use
↓
NE
↓
13. Rendered laundry services for cash
↑
NE
↑
14. Payment of telephone bill
↓
NE
↓
15. Payment of wages at month-end
↓
NE
↓
16. Rendered laundry services on account
↑
NE
↑
↑↓
NE
NE
17. Collected previously billed account from customers
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RECORDING OF BUSINESS TRANSACTIONS
DATE COLUMN
ENTRY COLUMN
POST REFERENCE/FOLIO
2018
Particulars
PR
Jan
1
Cash
M. Pacto, Capital
Initial cash investment
DEBIT
110
CREDIT
310
MONEY COLUMN
Debit
1
0
0
0
Credit
0
0
1
0
0
0
0
0
-
3
0
0
0
0
-
5
0
0
0
-
EXPLANATION
Office Equipment
150
Accounts Payable
3
0
0
0
0
-
210
Purchased computer on account
4
Supplies
140
Cash
5
0
0
0
-
110
Purchased supplies for cash
The Book of Original Entry = 2-column General Journal
2 or more debits, 1 credit
1 debit, 2 or more credits
2 or more debits, 2 or more credits
Simple Journal Entry = 1 debit, 1 credit
Compound Journal Entry
POSTING TO LEDGER
Cash
2017
May
Particulars
PR
Debit
Account No. 110
2017
17
Collection from
charged customers
GJ1
6
1 8
0 0
-
30
Services rendered
GJ1
3
9 0
0 0
-
May
26
29
31
31
Total
Balance
1 0
0 8
0 0
-
4
4 0
0 0
-
Particulars
Payment of
supplies
Payment of
salaries
Payment of gas
and oil
Withdrawal
PR
Credit
GJ1
8
8 0
0 -
GJ1
2 1
0 0
0 -
GJ1
1 2
5 0
0 -
GJ2
1 4
5 0
0 -
5 6
8 0
0 -
Total
Accounts Receivable
May
31
Services rendered
GJ2
4
5 0
0 0
-
May
Account No. 120
17
Collection from
charged customers
Balance
GJ1
6 1
8 0
0 -
1 6
8 0
0 -
The Book of Final Entry = 2-column General Ledger
©knpt
3-COLUMN GENERAL LEDGER
Cash
2017
May
Particulars
Account No. 110
PR
Debit
Credit
61 800 -
Balance
17
Collection from charged customers
GJ1
61 000 -
26
Payment of supplies
GJ1
8 800 -
53 000 -
29
Payment of salaries
GJ1
21 000 -
32 000 -
30
Services rendered
GJ1
31
Payment of gas and oil
GJ1
12 000 -
58 500 -
31
Withdrawal
GJ2
14 000 -
44 000 -
39 000 -
71 000 -
4-COLUMN GENERAL LEDGER
Cash
2017
May
Particulars
PR
Debit
61 800 -
Credit
Debit
17
Collection from charged customers
GJ1
26
Payment of supplies
GJ1
8 800 -
53 000 -
29
Payment of salaries
GJ1
21 000 -
32 000 -
30
Services rendered
GJ1
31
Payment of gas and oil
GJ1
12 000 -
58 500 -
31
Withdrawal
GJ2
14 000 -
44 000 -
Credit
61 000 -
39 000 -
71 000 -
UNADJUSTED TRIAL BALANCE
WORD PROBLEMS
Violeta Pitular Delivery Services
Trial Balance
May 31, 2017
Services rendered for the month of May is P250,000, 80% of which is
rendered on account.
Debit
Cash
Office Equipment
P 16 800 52 500 -
Accounts Payable
27 000 -
Pitular, Capital
52 500 -
Pitular, Withdrawals
14 500 -
Delivery Revenues
84 000 -
Salaries Expense
21 000 -
Gas and Oil Expense
12 500 -
Repair Expense
Advertising Expense
Supplies Expense
Accounts Receivable, April 30
Accounts Receivable, May 31
Payment to suppliers in May
Accounts Payable, May 1
Accounts Payable, May 31
Credit
P 44 000 -
Accounts Receivable
Total
Account No. 110
8 500 18 500 8 800 P 180 300 -
P 180 300 -
1.
2.
P 100,000
125,000
300,000
180,000
80,000
How much total cash is collected from customers? P225,000
How much expense is incurred on account? P200,000
During the month of March, Cora Tan deposited P1,000,000 in
Metrobank to start-up her auditing firm. She purchased P200,000
worth of equipment, 25% of which is paid thru cash and the balance
on account. She paid her monthly rental amounting to P30,000. She
also paid her utility bills and her employees amounting to P15,000
and P125,000 respectively. She rendered services to various clients
amounted to P200,000 and received a check worth P150,000. She
withdrew cash P20,000 for her personal use.
1.
2.
3.
4.
5.
How much is the cash balance at the end of March? P910,000
How much is the total assets? P1,160,000
How much is the net profit or (loss) during the month? P30,000
How much is the ending capital? P1,010,000
How much is the total debit/credit? P1,350,000
ADDITIONAL INFO:
Transposition Error
Slide Error
89 to 98
25250 to
2525, 25.25, 2.525
©knpt
ACCOUNTING EQUATION AND THE DOUBLE-ENTRY SYSTEM
Cash in Bank
Insurance Expense
Supplies Expense
Accounts Payable
Interest Income
Equipment
Notes Payable (18 months)
Rambo Tan, Drawings
Building
Unearned Rent Revenue
Trademark
Advertising Expense
Gas and Oil
Land
Notes Receivable (11 months)
Salaries Expense
Service Income
Prepaid Insurance
Franchise
Unused Supplies
Advances to Employees
P
400,000
5,000
4,000
540,000
10,000
750,000
1,120,000
317,000
4,500,000
12,000
25,000
130,000
14,000
1,000,000
16,000
150,000
800,000
13,000
60,000
5,000
7,000
Repairs and Maintenance
Accumulated Depreciation
Furniture and Fixture
Accrued Salaries Expense
Cash on Hand
Copyright
Bad Debts
Other Income
Advances from Customers
Goodwill
Accrued Interest Income
Utilities Expense
Taxes and Licenses
Accounts Receivable
Petty Cash Fund
Allowance for Doubtful Accounts
Depreciation Expense
Cash Equivalent
Mortgage Payable
Patent
P
8,000
220,000
250,000
20,000
100,000
70,000
10,000
500,000
15,000
100,000
10,000
44,000
130,000
250,000
80,000
60,000
22,000
90,000
2,500,000
100,000
Compute for the following:
1. Total cash P670,000
2. Total prepaid expenses P18,000
3. Total property, plant and equipment P6,280,000
4. Total intangible assets P355,000
5. Total contra-assets P280,000
6. Total current assets P911,000
7. Total non-current assets P6,635,000
8. Total assets P7,546,000
9. Total current liabilities P587,000
10. Total non-current liabilities P3,620,000
11. Total liabilities P4,207,000
12. Owner’s equity, ending P3,339,000
13. Total income P1,310,000
14. Total expenses P517,000
15. Net profit/or loss P793,000
16. Owner’s equity, beginning P2,863,000
17. Total debit/credit P8,660,000
“The expert in anything was once a beginner.”
@jddcpa
ADJUSTING ENTRIES
ACCRUALS
1. Accrued Income
On July 31, Anne Tozon rendered a service to a client and issued
a bill amounting to P5,000. What would be the adjusting entry
on July 31?
AJE:
2.
July 31
Accounts Receivable
Service Revenue
DEPRECIATION
On January 1, 2018, Whiley Go bought a computer to be used in his
accounting firm amounting to P55,000. The salvage value of the
computer is P5,000. What would be the adjusting entry on December
31, 2018 if the estimated useful life is 5 years?
1.
Annual
Depreciation
P 5,000
P 5,000
July 31
Salaries Expense
Salaries Payable
P 800
P 800
OJE:
July 4
AJE:
Nov. 30
b.
2.
2.
Asset Method (Unexpired to Expired)
Prepaid Insurance
Cash
P 1,800
P 1,800
Insurance Expense
Prepaid Insurance
P 750
P 750
July 4
AJE:
Nov. 30
Insurance Expense
Cash
P 1,800
P 1,800
Prepaid Insurance
Insurance Expense
P 1,050
P 1,050
Pre-Collection (Unearned Income/Deferred income)
On July 1, the business received P15,000 from a tenant
representing an advance rental for 3 months effective July 1.
What would be the adjusting journal entry on August 31 based
on the following methods?
a.
OJE:
July 1
AJE:
Aug. 31
b.
3.
Cash
Unearned Rent
P 15,000
P 15,000
Unearned Rent
Rent Income
P 10,000
P 10,000
1
Estimated Useful Life
= Original cost – Accumulated Depreciation
Dec. 31
Depreciation Expense
Accumulated Depreciation
P 10,000
P 10,000
) or 1 + 2 + 3 + … + n
SYD
=
n(
Annual
Depreciation
=
Depreciable Cost x
Dec. 31
Remaining Useful Life
SYD
Depreciation Expense
Accumulated Depreciation
P 16,666.67
P 16,666.67
Double Declining Method
Annual
Depreciation
Rate
=
Annual
Depreciation
=
1
Estimated Useful Life
x2
Book Value (at the beginning)
x
Annual Depreciation Rate
*disregard Salvage Value*
AJE:
Liability Method (Unearned to Earned)
=
Annual Depreciation
Depreciable Cost
Sum-of-the-Years’ Digits (SYD)
AJE:
Expense Method (Expired to Unexpired)
OJE:
= Original Cost – Salvage Value
Net Book
Value
AJE:
Original Cost – Salvage Value
Estimated Useful Life
Depreciable Cost x Annual Depreciation Rate
Annual
Depreciation
Rate
DEFERRALS
1. Pre-Payment (Prepaid expense/Deferred expense)
On July 4, the business paid P1,800 for a one-year insurance
policy effective July 1. What would be the adjusting entry on
November 30 based on the following methods?
a.
=
Depreciable
Cost
Accrued Expense
The employees receive salaries every Friday for a five-day work
week, P2,000. The last payday was July 27, Friday. What would
be the adjusting entry on July 31?
AJE:
Straight-line Method
Dec. 31
Depreciation Expense
Accumulated Depreciation
P 22,000
P 22,000
Income Method (Earned to Unearned)
OJE:
July 1
AJE:
Aug. 31
Cash
Rent Income
P 15,000
P 15,000
Rent Income
Unearned Rent
P 5,000
P 5,000
©knpt
STRAIGHT-LINE METHOD
Original Cost
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
P 55,000
P 55,000
P 55,000
P 55,000
P 55,000
P 55,000
(0)
(10,000)
(20,000)
(30,000)
(40,000)
(50,000)
P 55,000
P 45,000
P 35,000
P 25,000
P 15,000
P 5,000
Accumulated Depreciation
Net Book Value
Salvage Value
SUM-OF-THE-YEARS’ DIGITS (SYD)
Depreciation Expense
NBV
Dec 31, 2018
Year 1
P 50,000 x
=
P 16,666.67
P 38,333.33
Dec 31, 2019
Year 2
P 50,000 x
=
P 13,333.33
P 25,000.00
Dec 31, 2020
Year 3
P 50,000 x
=
P 10,000.00
P 15,000.00
Dec 31, 2021
Year 4
P 50,000 x
=
P 6,666.67
P 8,333.33
Dec 31, 2022
Year 5
P 50,000 x
=
P 3,333.33
P 5,000.00
Salvage Value
P 50,000.00
DOUBLE DECLINING METHOD
Depreciation Expense
NBV
Dec 31, 2018
Year 1
P 50,000 x =
P 22,000
P 33,000
Dec 31, 2019
Year 2
P 33,000 x =
P 13,200
P 19,800
Dec 31, 2020
Year 3
P 19,800 x =
P 7,920
P 11,880
Dec 31, 2021
Year 4
P 11,880 x =
P 4,752
P 7,128
Dec 31, 2022
Year 5
P 7,128
P 2,128
P 5,000
Salvage Value
P 50,000
DISPOSAL OF A FIXED ASSET
No Salvage Value
1.
Accumulated Depreciation
Office Equipment
To dispose fully-depreciated fixed asset
Sell at above book value, P6,000
P 55,000
P 55,000
3.
Sell at Book Value
2.
Cash
Accumulated Depreciation
Office Equipment
To record sale of fixed asset at book
value
P 5,000
P 50,000
P 55,000
Cash
Accumulated Depreciation
Office Equipment
Gain on sale of Equipment
To record sale of fixed asset at above
book value
P 6,000
P 50,000
P 55,000
P 1,000
Sell at below book value, P4,000
4.
Cash
Accumulated Depreciation
Loss on sale of equipment
Office Equipment
To record sale of fixed asset at below
book value
P 4,000
P 50,000
P 1,000
P 55,000
©knpt
PERIODIC VS PERPETUAL INVENTORY SYSTEM
Periodic
Perpetual
1.
Cash purchases
Purchases
Cash
xx
xx
Merchandise Inventory
Cash
xx
xx
2.
Credit purchases
Purchases
Accounts Payable
xx
xx
Merchandise Inventory
Accounts Payable
xx
xx
3.
Freight on merchandise bought and
paid
Freight-in
Cash
xx
xx
Merchandise Inventory
Cash
xx
xx
4.
Returned merchandise bought
(non-replacement)
Cash/Accounts Payable
Purchase Returns and Allowances
5.
Paid merchandise bought within a
discount period
Accounts Payable
Cash
Purchase Discounts
6.
Cash sales
7.
Credit sales
8.
Received returned merchandise by
customer
9.
Collected cash from merchandise sold
within a discount period
10. Freight on merchandise sold and paid
Cash/Accounts Payable
Merchandise Inventory
xx
xx
xx
xx
xx
Accounts Payable
Cash
Merchandise Inventory
xx
xx
xx
Cash
Sales
xx
xx
Cash
Sales
Cost of Goods Sold
Merchandise Inventory
xx
xx
xx
xx
Accounts Receivable
Sales
xx
xx
Accounts Receivable
Sales
Cost of Goods Sold
Merchandise Inventory
xx
xx
xx
xx
Sales Returns and Allowances
Cash/Accounts Receivable
Merchandise Inventory
Cost of Goods Sold
xx
xx
xx
xx
Sales Returns and Allowances
Cash/Accounts Receivable
xx
xx
xx
xx
Cash
Sales Discounts
Accounts Receivable
xx
xx
xx
Cash
Sales Discounts
Accounts Receivable
Freight out
Cash
xx
xx
Freight out
Cash
xx
xx
xx
xx
xx
ADDITIONAL INFO:
Trade Discounts
Purchase Discounts
Cash Discounts
Sales Discounts
Not recorded in the books
Discounts recorded by the buyer
Discounts recorded by the seller
©knpt
MERCHANDISING WORD PROBLEM
Back to Reality Merchandising bought merchandise from Wala na Tay Mahems Enterprise amounting to P200,000 on June 3, 2018. Mark up rate was
20% based on selling price. Term: 2/10 n/30. The buyer paid the freight amounting to P5,000. Back to Reality returned defective merchandise worth
P10,000. It paid the merchandise in full on June 13, 2018. Prepare journal entries for both the buyer and seller using the periodic and perpetual
inventory systems.
BACK TO REALITY MERCHANDISING
Periodic
Perpetual
1.
Credit purchases
Purchases
Accounts Payable
P 200,000
P 200,000
Merchandise Inventory
Accounts Payable
P 200,000
P 200,000
2.
Freight on merchandise bought
and paid
Freight-in
Cash
P 5,000
P 5,000
Merchandise Inventory
Cash
P 5,000
P 5,000
3.
Returned merchandise bought on
account
Accounts Payable
Purchase Returns and Allowances
4.
Paid merchandise bought within a
discount period
Accounts Payable
Cash
Purchase Discounts
WALA NA TAY MAHEMS ENTERPRISE
Credit sales
2.
Received returned merchandise
by customer
3.
Collected cash from merchandise
sold within a discount period
4.
Freight on merchandise sold and
paid
P 190,000
P 186,200
P 3,800
Accounts Payable
Merchandise Inventory
P 10,000
P 10,000
Accounts Payable
Cash
Merchandise Inventory
P 190,000
P 186,200
P 3,800
Periodic
Accounts Receivable
Sales
1.
P 10,000
P 10,000
Perpetual
P 200,000
P 200,000
Sales Returns and Allowances
Accounts Receivable
Cash
Sales Discounts
Accounts Receivable
P 10,000
P 10,000
P 186,200
P 3,800
P 190,000
Accounts Receivable
Sales
Cost of Goods Sold
Merchandise Inventory
P 200,000
P 200,000
P 160,000
P 160,000
Sales Returns and Allowances
Accounts Receivable
Merchandise Inventory
Cost of Goods Sold
Cash
Sales Discounts
Accounts Receivable
NO ENTRY
P 10,000
P 10,000
P 8,000
P 8,000
P 186,200
P 3,800
P 190,000
NO ENTRY
MERCHANDISING PROBLEM
Purchases
Sales Returns and Allowances
Sales Discounts
Freight out
Freight-in
Purchase Returns and Allowances
Purchase Discounts
Merchandise Inventory 12/31/17
Sales
Rent Expense
Supplies Expense
Merchandise Inventory 12/31/18
Taxes and Licenses
P 400,000
5,000
4,000
8,000
6,000
10,000
7,000
100,000
600,000
130,000
20,000
85,000
40,000
Compute for the following:
1.
2.
3.
4.
5.
6.
7.
Net Purchases P389,000
Cost of Goods Available for Sale P489,000
Cost of Goods Sold P404,000
Net Sales P591,000
Gross Profit P187,000
Operating Expenses P198,000
Net Profit/(Loss) (P11,000)
©knpt
ACCOUNTING FOR FREIGHT
Seller’s Book
FOB Shipping Point, Freight Collect
Buyer’s Book
NO ENTRY
FOB Shipping Point, Freight Prepaid
Accounts Receivable
Cash
xx
xx
FOB Destination, Freight Prepaid
Freight out
Cash
xx
xx
FOB Destination, Freight Collect
Freight out
Accounts Receivable
xx
xx
FOB Shipping Point
FOB Destination
Freight Collect
Freight Prepaid
Freight-in
Cash
xx
xx
Freight-in
Accounts Payable
xx
xx
NO ENTRY
Accounts Payable
Cash
xx
xx
Responsibility of the buyer to pay for the freight
Responsibility of the seller to pay for the freight
Actually paid by buyer
Actually paid by seller
FOB Shipping Point
FOB Destination
Transfer of Ownership
Upon Shipment
Upon Arrival
©knpt
ADJUSTING ENTRIES (CONT’D)
ESTIMATED UNCOLLECTIBLE ACCOUNTS
Direct Method
Accounts Receivable
Sales
To record sales on account
Accounts Receivable
Cash
To record sales on account
xx
xx
Doubtful Accounts Expense
Allowance for Doubtful Accounts
To record uncollectible account
xx
xx
xx
xx
Allowance for Doubtful Accounts
Accounts Receivable
To write-off customer’s account
xx
xx
Account is recovered
Accounts Receivable
Doubtful Accounts Expense
To record recovery of previously
written-off account
xx
xx
Accounts Receivable
Doubtful Accounts Expense
To record recovery of previously
written-off account
xx
xx
Account is collected
Cash
Accounts Receivable
To record collection of customer’s
account
xx
xx
Cash
Accounts Receivable
To record collection of customer’s
account
xx
xx
1.
Make credit sales
2.
Account is doubtful
3.
Account is worthless
Doubtful Accounts Expense
Accounts Receivable
To write-off customer’s account
4.
5.
Allowance Method
xx
xx
NO ENTRY
WORD PROBLEMS
Allowance for Doubtful Accounts
EB 5,400 BB
3,000
AJE
2,400
The following December 31 data were obtained from the books
before adjustment was made:
Debit
Accounts Receivable
Allowance for Doubtful Accounts
Sales
Sales Returns and Allowances
Credit
Accounts Receivable
Allowance for Doubtful Accounts, end
Net Realizable Value
P 100,000
P 3,000
500,000
20,000
Percentage of Receivable Method
Prepare the adjusting journal entry for estimated uncollectible
accounts under each of the following independent assumptions and
compute the net realizable value:
a. ½ of 1% of net sales will probably be uncollected
b. 5% of outstanding accounts are doubtful
Accounts Receivable
Allowance for Doubtful Accounts, end
Doubtful Accounts Expense
AJE:
Doubtful Accounts Expense
Allowance for Doubtful Accounts
P 100,000
x 0.05
P 5,000
Allowance for Doubtful Accounts
EB 5,000 BB
3,000
AJE
2,000
Percentage of Sales Method
Sales
Sales Returns and Allowances
Net Sales
P 100,000
(5,400)
P 94,600
P 500,000
(20,000)
P 480,000
X 0.005
P 2,400
P 2,400
P 2,400
AJE:
Doubtful Accounts Expense
Allowance for Doubtful Accounts
Accounts Receivable
Allowance for Doubtful Accounts, end
Net Realizable Value
P 2,000
P 2,000
P 100,000
(5,000)
P 95,000
©knpt
WORD PROBLEMS (CONT’D)
The Accounts Receivable clerk of Tronix Company prepared the following aging-of-receivables schedule as of the end of business on November 30.
Days Past Due
Customer
A
B
C
D
Total
Balance
P 100,000
50,000
80,000
70,000
P 300,000
Not Past Due
1 – 30
Tronix company has a history record of uncollectible accounts as
shown below.
Not Past Due
1 – 30
31 – 60
61 – 90
Over 90
31 – 60
a.
Over 90
Determine the number of days past due for each customer’s
account:
Percentage of Uncollectibility
2%
4%
10%
20%
40%
Customer
A
B
C
D
b.
61 – 90
Due Date
August 24
September 3
October 17
November 5
# of Days
98 days
88 days
44 days
25 days
Complete the aging-of-receivables schedule.
Days Past Due
c.
Customer
A
B
C
D
Total
Balance
P 100,000
50,000
80,000
70,000
P 300,000
ADA, end
P 60,800
Not Past Due
1 – 30
31 – 60
61 – 90
Over 90
P 100,000
P 50,000
P 80,000
-
P 70,000
P 70,000
x 0.04
P 2,800
P 80,000
x 0.10
P 8,000
P 50,000
x 0.20
P 10,000
P 100,000
x 0.40
P 40,000
Assume that the allowance for doubtful accounts for Tronix Company has credit balance P50,000 before adjustment on November 30.
Journalize the adjusting journal entry for uncollectible accounts as of November 30 and compute the net realizable value.
Allowance for Doubtful Accounts
EB 60,800 BB
50,000
AJE
10,800
AJE:
Doubtful Accounts Expense
Allowance for Doubtful Accounts
Accounts Receivable
Allowance for Doubtful Accounts, end
Net Realizable Value
P 10,800
P 10,800
P 300,000
(60,800)
P 239,200
©knpt
CLOSING JOURNAL ENTRIES
1.
2.
3.
4.
Computer-Aided Design Service Revenues
Income Summary
To close income account
P 1,470,000
Income Summary
Salaries Expense
Insurance Expense
Supplies Expense
Depreciation Expense – Building
Depreciation Expense – Computer Equipment
Interest Expense
To close expense accounts
P 1,022,000
P 1,470,000
P 847,000
P 12,000
P 53,000
P 15,000
P 18,000
P 77,000
Income Summary
Tejero, Capital
Net Profit for the year
P 448,000
Tejero, Capital
Tejero, Withdrawals
To close drawings to capital
P 250,000
P 448,000
P 250,000
POST-CLOSING TRIAL BALANCE
Debit
Cash
P 72,000
Accounts Receivable
331,000
Prepaid Insurance
36,000
Supplies
72,000
Land
170,000
Building
850,000
Accumulated Depreciation – Building
Computer Equipment
Credit
P 245,000
620,000
Accumulated Depreciation – Computer Equipt.
124,000
Notes Payable
550,000
Accounts Payable
143,000
Salaries Payable
34,000
Interest Payable
77,000
Mortgage Payable
470,000
Tejero, Capital – Dec. 31, 2016
508,000
Total
P 2,151,000
P 2,151,000
©knpt
REVERSING JOURNAL ENTRIES
Accrued Income
During the month of December, only P20,000 out of the agreed monthly rental of P50,000 was collected on December 23. An adjusting entry was
made on December 31, 2017 for the uncollected rental of P30,000. On January 18, 2018, the accrued rental of P30,000 and the January rental were
received.
Without Reversing Entry
With Reversing Entry
Original Journal Entry
(December 23,2017)
Cash
Rent Revenue
P 20,000
P 20,000
Cash
Rent Revenue
P 20,000
P 20,000
Adjusting Journal Entry
(December 31, 2017)
Rent Receivable
Rent Revenue
P 30,000
P 30,000
Rent Receivable
Rent Revenue
P 30,000
P 30,000
Rent Revenue
Income Summary
P 50,000
P 50,000
Rent Revenue
Income Summary
P 50,000
P 50,000
Rent Revenue
Rent Receivable
P 30,000
P 30,000
Cash
Rent Revenue
P 80,000
P 80,000
Closing Journal Entry
(December 31,2017)
Reversing Journal Entry
(January 1, 2018)
January 18, 2018
NO ENTRY
Cash
Rent Receivable
Rent Revenue
P 80,000
P 30,000
P 50,000
Accrued Expense
On December 31, 2017, the end of the accounting period, the company has accrued taxes amounting to P1,500. On January 30, 201 8, taxes
amounting to P2,000 are paid, the accrual being included in this amount.
Without Reversing Entry
Adjusting Journal Entry
(December 31, 2017)
Closing Journal Entry
(December 31,2017)
Tax Expense
Tax Payable
P 1,500
P 1,500
Tax Expense
Tax Payable
P 1,500
P 1,500
Income Summary
Tax Expense
P 1,500
P 1,500
Income Summary
Tax Expense
P 1,500
P 1,500
Tax Payable
Tax Expense
P 1,500
P 1,500
Tax Expense
Cash
P 2,000
P 2,000
Reversing Journal Entry
(January 1, 2018)
January 30, 2018
With Reversing Entry
NO ENTRY
Tax Payable
Tax Expense
Cash
P 1,500
P 500
P 2,000
©knpt
REVERSING JOURNAL ENTRIES (CONT’D)
VALUE-ADDED TAX
Expense Method
Kaya Pa Company paid P120,000 for a one-year insurance premium
on September 1, 2017. An expense was originally debited. The
company prepared an adjusting journal entry on December 31, 2017.
As Buyer
Purchase Price = P112,000 (inclusive of VAT)
B=
P
R
P112,000
1.12
=
= P 100,000 (Purchases)
Reversing Entry
Original Journal Entry
(September 1, 2017)
Insurance Expense
Cash
P 120,000
P 120,000
Adjusting Journal Entry
(December 31,2017)
Prepaid Insurance
Insurance Expense
P 80,000
P 80,000
Closing Journal Entry
(December 31, 2017)
Income Summary
Insurance Expense
P 40,000
P 40,000
Reversing Journal Entry
(January 1, 2018)
Insurance Expense
Prepaid Insurance
P 80,000
P 80,000
Income Method
Tiwala Lang Company received P90,000 advance rental good for 9
months on October 1, 2017. An income was originally credited. The
company prepared the adjusting journal entry on December 31,2017.
Reversing Entry
Original Journal Entry
(October 1, 2017)
Cash
Rent Revenue
P 90,000
P 90,000
Adjusting Journal Entry
(December 31,2017)
Rent Revenue
Unearned Rent
P 60,000
P 60,000
Rent Revenue
Income Summary
P 30,000
P 30,000
Unearned Rent
Rent Revenue
P 60,000
P 60,000
Closing Journal Entry
(December 31, 2017)
Reversing Journal Entry
(January 1, 2018)
Purchases
Input Tax
Cash
P 100,000
P 12,000
P 112,000
As Seller
Selling Price = P123,200 (inclusive of VAT)
B=
P
R
=
P 123,200
1.12
= P 110,000 (Sales)
Cash
Sales
Output Tax
P 123,000
P 110,000
P 13,200
Output Tax
Input Tax
Vat Payable
P 123,000
P 110,000
P 13,200
VAT Payable
Prepaid VAT
If Output > Input
If Input > Output
ADDITIONAL INFO:
Reversing Journal Entry
Optional step in accounting cycle
Applicable to the following:
1. All Accruals
2. Expense Method
3. Income Method
©knpt
a.
PREPARATION OF THE STATEMENT OF FINANCIAL POSITION
Financial Statements
Serve as the output of the financial accounting process.
Through this, users of financial information can make use of
accounting data in coming up with decisions about the
business.
One of the components of financial statements is the statement
of financial position or also known as the Balance Sheet.
This provides information about the company’s current state of
liquidity, solvency, flexibility and financial structure.
COMPONENTS OF THE STATEMENT OF FINANCIAL POSITION
1. Assets
These are resources controlled by an entity as a result of
past transactions and events and from which future
economic benefits are expected to flow to the entity.
a. Result of Past Transaction and Event
Indicates that a company cannot assume
authority over the asset before a transaction has
happened.
b. Future Economic Benefits
Mean that the asset could directly or indirectly
contribute to the cash inflows of the entity.
c. Reliable Basis for the Measurement
Normally, the purchase cost of the asset is used
as fundamental basis for its measurement.
However, other measures such as its fair value
may also be used.
b.
c.
2.
CLASSIFICATION OF ASSETS
A. Current Assets
o The asset is cash or cash equivalent unless the asset is
restricted from being exchanged or used to settle a
liability for at least twelve months after the reporting
period.
o The entity holds the asset primarily for the purpose of
trading.
o The entity expects to realize the asset within twelve
months after the reporting period.
o The entity expects to realize the asset or intends to
sell or consume it within the entity’s normal
operating cycle.
B.
Non-Current Assets
Those assets that do not meet the criteria for current
assets are classified as non-current.
Liabilities
Present obligations of an entity arising from past
transactions and events, the settlement of which is
expected to result in an outflow from the entity of
resources embodying economic benefits.
a. Present Obligation
An obligation represents the duty of the
company to settle the liability through payment
of cash, other assets or performance of services.
b. Result of a Past Transaction or Event
This indicates that there should be a transaction
that had happened that led to the creation of
the obligation of the entity.
c. Outflow of Resources Embodying Economic Benefits
The payment of the obligation should require
the company to give up something that has
value on their part.
CLASSIFICATION OF LIABILITIES
A. Current Liabilities
o The entity expects to settle the liability within the
entity’s normal operating cycle.
o The entity holds the liability primarily for the purpose
of trading.
o The liability is due to be settled within twelve months
after the reporting period.
o The entity does not have an unconditional right to
defer settlement of the liability for at least twelve
months after the reporting period.
Normal Operating Cycle
It starts when the entity first gives out cash until the
time it can collect it back once again.
For instance, a small store’s normal operating cycle
starts when they give out cash for the purchase of
their inventory from the time they can collect
payment from the customers after selling the
inventory.
Examples of Current Assets
o Cash and Cash Equivalents
o Short-Term Investments
o Trade Receivables (Accounts and Notes Receivables)
o Supplies
o Merchandise Inventory
o Prepaid Expenses
Property, Plant and Equipment
Tangible assets which are held by an entity for
use in production or supply of goods and
services, for rental to others, or for
administrative purposes, and are expected to be
used during more than one period.
Ex. Land, Building, Machinery, Equipment, Cars,
Furniture and Fixture
Long-Term Investment
An asset held by an entity for the accretion of
wealth through capital distribution such as
interests, royalties, dividends, and rentals, for
capital appreciation or other benefits to the
investing entity such as those obtained through
trading relationships.
Intangible Assets
An identifiable non-monetary asset without
physical substance.
Ex. Franchise, Patent, Copyright, Trademark,
Goodwill
Examples of Current Liabilities
o Accounts Payable
o Notes Payable
o Unearned Income
B.
3.
Non-Current Liabilities
Those liabilities that do not meet the criteria for
current liabilities are classified as non-current.
Capital or Equity
It is the residual interest in the assets of the entity after
deducting all of its liabilities.
It is also known as Net Assets or Net Worth.
©knpt
-
Other names:
o Sole-Proprietorship – Owner’s Equity
o Partnership – Partner’s Equity
o Corporation – Stockholder’s / Shareholder’s Equity
PREPARATION OF THE STATEMENT OF FINANCIAL POSITION
It is also known as the Balance Sheet.
It is composed of Assets, Liabilities, and Capital.
It provides insights as to Liquidity, Solvency, Financial Structure
and Flexibility of the company.
Liquidity
It pertains to the capacity of the company to pay for its
currently maturing obligation.
Simply put, the company has enough current assets to settle for
its current liabilities.
Solvency
It pertains to the ability of the company to pay for its long-term
obligations.
Long-term obligations are those that will mature for more than
12 months from the reporting period.
Financial structure
It shows the composition of the claims over the assets of the
company.
It provides insights whether the assets of the company are
financed more from creditors or the company’s equity.
Flexibility
The statement of financial position also shows insights as to the
capacity of the company to adapt various circumstances.
This could be in the form of its capability to grab possible
opportunities or to adjust in possible unfavourable situations.
PREPARATION OF THE STATEMENT OF COMPREHENSIVE INCOME
Financial Performance
Is measured by the results of an entity’s operations.
This involves the computation of the net income or net loss of
the company which is shown in the statement of
comprehensive income.
Comprehensive Income
Is defined by the International Accounting Standards as the
change in equity during a period resulting from transactions
and other events, other than those changes resulting from
transactions with owners in their capacity as owners.
COMPONENTS OF COMPREHENSIVE INCOME
1. Profit or Loss
It is the total of income minus the expenses of the
company excluding other comprehensive income. The
resulting amount is:
a. Net Profit / Net Income
If total income exceeds total expenses.
b. Net Loss
If total expenses exceed total income.
2.
Other Comprehensive Income
Is composed of income and expenses that are not
presented as profit or loss as required by the Philippine
Financial Reporting Standards (PFRS).
Examples:
o Unrealized gain or loss on investment in equity
instrument measured at fair value through other
comprehensive income
o
o
o
o
Gain or loss from translating the financial statements
of a foreign operation
Change in revaluation surplus
Unrealized gain or loss from derivative contracts
designated as cash flow hedge
Actuarial gain or loss on defined benefits plan by the
full recognition approach
STATEMENT OF COMPREHENSIVE INCOME
1. Two Statement Approach
Presents a separate income statement containing the
components of profit or loss and a separate statement of
comprehensive income beginning with profit or loss plus
or minus the other comprehensive income.
2. One Statement Approach
Shows the components of the profit and loss and
components of other comprehensive income in a single
statement.
Per revised IAS no.1, an entity should present an analysis of expenses
using a classification based on either the nature of expenses or their
function within the entity, whichever provides information that is
reliable and relevant.
The difference between the two methods lies in the Items above
operating profit. The standard does not prescribe any format. The
choice between the two methods depends on historical and industry
factors. The two methods are:
1. Nature of Expense Method
Expenses are aggregated or combined in the income
statement according to their nature and are not
reallocated among various functions within the entity. This
straight-forward method of presentation is also called a
Single Step Approach.
2. Function of Expense Method
This method, also referred to as the Cost of Sales Method,
classifies expenses according to their function as part of
sales, distribution/selling, administrative and other
operating activities. This method provides multiple
classifications and intermediate differences to highlight
significant relationships. This is also known as a Multi-Step
Approach.
OPERATING EXPENSES
1. Selling Expenses
Pertain to expenses related to selling the products of the
company.
Examples:
o Advertising Expense
o Commission Expense
o Depreciation Expense of the Store
o Depreciation Expense of the Delivery Van
o Freight Out
o Other Selling Related Expenditures
2. Administrative Expenses
Pertain to expenses related to office and administrative
work of the company.
Examples:
o Salaries of Employees
o Rent of Office
o Utilities of the Office
o Depreciation Expense of the Office
o Office Supplies
o Other Office Related Expenditures
©knpt
1ST SEMESTER A.Y. 2019-2020
ACC 02: ADDITIONAL NOTES
PREPARATION OF THE STATEMENT OF COMPREHENSIVE INCOME
 SERVICE TYPE OF BUSINESS
Assume the following income and expense account of a Service Company for the year ended December 31,
2018:
Service Income
Other Income
Rent Expense
Salaries Expense
Utilities Expense
Advertising Expense
Depreciation Expense
Other Comprehensive Income:
Unrealized Gain on Investment in Equity instrument
P 940,000
80,000
15,000
20,000
12,000
15,000
31,000
14,000
1. TWO STATEMENT APPROACH
Service Company
Income Statement
For the year ended December 31, 2018
Service Income
Other Income
Total Income
Expenses:
Rent Expense
Salaries Expense
Utilities Expense
Advertising Expense
Depreciation Expense
Net Income
P 940,000
80,000
P 1,020,000
P 15,000
20,000
12,000
15,000
31,000
(93,000)
P 927,000
Service Company
Statement of Comprehensive Income
For the year ended December 31, 2018
Net Income
Other Comprehensive Income:
Unrealized Gain on Investment in Equity instrument
Comprehensive Income
ACC 02 | Fundamentals of Accountancy, Business and Management Part 2
P 927,000
14,000
P 941,000
1
2. SINGLE STATEMENT APPROACH
Service Company
Statement of Comprehensive Income
For the year ended December 31, 2018
Service Income
Other Income
Total Income
Expenses:
Rent Expense
Salaries Expense
Utilities Expense
Advertising Expense
Depreciation Expense
Net Income
Other Comprehensive Income:
Unrealized Gain on Investment in Equity instrument
Comprehensive Income
P 940,000
80,000
P 1,020,000
P 15,000
20,000
12,000
15,000
31,000
( 93,000)
P 927,000
14,000
P 941,000
 MERCHANDISING TYPE OF BUSINESS
Assume that Merchandising Company uses the periodic inventory system and has the following income and
expenses accounts for the year ended December 31, 2018:
Merchandise Inventory, 1/1/2018
Merchandise Inventory, 12/31/2018
Sales
Sales Returns
Sales Discount
Purchases
Purchase Returns
Purchase Discount
Freight in
Selling Expenses
Administrative Expenses
Other Comprehensive Income:
Unrealized Gain on Investment in Equity instrument
P 290,000
120,000
760,000
10,000
19,000
210,000
12,000
10,000
5,000
40,000
60,000
14,000
ACC 02 | Fundamentals of Accountancy, Business and Management Part 2
2
1. TWO STATEMENT APPROACH
Merchandising Company
Income Statement
For the year ended December 31, 2018
Net Sales (1)
Cost of Goods Sold (2)
Gross Profit
Operating Expenses:
Selling Expenses
Administrative Expenses
Net Income
P 731,000
(363,000)
P 368,000
P 40,000
60,000
(100,000)
P 268,000
Notes:
(1) Net Sales
Sales
Sales Returns
Sales Discount
Net Sales
P 760,000
(10,000)
(19,000)
P 731,000
(2) Cost of Goods Sold
Merchandise Inventory, 1/1/2018
Net Purchases (3)
Total Goods Available for Sale
Merchandise Inventory, 12/31/2018
Cost of Goods Sold
P 290,000
193,000
483,000
(120,000)
P 363,000
(3) Net Purchases
Purchases
Freight in
Purchase Returns
Purchase Discount
Net Purchases
P 210,000
5,000
(12,000)
(10,000)
P 193,000
Merchandising Company
Statement of Comprehensive Income
For the year ended December 31, 2018
Net Income
Other Comprehensive Income:
Unrealized Gain on Investment in Equity instrument
Comprehensive Income
ACC 02 | Fundamentals of Accountancy, Business and Management Part 2
P 268,000
14,000
P 282,000
3
2. SINGLE STATEMENT APPROACH
Merchandising Company
Statement of Comprehensive Income
For the year ended December 31, 2018
Net Sales (1)
Cost of Goods Sold (2)
Gross Profit
Operating Expenses:
Selling Expenses
Administrative Expenses
Net Income
Other Comprehensive Income:
Unrealized Gain on Investment in Equity instrument
Comprehensive Income
P 731,000
(363,000)
P 368,000
P 40,000
60,000
(100,000)
268,000
14,000
P 282,000
 NATURE OF EXPENSE METHOD
Service Company
Income Statement
For the year ended December 31, 2018
Revenues
Service Income
Other Income
Expenses
Rent Expense
Salaries Expense
Utilities Expense
Advertising Expense
Depreciation Expense
Net Income
P 940,000
80,000
P 15,000
20,000
12,000
15,000
31,000
ACC 02 | Fundamentals of Accountancy, Business and Management Part 2
P 1,020,000
(93,000)
P 927,000
4
 FUNCTION OF EXPENSE METHOD
Merchandising Company
Income Statement
For the year ended December 31, 2018
Net Sales
Gross Sales
Sales Returns
Sales Discount
Net Sales
Cost of Goods Sold
Merchandise Inventory, 1/1/2018
Purchases
Purchase Returns
P 12,000
Purchase Discount
10,000
Freight in
Net Cost of Purchases
Cost of Goods Available for Sale
Merchandise Inventory, 12/31/2018
Cost of Goods Sold
Gross Profit
Operating Expenses
Selling Expenses
Administrative Expenses
Net Income
P 760,000
P 10,000
19,000
(29,000)
P 731,000
P 290,000
P 210,000
(22,000)
5,000
193,000
P 483,000
(120,000)
(363,000)
368,000
P
40,000
60,000
(100,000)
P 268,000
-End-
©jddcpa
ACC 02 | Fundamentals of Accountancy, Business and Management Part 2
5
PREPARATION OF THE STATEMENT OF CHANGES IN EQUITY
THREE FORMS OF BUSINESS ORGANIZATIONS
1. Sole Proprietorship
A sole proprietorship is a business that is owned and
managed by one person.
Normally, these are the types of businesses that a starting
entrepreneur has.
Owner of this type of business is simply called Sole
Proprietor.
ADVANTAGES OF A SOLE PROPRIETORSHIP
o It is easy to set up and has no complex legal process.
o It requires a small capital only.
o It is easy to manage and control.
o Owner gets all the profit of the business.
o For the creditors, the unlimited liability of the owner is an
advantage.
DISADVANTAGES OF A SOLE PROPRIETORSHIP
o It has a limited source of capital.
o Owner may not be able to handle more complex business
operations
o For he is alone in managing the business.
o In case of poor performance, the owner will solely absorb
all losses.
o It can easily be dissolved.
o For the owners, the unlimited liability is a disadvantage.
2.
Partnership
Partnership is a business formed by two or more
individuals who are willing to contribute money, property,
or service to a common fund with the agreement of
dividing profits among themselves.
Owners of this type of business are called Partners.
ADVANTAGES OF A PARTNERSHIP
o It has a more capitalization than sole proprietorship.
o It has a more pooling of skills and expertise.
o Although with bigger sources of capital than sole
proprietorship, partnership is still easier to form than
corporation.
o The interest of one partner cannot be transferred to a new
partner without the consent of others.
DISADVANTAGES OF A PARTNERSHIP
o Disagreements among partners may cause delay in
decision-making.
o It can be easily dissolved through withdrawal, insolvency
or death of a partner.
o Profit is not owned by one person alone.
o It has an unlimited liability except for limited partners.
3.
Corporation
As defined by the corporation code of the Philippines
(Batas Pambansa Bilang 68), now revised corporation code
(RA 11232),a corporation is an artificial being created by
the operation of law, having the right of succession and
the powers, attributes and properties expressly authorized
by law or incident to its existence.
A corporation is separate and distinct from its owners.
It has its rights, duties, and responsibilities as a juridical
person.
Investors of this type are called Shareholders.
-
Unlike sole proprietorship and partnership where the
ownership and management are vested on the owners
themselves, a corporation separates ownership from
management.
In a corporation, shareholders elect the board of directors
who will manage the corporation.
ADVANTAGES OF A CORPORATION
o It has a huge source of capital.
o It has increased capacity to handle more complex and
wider operations.
o It has the capacity to hire people to manage the company.
o It has an indefinite life. A corporation can operate for fifty
(50) years and renewable for another fifty (50) years.
o Investors have no unlimited liability (advantage for the
investors).
o Death of any shareholders will not dissolve the corporation
because of the transferability of shares.
DISADVANTAGES OF A CORPORATION
o It has more legal and tax requirements.
o It has more complex operations.
o Investors have no unlimited liability (disadvantage for
creditors).
o Higher risk of fraud due to personal motives of BOD.
Batas Pambansa Bilang 68
Section 10. Any number of natural persons not less than five (5)
but not more than fifteen (15), all of legal age and a majority of
whom are residents of the Philippines, may form a private
corporation for any lawful purpose or purposes.
RA 11232 (Revised Corporation Code)
Section 10. Any person, partnership, association or corporation,
singly or jointly with others but not more than fifteen (15) in
number, may organize a corporation for any lawful purpose or
purposes.
Provided, that natural persons who are licensed to practice a
profession, and partnerships or associations organized for the
purpose of practicing a profession, shall not be allowed to
organize as a corporation provided under special laws.
Incorporators who are natural persons must be of legal age.
Was signed into law by President Rodrigo Duterte on February
20, 2019.
STATEMENT OF CHANGES IN EQUITY
The Statement of Changes in Equity is a financial statement that
shows the movement in the equity or capital.
The Statement of Changes in Equity for a sole proprietorship
presents in detail the movement of the capital account for the
period.
According to the International Accounting Standards (IAS), the
statement must include the:
o Total comprehensive income for the period
o Effects of any retrospective application of accounting
policies or restatements made.
o Reconciliations between the carrying amounts at the
beginning and the end of the period separately discussing:
 Profit or loss
 Other comprehensive income
 Transactions with owners, showing contributions by
and distributions to owners separately
©knpt
PREPARATION OF THE STATEMENT OF CASH FLOWS
Statement of Cash Flows
According to the International Accounting Standards, an entity
must present a statement of cash flows as an integral part of its
primary financial statements.
This simply means that the statement of cash flows presents in
detail the inflow and outflow of cash in the company.
Only transactions that have effects on cash are reflected on this
statement.
THREE CLASSIFICATIONS OF CASH FLOWS
1. Operating Activities
These represent the main revenue-producing activities of
the entity.
Examples of these activities include:
o Cash received from customers
o Cash paid to suppliers
o Cash paid to employees
o Cash paid for selling and administrative expenses
2.
Investing Activities
These pertain to the acquisition and disposal of long-term
assets and other investments that are not considered to be
cash equivalents.
Examples of these activities include:
o Cash paid to acquire property, equity or debt
instruments of other entities
o Cash received for selling property, equity or debt
instruments of other entities
3.
Financing Activities
These pertain to activities that alter the equity and
borrowing structure of the entity.
Examples of these activities include:
o Cash received through short term or long term
borrowings
o Cash paid for short term or long term borrowings
©knpt
STATEMENT OF CASH FLOWS (CONT’D)
DIRECT METHOD
Cash flow from Operating Activities:
Receipts:
Cash collection from customers
Cash received from income (i.e., interest, rent, royalties, sales, etc.)
Dividend received
Payments:
Cash paid to suppliers
Cash paid to employees
Cash paid for expenses (i.e., interest, rent, insurance, purchases, etc.)
Net cash flow provided by/ (used) in OPERATING ACTIVITIES
Cash flow from INVESTING ACTIVITIES:
Receipts:
Proceeds from sale of PPE or long-term investment
Payments:
Cash paid for the purchase of PPE or long-term investment
Net cash flow provided by/ (used) in INVESTING ACTIVITIES
Cash flow from FINANCING ACTIVITIES:
Receipts:
Proceeds from short-term or long-term borrowings (bank loans)
Additional cash investments
Payments:
Cash paid for short-term or long-term borrowings (bank loans)
Cash withdrawal
Dividend paid
Net cash flow provided by/ (used) in FINANCING ACTIVITIES
Net increase/ (decrease) in cash
Cash balance, beginning
Cash balance, ending
Accounts Receivable
Beginning Balance (Outstanding)
Credit Sales/ Income
P xx
xx
xx
P xx
P xx
xx
xx
(xx)
P xx
or (xx)
xx
or (xx)
xx
P xx
xx
P xx
or (xx)
or (xx)
P xx
(xx)
P xx
xx
P xx
P xx
xx
xx
(xx)
Accounts Payable
Collection
+inflow
Write-off
Ending Balance (Outstanding)
-outflow
Payments
Ending Balance
Beginning Balance
Credit Purchases/ Expenses
Outstanding Balance = Net Realizable Value + Allowance for Doubtful Accounts
INDIRECT METHOD
–
+
+
–
+
+
–
+
Cash flow from OPERATING ACTIVITIES:
Net Income
Increase in Current Assets
Decrease in Current Assets
Increase in Current Liabilities
Decrease in Current Liabilities
Depreciation (PPE)
Amortization (Intangible Assets)
Gain on sale of Non-current Assets
Loss on sale of Non-current Assets
Net cash flow provided by/ (used) in OPERATING ACTIVITIES
Net cash flow provided by/ (used) in INVESTING ACTIVITIES
Net cash flow provided by/ (used) in FINANCING ACTIVITIES
Net increase/ (decrease) in cash
Cash balance, beginning
Cash balance, ending
P xx
(xx)
xx
xx
(xx)
xx
xx
(xx)
xx
P xx
xx
xx
P xx
xx
P xx
or (xx)
or (xx)
or (xx)
or (xx)
©knpt
e.
FINANCIAL STATEMENT ANALYSIS
Financial statements can be analyzed in terms of:
1. Liquidity
It is the ability of the company to settle its currently
maturing obligations as they fall due and continue
operations.
a.
Working Capital
It measures the short-term liquidity of a company.
Working Capital
b.
=
Times Interest Earned
3.
Operational efficiency
Is measured based on the company’s ability to
generate sales from the utilization of its assets, as a
whole or individually. The turnover ratios are
primarily used to measure operational efficiency.
a.
c.
Total Current Assets
Total Current Liabilities
=
Quick Ratio (or Acid-Test Ratio)
It measures immediate liquidity with the ability to pay
current liabilities with the most liquid assets.
Quick
Assets
2.
=
Quick Assets
Total Current Liabilities
=
Cash + Cash Equivalents + Net
Receivables + Marketable Securities
Solvency (or Leverage)
It measures the company’s use of debt to finance assets
and operations.
a.
b.
=
Total Assets
Total Equity
Net Credit Sales
Average Accounts Receivable
=
Average Collection Period (or Days Sales Outstanding)
It is the approximate number of days for a business to
collect its receivables from credit or account sales.
Average
Collection Period
365 days
Receivable Turnover
=
Note: 366 days if Leap Year
c.
Financial Leverage (or Equity Multiplier)
It measures the amount of total assets financed by
equity.
Financial Leverage
Receivable Turnover
It measures the efficiency to collect the amount due
from credit customers.
Receivable
Turnover
b.
Quick Ratio
Operating Income
Interest Expense
Asset Management
It measures the ability of the company to utilize its assets.
Current Ratio
It measures the ability of the business to pay its shortterm obligations as they fall due.
Current Ratio
EBIT
Interest Expense
or
=
Total Current Assets
–
Total Current Liabilities
=
Times Interest Earned
It measures the company’s ability to pay the interest
charged to the company for its outstanding liabilities.
Inventory Turnover
It measures the number of times a company’s
inventory is sold and replaced during the year.
Inventory Turnover
d.
Debt to Equity Ratio
It measures the financing provided by the creditors
against those provided by the owner.
=
Cost of Goods Sold
Average Inventory
Average Sales Period (or Inventory Days)
It is the average time to convert inventory to sales.
Average Sales
Period
=
365 days
Inventory Turnover
Note: 366 days if Leap Year
Debt to Equity Ratio
c.
e.
Debt Ratio
It measures the business liability as a percentage of
total assets.
Debt Ratio
d.
=
Total Liabilities
Total Equity
=
Equity Ratio
=
Payable
Turnover
Total Liabilities
Total Assets
Equity Ratio
It measures the percentage of total assets financed by
the owner’s investment.
Total Equity
Total Assets
Payable Turnover
It measures the number of times the amount of
average payable is paid during the period.
Net Credit Purchases
Average Accounts Payable
=
Note: Exclude Freight-in
f.
Average Payment Period
It is the approximate number of days for a business to
pay its obligation on account purchases.
Average
Payment Period
=
365 days
Payable Turnover
Note: 366 days if Leap Year
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g.
Cash Conversion Cycle (or Net Cash Cycle)
It is the length of time between paying for the
obligation and collecting receivables.
Cash
Conversion
Cycle
Operating Cycle – Avg.
Payment Period
Fixed Assets Turnover
It measures the level of use of the property, plant and
equipment.
=
Basic Earnings Power
It calculates the earning power of a business before
income taxes and its financial leverage take effect.
Basic Earnings
Power
5.
Return on Sales x Asset
Turnover
=
=
EBIT
Average Total Assets
Market Value (or Market Valuation)
This measure the company’s potential for future earnings,
dividend payments and stock price growth.
Net Sales
Average Net Fixed Assets
Assets Turnover
It measures the level of capital investment relative to
sales volume.
Assets Turnover
4.
e.
or
Fixed Assets
Turnover
i.
Return on
Assets
Avg. Collection Period + Avg.
Sales Period – Avg. Payment
Period
=
=
h.
or
Net Sales
Average Total Assets
=
Profitability
This measures the company’s operating performance as a
return on its investment. It gauges management’s
efficiency in using the company resources in order to
generate revenue.
a.
Gross Profit Rate
It measures the percentage of peso sales earned after
deducting cost of goods sold.
Gross Profit Rate
b.
Gross Profit
Net Sales
=
Operating Profit Margin
It measures the percentage of income earned after
deducting the cost of sales and the operating
expenses.
=
Operating Profit
Margin
or
=
c.
EBIT
Net Sales
Net Profit Margin (or Return on Sales)
It measures the percentage of net income earned
from net sales after all other income has been added
and all operating expenses and other expenses
including income taxes have been paid.
Net Profit
Margin
d.
Operating Income
Net Sales
=
Net Income
Net Sales
Return on Assets (or Return on Investments)
It measures the company’s efficiency in using its level
of investment in assets in order to generate income.
Return on
Assets
=
Net Income
Average Total Assets
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BANK RECONCILIATION
THREE KINDS OF BANK DEPOSITS
1. Demand Deposit
It is the current account or checking account or
commercial deposits that are covered by deposit slips and
where funds are withrawable on demand by drawing
checks against the bank.
2. Saving Deposit
The depositor is given a passbook upon initial deposit. The
passbook is required when making deposits and
withdrawals. Withdrawals are made anytime but the bank
sometimes may require notice of withdrawal.
3. Time Deposit
It is evidenced, however, by formal agreement embodied
in an instrument called Certificate of Deposit. Time deposit
may be pre-terminated or withdrawn on demand or after a
certain period of time agreed upon.
WHAT IS A BANK RECONCILIATION?
Before we answer the question, let us have a background on the
matter of opening a demand deposit or checking account.
Incidentally, of the three kinds of deposit, a bank reconciliation is
necessary only for a demand deposit or checking account.
When an account is opened at the bank, the person authorized to
draw against the account will be required to sign cards furnished by
the bank, to show the specimen signatures to be used on the checks.
These specimen signatures will be filed by the bank so that any teller
who may be unfamiliar with the depositor’s signature can test the
authenticity of a check by comparing the depositor’s signature on the
card with signature on the check.
If the depositor is a Corporation, the bank will request that the
directors pass a resolution authorizing certain officers of the
corporation as signatories of checks and that a copy of this resolution
be filed with the bank.
Depositor
↔
Bank
Assume that Company X (the depositor) collected P100,000 from a
customer in settlement of an account. The collection is deposited at
the First Bank. The entry to record the collection and the subsequent
deposit is:
Cash (or Cash in bank)
Accounts Receivable
100,000
100,000
Accounts Payable
Cash (or Cash in bank)
30,000
30,000
The entry on the books of the bank is:
Company X
Cash (or Cash in bank)
30,000
30,000
The entry on the books of the bank shows the debit is Company X.
When a check is issued, the payee will present the same to the bank
for payment. The depositor is actually ordering the bank to pay the
payee out of its deposit in the bank. This is the reason the bank
debits the account of the depositor thereby reducing its liability to
the depositor. Thus, when the depositor’s account is decreased, the
same is debited.
At this point, when balances are extracted, the cash in bank account
on the depositor’s book has a balance of P70,000, and the Company
X account on the book of the bank has also a balance of P70,000.
Depositor’s Books
=
Depositor’s Bank Account
The two accounts have equal or the same balances because they are
reciprocal accounts.
Thus, if no errors are committed in recording, and the same
information has been recorded by both accounts, the two should
have equal or the same balances.
But very frequently, there are items on the depositor’s book which
do not appear on the bank records as of the same date.
o Checks issued by the depositor are not yet presented for
payment to the bank; or
o Deposits may have been made after the bank records are sent
out to the depositor.
But less frequently, there are items on the bank records which do not
appear on the depositor’s book.
o The bank may have charged the depositor’s account with
service charges which the depositor may not know about until a
report is received from the bank; or
o Notes endorsed to the bank for collection have been collected
by the bank and credited to the depositor’s account but notice
of collection is not yet received from the bank by the depositor.
In light of the foregoing, it becomes necessary to prepare a bank
reconciliation.
On the books of the bank, the entry is:
Cash (or Cash in bank)
Company X
Let us assume further that Company X (the depositor) subsequently
issued a check for P30,000 in payment of an account payable. On the
books of Company X, the entry is:
100,000
100,000
The entry on the books of the bank shows the credit is Company X.
Bank Reconciliation
Is a statement which brings into agreement the cash balance
per book and cash balance per bank.
It is usually prepared monthly because the bank provides the
depositor with the bank statement at the end of every month.
When the bank credits the account of the depositor, Company X, it
recognizes its liability to the depositor. Legally, when a deposit is
made, there exists a debtor-creditor relationship between the bank
(debtor) and the depositor (creditor). Hence, when the account of
the depositor is increased the same is credited.
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Bank Statement
is a monthly report of the bank to the depositor showing:
o The cash balance per bank at the beginning
o The deposits acknowledged
o The checks paid
o Other charges and credits
o Daily cash balance per bank during the month
o
b.
RECONCILING ITEMS
At the end of every month, comparison between cash records of the
depositor and the bank statement received from the bank will yield
the reconciling items.
1.
2.
Book Reconciling Items
a. Credit Memos (+)
Refer to items not representing deposits credited by
the bank to the account of the depositor but not yet
recorded by the depositor as cash receipts. They have
the effect of increasing the book balance.
Examples:
o Notes receivable collected by the bank in favor
of the depositor and credited to the account of
the depositor.
o Proceeds of the bank loan credited to the
account of the depositor.
o Matured time deposits transferred by the bank
to the current account of the depositor.
b. Debit Memos (–)
Refer to items not representing checks paid by the
bank which are charged or debited to the account of
the depositor but not yet recorded by the depositor
as cash disbursements. They have the effect of
decreasing the book balance.
Examples:
o NSF (No Sufficient Fund)
These are checks deposited but returned by
the bank because of insufficient fund.
o Technically Defective Checks
These are checks deposited but returned by
the bank because of technical defects such
as:
 absence of signature/countersignature
 erasures not countersigned
 mutilated checks
 conflict between amount in words and
amount in figures
o Bank Service Charges
These include bank charges for interest,
collection, checkbook and penalty.
o Reduction of Loan
This pertains to amount deducted from
current account of the depositor in
payment for loan which the depositor owes
to the bank and which has already matured.
c. Errors (+/–)
Bank Reconciling Items
a. Deposits in Transit (+)
are collections already recorded by the depositor as
cash receipts but not yet reflected on the bank
statement.
Examples:
o Collections already forwarded to the bank for
deposit but too late to appear in the bank
statement.
c.
Undeposited collections or those still in the
hands of the depositor. In effect, these are cash
on hand awaiting delivery to the bank for
deposit.
Outstanding Checks (–)
Are checks already recorded by the depositor as cash
disbursements but not yet reflected on the bank
statement.
Examples:
o Checks drawn and are already given to the
payees but not yet presented to the bank for
payment.
o Certified Check
Is one where the bank has stamped on its
face the word “accepted” or “certified”
indicating insufficiency of fund.
When the bank certifies a check, the
account of the depositor is immediately
debited or charged to insure the eventual
payment of the check.
Certified check should be deducted from
the total outstanding checks (if included
therein) because they are no longer
outstanding for bank reconciliation.
Errors (+/–)
FORMS OF BANK RECONCILIATION
1. Adjusted Balance Method
Under this method, the book balance and the bank
balance are brought to a correct cash balance that must
appear on the balance sheet.
Cash balance per book (Unadjusted)
Credit Memos (+)
Debit Memos (–)
Adjusted cash balance per book
xx
xx
(xx)
xx
Cash balance per bank (Unadjusted)
Deposits in transit (+)
Outstanding Checks (–)
Adjusted cash balance per bank
xx
xx
(xx)
xx
Cash balance per
book (Unadjusted)
In relation to
correct cash
balance
Reconciliation
Credit Memos
Debit Memos
Understated
Overstated
Add
Deduct
Cash balance per
bank (Unadjusted)
In relation to
correct cash
balance
Reconciliation
Deposits in Transit
Outstanding Checks
Understated
Overstated
Add
Deduct
©knpt
2.
Book to Bank Method
Cash balance per book
Credit Memos (+)
Outstanding Checks (+)
Debit Memos (–)
Deposits in Transit (–)
Cash balance per bank
3.
The following data are gathered in connection with CM and DM
appearing on the bank statement:
1. The CM of P15,000 on January 26 represents proceeds of note
collected by the bank in favor of the Company.
2. The RC of P5,000 represents check of customer deposited
previously but returned by the bank because of “no sufficient
fund” or NSF.
xx
xx
xx
(xx)
(xx)
xx
GENERAL PROCEDURES IN PREPARING THE RECONCILIATION
1. Determine the balance per book and the balance per bank.
o As mentioned earlier, the cash in bank account on the
book of the depositor has a debit balance of P50,000. The
bank balance is shown on the bank statement as the final
item, P84,000.
Bank to Book Method
Cash balance per bank
Deposits in Transit (+)
Debit Memos (+)
Outstanding Checks (–)
Credit Memos (–)
Cash balance per book
xx
xx
xx
(xx)
(xx)
xx
ILLUSTRATION
The cash records of Company X show the following for the month of
January:
Cash Receipts
Jan. 5
P 60,000
13
20,000
25
30,000
31
40,000
P 150,000
Jan. 6
7
10
14
28
31
Cash Disbursements
Check No. 721
P 5,000
Check No. 722
10,000
Check No. 723
18,000
Check No. 724
2,000
Check No. 725
37,000
Check No. 726
28,000
P 100,000
The general ledger of the company shows the cash in bank account
for January as follows:
Cash in bank – First Bank
Jan 31 CR 150,000 Jan 31 CD
Debit balance
50,000
Date
Jan. 6
8
11
12
14
17
26
26
30
30
CM – Credit Memo
DM – Debit Memo
Check No.
Withdrawals
721
722
723
5,000
10,000
18,000
724
2,000
First Bank
Cebu City, Philippines
SC – Service Charge
RC – Returned Check
Deposits
60,000
20,000
30,000
CM 15,000
RC 5,000
SC 1,000
3.
Trace the checks issued to the bank statement to ascertain
whether there are checks not yet presented for payment.
o In the illustrative problem, Check Nos. 725 for P37,000,
and 726 for P28,000 do not appear in the bank statement.
These are outstanding checks.
4.
The bank statement should be examined to determine whether
there are bank credits or bank debits not yet recorded by the
depositor.
o In the illustrative problem, there is CM of P15,000 and DM
for returned check of P5,000 and service charge of P1,000.
5.
Watch out for errors. Again, errors are reconciling items of the
party which committed them.
o In the illustrative problem, there are no errors committed.
Adjusted Balance Method
The following is the bank statement for January received from the
First bank:
Code:
Trace the cash receipts to the bank statement to ascertain
whether there are deposits not yet acknowledged by the bank.
o In the illustrative problem, the cash receipt of P40,000 on
January 31 does not appear in the bank statement. This
represents deposit in transit.
100,000
The balance of the cash in bank on the depositor’s book is P50,000.
In account with: No. 775
Company X
Cebu City
2.
Balance
60,000
55,000
45,000
27,000
47,000
45,000
75,000
90,000
85,000
84,000
Cash balance per book
Add: Note collected by bank (CM)
Total
Less: NSF check (DM)
Service charge (DM)
Adjusted cash balance per book
Cash balance per bank
Add: Deposit in transit
Total
Less: Outstanding check:
Check No. 725
Check No. 726
Adjusted cash balance per bank
P 50,000
15,000
65,000
P 5,000
1,000
6,000
P 59,000
P 84,000
40,000
124,000
P 37,000
28,000
65,000
P 59,000
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PREPARATION OF ADJUSTING ENTRIES
Only the book reconciling items require adjusting entries on the book
of depositor. This is understandable. The adjustments are necessary
to bring the cash in bank balance to its correct balance for statement
presentation purposes.
1.
Accounts Receivable
Cash in bank
3.
Deposit of another entity is credited by the bank to the account
of the depositor
o This is a deduction from the bank balance because it
erroneously increased the account balance of the
depositor in the bank. No adjustment is necessary in the
book of the depositor.
4.
Check of another entity charged to the account of the depositor
o This is an addition to the bank balance because it
erroneously decreased the account balance of the
depositor in the bank. No adjustment is necessary in the
book of the depositor.
15,000
15,000
To record the returned check or NSF check:
5,000
5,000
18,000
18,000
3.
To record the note collected by the bank:
Cash in bank
Notes Receivable
2.
Accounts Payable
Cash in bank
To record the bank service charge:
Bank service charge
Cash in bank
1,000
1,000
Book to Bank Method
Cash balance per book
Add: Note collected by bank (CM)
Outstanding checks:
Check No.725
Check No.726
Total
Less: NSF check (DM)
Service charge (DM)
Deposit in transit
Cash balance per bank
P 50,000
P 15,000
P 37,000
28,000
65,000
P 5,000
1,000
40,000
80,000
130,000
46,000
P 84,000
Bank to Book Method
Cash balance per bank
Add: Deposit in transit
NSF check (DM)
Service charge (DM)
Total
Less: Outstanding checks:
Check no. 725
Check No. 726
Note collected by bank (CM)
Cash balance per book
P 84,000
P 40,000
5,000
1,000
P 37,000
28,000
P 65,000
15,000
46,000
130,000
80,000
P 50,000
SOME ERRORS AND THEIR TREATMENT
1. Understatement of cash receipts on the book of the depositor
o For instance, the collection from customer which is
deposited amounts to P10,000 but is recorded in the book
only as P1,000. There is an understatement of cash receipt
and book balance. The error is added to the book balance.
Cash in bank
Accounts Receivable
2.
9,000
9,000
Understatement of check drawn by depositor
o For instance, a check in payment of account payable
amounting to P20,000 is recorded in the book as P2,000.
There is an understatement of cash disbursement and a
consequent overstatement of book balance. The error is
deducted from the book balance.
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