REVIEWER IN ACCOUNTING
Accounting - (PFRS) a service activity that
provides quantitative financial information
used in making economic decisions.
Branches of Accounting

Auditing

Financial


prepares periodic financial reports
based on historical data
interprets financial statements to its
internal and external users
Government

concerned
with
the
allocation
administration and efficient utilization
of govt. or public funds
Management

uses historical and estimated data to
its internal users for decision-making
purposes


traces, categorizes, and summarizes
manufacturing costs
used by management in planning and
control
stakeholders are people who uses the
accounting info for different purposes. They
have a stake or interest in the business.
Owners


deals with tax-related matters (i.e.,
computation of taxable income)
usually has a significant impact on
expected outcomes of proposed
decisions
Accounting Education

teaches accounting and related
subjects in an organized learning
environment
need accurate and timely financial
info to know if they earned or lost
during a period
Suppliers
to assess the credit worthiness of an
entity to decide whether to continue
providing goods on credit
Management

Tax

refers to the independent review,
examination, verification, evaluation,
or inspection of historical events for the
lending credibility of an entity
Users of Accounting Information

Cost
Accounting Research: careful analysis
of economic events and other
variables to understand its impact on
decisions and creation of knowledge.
uses the info for the evaluation of
financial positions and performance to
take important economic decisions
Customers

to assure them of the continuous
availability and consistent supply of
products
Investors

to know how well the management
used the business funds as a basis
whether to increase or decrease their
investment.

potential investors decide whether it is
suitable for their investment needs or
not.
Employees

Types of Business According to Activity
Service

to ensure them that the business they
will apply to will give them job security,
better pay, retirement benefits, and
job promotion

Merchandising

Lenders

to assess the financial performance
and position of an entity as a basis to
decide whether the entity will be able
to repay the principal AND the interest.

used for
purposes
taxation
and
regulation
Forms of Business Organizations

one owner only
bears all responsibilities in providing its
capital, business management, and
the risks of the business
Analyzing

owned by two or more persons
divides the work among the owners in
contributing money, property, and
profits among themselves
Corporation


has a separate legal personality from
its owners.
has an elected group called board of
directors
determining the effects of the
transaction in the accounts involved
Journalizing


Partnership


buys raw materials to be used in
making a new product, then selling it
to customers
Steps in Accounting Cycle
Sole Proprietorship


buys and sells products without
changing its form at a higher price.
Ex. resellers, distributors
Manufacturing
Government agencies

engaged in offering and providing
services to its customers with a fee.
school, repair shops
arranging the transaction in a
chronological fashion
applies the Double Entry System where
it affects at least 2 accounts
Posting

to facilitate the classification and
grouping of transactions relating to a
single account
Summarizing

required computing the balance of
each account prior to the preparation
of unadjusted trial balance
Adjusting

updating the balances of some
accounts; aka Adjusting Journal Entries
Correcting


found in the initial Trial Balance
Adjusted Trial Balance: amended trial
balance

Liability


Organizing

preparation of financial statements,
known as the statement of financial
position, performance, changes in
equity, and cash flows.
Closing


Closing Journal Entries
closes the accounts in preparation for
the next accounting period
Finalizing


preparation of the final trial balance,
aka Post-Closing Trial Balance
serves as the base for next year's
accounting cycle.
Five Major Accounts
 Real Accounts: not closed at the end of
the accounting period
 Nominal
Accounts:
serves
the
accumulating data over time and is
closed at the end of the accounting
period
Asset



Debit, Real Account
economic
resources
owned
or
controlled by the business that are
expected to benefit the business over
a period of time.
Tangible Assets - cash, building
Intangible Assets - copyrights,
trademarks
Credit, Real Account
debts that are expected to be made
in the future in the form of resources
outflow
 Accounts payable trade, notes
payable, deferred revenue,
income tax payable
Capital/Owner’s Equity



Credit, Real account
Residual rights interests or the net assets
claimable by the owners
Under the equity account
Revenue


Credit, Nominal account
Inflow of cash due to the entity’s
provision of services or sale of goods
 Ex. Sales service revenue
Expense


Debit, nominal account
Any resources expended or consumed
to generate revenue
 Salaries Expense, Rent expense,
Utilities Expense, etc.
Accounting Equation

Foundation of modern double entry
system
ASSETS = LIABILITIES + OWNER’S
EQUITY
**explanation ng ALOE sa previous lesson
To show increase and decrease in equity due
to economic events,
ASSETS = LIABILITIES + OWNER’S EQUITY –
DRAWINGS + REVENUE - EXPENSES
Business Transactions Effects to Accounting
Structures
Legend: increases, decreases
x
x
x
Where:
Drawings – withdrawal for personal use
x
Revenues – earnings when services or goods
are rendered or sold
x
Expenses – amount of goods or services paid
or given up to earn
x
Business Transactions and Analysis
x
x
Business Transactions



aka Financial Transaction
An event/activity measurable in terms
of money and impact to the financial
position of a business
Characterized by exchange of values
in terms of money between 2 parties
Double Entry System
Business Start-Up Activities

Financing


Ex.
owner finances with a capital in cash
and other resources
insufficient contributions = loans by
banks/other financial institutions

Based on 2 financial changes/effects
between 2 accounts
Every debit has a corresponding credit
and vice versa
Rules of Debit and Credit
Investing

Acquisition
of
properties
furniture, equipment)
(land,
Operating

Day-to-day activities to earn income
and incur expenses
 Contra-Accounts:
relevant account
opposite
of
its
Book of Accounts
General Journal


aka Book of Original Entry
Journalizing: accounting transactions
are arranged in chronological order
General Ledger



aka Book of Final Entry
where
ledger
accounts
are
maintained
Posting: entries periodically transferred
into its respective ledgers
Special Journal

Records business transactions that are
frequent or repetitive
Process of making a Journal Entry
It contains:
1.
2.
3.
4.
5.
Date
Account title, amount to be DEBITED
Acc title, amount to be CREDITED
Explanation
Folio/Reference
 Simple Entry: 1 Dr. and Cr. only
 Compound: 1 or more Dr. and Cr.
T-Account as a Guide
Unadjusted Trial Balance


Prepared AFTER posting to the general
ledger but BEFORE the formulation of
adjusting entries
To check the mathematical equity of
the debit and credit of accounts
If unbalanced,
inaccurately:
ff.
might
be
done
1. Balance Extraction/Computation of
each ledger
2. Posting of general entries to ledger
accounts
3. Formulation of Journal Entries
4. Analysis of business transaction effects
on Major Accounts
The columns are arranged in the ff. order:
1.
2.
3.
4.
5.
Assets
Liabilities
Owner’s Equity
Revenue
Expenses
Adjusting Entries

Made AFTER the preparation of the
unadjusted trial balance
The following are adjusted PRIOR to the
closing of the Book of Accounts:
Deferred Income: money already collected
but not yet earned; LIABILITY
Deferred Expense: already paid but not yet
incurred; ASSET
Depreciation


Accrued Income:
collected; ASSET
earned
but
not
Provided when the utility value of an
Asset is spread over its estimated useful
life
Formula:
yet
Accrued Expense: already incurred but not
yet paid; CURRENT EXPENSE
Additional Notes:
Income: Revenue or Gains
Expenses: Expense or Loss
Bad Debts/Doubtful Accounts



Provided since some customers may
not be able to pay
Direct Write-Off Method: applied when
it is certain that a company is not able
to collect money from a customer
Allowance Method: applied when it is
uncertain if money cannot be
collected in the future
Methods in estimating BD/DA:
1. Provide a certain % of Sales as BD
2. Increase allowance BY a certain % of
Accounts Receivables
3. Increase allowance TO a certain % of
Accounts Receivables
4. Aging the Accounts Receivables
Liabilities: Current or Non-Current
Assets: Tangible or Intangible
Accounting Cycle Completion
Adjusted Trial Balance


Prepared after all adjusted entries are
accounted for and posted
A statement/source document that is
helpful when financial statements are
manually prepared
Preparation of Financial Statements
A complete set of financial statements
consists of:
A. Statement of Financial Position/Balance
Sheet



Shows the ALOE of a business at a
particular date
Prepared at the end of the accounting
period
Has 2 formats:
 Account Format
Asset on the left, Liabilities and
OE on the right side
C. Statement of Changes in Equity
 Explains why the owner’s
changed in a period of time
share
D. Statement of Cash Flows
 Shows why the amount of cash
changed over a period of time.
 Shows a company’s cash receipts and
cash disbursements
Closing Journal Entries

 Report Format
Assets, Liabilities, and OE are
aligned vertically
Journal entries prepared at the end of
the period that is transferred to various
nominal accounts to the real accounts
 Debiting various revenue accounts and
crediting the Income Summary account
= closes all revenue accounts.
 Debiting the Income Summary account
and crediting various expense accounts
= closes all expense accounts
After closing the revenue and expense
accounts, the balance in the Income
Summary is closed to the owner’s equity
account, including any withdrawals during
the accounting period.
Post-Closing Trial Balance
B. Statement of Financial Performance
 aka Income Statement
 summarizes the operating results of a
business, how it operated/produced
wealth at a point in time.
 Profit: total revenue > total expenses
 Loss: total revenue < total expenses
 Breakeven: total revenue = total
expenses




aka After-closing Trial Balance
Permanent Ledger only
prepared after the closing entries and
posting its effect to the relevant ledger
accounts
to assure that accounts are in balance
and
are
ready
for
recording
transactions in the next period.
Reversing Journal Entries

usually made in the first day of the next
accounting period to reverse certain
adjusting entries in the preceding
period.
Not all adjusting entries may be reversed.
Only the ff. may be reversed:
1. Accruals for income/expense
2. Prepayments initially recorded using
the expense method
3. Advanced
collections
initially
recorded using the income method