Accountancy
1. Intro to accounting
Definition: Accounting is a service activity. Its function is to provide quantitative
information, primarily financial in nature, about economic entities that are intended
to be useful in making economic decisions, and in making reasoned choices among
alternative courses of action. It is the process of identifying, measuring, and
communicating accurately economic information of a business to perform informed
judgment and decisions by users of the information.
a) Accounting is a service activity
b) The function of accounting is to provide quantitative information, primarily
financial in nature.
c) Quantitative = financial by nature.
d) Information that is financial by nature. Income statement.
e) Revenue = what the company earns
f) Expenses = Amount being sacrificed.
g) Intended to be useful in making economic decisions.
h) Making reasoned choices among alternative courses of action.
Accounting term definitions
a) Accounts payable: Account payables (AP) track money owed to creditors.
Examples include bank loans, unpaid bills and invoices, debts to suppliers or
vendors, and credit card or line of credit debts. Rarely, the term "trade payables"
is used in place of "accounts payable." Accounts payable belong to a larger class
of accounting entries known as liabilities.
b) Interest payable: Interest payable is the amount of interest on its debt that a
company owes to its lenders as of the balance sheet date
c) Notes payable: Notes payable are long-term liabilities that indicate the money a
company owes its financiers, banks and other financial institutions as well as
other sources of funds such as friends and family. They are long-term because
they are payable beyond 12 months, though usually within five years.
d) Account receivable: Accounts receivable (AR) tracks the money owed to a person
or business by its debtors. It is the functional opposite of accounts payable.
e) Accruals: Revenues and expenses recognized by a company but not yet recorded
in their accounts are known as accruals (ACCR). By definition, accruals occur
before an exchange of money resolves the transaction. For example, a company
that hired an external consultant would recognize the cost of that consultation
in an accrual. That cost would be recognized regardless of whether or not the
consultant had invoiced the company for their services. Accounts payable and
accounts receivable are accrual types. Others include accrued costs (costs
incurred but not resolved during a particular accounting period) and accrued
expenses (expenses or liabilities incurred but not resolved during a particular
accounting period).
f) Assets: Assets are items of value or resources that a business owns or controls.
More technical and precise definitions specify two technicalities: First, assets
result from past business activities. Second, they will or are expected to
generate future economic value. Assets come in many types and classes. Types
include current and noncurrent, operating and nonoperating, physical, and
intangible. Classes include broad categories such as cash and equivalents,
equities, commodities, real estate, intellectual property(ex: copyright), and fixed
income, among others.
g) Capital: In common usage, capital (abbreviated "CAP.") refers to any asset or
resource a business can use to generate revenue. A second definition considers
capital the level of owner investment in the business. The latter sense of the
term adjusts these investments for any gains or losses the owner(s) have already
realized. Accountants recognize various subcategories of capital. Working
capital defines the sum that remains after subtracting current liabilities from
current assets. Equity capital specifies the money paid into a business by
investors in exchange for stock in the company. Debt capital covers money
obtained through credit instruments such as loans.
h) Equity: At a basic level, equity describes the amount of money that would
remain if a business sold all its assets and paid off all its debts. It, therefore,
defines the stake in a company collectively held by its owner(s) and any
investors. The term "owner's equity" covers the stake belonging to the owner(s)
of a privately held company. Publicly traded companies are collectively owned
by the shareholders who hold its stock. The term "shareholder's equity"
describes their ownership stake.
i) Non trade notes receivable: Non trade receivables are amounts due for payment
to an entity other than its normal customer invoices for merchandise shipped
or services performed
j) Trade notes receivable: Documents received from a customer with the
commitment to pay the amount due after a certain period of time
k) Accrued liabilities: Refers to an expense incurred but not yet paid for by a
business. These are costs for goods and services already delivered to a company
for which it must pay in the future
Vouchers:
1) Payment voucher: It is usually on a printed standard form, is a record of
payment. When payment is made for an expense, generally bills are prepared to
record full particulars of the claim by the person or organization receiving
payment. From the bill, the accounting department prepares a voucher for each
payment to be made, no matter whether the amount that is paid for the goods
purchased, or to pay employee’s salaries, or to pay for services or to pay for any
other asset acquisition
2) Receipt voucher: A document which is issued against cash receipts. It may also
be a printed standard form. This document shows that a certain sum of money
was received from a person or organization and also, contains information
about the purpose for which the money is received. It is signed by a responsible
employee, authorized by the management to receive the money.
3) Transfer voucher: Used to record the residuary transactions. An internal
transaction or a transaction not involving any cash payment or cash receipt is
recorded in the transfer voucher. Examples are goods purchased on credit,
depreciation of assets, outstanding expenses, accrued income, etc.
Nature of Accounting
1) Art
2) Financial
3) Process
4) Information system
Functions of Authority:
1) Maintenance of systematic records
2) Financial results of an entity can be communicated.
3) Meeting legal requirements
4) Protecting assets of a business.
5) Assistance to management.
6) Accounting can be traced to ancient civilizations. Records dating back more
than 7000 years have been found in mesopotamia.
7) Details of calculation and recording. Describes the accounting methods then in
use among northern-Italian merchants, including double-entry bookkeeping,
trial balances, balance sheets, and various other tools still
2. Accounting branches
a) Financial accounting
1- Records and provides the information as a whole (Revenue, cost of any
investment)
2- Makes financial statements that are used by the company and management
b) Management accounting
1- Decision making (What branch of the company is losing money which is
gaining money and which should be promoted or changed more)
2- Looks more in-depth and into detail of the overall info given by the FA
c) Cost accounting
1- Looks at the overall cost going out from the company
2- What funds is used by who
d) Government accounting
1- Checks how the government funds are being used for the public
2- Stay transparent to the public
e) Auditing
1- Internal auditing: Checking and verification if the actions of a company are
in line with the rules of management
2- External auditing: Verify if financial reports and statements for users to see
and use are correct
f) Tax accounting
1- Deals with filing the taxes and verifying the tax amount that is needed and
paid.
2- Taxation in general
g) Accounting education
1- Teaching accounting
h) Accounting research
1- Research new knowledge on accounting
2- Academic
3. Users of accounting information
a) Internal users
1- Owners: Provide capital business, assess if additional funding is needed
2- Managers: They need financial info to plan and organize the firm
b) External users
1- Investors: To know if they should invest in the company
2- Creditors: Can the company pay their obligations to them when its due, with
interest
3- Customers: Curious about business continuity
4- Suppliers: Can the company pay for the goods the suppliers provide
5- Employees: Is the company they're working for stable
6- Tax authorities: Check if they pay their taxes
7- Government: Do they follow rules and regulations
8- General public: What are the new business trends
4. Forms of business organization
a) Sole proprietor
1- A unincorporated business with just one owner
2- Easy to establish and dismantle
3- No government involvement with their creation
4- Popular with small business owners and contractors
Advantages
Disadvantages
Easy to form
Small size
Effort-reward relationship
Limited
Full control
Lacks professional skills and talent
Quick decisions
Unlimited liability
Economical and efficient operations
Growth prospect
Personal touch
Limitation of capital
Keep the business simple, dynamic
and flexible
Risk of wrong decisions
b) Partnership
1- Two or more people bind themselves to contribute money, property or
industry to a common fund, intending to divide the profit among themselves
2- Contract involved
Advantages
Disadvantages
Bridging the gap in expertise and
knowledge
Loss of autonomy
More cash (and properties)
Emotional issues
More business opportunities
Future selling complications
Moral support
Unlimited liability
New perspective
c) Corporate
1- An artificial being created by operation of law
2- Has the right of succession
3- Has the powers, attributes and properties expressly authorized by law or
incidental to its existence
Advantages
Disadvantages
Limited liability
Double taxation
Source of capital
Independent management
Ownership transfers
Forming a corporation costs more
d) Cooperatives
1- People centered entreprises owned, run and controlled by and for their
members
2- There to realize the common economic, social and cultural needs and
aspirations of the members
Advantages
Disadvantages
Lower costs for creation
Big investors dont get attracted much
Further marketing reach
Lack of membership and
participation
Democratic organization
5. Type of businesses
a) Service companies:
1-Generates income by providing services (customers go for services and pay a
fee)
Ex: Barbershop, spa, traveling agencies, IT professionals, law firms, accounting
services, etc…
2- Income measurement: service revenue - operating expenses = net income
b) Merchandising companies:
1- Buying and selling of goods (company buys goods from a supplier then sells
them to customers
Ex: Grocery store, retail store, clothing store, etc…
2- Income measurement: sales revenue - cost of goods sold = gross profit operating expenses = net income
c) Manufacturing companies:
1- Purchases raw material, goes through a process then the finished goods is
sold to customers
2- Company prepares the goods they sell
Ex: Ice cream manufacturer, car manufacturing company, etc…
3- Income measurement: sales revenue - cost of goods sold = gross profit operating expenses = net income
6. Accounting concepts and principles
a) GAAP: Generally accepted accounting principles
b) Economic entity or accounting entity: The personal transaction of the owner
are separate from the business they own
c) Accrual basis of accounting: Revenue is recorded when earned, expenses are
recorded when it happens regardless of when cash is received or paid
Cash
Accrual
Revenue
Received
Earned
Expenses
Paid
Incurred
d) Going concern: The company will continue operating indefinitely until the
foreseeable future and that company closure is not imminent.
e) Monetary unit: Transactions are expressed in a monetary unit of measure.
f) Time period: Transactions are summarized and reported at regular time
intervals.
g) Cost principle: Amounts shown in financial reports are historical costs.
h) Full disclosure principle: Sufficient information for informed judgments.
i) Matching principle: Matching revenues with expenses to know the profit of the
business.
j) Revenue recognition principle: Recognize revenue when goods are sold or
services are rendered regardless of cash receipt.
k) Materiality: The impact of an omission or misstatement of information in a
company’s financial statement on the user of those statements. If it is probable
that users of the financial statements would have altered their actions if the
information had not been omitted or misstated the item is considered to be
material.
l) Conservatism: The conservatism concept is a concept in accounting which
refers to the idea that expenses and liabilities should be recognized as soon as
possible in a situation where there is uncertainty about the possible outcome
and in contrast record assets and revenues only when they are assured to be
received.
m) Objectivity: Recording and reporting process should be performed with
independence which is free from bias.
7. The qualitative characteristics of useful financial information
8. The accounting equation
a) The accounting equation: Assets = Liability + Capital
1- Asset is a resource controlled by the entity as a result of past events and from
which future economic benefits are expected to flow to the entity (Ex: cash,
building, land and other things owned by the company)
2- A liability is a present obligation of the entity arising from past events the
settlement of which is expected to results in an outflow from the entity of
resources embodying economic benefits (Ex: debt, loans)
3- Capital/Equity is the residual interest in the assets of the entity after
deducting all its liabilities.
b) Ressources = Claims of creditors + Claims of the owner
9. Types of major accounts
a) Assets
Current Assets
Noncurrent Assets
Cash
Long term receivables
Accounts receivable
Land
Office supplies
Building
Merchandise inventory
Equipment and machinery
Prepayments covering less than a
year
Furniture and fixtures
Investments in equity securities
Intangible assets
Investment properties
Prepayments extending more than a
year
b) Liabilities
Current liabilities
Noncurrent liabilities
Accounts payable
Long term notes payable
Short term notes payable
Bonds payable
Unearned revenue
Deferred tax liabilities
Accruals
Other long term liabilities
Other short term liabilities
c) Capital
Sole proprietorship
Partnership
Corporation
Owner’s equity
Partner’s equity(based
on the amount of
partners)
Share capital
Owner’s drawings
Partner’s drawings
Share premium
Retained earnings
d) Revenue
Service companies
Merchandising and manufacturing
Service revenue
Sales revenue
e) Expenses
Salaries
Representation
Rent
Transportation
Utilities
Communication
Depreciation
…and many others
Repairs and maintenance
Gas and oil
f) Charts of accounts: It is a listing of the names of the accounts that a company
has identified and made available for recording transactions.
Ex chart:
Assets
101
Cash
102
Accounts receivable
103
Office supplies
104
Prepaid rent
105A
Automobile
105B
Accumulated depreciation Automobile
106A
Office equipment
106B
Accumulated depreciation - Office
equipment
107A
Furniture and fixtures
107B
Accumulated depreciation Furniture and fixtures
Liabilities
201
Account payable
202
Notes payable
203
Unearned local travel fees
204
Unearned international travel fees
205
Interest payable
Capital
301
Yoon, capital
302
Yoon, drawing
303
Profit or loss summary
Revenue
401
Local travel fees earned
402
International travel fees earned
403
Travel assistance fees earned
Expenses
501
Salaries expense
502
Utilities expense
503
Rent expense
504
Repair and maintenance expense
505
Organization expense
506
Office supplies expense
507
Interest expense
508
Depreciation expense - Automobile
509
Depreciation expense - Office
equipment
510
Depreciation expense - Furniture and
fixtures
522
Gas and oil expense
10. Books of accounts
a) Ledger: A book that contains various accounts. It includes all accounts of the
business enterprise whether real, nominal or personal. Ledger may be kept in
any of the following two forms: Bound ledger and loose-leaf ledger. It is
common to keep the ledger in the form of loose-leaf cards these days instead of
keeping them in bound form. This helps in posting transactions particularly
when the merchandises system of accounting is used.
b) General journal: A book of accounts where all transactions are recorded. It can
also be called the book of original entry.
c) General ledger: A book of accounts where all transactions are classified based
on their account titles. It can also be called the book of final entry.
Special journals: Journals designed for transactions that are repetitive and
recurring, in which the use of the general journal would be inefficient.
Subsidiary ledgers: Ledgers that support the main general ledger account.
Some books that can be used to record transactions for especially large businesses
are:
-Cash book: It records all those transactions which are in cash or by cheques
-Purchases book: It records all transactions relating to goods purchased on credit
-Sales book: It records all transactions relating to goods sold on credit
-Purchases return book: It record return of goods by the suppliers
-Sales return book: It records return of goods by the customers
-Bills receivable book: It records entries regarding bills receivables. The details of bills
are given in this book
-Bills payable book: All bills which are accepted and payable by a business house are
recorded in this book
-Journal proper: Those transactions which are not recorded in any of the above
mentioned books are recorded in the journal proper
Goods: It refers to items forming part of the stock-in-trade of a business house which
are purchased and are to be resold at a profit. A business house may purchase fixed
assets or stationery for use in business, but they are not purchased goods.
Purchases: Ir refers to the purchase of goods for resale, and not the purchase of assets
or stationery. The purchases account, therefore, only contains purchases of goods for
resale.
Sales: It refers to the sale of goods which form part of the stock-in-trade of the
business.
11. Analysis of business transactions
a)
Accounting equation: Assets = Liabilities + Capital
b) Use parentheses to show deductions
c)
Capital is only affected by expenses, withdrawal, investment, income and revenue.
file:///Users/ashtray/Downloads/SCALP%20Handout%20012.pdf —> page 6 exercise
Cash
1
6,000,00
0
2
(250,000)
100,000
A/R
O/S
P/R
Auto
Equi
p
3,200,0
00
(30,000)
7
(200,000)
A/P
N/P
100,0
00
4
6
F/F
3,200
,000
30,00
0
50,0
150,0
ULTF
UITF
Capital
C/C
6,000,000
Investment
(250,000)
Org expense
00
8
(200,000)
9
73,160
11
(1,600,00
0)
15
(95,000)
18
00
600
,00
0
400,0
00
(200,000)
Automobile
expenses
73,160
Local travel
fees
garnered
(95,000)
Salaries
expense
194,440
International
travel fees
garnered
(7,000)
Repair
equipment
(1,60
0,00
0)
194,4
40
19
(7,000)
23
689,632
25
116,664
29
(30,000)
(30,000)
Drawing
30
(117,000)
(117,000)
Salaries,
utilities, gas
and oil
Totals
4,180,45
6
51,63
2
638,0
00
(116,
664)
77,77
6
50,00
0
150,0
00
3,200,
000
30,0
00
600,
000
2,00
0,00
0
100,
000
51,632
638,0
00
5,768,600
12. Rules of debit and credit
Debits record all of the money flowing into an account, while credits record all of the
money flowing out of an account
Debit
Credit
Assets
+
-
Liabilities
-
+
Capital
-
+
Drawing
+
-
Revenue
-
+
Expenses
+
-
Transactions
Debit
Credit
Cash investment by owner
Cash
Capital
Purchase of office supplies Office supplies
on account
Accounts payable
Payment of an account
payable
Accounts payable
Cash
Rendered services to
customers (cash payment)
Cash
Service revenue
Payment of expenses
Expense
Cash
Rendered services to
customers (on account)
Account receivable
Service revenue
Collection of account
receivables
Cash
Accounts receivable
Cash withdrawal by the
owner
Drawing
Cash
13. Journalizing
Continuation of exercise from above ^
Date
Description
1 April 2020
Cash
Yoon capital
*Cash investment by the
owner
6,000,000
2 April 2020
Organization expense
Cash
*Paid pre-organization
expense
2,500,000
Cash
Notes payable
*Borrowed money from the
bank
100,000
4 April 2020
Automobile
Account payables
*Purchased automobiles on
account
3,200,000
6 April 2020
Equipment
Cash
*Purchased computer
equipment
30,000
Office supplies
Prepaid rent
Cash
*Paid for office supplies
and advanced rental
50,000
150,000
2 April 2020
7 April 2020
PR
Debit
Credit
6,000,000
2,500,000
100,000
3,200,000
30,000
200,000
8 April 2020
9 April 2020
11 April 2020
15 April 2020
18 April 2020
19 April 2020
23 April 2020
25 April 2020
Furniture and fixtures
Cash
Account payables
*Purchased furniture
600,000
Cash
Local travel fees earned
*Travel services to Batanes
73,160
Accounts payable
Cash
*Paid one of the two vans
1,600,000
Salaries expense
Cash
*Paid half-month salaries
95,000
Account receivable
International travel fees
earned
*Rendered travel services
to Seoul, 5 persons
194,440
Repair and maintenance
expenses
Cash
*Paid for minor repairs of
automobile
7,000
Cash
Unearned local travel fees
Unearned international
travel fees
*Received advanced
payment from customers
689,632
Cash
Account receivable
116,664
200,000
400,000
73,160
1,600,000
95,000
194,440
7,000
51,632
638,000
116,664
*Collected payment from
customers
29 April 2020
30 April 2020
Yoon, Drawing
Cash
*The owner withdrew cash
for personal use
30,000
Salaries expense
Utilities expense
Oil and Gas
Cash
*Paid month-end expenses
95,000
12,000
10,000
30,000
117,000
14, Posting
1) Posting refers to transferring the debit and credit items from the journal to
their respective accounts in the ledger.
2) Rules regarding posting:
a- Separate accounts should be opened in the ledger for posting transactions
relating to different accounts recorded in the journal.
b- The concerned account which has been debited in the journal should also be
debited in the ledger. However, a reference should be made of the other account
which has been credited in the journal.
c- The concerned account, which has been credited in the journal should also
be credited in the ledger, but reference should be given of the account which
has been debited in the journal.
3) The posting from the purchases book is made as follows:
a) Debit the purchases account with the periodical totals of the purchase
book. On the debit side of the purchase account, write ‘to total as per
purchase book’ or ‘to sundries’ in the particulars column.
b) Personal accounts of each individual supplier is credited with the net
amount of inward invoice recorded in purchases book by writing ‘by
purchase’.
General journal(Page 1):
Date
Description
PR
Debit
Credit
1 April 2020
Cash
101
6,000,000
Yoon capital
301
6,00,000
*Investment by the owner
Cash(Acct no. 101):
Date
Items
1 April
2020
PR
Debit
1
6,00,000
Date
Items
PR
Credit
Date
Items
PR
Credit
1
6,000,000
Yoon capital(Acct no. 301):
Date
Items
PR
Debit
1 April
2020
15. Trial balance
1) In case, the various debit balances and the credit balances of the different
accounts are taken down in a statement, the statement so prepared is termed as
‘trial balance’. In other words, a trial balance is a statement containing the
various ledger balances on a particular date.
Practice example:
Debit
Cash
4,180,456
Account receivables
77,776
Credit
Office supplies
50,000
Prepaid rent
150,000
Automobile
3,200,000
Office equipment
30,000
Furniture and fixtures
600,000
Account payables
2,000,000
Notes payable
100,000
ULTF
51,632
UITF
638,000
Yoon capital
6,000,000
Yoon drawing
30,000
LTFE
73,160
ITFE
194,440
Salaries expense
190,000
Utilities expense
12,000
Repairs and maintenance
7,000
Organization expense
250,000
Gas and oil expense
10,000
TOTAL
9,057,232
9,057,232
16. Adjusting Entries: Prepaid Expenses (Basic Approach)
A) Adjusting entries: Entries made at the end of the accounting period before
closing procedures to update balance of asset, liability, revenue, and expense
account to make their balance ready for the preparation of financial
statements.
B) Different types of adjusting entries:
1- Prepaid expenses(Ex: Prepaid rent, prepaid insurance, etc…) Asset → Expense
2- Deferred revenue(Ex: Customer prepayment) Liability → Revenue
3- Accrued revenue(Ex: Earning from providing a service) Earning not a
payment
4- Accrued expenses(Ex: Salaries, bonuses, etc…) Incurred not a payment
5- Asset depreciation(Ex: Asset getting old, losing value, etc…)
6- Uncollectible accounts
7- Subsequent measurements of asset and liability accounts
C) Adjusting entries adheres to:
1- Freedom from errors
2- Timeline
3- Accrual basis
4- Revenue recognition
5- Matching principle
Practice exercise: Jimin Company purchased office supplies on August 1, 2020
amounting to P100,000 in which the company immediately paid in cash. At December
31, 2020 which coincides to be the end of the accounting period, inventory records
show that the amount of remaining office supplies amount to P40,000.
Prepare the initial and adjusting entries for this transaction using the two methods
namely, asset method and expense method.
Asset method
Expense method
August 1, 2020
Office supplies 100,000
Cash
100,000
Office supplies 100,000
Cash
100,000
Analysis
O/S → 100,000
(40,000)
60,000 used
December 31, 2020
Office supplies expense 60,000
Office supplies
40,000
Adjusting entry
Office supplies
60,000
Office supplies expense
40,000
T-account postings
17. Adjusting Entries: Prepaid Expenses (Insurance)
Practice exercise from:
SCALP Handout 018.pdf
Calculations for
INSURANCE EXPENSE
Calculations for
PREPAID INSURANCE
Financial Statements as at
and
for the year ended
DECEMBER 31, 2020
M 7,440 x 9/12 = 5,580
N 12,000 x 5/24 = 2,500
L 16,200 x 2/36 = 900
Total = 8,980
Beg. Balance: 0
Add: Payments: 35,640
Less: Expired: (8,980)
End. Balance: 26,660
Financial Statements as at
and
for the year ended
DECEMBER 31, 2021
M 7,440 x 3/12 = 1.860
N 12,000 x 12/24 = 6,000
L 16,200 x 12/36 = 5,400
Total = 13,260
Beg. Balance: 26,660
Less: Expired: (13,260)
End. Balance: 13,400
Financial Statements as at
and
for the year ended
DECEMBER 31, 2022
M 7,440 Expired
N 12,000 x 7/24 = 3,500
L 16,200 x 12/36 = 5,400
Total = 8,900
Beg. Balance: 13,400
Less: Expired: (8,900)
End. Balance: 4,500
Financial Statements as at
and
for the year ended
DECEMBER 31, 2023
M 7,440 Expired
N 12,000 Expired
L 16,200 x 10/36 = 4,500
Total = 4,500
Beg. Balance: 4,500
Less: Expired: (4,500)
End. Balance: 0
18. Adjusting Entries: Deferred Revenue
1) Deferred: Any prepayment, or payment done in advance before a service is
provided.
Practice exercise: Lipana Tax Consultancy received P150,000 representing advanced
payment for six (6) months tax compliance and consultancy services from one of their
clients on November 1, 2020. The accounting period of the entity ends on December 31,
2020.
Prepare the initial and adjusting entries for this transaction using the two methods
namely, liability method and revenue method.
LIABILITY METHOD
REVENUE METHOD
November 1,
2020
Cash
150,000
Cash
150,000
Unearned tax consultation fees 150,000 Tax consultation fees earned 150,000
Analysis
150,000 x 2/6 = 50,000
150,000 ÷ 6 = 25,000 x 2 = 50,000
150,000 x 4/6 = 100,000
December 31,
2020
ADJUSTING
ENTRY
Unearned tax consultation fees 50,000
Tax consultancy fees earned
50,000
Tax consultation fees earned 100,000
Unearned tax consultation fees 100,000
T-account
postings
19. Adjusting Entries: Accruals
1) Accrued: Revenue or payment that has been earned or given after a service is
provided (Transaction that is recognized by the business even if cash has not
been received yet).
Practice exercises:
Lipana Tax Consultancy rendered year-end tax compliance and consultancy services
to ABC Company on December 15-19, 2020 amounting to P50,000. It was ascertained
that ABC Company would be paying Lipana Tax Consultancy during the first quarter of
2021. Prepare the adjusting entry on December 31, 2020.
Dec 31, 2020
Accounts receivable
Tax consultation fees earned
50,000
Payment:
Cash
Accounts receivable
50,000
50,000
50,000
Accrued Expenses – Salaries
Lipana Tax Consultancy pays their liaison officers on a weekly basis. The company has
ten (10), liaison officers, receiving P3,000 weekly, every Friday. The last day of the year,
December 31, 2020, fell on a Thursday. Prepare the necessary adjusting entry on
December 31, 2020, and the entry to record the payment of the weekly salary on
January 1, 2021, Friday.
M
28
|
T
29
|
W
30
|
3,000 x 10 x ⅘ = 24,000
Dec 31 Salaries expense
Salaries payable
24,000
24,000
Jan 1 Salaries payable
24,000
T
31
|
|
F
1
Salaries expense
Cash
6,000
30,000
Accrued Expenses – Interest Payable
Lipana Tax Consultancy borrowed P200,000 from a bank, evidenced by a note of
promise to pay on May 1, 2020 with an interest rate of 12%. Both the principal and the
interest are payable after one year, that is, April 30, 2021. Prepare all necessary entries
(a) without the use of reversing entries and (b) with the use of reversing entries.
May 1 Cash
Notes payable
200,000
200,000
200,000 x 12% = 24,000 x 8/12 = 16,000
Dec 31 Interest expense
Interest payable
16,000
16,000
April 30 Notes payable
Interest payable
Interest expense
Cash
200,000
16,000
8,000
224,000
Borrowing made 200,000
Add 12% interest 24,000
224,000
Interest - 2020 - 16,000
Interest - 2021 - 8,000
Principal
200,000
224,000
20. Adjusting Entries: Straight-Line Depreciation
1- Depreciation: A decline in the value of an asset due to wear and tear obsolescence
and passage of time.
2- Residual value: The value expected in the asset after its useful life.
3- Straight-line depreciation: Asset cost - Residual value
—————————————
= Annual depreciation
Life in years
Practice exercise:
Annual Depreciation coinciding with the calendar year-end:
Jimin Company purchased equipment on January 1, 2020 amounting to P500,000 with
residual value of P50,000 and life of five (5) years. Prepare the adjusting entries on
asset depreciation and fill up the depreciation table.
Asset cost - Residual value
––––––––––––––––––––
Life in years
500,000 - 50,000
––––––––––––––– = 90,000 annual depreciation
5
Depreciation expense
Accumulated depreciation
Date
90,000
90,000
Depreciation
expense
Accumulated
depreciation
January 1, 2020
Carrying value
500,000
December 31, 2020
90,000
90,000
410,000
December 31, 2021
90,000
180,000
320,000
December 31, 2022
90,000
270,000
230,000
December 31, 2023
90,000
360,000
140,000
December 31, 2024
90,000
450,000
50,000
Annual Depreciation not coinciding with the calendar year-end:
Jimin Company purchased equipment on April 1, 2020 amounting to P500,000 with
residual value of P50,000 and life of five (5) years. Prepare the adjusting entries on
asset depreciation and fill up the depreciation table.
500,000 - 50,000
––––––––––––––– = 90,000 annual depreciation
5
90,000 x 9/12 = 67,500
Depreciation expense
67,500
Accumulated depreciation
67,500
90,000 x 3/12 = 22,500
Date
Depreciation
expense
Accumulated
depreciation
January 1, 2020
Carrying value
500,000
December 31, 2020
67,500
67,500
432,500
December 31, 2021
90,000
157,500
342,500
December 31, 2022
90,000
247,500
252,500
December 31, 2023
90,000
337,500
162,500
December 31, 2024
90,000
427,500
72,500
December 31, 2025
22,500
450,000
50,000
21. Adjusting Entries: Adjusting Entries for the Sample Problem
Practice exercise
(https://drive.google.com/file/d/1zti7hzBTqPEqA3sMBIL6sS0AQ38wrPTX/view):
Landing On You Travel Services Company
Summary of Adjustments
April 30, 2020
a) Interest accrued for the note payable for one month.
Original transaction: Bank borrowing was approved with a note promise to
repay 100,000 payable in one year with 12% interest upon repayment of the
principal amount.
Initial entry made:
Cash
100,000
Notes payable
100,000
Approved borrowing with a note of promise to pay
Analysis: 100,000 notes payable x 12% interest x 1/12 = 1,000
Adjusting entry:
Interest expense
Interest payable
1,000
1,000
b) Depreciation of automobile, ten-year useful life, P100,000 estimated residual
value per vehicle.
Original transaction: Purchase two shuttle 15-seater van amounting to
1,600,000 per vehicle, on account.
Initial entry made:
Automobile
3,200,000
Accounts payable
3,200,000
Purchased two vehicles
Analysis: (Asset cost 3,200,000 - Residual value 200,000) / 10 years = 300,000
annual depreciation
300,000 x 1/12 = 25,000 monthly depreciation
Adjusting entry:
Depreciation expense - Automobile
Accumulated depreciation - Automobile
25,000
25,000
c) Depreciation of office equipment, five-year useful life, 10% estimated residual
value per set.
Original transaction: Purchased ten (10) computer equipment sets for
operational purposes, P30,000 per unit, cash payment made.
Initial entry made:
Office equipment 300,000
Cash
300,000
Purchased ten computer sets
Analysis: (Asset cost 300,000 - Residual value 30,000) / 5 years = 54,000
annual depreciation
54,000 x 1/12 = 4,500 monthly depreciation
Adjusting entry:
Depreciation expense - Office equipment
Accumulated depreciation - Office equipment
4,500
4,500
d) Depreciation of furniture and fixtures, five-year useful life, no residual value.
Original transaction: Purchased furniture and fixtures such as tables, chairs,
cabinets, and sofa set for guests and clients, package of P600,000, P200,000
paid in cash, balance on account.
Initial entry made:
Furniture and fixtures 600,000
Cash
200,000
Account payable
400,000
Purchased furniture and fixtures
Analysis: Asset cost 600,000 / 5 years = 120,000 annual depreciation
120,000 x 1/12 = 10,000 monthly depreciation
Adjusting entry:
Depreciation expense - Furniture and fixtures
Accumulated depreciation - Furniture and fixtures
10,000
10,000
e) P35,000 worth of office supplies were used.
Original transaction: Purchased office supplies amounting to 50,000 and paid
rent in advance covering 6 months equivalent rent 150,000
Initial entry made:
Office supplies
50,000
Prepaid rent
150,000
Cash
200,000
Purchased office supplies and paid rent in advance
Analysis: Original purchase of office supplies 50,000
To be reported as office supplies expense(used portion) 35,000
To be reported as remaining office supplies(unused portion) 15,000
Adjusting entry:
Office supply expense
Office supplies
f)
35,000
35,000
One month of rent was expired.
Original transaction: Purchased office supplies amounting to 50,000 and paid
rent in advance covering 6 months equivalent rent 150,000
Initial entry made:
Office supplies
50,000
Prepaid rent
150,000
Cash
200,000
Purchased office supplies and paid rent in advance
Analysis: 150,000 x ⅙ = 25,000 rent expired
Unused rent 125,000
Adjusting entry:
Rent expense
Prepaid rent
25,000
25,000
g) Earned the Japan travel service in full on April 30.
Original transaction:
Initial entry made:
Cash
689,632
Unearned local travel fees
51,632
Unearned international travel fees
638,000
Received advanced payment from customers
Analysis: 638,000 earned in full
Adjusting entry:
Unearned international travel fees
International travel fees earned
638,000
638,000
22. Ten-column Worksheet
Account titles
Unadjusted TB
Adjustments
Adjusted TB
Profit and loss
Financial position
Cash
4,180,456 |
4,180,456 |
4,180,456 |
Account
receivable
77,776 |
77,776 |
77,776 |
Office supplies
50,000 |
| 35,000
15,000 |
15,000 |
Prepaid rent
150,000 |
| 25,000
125,000 |
125,000 |
Automobile
3,200,000 |
3,200,000 |
3,200,000 |
Office
equipment
300,000 |
300,000 |
300,000 |
Furniture and
fixtures
600,000 |
600,000 |
600,000 |
Accounts
payable
| 2,000,000
| 2,000,000
| 2,000,000
| 100,000
| 100,000
| 100,000
ULTF
| 51,632
| 51,632
| 51,632
UITF
| 638,000
Notes payable
Yoon, Capital
Yoon, Drawing
638,000 |
-
| 6,000,000
| 6,000,000
30,000 |
| 6,000,000
30,000 |
LTFE
| 73,160
ITFE
| 194,440
| 638,000
30,000 |
| 73,160
| 73,160
| 832,440
| 832,440
Salaries expense
190,000 |
190,000 |
190,000 |
Utility expense
12,000 |
12,000 |
12,000 |
Repair and
maintenance
expense
7,000 |
7,000 |
7,000 |
Organization
expense
250,000 |
250,000 |
250,000 |
Gas and oil
expense
10,000 |
10,000 |
10,000 |
1,000 |
1,000 |
9,057,232 | 9,057,232
Interest expense
1,000 |
Interest payable
Depreciation
expense Automobile
Accumulated
| 1,000
25,000 |
| 1,000
25,000 |
| 25,000
| 1,000
25,000 |
| 25,000
| 25,000
depreciation Automobile
Depreciation
expense - Office
expense
4,500 |
Accumulated
depreciation Office expense
4,500 |
| 4,500
Depreciation
expense Furniture And
fixtures
10,000 |
Accumulated
depreciation Furniture and
fixtures
4,500 |
| 4,500
10,000 |
| 10,000
| 4,500
10,000 |
| 10,000
| 10,000
Office supplies
expense
35,000 |
35,000 |
35,000 |
Rent expense
25,000 |
25,000 |
25,000 |
9,097,732 | 9,097,732
569,5000 | 905,600
738,500 | 738,500
NET INCOME
8,528,232 | 8,192,132
336,100 |
905,600 | 905,600
| 336,100
8,528,232 | 8,528,232
23, Financial statements
a) Financial statements are structured representation of the entity’s financial
position, financial performance and cash flows of an entity that is useful to a
wide range of users in making economic decisions.
b) There are five types of financial statements
1- Statement of financial position: Presents the entity’s assets, liabilities, and
capital as of the period(Ex: balance sheet, financial position column^)
2- Statement of comprehensive income: Presents the entity’s revenues and
expenses during an accounting period that tells users on whether the entity
enjoyed profit or suffered a loss during the period(Ex: profit and loss column ^).
3- Statement of changes in equity: Presents the changes in the equity of the
owner due to investments, additional contributions, net income or loss, and
personal withdrawals.
4- Statement of cash flows: Presents the entity’s cash inflows and outflows on
three major activities: operating, investing, and financing.
● Operating activities: Include cash activities related to net income. For
example, cash generated from the rendering of services and cash paid for
expenses and operating activities because revenues and expenses are
included in net income
● Investing activities: Include cash activities related to concurrent assets.
Noncurrent assets include long-term investments and property, plans,
and equipment such as automobiles.
● Financing activities: Comes from conducting financing activities for the
business. In other words, financing cash flow includes obtaining or
repaying capital, be it in equity or long-term debt.
5- Notes and disclosures
c) Summary
24. Closing procedures
a) Wrapping up the accounting process
1- Journalize and post adjusting entries: Adjusting entries were already
prepared and its effects were included in the worksheet and ultimately, in the
financial statements. However, these adjusting entries are not journalized and
posted formally in the book of accounts.
2- Journalize and post-closing entries: After these adjusting entries are
journalized and posted formally, the updated balances in the ledger should be
equal to the adjusted trial balance column of the worksheet.
3- Prepare post-closing trial balance: Closing entries are entries that close the
balance of drawing, revenue and expense accounts to zero to prepare them for
the next accounting period.
b) Assets, liabilities, capital = Real accounts
c) Drawing, revenue, expenses = Nominal accounts
d) Journalize and post-closing entries:
1- Debit all revenue accounts and credit the total to the profit or loss summary
account
2- Credit all the expenses accounts and debit the total to the profit or loss
summary account.
3-The net effect of the profit or loss summary account will be closed to the
capital account
4- Any balance of the drawing account will be charged against the capital
account.
e) After journalizing and posting closing entries
1- Assets and liabilities should maintain their updated balances.
2- Drawing, revenue, and expenses should be zero.
3- The capital account should be updated with the amount equal to what is
reported in the Statement of Change in Equity.
f) Post-closing trial balance: The post-closing trial balance is a trial balance
prepared after closing procedures. Since all nominal accounts have already been
closed, the PCTB only includes assets, liabilities, and capital
g) After all the processes, make sure that:
1- The journal shall include the normal journal entries, adjusting entries,
closing entries, and reversing entries
2- The ledger balances are updated as to assets, liabilities, and capital, and zero
as to drawing, revenue, and expenses.
3- The post-closing trial balance has been prepared.
h) Closing entries for trading account: The journal entries necessary to transfer
opening stock, purchases, sales and return to the trading account are called
closing entries as they serve to close the account. These are as followed:
1) For transfer of opening stock, net purchases, and direct expenses to
trading account.
Trading A/c
To stock (opening) A/c
To purchases A/c
To direct expenses A/c
Being opening stock, purchases and direct expenses transferred to
trading accounts.
2) For transfer of net sales and closing stock to trading account.
Sales A/c
Stock (closing) A/c
To trading A/c
Being sales, closing stock transferred to trading account.
3) For gross profit
Trading A/c
To profit and loss A/c
Being gross profit transferred to profit and loss account.
4) For gross loss
Profit and loss A/c
To trading A/c
Being gross loss transferred to profit and loss account.
25. Reversing entries
a) Reversing entries is an optional step in the accounting cycle usually used when
accrued expenses or assets are present. However, it is useful in facilitating the
recording of assets, liabilities, revenues, and expenses in the usual manner.
They are journalized and posted at the beginning of the new accounting period.
b) Adjusting entries that are recommended to undergo reversing entries:
Prepayment under expense method, deferrals under revenue method, accrued
revenues, and accrued expenses.
c)
26. Accounting for Merchandising Operations 1: Sales and Purchases
A) Merchandising is a business activity of buying and selling of goods. The goods
that a merchandising company sells to its customers are called Merchandise
Inventory, or simply Inventory. Inventories are reported in the financial
statements as a current asset(Ex: TJMaxx, Walmart, etc…).
B) Operating cycle:
C) Gross invoice price: In accounting for merchandising operations, we always
record the gross invoice price in the books. Merchandises are always quoted in
the original price called list price and deductions are given by the seller to
encourage the buyer to buy more, called trade discounts.
D) Practice questions:
1- Find the amount that will be recorded in the books of Jimin trading regarding
their purchase of merchandise, listed as 6,000 and is given a trade discount of
20%
List price
-Trade discount
—-------------Gross invoice price
6,000
(1,200) ← 6,000 x 20%
—---4,800
2- Find the amount that will be recorded in the books of Jimin trading regarding
their purchase of merchandise, listed as 7,000 and is given chain discounts of
30% and 25%.
7,000
(2,100) ← 7,000 x 30%
—---4,900
(1,225) ← 4,900 x 25%
—--3,675
E) Sales:
1- In a sales transaction, the legal ownership of goods is transferred from the
seller of the goods to the buyer of the merchandise. When you purchased a
flat-screen television from an appliance center. The appliance center first had
ownership of the television when they bought it from the supplier. The
appliance center then sells it to you and transfers the ownership to you in the
sales transaction.
2- Revenue is earned each time a sale is made.
3- Sales can be accepted in cash or on account. When goods are sold on account,
the terms of payment must be specified on the invoice. This term of payment is
called the Credit term.
4- Sales, whether in cash or on account are sometimes returned to the seller
because of wrong color, wrong size, inferior quality, and many other reasons.
5- Sales returns are merchandise returned to the seller, which implies the
cancellation of sales.
6- Sales allowances are granted if customers keep the merchandise although
unsatisfied with what they bought. We use the accounts sales returns and
allowances to record these types of transactions.
7- Practice questions:
The following transactions were dealt with by the Lisa merchandising:
-April 1, sold merchandise to Jennie company with a price of 12,000, cash on
delivery.
-April 2, sold merchandise to Rose company with a price of 8,000 terms 2/10,
n/30
-April 5, Jennie returned 3,000 worth of defective merchandise. Cash refund
was granted
-April 11, Rose company paid their account balance
April 1 Cash 12,000
Sales
12,000
April 2 Accounts receivable - Rose company 8,000
Sales
8,000
April 5 Sales returns and allowances 3,000
Cash
3,000
April 11 Cash discount 8,000 x 2% = 160 → Sales discount
Cash
7,840
Sales discount
160
Accounts receivable - Rose company
8,000
F) Purchases
1- The cash collected by the merchandising entity will then be used to purchase
goods that will be sold by the firm.
2- Merchandising entities need to purchase inventory in order to be able to sell
and gain profit
3- We can say that purchases are also sales transactions. However, the viewpoint
here is that the company that accounts for the transactions will be the buyer of
the merchandise
4- Practice exercise:
The following transactions were dealt with by Lisa merchandising:
-May 1, purchased merchandise from the M company amounting to 15,000, cash
on delivery
-May 2, purchased merchandise to Kim company amounting to 6,000, terms
5/10, n/EOM
-May 7, Lisa returned 3,000 worth of merchandise to M company, cash refund
was granted
-May 10, Lisa paid their account balance to Kim company
May 1 Purchases 15,000
Cash
15,000
May 2 Purchases
6,000
Accounts payable - Kim company
6,000
May 7 Cash
3,000
Purchases returns and allowances
3,000
May 10 Cash discount 6,000 x 5% = 300 → Purchase discount
Accounts payable - Kim company 6,000
Cash
5,700
Purchase discount
300
27. Accounting for Merchandising Operations 2: Transportation
A) Freight terms:
B) Practice exercise: Who is the owner by December 31?
Buyer
1- Goods shipped FOB shipping point on Dec 28,
received by the buyer on Dec 30
X
2- Goods shipped FOB shipping point on Dec 28,
received by the buyer on Jan 3
x
3- Goods shipped FOB destination on Dec 28, received
by the buyer on Dec 30
X
Seller
4- Goods shipped FOB destination on Dec 28, received
by the buyer on Jan 3
X
C) FOB destination: Title is passed to the buyer only when the buyer receives the
goods purchased.
D) FOB shipping point: Title is passed to the buyer at the point of shipping/in
transit.
E) Freight prepaid vs freight collect:
F) Freight in vs freight out:
1- Freight-in: Buyer pays for the freight charges. It is an adjunct account to the
purchases and thus added as cost of inventory in bringing it to its present
location and condition.
2- Freight-out: Seller pays for the freight charges. It is recorded by the seller as
an operating expense, under the selling of the line item.
3- A freight in expense is the shipping cost associated with receiving goods from
a manufacturer or supplier.
G) Practice exercise: What will be the entry for the following?
1- ABC company purchased merchandise worth 15,000 with terms 5/10, n/30.
Freight charges paid by ABC amount to 3,000
Purchases
Freight-in
Accounts payable
Cash
15,000
3,000
15,000
3,000
2- DEF company sold merchandise priced at 8,000 with terms 2/10, n/30.
Freight charges paid by DEF amount to 2,000 and will be reimbursed by the
buyer.
Accounts receivable
Freight-out
Sales
Cash
8,000
2,000
8,000
2,000
28: Accounting for merchandising operations: Income statement
a) Adjusting entry
1- Profit or loss summary
xxx
Merchandise inventory (beg)
xxx
To close beginning inventory
2- Merchandise inventory (end)
xxx
Profit or loss summary
To record ending inventory
b) Merchandising income statement
xxx
1-
2-
3-
c) Methods of presenting the income statement:
-Function of expense method: Classifies expenses according to their functions as cost
of goods sold.
-Nature of expense method: Expenses are aggregated according to their nature and
not by function.
Practice example
(https://drive.google.com/file/d/1HpYHOTINjirEa-Y69uquZaxZvp27FDtH/view):
Expense method:
Nature of expense method:
Intro to financial accounting -1Accounting
-Language of business
-Identifying, recording, and communicating business results
-Ethics is key when communicating business results
GAAP
-General accepted accounting principles
-Financial accounting is governed by GAAP
-Ensures information is accurate, reliable, and comparable
-GAAP exists to help investors or creditors decide the worth of a company(decide if
they want to invest in a business or not based on true factual information on the
business.)
Accounting principles
-Measurement principle(or cost principle): Accounting info is based on actual cost.
Actual cost is considered objective.
-Revenue recognition principle: Recognize revenue when it's earned, proceeds need to
be in cash, and measure revenue by cash value of items received.
-Expense recognition principle(or matching principle): A company must record its
expenses to generate the revenue reported.
-Full disclosure principle: A company is required to report all information behind
financial statements that would impact users' decisions.
Accounting assumptions
-Going concern assumption: Reflects assumptions that the business will continue
operating instead of being closed or sold
-Monetary unit assumption: Express transactions and events in monetary or money
units,
-Business entity assumption: A business is accounted for separately from other
business entities, including the owners.
-Time period assumption: Presumes that the life of a company can be divided into
time periods such as months and years.
Assets: Economic resources that provide a future benefit for the company(Cash,
account receivable, notes receivable, land, building, equipment, furniture, fixtures)
Liabilities: Something you owe to an outside or third party(Account payable, notes
payable, accrued liabilities.)
Stockholders(owners) equity: The owner's claims to assets(Common stocks, retained
earnings, dividends, revenues, expenses)
The ‘T’ account: Helps us analyze transactions and assists in determining the ending
balance.
Increases and decreases
-An account will increase with either a debit or credit entry
-The account type determines the way we increase the amount
-Debits, like credits are neither good nor bad
Rules of debit and credit:
Financial statements:
Debit and credit:
-Debit is all the money flowing into an account and credit is the money flowing out.
-Debits are assets, drawings, and expenses while credits are capital, liabilities, and
revenue.
-It allows you to see where money is coming from and where it's going
-Debits increase as credits decrease
-Record debit on the left side of the account
-Debit increases asset and expense accounts
-Debit decreases liability, equity, and revenue accounts
-Credits increase as debits decrease
-Record credit on the right side of an account
-Credits increase liability, equity and revenue accounts
-Credits decrease assets and expense accounts
Preparing the financial statement
Income statement: Revenue - Expense = Net income
Statement of changes in equity: Common shares, Retained earnings (Begin with → how
did it change → what do I have now)
Balance sheet: Assets = Liabilities + Equity
Cash flow statement: Cash beginning → Change → Cash end
Personal accounts:
1) Accounts which are related with accounts of individuals, firms and companies.
2) They can be classified into three categories
a- Natural personal accounts: Accounts of individuals relating to natural
persons.
b- Artificial personal accounts: Accounts of companies and institutions are
artificial personal accounts. These exist only in the eyes of the law.
c- Representative personal accounts: The accounts which represent some
person such as wage outstanding account, prepaid insurance account, and
accrued interest account.
Real accounts:
Real accounts are the accounts related to assets and properties. They can be tangible
or intangible.
1) Tangible accounts: Assets relating to tangible accounts are buildings, plants,
machinery, cash, and furniture.
2) Intangible accounts: Assets relating to intangible accounts are goodwill,
trademarks, copyrights, franchises, and patents.
Nominal accounts:
The accounts relating to income, expense, losses, and gains are classified as nominal
accounts such as wages account, rent account, interest account, salary account, and
bad debt account.
Debit and credit when it comes to account types:
Goods accounts:
1) Generally the term goods include every type of property such as land, building,
machinery, furniture, cloth, and such. But in accountancy, its meaning is
restricted to only the articles which are purchased by a businessman with an
intention to sell it.
2) The goods account is not opened in accounting books and it is to be noted goods
include purchases, sales, sales returns, and purchases return of goods.
3) However, purchase account, sales account, sales return account, and purchase
return account are opened in the books of account.
a- Purchases account: This is opened for goods purchased on cash and credit
b- Sales account: This account is opened for the goods sold on cash and credit
c- Purchase returns account or return outward account: This account is opened
for the goods returned to suppliers
d- Sales returns account or return inward account: This account is opened for
the goods returned by customers.
Cash books:
1) A special journal which is used for recording all cash receipts and cash
payments. Cash book serves dual role of journal as well as ledger. It is the book
of original entry since transactions are recorded for the first time from the
source documents.
2) It performs the function of both journal and the ledger at the same time.
3) Only cash transactions are recorded in the Cash Book
4) All cash receipts are recorded on the debit side and all cash payments are
recorded on the credit side
5) The cash book, recording only cash transactions can never show a credit
balance.
6) Different kinds of cash book:
a- Single column cash book: for recording cash transactions only. It has one
column of amount on each side. All cash receipts are recorded on the debit side
and all cash payments are recorded on the credit side.
b- Double column cash book: for recording cash transactions involving gain or
loss on account of discount. This cash book has two amount columns on each
side, one for cash and one for discounts. It is customary in business to allow
discount when payment is received from a customer promptly and before due
date. All cash receipts and discount allowed are recorded on the debit side and
all cash payments and discount received are recorded on the credit side of the
cash book.
c- Triple column cash book: for recording cash and bank transactions involving
gain or loss on account or discount. This type of cash book is an improvement
over the double column cash book. Transactions through bank are also recorded
in the cash book by adding one more column on both sides of the cash book. So
in that case there will be three columns on each side, cash, bank and discount
column. The receipt side(debit) is used to record all receipts both in cash and by
cheques as also to record the discount allowed to our debtors while receiving
the payment. Cash receipts are entered in the cash column while amounts
received by cheques are entered in the bank column and discount allowed in the
discount column.
The payment side(credit) of the cash book is used to record all payments both in
cash and through cheques as also to record the discount received or availed by
us from over creditors while making payments to them. Cash payments are
recorded in the cash column, payments through cheques are entered in the
bank column and discount received in the discount column.
After recording the transactions, the bank balance may have a debit balance or a
credit balance. If the total of the debit side of the bank column is more than the
total of the credit side then it has a debit balance, but if the opposite happens
and it has a credit balance it is an overdraft. There is no need to balance the
discount columns.
d- Petty cash book: for recording petty expenses. In every business, there are
some payments that involve small amounts(payments for postage, telegrams,
carriage, cartage, etc). If all these transactions are recorded in the cash book it
will increase teh head cashiers' work manifold and it will make the cash book
unnecessarily bulky and uneasy. Normally one person is handed over a small
amount to meet the petty expense of a given period and is authorized to make
such payments and to record them in a separate cash book. Such person
amount and cash books are called as petty cashier, imprest and petty cash book.
The petty cash book may or may not be maintained on imprest system. Under
both systems, the petty cashier submits the petty cash book to the head cashier
who examines the book. Under the imprest system, the head cashing makes
reimbursements of the amount spent by the petty cashier but under nonimprest
system, the head cashier may hand over the cash to the petty cashier equal to or
more than or less than the amount spent. Usually the petty cash book is
maintained on the basis of imprest system.
A few advantages of the imprest system are:
a) The money in the hands of the petty cashier is limited to the imprest
amount.
b) As the periodical reimbursements are the actual expenses paid and not
mere advances on account only, they are as such brought prominently to
the notice of the chief cashier.
c) The chief cashier, by handing over a fixed sum, is relieved of the
cumbersome work of petty disbursements.
d) The main cash book is not unnecessarily clogged with the large number
of small items. Even in the ledger, only the totals are posted.
e) At all times, the amount of cash in hand plus expenses not reimbursed
must equal the imprest amount, thus, facilitating a simple check.
f) The maximum liability of the petty cashier can never excess the imprest
amount
g) The regular check of the petty cash book creates a sense of responsibility
in the petty cashier.
7) Balancing the cash book. The cash book should be balanced daily to verify and
confirm the authenticity of the cash balance. In the cash book the total of
amount column of the debit side always exceeds the total of the credit side.
Purchase book:
a) The purchases book is used for recording only the credit purchases of goods
and merchandise in which the business is dealing in(goods purchased for resale
purposes for earning revenue).
b) It records neither cash purchases of goods nor purchase of any asset other than
the goods or merchandise.
c) The invoice states the quality, price and the value of goods supplied. It also
states the discount allowable(trade and cash) and the condition under which
payment is expected.
d) The entries in the purchase book are made on the basis of invoices received
from the supplies with the amounts net of trade discount/quantity discount.
e) Trade discount is a reduction granted by the supplier from the list price of
goods and services on business consideration such as quantity bought, trade
practices other than for prompt payment.
f) Entries in the books of both suppliers as well as retailer are made on the basis of
net amount(invoice price less trade discount).
Sales book:
a) Sales book is written up to record all the credit sales
b) Sales book records only those goods which are sold on credit and the goods in
question must be those which the firm generally deals in.
c) If they are cash sales they are recorded in cash book and sales of assets are
recorded in the journal proper
d) The entries in the sales book are made from the copies of the invoice which have
been sent to customers along with the goods. Such copies of the invoice may be
termed as outward invoice.
e) Each outward invoice should be numbered consecutively and the reference be
given in the sales book along with the entry
f) The sales book is totalled periodically. The net amount of the invoices in sales
book is posted to the ledger as follows:
1) Debit the personal accounts of the customers with the value of sales to
them.
2) Credit sales account with the periodical total.
Purchase return book:
a) Used to record returned goods due to defects and other issues. These
transactions are recorded in the purchases return book or returns outward
book.
b) The entries in the purchases returns book are usually made on teh basis of debit
notes issues to the suppliers.
c) When a firm returns some goods to its suppliers it rpepares a debit note in
duplicate, teh original cop is sent to the supplier to whom the goods are
returned.
d) After recording the transaction in purchases return book, posting to the ledger
involves:
1) The periodical total of the purchases return book is posted to the credit
of the purchases return account in the ledger.
2) The personal account of each individual supplier is debited with teh
amount of debit note.
e) Debit note example:
Sales return book:
a) Sales return book or returns inward book is meant for recording return of
goods sold on credit.
b) The goods that are sold for cash if returned are either exchanged for new goods
or parties are paid in cash, do not find a place in the sales return journal.
c) A different column is used instead of invoice or debit note and it is credit note.
d) The posting from the sales return book will be done periodically to the debit
side of the sales returns account in the ledger and teh individual accounts of the
customers will be credited with their respective amount.
Bills receivable book:
a) When a payment for a business transaction is not made immediately but is
deferred or postponed for a few months a bill of exchange payable some time
ahead may be drawn by the creditors on his debtor.
b) The bill of exchange is then accepted by the debtor indicating that he would pay
the amount specified therein on the expiry of the period stated on the bill.
c) To the creditor who draws the bill upon his customer it is termed as bills
receivable representing money to be received at a future date.
d) Transactions involving the drawing, the acceptance and negotiation of bills are
recorded in bills receivable and bills payable books respectively.
e) Bills receivable book is used to record the details of bills receivable on which
business enterprise will receive teh amounts from other parties in the future.
f) The entries to be made in this book include the name of the acceptor, the terms,
due date, the amount and other details.
g) Posting: The total of the amount column of the bills receivable book is debited to
the bills receivable account while the amount of each bills receivable is posted to
the credit of the account of the party from whom it is received.
Bills payable book:
a) This is also a book of original entry and is used to record the particulars of all
the bills payable accepted by the business enterprise for the purpose of paying
at a future date amounts due by it to its or his creditors.
b) The entries to be made in this book relate to the name of the drawer, the name
of the payee, the period, the due date and other particulars.
c) Posting: The amount of each bill is posted to the debit side of the drawer’s
account in the ledger and the total of the amount column of the bills payable
book is posted to the credit of bills payable account in the ledger.
Journal proper:
a) It is a residuary book in which those transactions are recorded which cannot be
recorded in any other subsidiary book such as cash book, purchases book, sales
book, purchases return book, sales return book, bills receivable book and bills
payable book.
b) Opening entry: An opening entry si passed in the journal for bringing the
balances of various assets, liabilities and capital appearing in the balance sheet
of the previous accounting period, in teh books of current accounting period.
c) Closing entries: Closing entries are passed in teh journal for closing the nominal
accounts by transferring them to the trading and profit and loss account. These
are needed at the end of the accounting year, when the final accounts are
prepared.
d) Transfer entries: Transfer entries are passed in the journal for transferring an
amount from one account to another account.
e) Adjusting entries: Adjusting entries are passed in the journal to bring into the
books of accounts certain unrecorded items like closing stock, depreciation on
fixed assets, outstanding and prepaid items. These are needed at the time of
preparing the final accounts.
f) Rectifying entries: Rectifying entries are passed in the journal to rectify the
various errors committed while posting, totalling and balancing.
g) Miscellaneous entries: This includes the following:
1) Capital brought in kind. If the proprietor of the business brings in his
capital contribution in kind and not in cash, such transaction can be
recorded only in the journal proper and not in the cash book since
transaction does not involve any cash inflow.
2) Purchase of assets on credit. Such transactions can neither be recorded
in the purchase book nor the cash book.
3) Sales of assets which were sold on credit. Such transaction can neither be
recorded in teh sales book nor the cash book.
4) Return assets which were sold on credit cant be record in teh return
inwards book since no goods have been returned.
5) Return of assets which were bought on credit cannot be recorded in the
return outwards book since no goods have been returned.
6) Endorsement of bills receivable to a creditor.
7) Dishonour of bills receivable.
8) Cancellation of bills payable.
9) Abnormal loss of stock in trade, other assets by theft, accident, fire, etc.
10) Writing-off bad debt.
Doubtful accounts:
-An account receivable
-Might become a bad debt in the future
-An allowance for doubtful accounts is considered a “contra asset,” because it reduces
the amount of an asset, in this case the accounts receivable. The allowance, sometimes
called a bad debt reserve, represents management's estimate of the amount of
accounts receivable that will not be paid by customers.
Major accounts:
Asset account:
-Cash
-Accounts receivable
-Inventory
-Prepaid expenses
-Property and equipment
-Vehicles
Expense account:
-Advertising
-Utilities
-Rent
-Travel
-Salaries
Revenue account:
-Sales revenue
-Service revenue
-Interest income
-Investment income
Liability accounts:
-Accounts payable
-Income tax payable
-Loans payable
-Bank fees
Equity account:
-Available for sales security
-Stocks
-Bonds
-Mutual funds
-Real estate
-Pension and retirement plans
-Derivative instruments
-Debt security
Trading accounts:
a) After the preparation of trial balance, the next step is to prepare trading
account.
b) It is one of the financial statements which shows the result of buying and selling
of goods or services during an accounting period.
c) Its main objective is to ascertain gross profit or gross loss during the accounting
period.
d) Gross profit is said to have made when teh sale proceeds exceed the cost of
goods sold. However, when sale proceeds are less than the cost of goods sold,
gross loss is incurred.
e) We have to take into consideration opening stock, purchases, direct expenses on
purchasing or manufacturing the goods and closing stock.
f) The balance of this account(gross profit or gross loss) is transferred to the profit
and loss account.
Stocks:
a) Stocks may be of two types, opening stock and closing stock.
b) Opening stock refers to the closing stock of unsold goods at the end of previous
accounting periods. This is shown on the debit side.
c) Closing stock refers to the stock of unsold goods at the end of the current
accounting period. They are valued either at cost price or at market price
whichever is less.
d) Closing stock is not generally available in the trial balance. If it is given in the
trial balance it is not shown on the credit side of the trading account but
appears only in the balance sheet as an asset. If it is given outside the trial
balance, it is to be shown on the credit side of the trading account as well as on
the asset side of the balance sheet.
Purchases:
a) Purchases refer to those goods which have been brought for resale.
b) It includes both cash and credit purchases of goods.
c) The following are shown by the way of deduction from the amount of purchases:
1) Purchases returns or return outwards
2) Goods withdrawn by proprietor for his personal use
3) Goods received on consignment basis or on approval basis or on hire
purchase
4) Goods distributed by way of free samples
5) Goods given as charity
Direct expenses:
a) Direct expenses are expenses which are directly attributable to the purchase of
goods or to bring the goods in saleable conditions.
b) Some examples of direct expenses are:
1) Carriage inward: Carriage paid for bringing the goods to the godown is
treated as carriage inward and it is debited to trading account
2) Freight and insurance: Freight and insurance paid for acquiring goods or
making them saleable is debited to trading account. If it is paid for the
sale of goods, then it is to be charged to profit and loss account.
3) Wages: Wages incurred in a business is direct, when it is incurred on
manufacturing or merchandise or on making it saleable. Other wages are
indirect wages. Only direct wages are debited to the trading account.
Other wages are debited to the profit and loss account. If it is not
mentioned whether wages are direct or indirect, it should be assumed as
direct and should appear in the trading account.
4) Fuel, power and lighting expenses: Fuel and power expenses are incurred
for running the machines. Being directly related to production, these are
considered as direct expenses and debited to trading account. Lighting
expenses of factory is also charged to trading account, but lighting
expenses of administrative office or sales office are charged to profit and
loss account.
5) Octroi: When goods are purchased within municipality limits, generally
octroi duty has to be paid on it. It is debited to trading account.
6) Packing charges: There are certain types of goods which cannot be sold
without a container or a proper packing. These form a part of the
finished product. One example is ink, which cannot be sold without a
bottle. These type of packing charges are debited to trading account. But
if the goods are packed for their safe despatch to customers (packing
meant for transportation or fancy packing meant for advertising) will
appear in the profit and loss account.
7) Manufacturing expenses: All expenses incurred in manufacturing the
goods in the factory such in factory rent, factory insurance are debited to
trading account.
8) Royalties: These are the payments made to a patentee, author or landlord
for the right to use his patent, copyright or land. If royalty is paid on the
basis of production, it is debited to trading account and if it is paid on the
basis of sales, it is debited to profit and loss account.
Sales:
a) Sales include both cash and credit sales of those goods which were purchased
for resale purposes.
b) Some customers might return the goods sold to them which are deducted from
the sales in the inner column and net amount is shown in the outer column.
c) While ascertaining the amount of sales the following points need attention:
1) If a fixed asset such as furniture, or machinery is sold it should not be
included in sales
2) Goods sold on consignment or on hire purchase or on sale or return basis
should be recorded separately
3) If goods have been sold but not yet despatched, these should not be
shown under sales but are to be included in closing stock
4) Sales of goods on behalf of others and forward sales should also be
excluded from sales.
Accounts receivable:
1850k - 448k = 1402k
1402,000 x 2% = 28,040 ← Bad debt
May 31, 2024
Bad debt exp
Allowance for doubtful accounts
28,040
28,040
The green political theory focuses on:
● The relationship between humans and nonhumans(animals, environment, the
earth, etc).
● Human social, economic, and political relations in regards to nature.
● Climate change and how it impacts economics and politics.
● Rising levels of global and national inequalities.
● Overconsumption and the resource crisis.
The green political theory has often been described with terms such as ecologism and
environmentalism, though they share a few similarities, both of these ideologies have
very narrow and focused views on certain topics while the green political theory has a
broader view on those issues and takes more things into account while pushing the
idea of sustainability.
Environmentalism: The theory that environment, as opposed to heredity, has the
primary influence on the development of a person or group.
Ecologism: An ideological position that advocates a transformation in human–nature
relations, challenges anthropocentric values, emphasizes respect for natural limits,
and calls for significant social and economic change. Of the two, ecologism is closer to
the green political theory than environmentalism though they are still not the same.
Sustainability: Avoiding the depletion of natural resources in order to maintain an
ecological balance.
Some origins of the green political theory are:
● The reactions to the Industrial Revolution, from working class resistance to
capitalism, mechanization, the despoliation of the countryside, and the factory
production system.
● The positive reaction to unfinished projects in the french revolution (Look into
this later more context is needed cause what??? Could have smth to do with the
siècle de lumiére and the philosophers then).
● The negative reaction to colonialism and imperialism in the nineteenth and
twentieth centuries, which started a concern with global ecological injustice,
and the ecological debt owed by the ’developed’ world to the ’underdeveloped’
world.
● The emergence of ecology and Darwinism (An evolutionary theory based on
natural selection).
● Public perception of an ecological crisis(1960s), limits to growth
concerns(1970s-onwards), global environmental problems(1980s-1990s), and
peak oil and climate change in this century.
● Growing moral sensitivity and care towards the nonhuman world (animal rights,
preservation of the earth, etc)
● The presence of more progressive social, economic, and political policies.
The green theory looks to overcome the separation of humans and nature and the
common misconception that humans are ‘above’ nature, animals, and all else. Green
theory starts analyzing humans through a species of nature lens, taking into account
their species-specific characteristics and needs first and foremost. They also try and
push the point that social-environmental relations are not just important but crucial
and constitutive in human society. It also shows that morality is needed when we
interact with the nonhuman world and that whether our interaction with it is ethical
or morally correct or not it will have an impact on our society and future generations.
Like any movement, the green theory came in a number of waves that each brought up
different ideologies and statements that make up what it is today, these three main
waves are:
● The first wave was primarily concerned with articulating the distinctiveness of
ecologism as an ideology and green political theory as a distinctive approach to
politics.
● The second wave brought up ecological thoughts that were characterized by a
concern with debates between green political theory and other schools of
thought such as liberalism, feminism, critical theory, and socialism, as well as
focusing on some key concepts within political thought such as democracy,
justice, the state, and citizenship.
● And what we can currently all the third wave is noticeable for its explicitly
interdisciplinary and applied focus. People tend to be informed by a much wider
range of disciplines integrated with practical, empirical research.
Green political theory can be seen as a form of applied political theory.