Fundamentals of Accounting 1
Basic Concepts and Principles
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Definition of Accounting
o Accounting Standards Council (ASC)
§ Accounting is a service activity (Type of business organization à Service, Merchandising,
Manufacturing)
§ Its function is to provide quantitative information (Quantity = ₱), primarily financial in nature,
about economic entities (Sole Proprietorship, Partnership, Corporation), that is intended to be
useful in making economic decisions
• Judgment or decision
o Revenue (earned) = Expenses (incurred) à Breakeven ∅ always 0 no profit/loss
o Revenue > Expenses à Profit Gain more than expenses spent
o Revenue < Expenses à Loss Losing money; Too much expenses
§ Start-up businesses may experience losses. However, don’t discontinue your business right away.
You can experience this up to 5 years
o American Accounting Association (AAA)
§ Accounting is the process of identifying, measuring, and communicating economic information to
permit informed judgement and decisions by users of the information
• Identifying
o Business Transactions
§ Any event/activity done by a company within a period
§ Calendar: Jan 1 – Dec. 31
§ Fiscal: Any day of the year ending after 12 months
o Anything personal is not part of business transactions
• Measuring
o Measured by amount or peso equivalent
• Communicating
o Stakeholders (Customers, Suppliers, Owners, Government Agencies, Bank)
(People in and out of the company)
o American Institute of Certified Public Accountants (AICPA)
§ Accounting is the art (it is a skill) of recording, classifying, and summarizing in a significant
manner and in terms of money, transactions and events which are in part at least of financial
character, and interpreting the results thereof
• Recording
o There is a style
o Ex. Debit: To the left; Credit: To the right Explanation below
• Classifying
o Identify if it’s Current (Asset, Liability, Revenue, Expenses)/Non-current (Asset,
Liability)
• Summarizing
o Summarize in Financial Statement
§ Fulfills the stewardship function of the owners and managers
• Businesses should be transparent on the performance and
standing of the business to its stakeholders
§ Reflect the financial standing and economic activities of the business
• These economic activities may relate to transactions that can
affect the financial position, financial performance and cash flow
of the business
§ Outputs of the accounting process
•
o Types of Financial Statement
§ SCI: Statement of Comprehensive Income
§ SFD: Statement of Financial Position (Financial Health of the company)
§ SCE: Statement of Changes in Equity
§ SCF: Statement of Cash Flows (Cash in and Cash Out)
§ Notes to Financial Statement: Details of revenue & expenses are here
o Objectives of Financial Statements
§ Provide information about the financial position, financial performance,
and cash flows of a business that is useful to key personalities who are
making economic decisions
• Financial statements provide information about a business’ assets,
liabilities, equity, income and expenses, contributions by and
contributions to owners, cash flows
Interpreting
o Coming up with informed judgment (Loss, profit, breakeven)
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Nature of Accounting
o Art
§ Design of how something can be performed
§ It is a behavioral knowledge involving creativity and skill
o Process
§ Systematic series of actions directed towards an outcome.
§ It follows logical steps in the accounting cycle like recording, classifying, and summarizing
financial transactions and communicating the results after
§ You can’t go to Step 2 if you’re not done with Step 1
o A means and not an end
§ Means to decide for the common good of the business
§ Users have the liberty to make economic decisions based on the management assertions in the
financial statements
o Service Activity
§ Role to provide financial statements on a timely basis
o Information System
§ An information system is a set of interrelated components that work together to achieve a
common purpose
§ Repository of collected financial data, proposed financial information and communicated
financial statement
o Financial in nature
§ Involves financial transactions (money)
o Systematic
§ It has definite techniques and its proper application requires a particular skill and expertise
•
Functions of Accounting
o Stewardship function of owner
§ Safeguard of assets and investments (monthly, quarterly, annually)
o Helps users in informed or economic decisions
o Support daily operations of the business
•
Accounting as the Language of Business
o Serves a means of communication between the business and interested uses, internal or external
o Facilitates the smooth flow of information in and out of the business
o Management/owners: Report how well business fares reflects how well they manage business
o Interested Users: Use reports to make informed decisions based on the past & current performance
Business Transactions
o Interactions between businesses & other stakeholders (Happens once a business starts operation)
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Difference of Bookkeeping and Accounting
o Accounting: Broader in scope as it includes the bookkeeping function
o Bookkeeping: Confined with recording of monetary transactions, one part of the accounting process
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History of Accounting
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21st Century
o Republic Act 9298 (Regulating
practice of accounting in the Phil.)
repealed Pres. Decree No. 692.
o This
became
the
Revised
Accountancy Law which allows to
take BE before being accountant
•
•
Cradle of Civilization (4000 BC - Mesopotamia)
o Accounting was used by rulers of each civilization
in order to account (compute, record) for income,
what they spent & eventually how much tax was
imposed
th
14 Century
o Early form of bookkeeping was introduced
o Massari ledgers of Commune of Genoa
introduced
double-entry
bookkeeping
(somewhere in Italy)
French Revolution
o Approaches to Reporting
§ Florentine Approach (Journal entries)
(Amatino Manucci)
§ Venetian Approach (Ledger postings)
(Andrea Bargarigo)
o Double entry accounting systems were used by
merchants to be able to maintain records to
improve efficiency of business
Industrial Revolution
o Added invested capital & dividend distribution
o Evaluation of assets
o Assets must be carried at their market value and
not based on historical cost
th
19 to 20th Century
o PRC has PICPA under. This created ASC. PRC
succeeded ASC
o
Branches of Accounting
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Sectors of Accounting
o Public Accounting
§ The accountant performs or offers to perform any activity that will result to the issuance of an
attest report that is in accordance with professional standards
§ For the public
§
External Auditing
• Public accountants examine the financial statements in order to express an opinion on
whether statements have been fairly presented or not
• Examine financial records and business transactions (receipts) of a company with which he
is not affiliated with to check if business transactions have been properly recorded
• Key Person
o Auditor
§ Gives credibility to financial statements
• Output
o Auditor’s Opinion or Report
§ Basis whether or not the financial statement are prepared truthfully and
without any material error
o Audited Financial Statement
§ Financial statement that underwent the process of auditing
• Philippine Standards on Auditing (PSA)
o Deals with the independent auditor’s overall responsibilities when conducting an
audit on financial statements
§
Tax Preparation and Planning Service
• Some Certified Public Accountants (CPAs) also offer tax services wherein they advise
and help their clients in tax planning and preparing tax returns
• Key Person
o Tax Specialist
§ Expected to be knowledgeable about revenue regulations & tax laws
§ Represents the client in any tax-related case filed by the Bureau of
Internal Revenue (BIR)
§ Should know the National Internal Revenue Code (NIRC) of the
Philippines from the BIR (Bible of Tax Specialists)
• Tax Reports
o Income Tax
§ Individual: 0% to 32%
• Before TRAIN Law, it is 5% to 32%
• Based on TRAIN Law effective January 1, 2018, those who earn
<250 K in a year, you have 0% income tax
§ Corporate: 30%
o Withholding Tax on Compensation
§ Receiving purely compensation income
o Business Tax
§ VAT (Indirect tax passed on buyer)
Document Stamp Tax
§ Percentage Tax
Donor’s Tax
§ Real Property Tax
Estate Tax
§ Excise Tax (Goods manufactured in Phil.)
Final Withholding Tax
§ Capital Gain Tax (Sale of real property)
Expanded Withholding Tax
§
Management Advisory Services (Consultancy)
• Management consulting involves financial planning and control, and the development of
accounting and computer systems
• Key Person
o Consultant
§ The accountant advises management on matters such as the installation of
an accounting system, finance, budgeting, business processes, introduction
of new products, and other business activities
§ Devises ways for the company to run services smoothly, efficiently, and
effectively (Report for recommendation of improvement of bus.)
o Private Accounting
§ Involves setting up systems of recording business transactions that are aggregated into financial
statements
§ Includes the development and interpretation of accounting information intended to assist
management in operating the business
§ Private Accountant: Salaried employee who deals with the company’s day-to-day accounting
needs
§
Financial Accounting (FABM 1)
• Provides economic & financial information for investors, creditors, & other external users
in deciding where to place their scare resources
• Uses a system of reporting designed to meet the information needs of external users
• Ends in preparation and presentation of financial statements in accordance with
Generally Accepted Accounting Principles (GAAP: Established body of standards and
principles)
§
Cost Accounting
• Accumulates manufacturing costs 4 financial reporting & decision-making purposes
• Covers the reporting of financial information relevant to manufacturing operations
• Provides management with the necessary tools and information for planning and
controlling activities
• Accounting for inventory of materials
• Key Person
o Cost Accountant
§ Determine the inventory cost for financial reporting purposes
§ To determine the cost, Raw Materials + Direct Labor + Factory
Overhead
§
Budgeting
• Provides a detailed collection and reporting of the expenditures and revenues involved
in a business or company operations
• Tracks the financial details of the firm, including the money taken in and the money spent
by the company and the staff
• Assists the management in quantifying goals concerning revenue, cost of sales or services
and operating expenses
§
Accounting Information System
• Collects and processes transaction data
• Disseminates information to interested parties
• Designs both manual and computerized data processing systems
o Suggest soft wares like MYOB, Quickbooks
o Suggest soft wares for big companies like SAP, Oracle
§
Tax Accounting
• Deals w/ the preparation of various tax returns & doing tax planning for business
• Client is the business and not the public (Similar to tax services in public accounting)
• Prepare tax reports for the business
§
Internal Auditing
• Reviews business operations to check if they are complying to management policies
• Evaluates the efficiency of business operations
• Key Person
o Internal Auditor
§ Check compliance of three levels of management to Standard Operating
Procedures (SOP)
§ See to it that the operations of the company run smoothly
o Government Accounting
§ System used in government offices tor record and report financial transactions
§ Systematic process of collecting, recording, classifying, summarizing, and interpreting the financial
transactions relating to the revenues and expenditures of government offices
§ Reveals how public funds have been generated and utilized (Both national and local governments)
§ Be a Commission on Audit auditor, BIR Examiner to local and national businesses, Bank Examiner
of BSP etc.
o Accounting Education
§ Responsible for training future accountants
§ Engages in teaching accounting, financial management, taxation, and other related business
courses
§ Be a teacher, administrator, or researcher
§ Sub branch
• Accounting Research
o Broader in scope and wider in coverage
o Encompasses research interests in the areas of financial accounting, management
accounting, auditing and assurance, taxation, etc.
o Specialized Areas
§ Forensic Accounting
• Forensic accountants provide the detective work needed to investigate and examine
evidence of white-collar financial crimes such as stealing and fraud
• Expert witnesses in legal proceedings & prepare evidence to be presented in court
§ Information Technology Services
• Businesses often seek individuals design & implement customized software systems
• CPAs who possess strong skills in information technology can work with e-commerce
ventures and consult with others to determine which decisions are the most financially and
technologically sound for a company
§ Environmental Accounting
• CPAs involved in environmental accounting determine how companies can be both
profitable and environmentally-responsible
• Do environmental compliance audits and set up preventative systems to ensure compliance
and avoid future environmental-related claims or disputes
§ International Accounting
• International accountants are knowledgeable in international trade rules & regulations,
international mergers, government regulations, tax laws, & oversees transactions.
Users of Accounting Information
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Definition
o Accounting communicates financial information to decision makers.
o Different decision makers are users of these accounting information
o Users of accounting information are stakeholders. This may be internal or external users.
Internal Users
o Those who make decisions on behalf of the organization
o The accounting information provided to internal users can be in the form of management reports,
budgets and financial statements
§ Managers or management
• They plan, organize, and run a business
• Top-level Management
o Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chief Operating
Officer (COO), among others
o They use information to oversee the performance of the whole organization and
set its strategic direction & make final decision
• Middle-level Management
o Department heads, branch managers, and junior executives, among others
o They ensure that their units performances are aligned with the organization’s
objectives
• Lower-level Management
o Supervisors and team leaders
o They oversee the day-to-day operations and direct employees in the performance
of tasks
§ Employees or labor unions
• They assess the company’s profitability and stability, and their consequence on future
salary and job security
• Labor unions: Association of employees to protect welfare of employees (benefits,
salaries, security)
§ Owners
• They provide the capital to the business
• Owners need these accounting information to help them decide whether they should
withdraw or increase their investments
• They are interested to know the return on investment
External Users
o Those who make their decisions based on the company’s financial information
§ Potential and existing investors
• Need information to help them decide whether they should invest/not in business
• Through past performances or operating results of the company, they would want to know
potential returns of investments
§ Creditors and potentials creditors
• They assess the credit worthiness and the capability of the business to pay its obligation
including the related interests on maturity date
§ Customers
• They assess the financial position of their suppliers which is necessary for them to maintain
a stable source of supply in the long term
• They are interested to know whether business will continue to honor its product warranties
• To know reasons for increase in prices of commodities
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Suppliers
• They use financial statements of their customers to determine whether the debts owed to
them will be paid when due or whether the customer has enough funds or resources to pay
the goods to be delivered or the services to be rendered
• To know if you can pay on time
o Credit Terms of Suppliers
§ n 30 – net 30 days (You can still pay until 30 days)
§ n 60 – net 60 days (You can still pay until 60 days)
§ n 180 – net 180 days (You can still pay until 180 days)
§ Ex. 2/10, n/30 (You can receive 2% discount if you pay in 10 days) (No
discount if you pay up to 30 days)
§ Ex. 2/5, 1/10, n/60 (2% discount if you pay up to 5 days) (1% discount
if you pay in 10 days) (No discount if you pay up to 60 days)
Tax Authorities
• They use financial reports to determine the credibility of the tax returns filed on behalf
of the company
• They are interested to know if the business paid the correct amount of taxes
• Evaluate if tax declared is same with the actual (BIR)
Regulatory bodies
• They want to ensure that the company’s disclosure of accounting information is in
accordance with the rules and regulations set in order to protect the interest of the
stakeholders who rely on such information.
• Examples: Securities and Exchange Commission (SEC), Bangko Sentral ng Pilipinas (BSP)
and Department of Trade and Industry (DTI) (Know if you are a duly registered
corporation)
Public
• They use the financial information to know how the business affects the economy, possible
prospects for employment, and/or for educational and research purposes
Forms of Business Organization
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A business is an organization that utilizes resources & information, supplying the needs and wants of the
customers through goods or services, in exchange for money/giving back a different kind of goods/services
o Types of Businesses According to Ownership
§ Sole Proprietorship
• A business that is owned by only one individual for practice of trade or profession
• Simplest and least costly form of ownership among other forms of business
• Quite risky since the owner assumes unlimited liabilities and in most cases even his or her
personal assets are on the line if the business cannot pay the creditors
• Common to small business entities like grocery store, repair shop & beauty parlor
• Less capital (May access bank loans) (Capital come from owner – sole proprietor)
Advantages
Disadvantages
Unlimited liability – Owner is legally obliged to pay all the
Full control of operations
business debts
Limited life – Business ceases to operate if owner dies,
Easy to start, easy to dissolve
becomes physically or mentally incapacitated, imprisoned
All profits go directly to the
Difficult in raising capital
owner
Less regulations
The government taxes the
owner and not business
§
Partnership
• A business that is owned by two or more individuals pooling their resources together as
a common fund
• Partners are normally involved in the management and operation of the business
• Profit is divided among the partners as per partners’ agreement (Allocate profit/loss Ex.
50, 20, 30)
• If 1 partner decides for company, decision is bound by all partners (Mutual Agency)
• Written agreement: Articles of co-partnership
• Types of Partnership
o General Partnership
§ Each partner is a general partner with unlimited liability
§ Liable to extent of personal assets
o Limited Partnership
§ Limited partners and at least one general partner
§ General partner has unlimited liability while the limited partners enjoy
limited liability to the extent only of their capital contribution
§ Liable to capital contribution to company
Advantages
Disadvantages
Increased
potentials
from Unlimited liability of one or all
two/more different strengths
owners
Limited life – Business ceases to
Easy to form with proper operate if one of the partners dies,
agreements on its formation
becomes physically or mentally
incapacitated, imprisoned
Less regulations compared to High possibility of dispute and
corporations
conflicts between partners
§
Corporation (Owned by stockholders) (More # of stocks, mas may say ka sa company)
• A business required to have five to fifteen incorporators (Who formed corporation)
• Section 2 of the Corporation Code of the Philippines defines corporation as “an artificial
being created by operation of law, having the right of succession and the power
attributes and properties expressly authorized by law or incident to its existence”
(Follow SEC and rules of BIR) (Life: 50 years & renewable)
• Has a legal personality that is separate and distinct from the owners
• Owners have limited liability and limited involvement from the operations
• Board of Directors, elected by owners, take control of the corporation’s activities
• Profit Corporation: Issues to owners/shareholders shares of stocks evidenced by stock
certificates
• Non-profit Corporation: Does not issue shares of stocks. Owners are called members
• Existence of corporation is evidenced by articles of incorporation and by-laws that are
duly approved by SEC
• By-laws: Provisions for internal administration of the corporation
Advantages
Disadvantages
More sources of fund
More regulations to be followed
Easy to transfer ownership
(Pwede ipamana sa anak)/ Profit is taxed at corporate tax rate
ibenta
Liability to owners is limited
Costly to incorporate
Stockholders are taxed again when
Unlimited commercial life
profits are distributed to them
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Cooperative
• A business that is owned by a group of individuals who also serve as benefactors to the
business endeavor
• Usually requires at least fifteen members to function
• Board of Directors and Officers are elected to manage the business operation
• Members can be part of the cooperative by purchasing shares
• Cooperative: Can be incorporated or unincorporated
• Similar to corporation, usually has a set of by-laws and articles of cooperation
• By-laws contain rules and regulations governing the operation of cooperative.
• Types of cooperative: Credit, consumer, producers, marketing, workers cooperative
Advantages
Unlimited life. The change of
members does not dissolve the
business
Democratic organization. Social
equality of members is the most
important
component
of
cooperatives. It ensures that it
serves its members’ needs
Disadvantages
Obtaining capital through investors.
Cooperative has a “one-memberone-vote” philosophy. Big investors
may choose to invest their money to
other firms where their voting power
is equal to their ownership interest
Lack
of
membership
and
participation. The cooperative may
not fully function if members do not
involve themselves in the routine
business operation
o Types of Businesses According to Activities
§ Service Business
• Business to Client or Customer (B2C)
• Focus on providing intangible products, such as offering professional skills, proposals,
and expertise
• Render services with a fee
• Ex. Accounting firms, law firms, schools, medical clinic, banks, hair salons and spas, and
repair shops
Advantages
Disadvantages
No need for inventory
Services are harder to value
Skill can be improved and can Less demand during economic
produce better service
downturns
§
Merchandising Business
• Business to Client or Customer (B2C)
• Commonly known as the “buy and sell” business
• Products are bought from manufacturers or other merchandisers and are all sold as is at
an amount higher (markup) than the purchase price (minimum 30%).
• Ex. Grocery stores, hardware, department stores, and drug stores
Advantages
Disadvantages
Good merchandising attracts Profits are highly dependent on
more customers
prices set by merchandise supplies
Merchandise
inventory
maybe
It is flexible to changes
perishable
§
Manufacturing Business
• Business to Business (B2B)
• Materials are bought to create a new product
• You make your own product and sell it to other business (Acquisition & conversion of raw
materials to finished goods through manual & technological labor)
• Ex. Food factories, garment factories, car manufacturing companies
Advantages
Disadvantages
Because of the scope of activities,
There is continuous demand on
manufacturing firms are often more
manufactured goods
labor and capital intensive
The cost of the manufactured
It is flexible to changes
products highly depends on the price
& availability of the raw materials
Accounting Concepts and Principles
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Generally Accepted Accounting Principles (GAAP)
o Determine what to record, when to record, and amount to record
o The rules and procedures necessary to define accepted accounting practice at a particular time
o A widely accepted set of rules, concepts, & principles governs application of accounting procedures
o Importance
§ Guide
• Has been developed by the accounting professionals to guide preparers of financial
statements in recording and reporting financial information regarding a business
enterprise
§ Aid
• Aiding in effective execution of the accounting procedure & in communicating the
financial condition of business
o Attempts to standardize and regulate accounting definitions, assumptions, and methods
o We are able to assume that there is consistency from year to year in the methods used to prepare a
company’s financial statements. Although variations may exist, we can make reasonably confident
conclusions when comparing one company to another
Philippine Accounting Standards (PAS)& Philippine Financial Reporting Standards (PFRS)
o New set of GAAP issued by ASC to govern preparation of financial statement
o Patterned after the revised International Financial Reporting Standards (IFRS) and International
Accounting Standards (IAS) issued by the International Accounting Standards Board (IASB)
o Philippine Financial Reporting Standards (PFRS) (ASC to FRSC)
§ Set of accounting standards issued by Financial Reporting Standards Council (FRSC)
Underlying Accounting Assumptions (GAMET)
o Going Concern Assumption
§ A business is assumed to remain in existence for an indeterminate period of time
§ This assumes that a company will continue to exist long enough to carry out its objectives and
commitments and will not liquidate in the foreseeable future
o Accrual Basic Assumption
§ Requires that all business transactions and other events are recognized in the accounting records
when they occur, rather than when the cash or equivalent is received or paid
§ Assumed that revenue is recorded in the period it is earned, regardless of the time the cash is
received or collected. The same is true for expense
§ Expense is recognized and recorded at the time it is incurred, regardless of time cash is paid.
§ Assumption adheres to revenue recognition, matching, and cost principles
o Monetary Unit
§ Assumes only transactions that can be expressed in terms of money are recorded
§ Hence, any non-financial or non-monetary information that cannot be measured in terms of
money are not recorded in the accounting books
o Economic Entity Assumption
§ Assumes that all of the business transactions are separate from the owner and therefore the two
should be treated separately
§ Any personal transaction of its owner should not be recorded in the company’s accounting book,
and vice versa, unless the owner’s personal transaction involves investing or withdrawing
resources from the business
§ Accounting records of the business must not include the personal assets/liabilities of owner
o Time-Period Assumption
§ The life of an economic entity can be divided into artificial time periods for the purpose of
providing periodic reports on the economic activities of the entity
§ Means financial statements are prepared at equal time intervals
§ Requires a business to complete the whole accounting process of a business over a specific
operating time period (Monthly, quarterly, annually)
§ Annual: Calendar year (Twelve-month period that ends in December 31) & Fiscal year (Twelvemonth period which may or may not end on December 31)
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Basic Accounting Principles (FOMAMA COCO REVERE)
o Full Disclosure Principle
§ In preparation of F/S, accountant should include sufficient information to permit the stakeholders
to make an informed judgment about the financial condition of the enterprise
§ If certain information is important to an investor or lender using the financial statements, that
information should be disclosed within the statement or in the notes to the statement
§ A company usually lists its significant accounting policies as the first note to its financial statements
§ Cash and Cash Equivalent
• Cash on Hand
• Cash on Bank
• Cash in Foreign Currency
o Objectivity Principle
§ Requires business transactions to have some form of impartial supporting evidence or
documentation
§ Also, it entails that bookkeeping and financial recording be performed with independence, that
is free of bias and prejudice
o Materiality Principle
§ Business transactions that may affect the decision of a user of financial information are considered
important or material, and thus, must be reported properly
§ Principles allows an accountant to violate another accounting principle if an amount is insignificant
or immaterial (10K may not be material to Ayala Corp but material to small bus.)
o Matching Principle
§ Requires that expenses be matched with revenues
§ Means that in a given accounting period, the revenue recorded should have its corresponding
expense recorded, in order to show the true profit of the business
§ The use of accrual accounting procedures assists the accountant in allocating revenues and
expenses properly among accounting periods that compose the life of a business enterprise
o Cost Principle
§ Cost: Amount spent (cash or the cash equivalent) when an item was originally obtained
§ Amounts shown in financial statements are referred to as historical cost amounts
§ All assets acquired should be valued and recorded based on the actual cash equivalent or
original cost of acquisition, not the prevailing market value or future value
o Conservatism or Prudence Principle
§ Given two options in the valuation of business transactions, the amount recorded should be the
lower rather than the higher value
§ If a situation arises where there are two acceptable alternatives for reporting an item,
conservatism directs the accountant to choose the alternative that will result in less effect on net
income and/or less asset account
§ Helps accountant break a tie while remaining unbiased and objective
§ Leads accountants to anticipate or disclose losses, but it does not allow a similar action for gains.
Losses and costs are recorded only when they are probable and can be reasonably estimated,
while gains are recorded only when they are realized
o Revenue Recognition Principle
§ Revenues are recognized as soon as good have been sold (delivered to customers) or a service
has been rendered, regardless of when the money is actually received
§ Revenue is recognized when the earning process is virtually complete and an exchange transaction
has occurred
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Other Characteristics of Accounting Information
o When financial reports are generated by professional accountants, users expect that the accounting
information presented is reliable and verifiable. The consistency and comparability of the accounting
information reported are also expected from accountants
§ Financial statements must be relevant, reliable, and prepared in a consistent manner
• Helps a decision maker understand a company’s past performance, present condition, &
future outlook so informed decisions can be made in a timely manner
§ Reliable information is verifiable and objective
• Consistent information is prepared using same methods across accounting periods.
• Consistency thus allows meaningful comparisons to be made between different
accounting periods and between and among different companies
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Frater Luca Bartolomes Pacioli
o Italian monk and mathematician
o Father of Modern Accounting
o Book: Geometria, Proportioni et Proportionalita (Everything About Arithmetic, Geometry, Proportion, and
Proportionality)
The Accounting Equation
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Double-entry bookkeeping
o System in which at least one debit entry (left side) and at least one credit entry (right side) are entered
for each transaction
o Every transaction has two effects; For every debit entry, there will always be an equal credit entry
Duality
o Fundamental convention of accounting that necessitates the recognition of all aspects of an accounting
transaction.
o Underlying concept of the double-entry accounting systems that businesses employ today
The Basic Accounting Equation
o Ensuring equal debit effect and credit effect is fundamental to the universal acceptance of the basic
accounting equation
o Should be balanced always
o Assets = Liabilities + Owner’s Equity (or Capital)
§ Assets must equal to the sum of liabilities and owner’s equity
§ Equal sign: Ensures balance of movement in three main accounts being used in accounting
o Serves as the backbone of the entire accounting cycle
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Definition of an Account
o The accounting equation perfectly captures the major accounts or the main classifications of accounts
are assets, liabilities and owner’s equity (revenue and expenses)
o Account
§ Individual accounting record of movements (increases and decreases) in specific accounts
§ Movements in specific accounts are recorded in “journals” and “ledgers”
§ Assets accounts have normal balances of debit
§ Liability accounts & owner’s equity accounts have normal balances of credit
Definition and Preparation of Chart of Accounts
o Chart of Accounts
§ Listing of all the accounts and is usually tailored to the operations of the business
§ Functions as a guide to the accountant or bookkeeper in ensuring uniformity of and consistency
in the use of all the accounts in recording business transactions
§ Prepared in a manner that the five main or major accounts are grouped and organized
§ Businesses also just assign a range of numbers (block) to major accounts to accommodate
additional specific accounts that may be created or might arise in the future
§ Specific accounts may be coded numerically to facilitate a more efficient posting of the entries
to the ledger or in preparation for the transition to a computerized accounting system once the
business decides to acquire a computerized accounting system in the future
Major Accounts: Definition, Classification, and Examples
o Assets
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§
§
Resources controlled by the business as a result of past transactions and events from which
future economic benefits are expected to flow to the business
Anything of value that is owned by the business
Classifications
•
Current Assets (CRIP à Cash, Receivables, Inventories, Prepaid Items – AIR
(Advertising, Insurance, Rent))
o Reasonably expected to be realized in cash within one year from the reporting
date or the normal operating cycle, whichever is longer
o Owned by business wherein expected future cash flow or benefits will flow in the
business
o Consumed or converted into cash in an accounting period or one year
o Cash
§ Cash on hand (bills, coins, checks, money orders or bank drafts)
§ Cash deposited in bank (savings account – evidenced through ATM card;
earn interest every month or checking or current account – Evidenced
through cheque book; no interest gained)
§ Cash fund (petty cash fund, or payroll fund)
§ These are unrestricted in use.
§ Cash equivalents are short-term, highly liquid investments that are
acquired three months before maturity or earlier
o Accounts Receivable
§ Open accounts which represent the amount of money owed by the
customers to the business (Collectibles from customers)
§ Arises from business rendering services/selling goods to customers
§ Arises from trust & confidence of bus. to customers (Allow customers to
pay on future dates or credit terms – n/30, n/60, n/90, n/180)
o Notes Receivable (IOU = I owe you)
§ Represent the amount of money owed by the customer or debtor to the
business evidenced by a promissory note
§ Promissory note: A written and signed promise to pay by the maker to
payee a sum certain in money on demand at a specified future date
§ Must have stipulations if customers do not follow; there’ll be penalty
o Inventories
§ Represents assets held for sale in the ordinary course of business, in the
process of production for sale or in form of materials of supplies to be
consumed in production process or in rendering of services
§ Items placed on production in order to come up with finished product
(Binebenta)
§ Inventories of:
• Manufacturing Business
o Raw Material Inventory
o Work in Process Inventory (WIPI)
§ Items sent for further production
o Finished Goods Inventory
§ Finished product
• Merchandising Business
o Merchandise Inventory
§ Goods or stocks bought by company for reselling
purposes
• Service Business
o Unused Supplies
§ Represents supplies which remain unused at the
end of accounting period
§ Anything used up is considered as expense
o Prepaid Rent
§ Refers to an advance payment made by the business to cover for future
rental payments or commercial space
§ Prepaid Accounts (Prepaid AIR)
• Prepaid Advertising
• Prepaid Insurance (Down payment before using a service)
• Prepaid Rent
• Non-current Assets (LBMAF à Land, Building, Machineries, Equipment, Automobiles,
Furniture and Fixtures)
o If assets cannot be classified as current, it is a non-current assets
o Provide future benefits to company for more than one year
o If future economic benefits of the asset exceed one year, then the operating
cycle of the business is the basis for the asset classification
o Operating Cycle: Average time it takes the business to turn the cash used in the
business to cash received from selling goods or rendering services
o Land
§ Refers to the physical site owned by the business where the building is
situated
§ Not subject to depreciation
§ Must not be idle for it to be reported as non-current asset of the company
(Dapat ginagamit)
o Building
§ Refers to the physical structure owned and used by the business to conduct
its business operation
o Machineries
§ Includes laminating machines
o Equipment
§ Represents manual or automated machines used in the business and they
include photocopying equipment, computers, laptops, ring binders
o Automobiles
§ Includes delivery vehicles and vans
o Furniture and Fixtures
§ Represents assets like tables, chairs, filing cabinets, & display racks
§ Furniture: Movable
§ Fixtures: Immovable
• Contra-Assets
o Allowance for Doubtful Accounts (ADA)
§ Contra-asset or valuation account which refers to the portion of accounts
receivable that is estimated to be uncollectible at the end of a particular
accounting period
§ Estimated Accounts Receivable which will no longer be collected
• Ex. A/R = 100; ADA (Ex. 10%) = 10; Net A/R = 90
§ Declare allowance if di na nagbabayad yung customer and na break
yung promise to pay
§ How to estimate?
• Check open accounts of accounts receivable
• Ex. If terms and conditions to pay of Company A is n/60 but it’s
n/90 and it’s 30 days after, then you start to count it as part of
ADA
• Any receivable that falls after 1 year of accounting period,
declare it as ADA
o Accumulated Depreciation
§ Contra-asset or valuation account which refers to the aggregate portion
of the total cost of property, plant, and equipment that has been
charged to depreciation expense
§ Value of asset goes down or decreases
§ Cost of property, plant and equipment (PPE) that has been charged to
depreciation (Reduction of value of asset)
§ Land: Only asset that value does not depreciate
§ Ex. Selling a cellphone worth Php 50,000 after 5 years it was released
then its Accumulated Depreciation is Php 50,000 ÷ 5 = Php 10, 000
o Liabilities
§
§
§
§
Present obligations of an entity arising from past transactions or events, settlement of which is
expected to result in an outflow from business of resources embodying economic benefits
Represent claims against the assets of the business (What the business owes)
Represent the current obligation of the business
Classifications
• Current Liabilities (ANSUITUC à Accounts Payable, Notes Payable, Salaries
Payable, Utilities Payable, Interest Payable, Taxes Payable, Unearned Revenues,
Current Portion of Long Term Debt)
o Reasonably expected to be settled by payment of cash, delivery of goods or
performance of service within its normal operating cycle or within one year from
the reporting date, whichever is longer
o Accounts Payable
§ Open accounts which represent the amount of money owed by the
business to creditors or suppliers (On account, on credit, Credit terms)
o Notes Payable
§ Represents the amount of money owed by the business to the supplier or
creditor evidenced by a promissory note
o Accrued Liabilities
§ Salaries Payable (Pay on 15th and 30th)
§ Utilities Payable (Pay after usage)
§ Interest Payable (You made a loan so you pay the interest)
§ Taxes Payable (Pay business permits, barangay permits etc.)
o Unearned Revenues
§ Represents cash collected by the business in advance for a service or
good that is yet to be rendered or delivered
o Current Portion of Long Term Debt
§ Generally non-current asset but portion settled in 1 year falls here
• Non-current Liabilities (MBL à Mortgage Payable, Bonds Payable, Loans Payable)
(Collective Term: Long Term Debt)
o Obligations reasonably expected to be paid in cash beyond one year
o Mortgage Payable
§ Represents the amount of money borrowed by the business from a bank
or a lending institution which is secured by collateral (Security pledge to
the 3rd party creditor if company does not pay, they will sell property)
• Chattel Mortgage: Movable (Ex. Car)
• Real Mortgage: Immovable (Ex. House and Land)
o Loans Payable
§ Represents the amount of money borrowed by the business to third party
creditors
o Bond Payable
§ In need of huge amount of money
§ Company gives you money and issues bond certificate (Evidence of
debtness)
o Owner’s Equity
§
§
§
§
§
§
§
§
A.K.A. Residual Interest of the owner
Contains the net difference between total assets and total liabilities
Represents ownership and its terminology changes depending on the form of business
organization
If it is a sole proprietorship form of business organization, owner’s capital account is used and
this is classified under owner’s equity or equity (Ex. JP Photocopying Center, we use Mercado,
Capital account)
Partners’ capital and shareholder’s equity are used when the form of business organization is
partnership or corporation
Owner’s Capital Account
• The owner’s capital account is increased by additional contribution of the owner and
recognition of business’ net income and decreased by withdrawals of the owner and
recognition of business’ net losses
Owner’s Drawing Account
• Used when withdrawal is made by the owner to determine total withdrawals for each
accounting period
Owner’s Equity (CREW)
• Capital
+
o Original Capital: Initial Investment or Start-up capital
o Additional Capital: Additional investment of owner
• Revenue
+
• Expense
(−)
• Withdrawal
(−)
Drawing Account (Money of business 4 personal use)
o Revenues
§
§
Earnings arising from rendering services or selling of goods
Service Revenue
•
•
§
Interest Income
•
•
§
Sales
•
§
Earnings made by any business that is into rendering services
Term “revenue” is used and not “income” to distinguish that such an earning arises from
the main line of operations of the business
Represents interests credited by the bank to the account of the business arising from bank
deposits
Term “income” is used since earning interests from bank deposits is not the main line
operations of the business
Represents the earnings made by any business that is selling goods or merchandise
Professional Fees
•
•
•
•
Earnings made by professionals/experts from rendering services to clients
Professionals include doctors, lawyers, & certified public accountants, among others
Considered as revenue account or an expense account
To distinguish, a company’s chart of accounts can have both Professional Fees Income
and Professional Fees Expense
o Expenses
§
§
Costs being incurred by the business in generating revenues
Utilities Expense
•
§
Salaries Expense
•
§
Costs incurred associated with the services rendered normally by permanent and full-time
employees who are paid on a regular basis, usually monthly
Wages Expense
•
Costs incurred associated with the services rendered normally by contractual and
temporary employees and workers who are paid on hourly rate or based on output
§
Taxes and Licenses Expense
§
Costs of Sales
§
Supplies Expense
•
•
•
§
§
Costs incurred to register business, to acquire the right to operate, and to settle taxes
Cost of merchandise or goods that were sold during a particular accounting period
Amount of supplies that was used during a particular accounting period
Doubtful Accounts Expense
•
Amount of accounts receivable that is estimated as uncollectible and is recognized as an
expense in the current accounting period
Depreciation Expense
•
•
Costs associated with the usage of electricity, water, and communication for a particular
accounting period
Allocated portion of the cost of property, plant and equipment charged to expense in
the current accounting period
Accounts and Financial Statements
o Statement of Financial Position
§ Determine financial health of business through accounting equation (Balanced always)
§ Presents the assets, liabilities, and owner’s equity of the business
§ Statement of financial position accounts (Real Accounts): Assets, liabilities, &owner’s equity
o Income Statement
§ Balance Sheet
§ Presents revenues and expenses
§ Income statement accounts (Nominal Accounts): Revenues and expenses
o Statement of Cash Flow
§ A.K.A. Cash Flow Statement
o Statement of Changes in Equity
§ A.K.A. Capital Statement
o Notes to Financial Statement
•
Normal Balances and Increases and Decreases
Assets
Liabilities
Owner’s Equity:
• Owner, Capital
• Owner, Drawing
Revenues
Expenses
Contra-asset accounts:
• Allowance for Doubtful Accounts
• Accumulated Depreciation
•
Normal
Balance
Debit
Credit
Increase
Through +
Debit
Credit
Decrease
Through −
Credit
Debit
Credit
Debit
Credit
Debit
Credit
Debit
Credit
Debit
Debit
Credit
Debit
Credit
Credit
Credit
Credit
Credit
Debit
Debit
Business Transactions Analysis
o Identify the effect of each transaction to each accounting element
Penaflor Landscapers completed the following transactions
A
L
Paid for supplies purchased on account
↑
↓
Received cash from customers
No effect
↑
Made a payment on accounts payable
↓
↓
Purchased supplies on credit
↑
↑
Billed a client for landscaping services
No effect
↑
Made rent payment for month
No effect
↓
Received cash from customers for
No effect
↑
landscaping services
Paid employees’ salaries
No effect
↓
Purchased equipment on account
↑
↑
Received and paid for the equipment in
↓
↓
previous account
OE
No effect
↑
No effect
No effect
↑
↓
↑
↓
No effect
No effect
Accounting Cycle of a Service Business
•
Step 1
o Analysis of business transactions
§ Business Transactions
• Events which involve the exchange of values between 2 or more parties
• External Business Transactions (Ex. Bank, Creditors, etc)
o Economic events entered into between business and an outside party
• Internal Business Transactions (Ex. Payment of salaries)
o Economic events that occur entirely within the enterprise
§
o Note:
§
§
§
§
§
§
§
§
§
Business Documents
• Official receipts, invoices, sales, etc.
• Adhere to Objectivity principle
Add account name (Ex. Cash, Unused Supplies etc.) based on the transaction made
Put peso sign (Php or ₱) in every first transaction under every account
Make sure the business transaction is matched with the date stated
Enclose amounts in ( ) to indicate deductions or minus
If it is not financial in nature, do not record. Put NO ENTRY
After analyzing, get the total of each account. Indicate the peso sign
Add all assets. Then liabilities, and owner’s equity.
The final amounts should have peso sign and be double ruled or underlined twice.
Make sure the A = L + OE
o Example 1
1. Invested ₱ 2,000,000 by opening an account with BPI
2. Paid for 1 year rent of commercial space, ₱ 72,000
3. Paid for the business permit in the LGU, ₱ 10,000
4. Bought tables and chairs for office use, ₱ 5,000
5. Hired 2 staff to man the computer shop
6. Purchased 10 units of PC for ₱ 30,000 each
7. Received cash from customers for the computer
rental, ₱ 6,000
8. Paid staff for the 1st half, ₱ 2,500 each
9. Borrowed funds from BPI, ₱ 70,000
10. Purchased bond papers and ink, ₱ 4,000
o Example 2
1.
2.
3.
4.
Owner invested ₱ 2,000,000 worth of capital
Bought 10 tables & chairs worth ₱ 20,000 on account
Purchased 3 overhead projectors, ₱ 10,000 each
Received a bill from Meralco worth ₱ 8,000
5. Borrowed ₱ 50,000 bearing a note from BPI
6. Bought 20 school kits worth ₱ 100 each
7. Paid 5 teacher salaries ₱ 10,000 each
8. Paid staff for the 1st half, ₱ 2,500 each
9. Received payments for tuition fees worth ₱
50,000 from 5 students
10. Hired a security guard
•
Step 2
o Recording transactions in the Journal
§ A.K.A. Journalizing
§ Process of recording the transaction in the first book of account called the Journal
§ Normal Balances
Account Title
Debit (Dr)
Credit (Cr)
A=
L + OE
Current Assets (CRIP)
Current Liabilities (ANSUITUC)
Non-current Assets (LBMAF)
Non-current Liabilities (MBL)
Drawing
Contra-assets
Expenses
Capital
Revenue
§ Book of Accounts
• General Journal (GJ)
o The simplest form of a journal
o A.K.A Book of Original Entry
o Provides a chronological generation of the debits and credits resulting from the
analysis of business transactions
o Abbreviations come from Latin words
§ Debere = Dr
§ Credere = Cr
o Uses of the Journal
§ Provides chronological record of business transactions
§ Reveals in one record the complete effect of business transactions
§ Readily facilitates the discovery of errors in the recording process since
debits and credit amounts are immediately shown
o Advantages of the General Journal
§ Provides a systematic and chronological record of transactions
§ Simplifies the ledger as some details in the journal need not be written in
the ledger
§ Provides adequate explanation of entry and presents the account
debited or credited and related amounts
§ Ensures that the double-entry bookkeeping system is observed when
recording transactions
§
Helps in solving misunderstandings in business because it serves as proof
and legal evidence of transactions (Everything written in book of accounts
are valid)
o Parts
§ Heading
• Name of the Business (Ex. GWAPhotograph Studio)
• Book of Account (General Journal)
§ Date Column
§ Particular (Account Title and Explanation)
• Debit account: Extreme left of the first line
• Credit account: Indented half – inch on the next line
• Explanation of transaction: Extreme left of the next line below the
credit
o Before writing the explanation, put TO RECORD
o Ex. To record initial investment
• Skip 1 line before proceeding to the next transaction
§ Post Reference (PR) Column
• Chart of Accounts
o Assets = 100 – 199
o Liabilities = 200 – 299
o Owner’s Equity = 300 – 399
o Revenue = 400 – 499
o Expenses = 500 – 599
§ Debit Column
§ Credit Column
§ Page number
•
Step 3
o Posting journal entries to the ledger
§ A.K.A. Posting
§ Process of transferring the information found in the journal into the book of final entry known as
the ledger.
§ The ledger summarizes the increases or decreases of individual accounts
§ Book of Accounts
• General Ledger (GL)
o A.K.A. Book of Final Entry
o “Reference book” of the accounting system and is used to classify and summarize
transactions and to prepare data for basic financial statements
o Each account has its own record in the ledger.
o Compared to a journal, a ledger organizes information by account
o Accumulates all data necessary prior to preparation of financial statement
o Basically T-form of every account where the left side provides the data about
the debit entry and the right side provides data about the credit side
o Accounts in the General Ledger
§ Permanent Accounts (Real Accounts)
• Carried on to the next accounting cycle
• Assets, Liabilities, Capital
• Statement of Financial Position Accounts
§ Temporary Accounts (Nominal Accounts)
• Zero out after accounting period & cannot be carried to next
• Serve only for changes in owner’s equity account
• Revenue, Expenses, Drawing
• Statement of Comprehensive Income Accounts
o Uses of Ledger
§ Serves as a collective record of individual accounts used by business
§ Used to sort all entries made in the GJ in chronological order and to group
all transactions that affect individual accounts in order to facilitate
preparation of financial statements
§ Provides last record of financial information before financial statements
are prepared
o Advantages of the Ledger
§ Provides detailed information about revenues and expenses in one place,
hence results of business operations are easily determined (SCI)
§ Provides detailed information abt. assets, liabilities & owner’s equity hence
financial health/position of business are easily known (SFP)
§ Assist management in monitoring business performance through information
in individual ledger accounts
§ Serves as a tool for auditors to track the flow of the business transactions
for a given period of time
o Parts of the General Ledger
Account Title
Acct. #
Date
§
§
§
§
§
Particular
PR
Debit Date
Particular
PR
Credit
Book of Account (General Ledger)
Account Title
Account Number
Date Column
Particular Column
• More concise version of particular in the journal
• Ex. GJ: To record initial investment; GL: Initial Investment
§ PR Column
• Write journal number where the account is located (Ex. GJ–1)
§ Debit Column
§ Date Column
§ Particular Column
§ PR Column
§ Credit Column
o Footing
§ Done after posting in the
ledger
§ Foot Debit and Credit Sides (“Foot” means to Total)
§ Write the sum of debit and sum of credit
§ Cross Footing: Find balance by finding the difference between the debit
and credit totals (Debit – Credit or Credit – Debit)
§ Balance is written on debit or credit side with larger total
§ After which, double rule it (Double underline it)
§ Only one account under account title: Double rule it immediately.
•
Step 4
o Preparing the trial balance
§ From the ledger, accounts with balances will be summarized in a trial balance
§ List of accounts and their balances at a given time
§ General Ledger balances are segregated into debit (A, W, E) and credit balances (L, C, R)
hence it shows the equality of debit and credit
§ Assists in the identification and rectification (correction) of errors
§ Components of a Trial Balance
• Heading
o Name of Business or Company
o Name of Statement (Trial Balance)
o End of Period Date
• Account Number
• Account Title
• Debit
• Credit
§ Arrangement of Accounts
• Current Asset
Owner’s Equity
• Non-current Asset
Revenue
• Current Liability
Expenses
• Non-current Liability
§ Steps
• Indicate in the heading (centered) the details of the trial balance (Name of the business,
the term “Trial Balance”, and the date)
• In their proper numerical order, make a listing of all account titles (List according to Acct.
#)
• Get the account balance of each ledger account and write them under their
corresponding debit or credit column
• Foot or add the debit and credit columns of the trial balance
• Check whether the debit totals and credit totals are equal. They must be equal,
otherwise your trial balance has error
• Double-rule the totals of the debit and credit columns
§ Since a trial balance only proves the equality of the debits and the credits after posting, a
“balanced” trial balance does not guarantee accuracy of journalizing and posting.
§ Errors in a “balanced” trial balance
• A transaction is completely omitted
• A correct journal entry is not posted
• A journal entry was posted twice
• Incorrect account titles are used in journalizing or posting
• Offsetting errors made in recording the amount of the transaction
§ Errors in an “unbalanced” trial balance
• A trial balance that is not “balanced” is never correct
• You should: Locate the error and Correct the error
• Errors of this kind usually emanate from
o Mathematical mistakes (Wrong addition or subtraction)
o Incorrect postings (Posting on the wrong side of amount, incomplete posting)
o Incorrect transcription (Error in transferring the balance from the ledger)
•
•
•
Locating the error in an “unbalanced” trial balance begins with determining the amount
of difference between the two columns
o Error in addition or subtraction
§ A difference of Php 1, 10, 100, or 1000
§ Re-add the trial balance columns and recalculate the account balances
o Error in posting on the wrong side of the account
§ Difference that is divisible by 2
§ You can scan the trial balance to check whether a balance equal to half
the difference has been posted on the wrong side
o Transposition error
§ A difference that is divisible by 9
§ Ex. 15,000 instead of 51,000
§ Transplacement Error or Slide Error
• A difference that is divisible by 9 or 99
• Results from misplacement of the decimal point
§ Retrace the account balances on the trial balance to check whether there
was an error in transferring the balances from the ledger
o Account Balance has been omitted from the trial balance
§ Difference that is neither divisible by 2 nor 9
§ Scan the ledger, then the journal to check whether a posting or a journal
entry have been omitted
When the trial balance is “unbalanced”, it is suggested that the error be located first
from the trial balance, then to ledger and then to the journal & business documents
Step 5
o Journalizing and posting adjusting journal entries
§ Classification of Adjusting Entries
• Supplies
o AJE
§ Supplies Expense (Used up portion)
Unused Supplies
• Depreciation
o If you don’t use them, they will still lose value (BMAF Assets) (Except Land)
o Done to allocate the cost, less salvage value (A.K.A. Residual Value) of the PPE
(Property, Plant, Equipment) (Collective term for non-current assets) over its useful
life
o If not given date acquired, assume it was given on the 1st day of the year
o Every depreciation expense, there’s accumulated depreciation (Contra asset)
o Adjusted Journal Entry (AJE)
§ Depreciation Expense – B/M/A/F
xxx (actual dep.)
Accumulated Depreciation – B/M/A/F
xxx
To adjust # months/years of depreciation for B/M/A/F
o Formula
§
𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 =
𝑪𝒐𝒔𝒕 & 𝑺𝒂𝒍𝒗𝒂𝒈𝒆 𝑽𝒂𝒍𝒖𝒆
# 𝒐𝒇 𝑼𝒔𝒆𝒇𝒖𝒍 𝑳𝒊𝒇𝒆
Actual Depreciation:
- First: Days 1 – 15 of
acquisition of equipment
(Include the said month)
- Last: Days 16 – 30
(Include the next month)
o Example
§ An office space was acquired at a cost Php 2,500,000 last Aug. 7. Its
estimated salvage value after 20 years is Php 150,000. Provide AJE
𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 =
𝑪𝒐𝒔𝒕 & 𝑺𝒂𝒍𝒗𝒂𝒈𝒆 𝑽𝒂𝒍𝒖𝒆
# 𝒐𝒇 𝑼𝒔𝒆𝒇𝒖𝒍 𝑳𝒊𝒇𝒆
=
𝟐,𝟓𝟎𝟎,𝟎𝟎𝟎 & 𝟏𝟓𝟎,𝟎𝟎𝟎
𝟐𝟎 𝒚𝒆𝒂𝒓𝒔
Yearly = Php 117, 500
;
Actual = Php 117, 500 x <= = Php 48,958.33
Adjusted Journal Entry (AJE)
Depreciation Expense – Building
48,958.33
Accumulated Depreciation – Building
48,958.33
To adjust 5 months of depreciation for the building
§
June 19 Purchased 15 units of computer, Php 300,000.00. Residual value
is Php 90,000.00. Estimated useful life is 3 years. Provide AJE for Dec. 31
𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 =
𝑪𝒐𝒔𝒕 & 𝑺𝒂𝒍𝒗𝒂𝒈𝒆 𝑽𝒂𝒍𝒖𝒆
# 𝒐𝒇 𝑼𝒔𝒆𝒇𝒖𝒍 𝑳𝒊𝒇𝒆
=
𝟑𝟎𝟎,𝟎𝟎𝟎 & 𝟗𝟎,𝟎𝟎𝟎
𝟑 𝒚𝒆𝒂𝒓𝒔
Yearly = Php 70, 000
@
Actual = Php 70, 000 x <= = Php 35,000.00
Adjusted Journal Entry (AJE)
Depreciation Expense – Machineries & Equipment 35,000.00
Accumulated Depreciation-Machineries & Equip.
35,000.00
To adjust 6 months of depreciation for the equipment
•
Bad Debts
o A.K.A. Doubtful Accounts
o In the ordinary course of business, it is just but normal to encounter customers who
later on, would not be able to pay their dues to the business entity
o Adjusted Journal Entry (AJE)
§ Doubtful Accounts Expense
xxx
Allowance for Doubtful Accounts
xxx
To adjust _% percent of uncollectible A/R
o Example
§ There is Php 1,000,000 accounts receivable at the end of the year, and it
is determined that 5% of these receivables could be uncollectible. What is
the amount of bad debts?
1,000,000 x 5% uncollectible A/R = Php 50,000
Doubtful Accounts Expense
50,000
Allowance for Doubtful Accounts
50,000
To adjust 5% percent of uncollectible A/R
§
Assume that Xerox Photocopying Center is using percentage of accounts
receivable in estimating doubtful accounts. However, it was determined
98% of these receivables could be collected. How much therefore is the
amount of bad debts?
1,000,000 x 2% = Php 20,000
Doubtful Accounts Expense
20,000
Allowance for Doubtful Accounts
20,000
To adjust 2% percent of uncollectible A/R
•
Prepaid Expenses
o Items that are paid even before they are incurred
o AJE
A/I/R Expense
(unused portion)
xxx
Prepaid A/I/R
xxx
To adjust ___ months of expired A/I/R
o Example
§ Dra. Vicky Kho signed a 3-yr contract worth Php 75,000 to advertise their
aesthetic restoration via billboard last December 5. What is the amount
expired portion (expense) if we are to record at year end?
A;,BBB
C
= 𝑃ℎ𝑝 25,000
<
25,000 ∗ <= = 𝑷𝒉𝒑 𝟐, 𝟎𝟖𝟑. 𝟑𝟑
Advertising Expense
2,083.33
Prepaid Advertising
To adjust 1 month of expired advertising
§
2,083.33
The company acquired a 5-yr insurance policy for Php 120,000 on Feb.
20. What is the amount expired portion (expense) if we are to record at
year end?
<=B,BBB
<B
= 𝑃ℎ𝑝 24,000
24,000 ∗ <= = 𝑷𝒉𝒑 𝟐𝟎, 𝟎𝟎𝟎
;
Insurance Expense
20,000.00
Prepaid Insurance
20,000.00
To adjust 10 months of expired insurance
§
Paid 1-yr rent in advance last May 1, 2017 amounting Php 72,000.
What is the amount expired portion (expense) if we are to record at
year end?
D
72,000 ∗ <= = 𝑷𝒉𝒑 𝟒𝟖, 𝟎𝟎𝟎
Rent Expense
48,000.00
Prepaid Rent
To adjust 8 months of expired rent
48,000.00
•
•
•
Accrued Expenses
o Expenses that have been incurred but not yet paid
o Best example of accrued expense are utilities (electricity, water), salaries, taxes,
interest
o AJE
S/U/I/T Expense
(accrued portion)
xxx
S/U/I/T Payable
xxx
To adjust accrual of S/U/I/T
o Example
§ The office assistant and the account executive were paid salaries on May
13 & 27. At month end, the employees have worked for 3 days (May
29,30,31) beyond the last pay period. Each of the employee’s salary rate
is Php 7,800 per month or 300 per day (7,800/26 working days). What
is the account to be accrued for 2 employees for 3 days?
300 * 3 days = Php 900 * 2 employees = Php 1,800
Salaries Expense
1,800
Salaries Payable
1,800
To adjust accrual of salaries
Deferred Revenue
o A.K.A. Unearned Revenue
o Revenues that have been collected but not yet earned or performed
o AJE
§ Unearned Revenue
xxx
_______ Revenue
xxx
o Example
§ Assume that on July 20, Xerox Photocopying Center received 3,000 from
a student-client for photocopying services which is expected to be
completely rendered on August 5. Assume further that as of July 31, 40%
of the service had already been completed & thus earned. What is its AJE?
OJE
Cash
3,000
Unearned Revenue
3,000
AJE
Unearned Revenue
1,200
Service Revenue
1,200
To adjust 40% of the printing services earned
Accrued Revenue
o Revenues that have been earned but not yet collected (Performed but not yet
collected) (What you need to collect)
o AJE
§ _______ Receivable
xxx
_________ Revenue
xxx
o Example
§ Last March 1,2018, Jonet Company entered into an annual service contract
worth 120,000. Their client agreed to pay at the end of the contract term.
Provide the AJE at December 31.
<B
OJE: N/A (Wala pang nababayaran); AJE: 120,000 (<=) = Php 100,000
Accounts Receivable
100,000
Service Revenue
100,000
§
•
The Need for Adjustments
• Reflect in the accounts information on economic activities that have occurred but have not
yet been recorded
• Assign revenues to the period in which they are earned, and expenses to the period in
which they are incurred
• Measure properly the profit for the period and to bring related asset and liability
accounts to correct balances for the financial statements
• Change account balances at the end of the period from what is the current balance of
the account to what is the correct balance for proper financial reporting
Step 6
o Preparing the adjusted trial balance
§ After all the adjusting entries have been journalized and posted, we can now prepare the
adjusted trial balance
§ Worksheet
• Working tool that is multi-column in form and that may be used in the adjustment process
and in preparing the financial statements
• Neither a journal nor a ledger
• Helpful in drafting adjusting entries and preparing financial statements
• Components
o Heading
§ Name of the Business
§ “Worksheet”
§ “For the Year Ended __________ (End Date)
o Account Number
o Account Name
o Unadjusted Trial Balance
o Adjustments
o Adjusted Trial Balance
o Income Statement
o Balance Sheet
§ Steps
• If new accounts used for the adjustments are not present on the accounts of the business,
put the new accounts below the current accounts on the worksheet
• In the Adjustments column, indicate the number enclosed in the parenthesis (Ex. (1)) for
the accountant to know what transaction the adjustment is pertaining to.
• Once the adjustments are posted, prepare trial balance
o Add the amounts if they are both on the same side (Dr-Dr) or (Cr-Cr)
o Subtract the amounts if they are on a different side (Dr-Cr)
o Put the new amount on the side that is higher (Ex. Dr: 1,000; Cr: 700; Put the
new amount or 300 on the Dr side)
o Make sure you put the correct amount on the correct side
o Add all the amounts on Dr side and Cr side.
o Make sure it is balanced
o Double rule the final amounts
• Income Statement on the Worksheet
o Transfer the amounts of revenue and expense accounts (Nominal accounts)
o Make sure to put the amounts on the correct side
o Add all the amounts on Dr side and Cr side.
o Double rule the amount on the greater side
o Subtract the amount on the greater side to the lesser side
o Put the answer below the lesser amount
o Add the lesser and new amount
o The answer should be equal and balanced with the amount on greater side
•
•
Balance Sheet of the Worksheet
o Transfer amounts of assets, liabilities&owner’s equity account(Real accounts)
o Make sure to put the amounts on the correct side
o Add all the amounts on Dr side and Cr side.
o Double rule the amount on the greater side
o Subtract the amount on the greater side to the lesser side
o Put the answer below the lesser amount
o Answer should be equal to the new amount on the income statement to know if it
is balanced
o Add the lesser and new amount
o The answer should be equal & balanced with the amount on the greater side
Step 7
o Preparing the financial statements
§ Statement of Comprehensive Income (SCI) (Income Statement)
• Formal statement showing financial performance of business for period of time
• Financial performance: Revenues earned less expenses incurred.
o Results of the Operation
§ Revenue > Expenses : Net Income
§ Revenue < Expenses: Net Loss
§ Revenue = Expenses: Breakeven
• Parts
o Heading
§ Name of the Company
§ Name of F/S “Statement of Comprehensive Income”
§ Period Covered “For the ___ (year/month) ended ____ (End Date)
o Body
§ Revenue
§ Expenses
• Presented in descending order (Highest value to Lowest Value)
• Except Miscellaneous Expense (Always last)
• Use this if problem did not state if you will arrange accounts by
account number
• Presented in order of the account number
• Format or Steps
o Natural Form (Single-step)
§ Presenting the income statement of a service business
“Revenue”
-“Less: Operating Expense”
---“Net Income or Net Loss”
₱ xxx (Cr Column)
₱ xxx (Dr Column)
xxx
xxx (Total of Exp;
Cr Col. of last acct)
₱ xxx (Rev – Exp)
(DOUBLE RULE)
o Functional Form (Multi-step)
§ Presenting the income statement of a merchandising business
“Revenue”
-“Less Operating Expense”
-“Operating Income”
“Less Interest Expense”xxx
Income Tax Expense
Add Other Income
(ex. Interest Income)
Net Income
§
xxx
xxx
xxx
xxx
xxx
xxx
xxx (Total of Exp)
Statement of Changes in Equity (SCE) (Capital Statement)
• Amount of net income arrived SCI will be used here
• Also a formal statement that shows the movements in equity accounts in a given period
of time
• Presents equity of:
o Owner: Sole Proprietorship
o Partners: Partnership
o Stockholders: Corporation
• Parts
o Heading
§ Name of Company
§ Name of Financial Statement “Statement of Changes in Equity”
§ Period Covered “For the Year Ended ____ (End Date)”
o Body
§ Additionals
• Net Income
• Additional Investment
§ Deductions
• Net Loss
• Withdrawal
§ End Capital
“____, Capital, Beginning”
“Add: Net Income”
“Additional Investment”
“Subtotal”
“Less: Net Loss”
“_____, Capital Withdrawal”
_____, Capital, End
§
xxx (DOUBLE RULE)
₱ xxx (Cr Column)
₱ xxx
₱ xxx (Cr Column)
xxx
xxx
₱ xxx (Capital B. –
Withdrawal) (Cr)
(DOUBLE RULE)
Statement of Financial Position (SFP) (Balance Sheet)
• The amount of ending capital arrived at SCE will be used here
• Financial health of the bus.(If not balanced, there may be sickness/poor financial health)
• Shows balances of the assets, liabilities, and owner’s equity accounts at a particular
period (A = L + OE)
•
•
Parts
o Heading
§ Name of Company
§ Name of Financial Statement “Statement of Financial Position”
§ End Date (Ex. December 27, 2017)
o Body
§ Assets
• Current Assets: CRIP & Allowance for Doubtful Accounts(Dr in () )
• Non-current Assets: LBMAF & Accumulated Depreciation(Dr in () )
§ Liabilities
• Current Liabilities: ANSUITUC
• Non-current Liabilities: MBL
§ Equity
• End Capital
Format
o Report Form
§ Vertical Presentation (Downward sequence)
o Account Form
§ Horizontal Presentation (Assets: Left side; L & OE: Right side of SFP)
ASSETS
Current Assets
---Total Current Assets
Noncurrent Assets
---Total of Noncurrent Assets
Total Assets
LIABILITIES
Current Liabilities
---Total Current Liabilities
Noncurrent Liabilities
---Total of Noncurrent Liabilities
Total Liabilities
OWNER’S EQUITY
_____, Capital, End
Total Liabilities and Owner’s Equity
₱ xxx (Dr Column)
xxx
xxx
₱ xxx (Cr Column)
₱ xxx (Dr Column)
xxx
xxx (
xxx
₱ xxx (CL + NCA)
(DOUBLE RULE)
₱ xxx (Dr Column)
xxx
xxx
₱ xxx (Cr Column)
₱ xxx (Dr Column)
xxx
xxx
xxx
₱ xxx (CL + NL)
(DOUBLE RULE)
₱ xxx (Cr Column)
₱ xxx (Cr Column)
(DOUBLE RULE)
•
Step 8
o Journalizing and posting closing entries
§ A.K.A. Cleaning entries
§ Setting the temporary or nominal accounts such as revenue, expense, and drawing accounts to
zero in order to measure operating results of the next accounting period
Accounts to close
Revenue
Expenses
Drawing
Net Income
Net Loss
•
Closing Entries
Service Revenue
Income Summary
To close revenue account
Income Summary
Expenses
To close expense accounts
Income Summary
Owner’s Withdrawal
To close drawing account
Income Summary
Owner’s Capital
To close net income to Income Summary
Owner’s Capital
Income Summary
To close net loss to Income Summary
Step 9
o Preparing post-closing trial balance
§ The balances of the accounts in the post-closing trial balance are brought forward as the
beginning balances of the same account in the next accounting period
§ Parts
• Heading
o Name of Company
o Name of Financial Statement “Post-closing trial balance” (Based on SFP)
o End Date (Ex. December 27, 2017)
• Account Number
• Account Name
• Dr
• Cr
§ Steps
• As you prepare, use the amounts on the SFP for the post-closing trial balance
• Arrange accounts from CA à NCA à CL à NCL à OE
• Make sure you copy the amounts for each account properly
• Add all the amounts on the debit side
• Add all the amounts on the credit side
• Make sure that the answer is the same and are balanced
• Double rule the final amount
Merchandising Business
•
•
•
•
•
•
Merchandising Business
o Type of business organization which is engaged in the purchasing merchandise from the suppliers at
cost and selling those items to a customer at a higher price
o Primary Purpose: To engage in the buying and selling of goods or merchandise
o Normal Operations consist:
§ Buying of merchandise
§ Selling of merchandise
§ Billing customers
§ Collecting customer accounts
Merchandise Inventory
o Refers to an item bought by a business for the purpose of reselling it
Merchandise Inventory, Ending
o A.K.A. Stocks
o It is classified as a current asset in the SFP because it is expected to provide future benefits, by being
sold within a period of one year
o Once sold, the business expects to receive cash from the customers
2 Inventory Systems
o Perpetual
§ Maintains a detailed cost of each inventory & continuously records
§ Always update balance of inventory
§ Low volume products (Handful & Homogenous products only) with high costs
o Periodic
§ Does not maintain a detailed record of inventory (Update through the use of barcodes)
§ Wait for a month or year before you count how much was sold
§ High volume of products, low cost products (Heterogenous) (Supermarkets)
Shipping Terms
o Terms of sales; Pertain to the transportation cost incurred in the delivery of goods
o FOB (Free On Board) (Shipment term used to indicate whether the seller/buyer is liable for goods that
are damaged or destroyed during shipping)
§ FOB Shipping Point (Buyer)
• Charged to Merchandise Inventory
• Goods delivered are free on board only up to the shipping point of seller’s business
• Buyer is at risk and takes ownership of the goods
• Buyer shoulders the transportation cost & buyer owns goods even on transit
• Journal Entry
Merchandise Inventory
Cash
§ FOB Destination (Seller)
• Charged to Freight Out
• The goods delivered are free on board up to the buyer’s point of business
• Seller retains the risk of loss until the goods reached the buyer
• Seller shoulders the transportation cost
• Sellers owns goods until it reaches its destination
• Journal Entry
Freight Out (A.K.A. Delivery Expense)
Cash
Purchase/Sales Discount
o A.K.A. Cash Discount
o Intended to encourage customers to promptly pay their accounts
o The discount is allowed only if collection from customers is made on or within the discount period
o Discount Period: Purchase date plus the specified period of time
•
•
Credit Terms
o Arrangements agreed upon between the buyer and the seller with respect to the method of payments
for goods sold. May be expressed as:
§ n/30 (net of 30 days): Payments made not later than 30 days from the date of invoice
§ 2/10, 5/10, 2/15, 2/10, n/60
o Encourage prompt payment for bulk purchase/sale (Ex. Sept. 1 +10 days = Discount until Sept. 11)
o Ex. 2/10, n/30 (2: % of discount; 10: # of days (Discount Period, Date sold + Denominator)
Proforma Merchandise Journal Entries (Buying Activities of Perpetual Inventory System)
o Purchase of merchandise in cash
Example
§ Merchandise Inventory xxx
Merchandise Inventory
2,000,000.00
Cash
xxx
Cash
2,000,000.00
To record purchase of _______
To record purchase of 10 units of
Hermes Bag
Effect: A (+/-) = L (NE) + OE (NE)
o Purchase of merchandise on account
Example
§ Merchandise Inventory
xxx
Merchandise Inventory
2,000,000.00
Accounts Payable
xxx
A/P
2,000,000.00
To record purchase of _______ on account
To record purchase of 10 units of
Hermes Bag on account
Effect: A (+) = L (+) + OE (NE)
o Purchase of merchandise on account with down payment Example
§ Merchandise Inventory
xxx
Merchandise Inventory 2,000,000.00
Cash
xxx
Cash
400,000.00
Accounts Payable
xxx
A/P
1,600,000.00
To record purchase of _______ on account
To record purchase of 10 units of
with ____% down payment
Hermes Bag on account with
Effect: A (+/-) = L (+) + OE (NE)
20% down payment
o Purchase of merchandise bought on account without purchase discount
§ Accounts Payable
xxx
Cash
xxx
Purchase Discount: Can be determined with credit terms (Ex. 2/10, n/30)
Ex. Date: Sept 1; With discount: Until Sept. 10; Date Payed: Sept. 11 (No discount) (You can
have 2% discount if you pay in 10 days, no discount if you pay further than that)
o Purchase of merchandise bought on account with purchase discount
§ Accounts Payable
xxx
(Total Amount)
Cash
xxx (Remaining Amount)
Merchandise Inventory
xxx (Discount Amount)
o Return of merchandise bought on account (Return: Due to defect, damage, wrong specification,
wrong item)
§ Accounts Payable
xxx
Merchandise Inventory
xxx
Effect: A (-) = L (-) + OE (NE)
o Return of merchandise bought on cash
§ Cash
xxx
Merchandise Inventory
Effect: A (+/-) = L (NE) + OE (NE)
xxx
•
Proforma Merchandise Journal Entries (Selling Activities of Perpetual Inventory System)
o Sales of merchandise in cash
§ Cash
xxx
Effect: A (+) = L (NE) + OE (+)
Sales
xxx (Selling Price)
To record sale of merchandise in cash
Costs of Goods Sold
xxx
Merchandise Inventory
xxx
To record costs of goods sold
(Original Price) Effect: A (−) = L (NE) + OE (−)
o Sales of merchandise on account
§ Accounts Receivable
xxx
Sales
xxx (Selling Price)
To record sale of merchandise on account
Costs of Goods Sold
xxx
Merchandise Inventory
xxx
To record costs of goods sold
Effect: A (−) = L (NE) + OE (−)
(Original Price)
o Sales of merchandise on account with down payment
§ Cash
xxx
Accounts Receivable
xxx
Sales
xxx
To record sales of _______ on account
with ____% down payment
Costs of Goods Sold
xxx
Merchandise Inventory
xxx
To record costs of goods sold
Effect: A (+) = L (NE) + OE (+)
Effect: A (+/+) = L (NE) + OE (+)
Effect: A (−) = L (NE) + OE (−)
(Original Price)
o Collection from customers for merchandise sold on account without sales discount
§ Cash
xxx
Effect: A (+/−) = L (NE) + OE (NE)
Accounts Receivable
xxx
o Collection from customers for merchandise sold on account with sales discount
§ Cash
xxx
Effect: A (+/−) = L (NE) + OE (−)
Sales Discount
xxx (Contra Sale)
Accounts Receivable
xxx
Sales Discount is computed from original receivable minus returns and allowances
o Return of merchandise bought on account (Return: Due to defect, damage, wrong specification, wrong
item)
§ Sales Returns & Allowances xxx
(Contra Sale) Effect: A (−) = L (NE) + OE (−)
Accounts Receivable
xxx
Merchandise Inventory xxx
Costs of Goods Sold
o Return of merchandise sold in cash
§ Sales Returns & Allowances xxx
Cash
Merchandise Inventory xxx
Costs of Goods Sold
(Contra Sale) Effect: A (+) = L (NE) + OE (+)
xxx
(Contra Sale) Effect: A (−) = L (NE) + OE (−)
xxx
(Contra Sale) Effect: A (+) = L (NE) + OE (−)
xxx
•
Example: ResMerl SubCon Fashion House (Steps 1 – 2: Analyzing and Journalizing business transactions)
o Oct. 1 Purchased various garments from Lacoste, Inc. Php 580,000. Terms: 2/10, n/30
Merchandise Inventory
580,000
Accounts Payable - Lacoste
580,000
To record purchase of merchandise on account
o Oct. 2 Received credit memo (issued by supplier) for merchandise purchase on Oct. 1, Php 12,000
Accounts Payable
12,000
Merchandise Inventory
12,000
To record received credit memo for merchandise return
o Oct. 4 Made partial payments to Lacoste, Inc. Php 200,000
Accounts Payable
200,000
Cash
200,000
To record partial payments to Lacoste Inc.
o Oct. 7 Sales for the week: Cash Php 159,000; On-account, Php 150,600. Assume total cost of goods
sold is Php 247,680
Cash
159,000
Accounts Receivable
150,600
Sales
309,600
To record sales for the week
Costs of Goods Sold
247,680
Merchandise Inventory
247,680
To record costs of goods sold
o Oct. 8 Made partial payments to Lacoste, Inc. Php 147,200
Accounts Payable
147,200
Cash
147,200
To record partial payments to Lacoste Inc.
o Oct. 10 Received various novelty items, Php 300,000. Terms: 25% down, Balance 2/10, n/30
Merchandise Inventory
300,000
Cash
75,000
Accounts Payable
225,000
To record purchased novelty items on account with down payment
o Oct. 11 Paid Lacoste, Inc. in full
Accounts Payable
220,800
Cash
209,440
Merchandise Inventory
11,360
To record full payment of merchandise bought on
account from Lacoste Inc.
o Oct. 14 Collection from credit customers, Php 98,675
Cash
98,675
Accounts Receivable
98,675
To record collection from credit customers
o Oct. 26 Purchased various goods, Php 350,000 Terms: 5/15, n/30, FOB Shipping Point 5,000
Merchandise Inventory
350,000
Accounts Payable
350,000
To record purchase of merchandise on account
Merchandise Inventory
5,000
Cash
5,000
To record payment for shipping
•
Step 3: Posting journal entries to the ledger
•
Step 4: Preparing the trial balance
o Arrangement
§ Assets
• CRIP
• ADA
• LBMAF
• Accu. Dep.
§ Liabilities
• ANSUITUC
• MBL
§ Owner’s Equity
• Capital
• Withdrawal
§ Revenue
• Sales
• Sales Discount
• Sales Returns and Allowances
§ Cost
• Cost of Goods Sold
§ Expenses
• SSWUT-DDAIR
RESMERL SUBCON FASHION HOUSE
UNADJUSTED TRIAL BALANCE
OCTOBER 31, 2017
Account Number
Account Name
Cash
Accounts Receivable
Merchandise Inventory
Accounts Payable
Sales
Costs of Goods Sold
Total
Dr
Cr
378,965.00
51,925.00
963,960.00
575,000.00
309,600.00
247,680.00
Php 1,263,565
Php 1,263,565
•
•
Step 5: Journalizing and posting adjusting journal entries
Step 6: Preparing the adjusted trial balance
KEDBERI TRADING CO.
ADJUSTED TRIAL BALANCE
OCTOBER 31, 2017
Account Name
Cash
Accounts Receivable
Merchandise Inventory
Office Supplies
Store Supplies
Prepaid Rent
Office Equipment
Store Equipment
Accounts Payable
Loan Payable
C.B. Capital
C.B. Withdrawal
Sales
Sales Returns and Allowances
Cost of Goods Sold
Utilities Expense
Salaries Expense
Office Supplies Expense
Store Supplies Expense
Rent Expense
Depreciation Expense - OE
Accumulated Depreciation - OE
Depreciation Expense - SE
Accumulated Depreciation - SE
Total
•
Dr
1,472,965.00
282,675.00
440,936.00
2,050.00
2,300.00
22,500.00
20,000.00
25,000.00
Cr
580,000.00
370,000.00
500,000.00
5,000.00
2,215,200.00
15,200.00
1,324,704.00
660.00
42,000.00
510.00
1,200.00
7,500.00
333.00
333.00
500.00
500.00
Php 3,666,033.00
Php 3,666,033.00
Step 7: Preparing the financial statements (SCI & SCE)
Kedburi Trading Co.
Statement of Comprehensive Income
For the Year Ended December 31, 2018
Sales
Less Sales Discount
Sales Returns and Allowances
Net Sales
Less Cost of Goods
Gross Profit (A.K.A. Operating Income)
Less Operating Expenses:
Utilities
Salaries
Office Supplies
Store Supplies
Rent
Depreciation Expense – OE
Depreciation Expense – SE
Net Income
P 2,115,000.00
P15,200
P 660.00
42,000.00
510.00
1,200.00
7,500.00
333.00
500.00
(15200.00)
P 2,200,000.00
(1,324, 704.00)
P 875,296.00
P
(52,703.00)
822, 593.00
Kedburi Trading Co.
Statement of Changes of Equity
For the Year Ended December 31, 2018
C.B,. Capital Beginning
Add: Additional Investment
Net Income
Subtotal
Less: C.B., Withdrawal
Net Loss
C.B., Capital, End
•
P 500,000.00
P
822, 593.00
P
5,000.00
-
822, 593.00
P 1,322,593.00
(5,000.00)
P 1, 317, 593.00
Step 8: Preparing the financial statements (SFP)
STS Trading Co.
Statement of Financial Position
March 31, 2018
Assets
Current Assets
Cash
Accounts Receivable
Merchandise Inventory
Office Supplies
Store Supplies
Prepaid Rent
Total Current Assets
P 1,472,965.00
282,675.00
440,936.00
2,050.00
2,300.00
22,500,00
P 2,223,426.00
Non-Current Assets
Office Equipment
Accumulated Depreciation – Office Equipment
Store Equipment
Accumulated Depreciation – Store Equipment
Total Noncurrent Assets
Total Assets
P 468,000.00
(333.00)
25,000.00
(500.00)
44,167.00
P 2,267,593.00
Liabilities
Current Liabilities
Accounts Payable
Total Current Liabilities
Non-Current Liabilities
Loans Payable
Total Non-current Liabilities
Total Liabilities
P 580,000.00
P 580,000.00
P 370,000.00
P 370,000.00
P 950,000.00
Owner’s Equity
C.B., Capital End
Total Liabilities & Owner’s Equity
P 1,317,593.00
P 2,267, 593.00
•
•
Step 9: Journalizing and posting closing entries (Proforma Entries)
o December 31 Sales
2,215,200
Sales Returns & Allowances
15,200
Income Summary
2,200,000
To close sales and contra sales accounts
o
31 Income Summary
1,377,407
Costs of Goods Sold
1,324,704
Utilities
660
Salaries
42,000
Office Supplies
510
Store Supplies
1,200
Rent
7,500
Dep. Exp - OE
333
Dep. Exp - SE
500
To close cost and expense accounts
o
31 C,B. Capital
5,000
C,B., Drawing
To close drawing accounts
o
31 Income Summary
822,593
C,B., Capital
822,593
To close net income to income summary
5,000
Step 10: Preparing post-closing trial balance
Kedburi Trading Co.
Post-Closing Trial Balance
December 31, 2018
Cash
Accounts Receivable
Merchandise Inventory
Office Supplies
Store Supplies
Prepaid Rent
Office Equipment
Accumulated Depreciation – Office Equipment
Store Equipment
Accumulated Depreciation – Store Equipment
Accounts Payable
Loans Payable
C.B., Capital End
P 1,472,965.00
282,675.00
440,936.00
2,050.00
2,300.00
22,500,00
468,000.00
25,000.00
P 333.00
500.00
580,000.00
370,000.00
1,317,593.00
P 2,267, 593.00 P 2,267, 593.00
•
Books of Accounts
Special Journals
o Sales Journal (SJ)
§ A journal used to record sale of merchandise on account
§ Typically used by merchandising businesses which have many credit sales transactions
§ Only the transactions which involve a debit to Accounts Receivable and a credit to Sales are
recorded in this journal
§ Sales of merchandise on cash basis or with down payment are recorded in this journal
§ Includes the following information
• The title “Sales Journal”
• Page Number
• Date of Transaction
• Invoice number
• Name of the customer
• Reference number for posting purposes
• A special money column for Accounts Receivable debit/Sales credit
o Purchase Journal (PJ)
§ A journal used to record purchase of merchandise on account
§ Typically used by merchandising businesses which have many credit purchases
§ Only the transactions involving a debit to Purchases and a credit to Accounts Payable are
recorded in this journal
§ Purchases of merchandise on cash basis or purchase of items other than merchandise is not
recorded in this journal
§ Includes the following information
• The title “Purchase Journal”
• Page Number
• Date of Transaction
• Name of Supplier; Reference number for posting purposes
• A special money column for Purchases debit/Accounts Payable credit
o Cash Receipts Journal (CRJ)
§ A journal used to record receipts of cash from whatever source
§ All business transactions which include a debit to Cash are recorded in this journal
Merchandising Business
Service Business
Sale of merchandise on cash basis
Receipt of cash for service rendered
Sale of merchandise with down payment
Collection of customer account
Collection of customer account
Cash investment made by owner
Cash investment made by the owner
§ Sale of merchandise on cash basis or with down payment, collection of customer account, cash
investment made by the owner are recorded here
§ Includes the following information
• The title “Cash Receipts Journal”
• Page Number
• Date of Transaction
• Official Receipt number
• Name of the party from whom cash is received
• Reference number for posting purposes
• A special money column for Cash debit
• A special money column for Sales Discount debit
• A special money column for Accounts Receivable credit
• A special money column for Sales credit
• A special money column for Other Accounts credit
•
o Cash Disbursements Journal (CDJ)
§ A.K.A. Cash Payments Journal (CPJ)
§ A journal used to record payments of cash for whatever purpose
§ All business transactions which include a credit to Cash are recorded in this journal
• Purchase of items on cash basis
• Purchase of items with down payment
• Payment of account with supplier
• Payment of expenses
• Cash withdrawal made by the owner
§ Includes the following information
• Title “Cash Disbursements Journal”
• Page Number
• Date of Transaction
• Check voucher number or reference number of other source documents
• Name of the party to whom cash is paid
• Reference number for posting purposes
• A special money column for Cash credit
• A special money column for Purchases debit
• A special money column for Accounts Payable debit and credit
• A special money column for Purchase Discount credit
• A special money column for Other Accounts debit
Subsidiary Ledgers
o Used to provide detailed information about a specific ledger account
o Follows a running-balance type of ledger because it adds a column to determine the account balance
after posting each transaction. The business knows at a glance how much it owes others and how much
others owe to it
o Includes the following information (1 per customer/supplier then labelled with their names)
§ The related control account (A/R or A/P)
§ Name of the customer/supplier
§ Page Number
§ Date of the Transaction
§ Items column – Explanation of transaction
§ Reference column – Reference number of the source of information
§ Debit money column
§ Credit money column
§ Account balance column – Makes the feature of subsidiary ledger a running-balance type
because the balance is determined after every posting to the subsidiary ledger of a particular
customer or supplier
o Accounts Receivable Subsidiary Ledger
§ A.K.A Customer subsidiary ledger
§ Gives more detailed information on the transactions of each credit customer and provides
information on which customers owe money to the business and how much
o Accounts Payable Subsidiary Ledger
§ A.K.A. Supplier subsidiary ledger
§ Gives details on the transactions of the business with each account supplier and provides
information on which suppliers the business owes money and how much
Fundamentals of Accounting 1
Full Accounting Cycle of a Merchandising Business
•
Step 1 & 2: Analyzing and journalizing business transactions
The following transactions of STS Trading Corporation occurred during March 2018
o Mar 1 Bought on account merchandise, 30,000, from Marcelo Co.
Merchandise Inventory
30,000
Accounts Payable – Marcelo Co.
30,000
To record purchase of merchandise on account
o Mar 1 Paid cash, 6,000, for a 6-month insurance policy
Prepaid Insurance
6,000
Cash
6,000
To record 6 months insurance paid in cash
o Mar 1, Issued a note for bank loan, 50,000 1% interest to be paid every end of the month
Cash
50,000
Notes Payable
50,000
To record issued note for bank loan
o Mar 3, Paid cash, 16,500, to Soriano Trading for the purchase of merchandise. Transpo cost is Php
3,000, FOB Shipping Point
Merchandise Inventory
16,500
Cash
16,500
To record merchandise purchased in cash
Merchandise Inventory
3,000
Cash
3,000
To record payment of transportation cost
o Mar 5, Purchased merchandise, 89,000, from Elizalde Trading. Terms: 2/10, n/30. Transportation
cost is 2,000, FOB Destination
Merchandise Inventory
89,000
Accounts Payable
89,000
To record merchandise purchase on account
o Mar 7, Sold merchandise, 10,000 to J. Manalo. Terms: 2/10, n/30. Inventory cost is 7,000. Transpo
cost is 2,000 FOB Shipping Point
Accounts Receivable – J. Manalo
10,000
Sales
10,000
Costs of Goods Sold
Merchandise Inventory
7,000
7,000
o Mar 10, Paid cash to Marcelo Manufacturing Co. in full payment of our account last Mar. 1
Accounts Payable – Marcelo Co.
30,000
Cash
30,000
o Mar 14, Sold on account merchandise, 8,000 to Nicanor Javier. Terms 2/10, n/30. Inventory cost is
5,000. Transpo cost is 1,000, FOB Destination
Accounts Receivable – Javier
8,000
Sales
8,000
Costs of Goods Sold
Merchandise Inventory
5,000
5,000
Freight Out
Cash
1,000
1,000
o Mar 15, Paid cash to Elizalde Trading in full payment of our account
Accounts Payable – Elizalde
89,000
Cash
87,220
Merchandise Inventory (2%)
1,780
o Mar 18, Total cash receipts, 97,000 for the retail sales of merchandise from previous month
Cash
97,000
Sales
97,000
o Mar 22, Bought on account merchandise from Del Rosario Bros., Inc. 11,000. Transpo cost is 2,000,
FOB Destination
Merchandise Inventory
11,000
Accounts Payable – Del Rosario Bro., 11,000
o Mar 24, Cash receipts from Nicanor Javier for his account in full
Cash
7,840
Sales Discount
160
Accounts Receivable – Javier
8,000
o Mar 25, Paid cash, 1,000 to Felix Garcia as refund for merchandise returned to him
Merchandise Inventory
1,000
Cash
1,000
o Mar 26, Received credit memo no. 112 for 2,000 from Del Rosario Bros., Inc. for the merchandise
returned to us
Accounts Payable – Del Rosario
2,000
Merchandise Inventory
2,000
o Mar 28, Bought merchandise, 28,000, from Getz Bros. Terms: 2/10, n/30. Transpo cost is 2,000, FOB
Shipping Point
Merchandise Inventory
28,000
Accounts Payable – Getz
28,000
Merchandise Inventory
2,000
Cash
2,000
o Mar 29, Returned merchandise, 5,000 to Getz Bros. due to inaccurate sizes
Accounts Payable – Getz
5,000
Merchandise Inventory
5,000
o Mar 30, Paid cash, 5,000 for salaries
Salaries Expense
5,000
Cash
5,000
o Mar 31, Paid 500 for interest from bank loan
Interest Expense
500
Cash
500
•
Step 3: Posting transactions to ledger
•
Step 4: Preparing the trial balance
STS TRADING
UNADJUSTED TRIAL BALANCE
MARCH 31, 2018
Account Number
Account Name
Cash
Accounts Receivable
Merchandise Inventory
Prepaid Insurance
Accounts Payable
Notes Payable
Sales
Sales Discount
Costs of Goods Sold
Salaries Expense
Interest Expense
Freight Out
Total
Dr
Cr
2,620.00
10,000.00
159,720.00
6,000.00
32,000.00
50,000.00
115,000.00
160.00
12,000.00
5,000.00
500.00
1,000.00
Php 197,000.00
•
Additional Information
o STS Capital
Php 260,000
o STS Withdrawal
Php 50, 000
o Additional Investment Php 100,000
•
Adjusting Entries
o Information for adjustments for March 2018
§ 10% of Accounts Receivable can no longer be collected
§ Prepaid Insurance good for 6 months was paid last March 1
§ Accrue 50% interest unpaid as of Mar. 31
§ Accrue 50% salaries unpaid as of Mar. 31
•
Step 5: Journalizing and posting adjusting journal entries
o Mar. 31 Doubtful Accounts Expense
1,000
Allowance for Doubtful Accounts
To adjust 10% of uncollectible A/R
1,000
Php 197,000.00
o
o
o
o
•
31 Insurance Expense
Prepaid Insurance
To adjust 1 month of expired insurance
31 Interest Expense
Interest Payable
To adjust accrual of interest
31 Interest Expense
Interest Payable
To adjust accrual of interest
31 Salaries Expense
Salaries Payable
To adjust accrual of salaries
1,000
250
1,000
250
250
250
2,500
2,500
Step 6: Adjusted Trial Balance
STS TRADING
WORKSHEET
FOR THE YEAR ENDED MARCH 31, 2018
Unadjusted Trial Balance
Account Name
Dr
Cr
Cash
2,620.00
Accounts
10,000.00
Receivable
Merchandise
159,720.00
Inventory
Prepaid
6,000.00
Insurance
Accounts
32,000.00
Payable
Notes Payable
50,000.00
Sales
115,000.00
Sales Discount
160.00
Costs of
12,000.00
Goods Sold
Salaries
5,000.00
Expense
Interest
500.00
Expense
Freight Out
1,000.00
Total
197,000.00 197,000.00
Doubtful
Accounts
ADA
Insurance
Payable
Interest
Payable
Salaries
Payable
Total
Adjustments
Dr
Adjusted Trial Balance
Dr
Cr
2,620
10,000
Cr
159,720
b) 1,000.00
5,000
32,000
50,000
115,000
160
7,500
d) 2,500
750
c) 250
1,000
a)1,000
1,000
a)1,000
b)1,000
4, 750
1,000
1,000
c) 250
250
d)2,500
2,500
4, 750
200, 750
200, 750
•
Step 7: Statement of Comprehensive Income and Statement of Changes of Equity
STS Trading Co.
Statement of Comprehensive Income
For the Year Ended March 31, 2018
Sales
Less Sales Discount
Sales Returns and Allowances
Net Sales
Less Cost of Goods
Gross Profit (A.K.A. Operating Income)
Less Operating Expenses:
Salaries
Interest
Freight Out
Doubtful Accounts
Insurance
Net Income
P 115,000.00
P 160.00
-
P 7,500.00
750.00
1,000.00
1,000.00
1,000.00
(160.00)
P 114, 840.00
(12,000.00)
P 102, 840.00
(11,250.00)
P 91, 590.00
STS Trading Co.
Statement of Changes of Equity
For the Year Ended March 31, 2018
STS Capital Beginning
Add: Additional Investment
Net Income
Subtotal
Less: Net Loss
STS Drawing
•
P 100,000.00
91, 590.00
50,000.00
P 260,000.00
191, 590.00
P 451, 590.00
(50,000.00)
P 401, 590.00
Step 8: Statement of Financial Position
STS Trading Co.
Statement of Financial Position
March 31, 2018
Assets
Current Assets
Cash
Accounts Receivable
Allowance for Doubtful Accounts
Merchandise Inventory
Prepaid Insurance
Total Current Assets
Non-Current Assets
Machineries and Equipment
Less Accumulated Depreciation Machineries and Equipment
Total Noncurrent Assets
Total Assets
P 2,620.00
10,000.00
(1,000.00)
159,720.00
6,000.00
P 177,340.00
P 468,000.00
(9,000.00)
459,000.00
P 636, 340.00
Liabilities
Current Liabilities
Accounts Payable
Notes Payable
Interest Payable
Salaries Payable
Total Current Liabilities
P 32,000.00
50,000.00
250.00
2,500.00
P 84,750.00
Non-Current Liabilities
Loans Payable
Mortgage Payable
Total Non-current Liabilities
Total Liabilities
P 50,000.00
100,000.00
P 150,000.00
P 234,750.00
Owner’s Equity
STS Capital End
Total Liabilities & Owner’s Equity
•
Step 9: Closing Entries
o March 31 Sales
P 401,590.00
P 636,340.00
115,000
Sales Discount
160
Income Summary
114,840
To close sales and contra sales accounts
o
31 Income Summary
23,250
Costs of Goods Sold
12,000
Salaries
7,500
Interest
750
Freight Out
1,000
Doubtful Accounts
1,000
Insurance
1,000
To close cost and expense accounts
o
31 STS Capital
50,000
STS Drawing
To close drawing accounts
o
31 Income Summary
91,590
STS Capital
91,590
To close net income to income summary
50,000
•
Step 10: Post Closing Trial Balance
STS Trading Co.
Post-Closing Trial Balance
March 31, 2018
Cash
Accounts Receivable
Allowance for Doubtful Accounts
Merchandise Inventory
Prepaid Insurance
Machineries and Equipment
Accumulated Depreciation Machineries and Equipment
Accounts Payable
Notes Payable
Interest Payable
Salaries Payable
Loans Payable
Mortgage Payable
STS Capital End
P 2,620.00
10,000.00
P 1,000.00
159,720.00
6,000.00
468,000.00
P 646,340.00
9,000.00
32,000.00
50,000.00
250.00
2,500.00
50,000.00
100,000.00
401,590.00
P 646,340.00