|. INTRODUCTION A. Accounting's Role in a Business: The Need for Accounting Accounting has been frequently referred to as the “language af business" The Financia! Information, contained primarily in a Batarce Sheer and an ficome Staremens which are the basic output of the Aecouuning Process, are being used by the management of a business organization to answer variety of questions Among others: [**Try answering these questions by referring, to pages, 7,8 &9] = What are the properties of the business? = What debis does it owe? = Does it generate income? * What expenses are being incurred? “These are but a few of the questions, to illustrate the need and usefulness of Financial tnformation provided by the Accounting Process. OL course, the management is but one of the several different groups of people who rely on accounting systems to provide them with data, For example, the creditors will make use of the financial information provided by the company’s accounting system to answer their basic question about the company’s eredit-worthiness and to make decisions related to it, For the other users, thus: ‘# Owners-does the business generate income? ‘© Workers- does the business has the capacity to increase salaries © Government (BIR) - How much is the taxable income and taxes due? Therefore, accounting is basically a vital #y/armation System used by management Wo enable it 10 make good decisions designed ta accomplish the company’s goals and objectives, However, as earlier stated, many people and agencies outside a company’s management need accounting information about the company because they have levitimate financial interest in its condition, ‘The Business Entity ‘A business entity is a unit organized to conduct business operations and it may involve one person or very large number of persons, In developing and maintaining accounting information, itis required to Aeep she financial interest of the business entity SEPARATE from the financiat interests of the individuals ihe are associated with if (eg. owners, managers, employees). Thus, only transactions of the business (external wansactions) as distinguished from personal transactions (internal transactions) of owners rmust be recorded per entity's books, [see Zndiér Comcepa Every business entity has certain objectives and goals. Primarily, a business entity wants to 1) eam profit and 2) remain. solvent (stay in business), These objectives boil down to the objective of survival which should and generally the fundamental business abjective. Forms of Business Organizations Sole proprietorship- One owner called proprietor Partnership- Two or more owners called partners. ‘Corporation- Several awnets called stockholders or shareholders ‘Cooperative- Several owners called members Types of Business Activity eee1, Merchandising "Buy and Sell" business. It involves buying and selling goods without changing their form. (eg. sari- sari stores, book stores) 2, Manufacturing ‘This kind of business involves the purchase of raw materials which are ‘converted to finished goods then selling them at a profit, (eg, factories, furniture shops) 3, Service ‘This type of business derives primarily from sale of services to clients or customers, (eg, barbershops, hotels, public utility vehicle operators) B. Accounting and Bookkeeping Nature and purpose of accounting, The accounting function can be broadly described as a system for accumulating and communicating information pertaining to all forms of business and governmental organization, ‘Two major purposes: 1. Provide information about financial condition ar status of the business (Balance Sheel) 2, Provide information about results of operations (Income Statement) ‘Consequently, io be able to provide these information, we need to have a tool for us ta accumulate data and give meaning to these major purposes. ‘This is where the ceouming Processot Bookkeeping cores in. ‘Accounting, as defined by the American Institute of Certified Public Accountants (AICPA), is "she at of recording, classifvine and summarising in a significant manner and in terms of money, wransactions and events whch are in part at teast of a financial character. aod intemmetine the results thereof” On the other hand, as popularly defined, Bookkeeping is "dle systematic an chronological recording of business mansactions ar events in accordance with established accounting niles and procedures” In comparison, bookkeeping is the routinely functions af accounting to revard, classify and summarize transactions whereas accounting is broader in seope Accounting includes bookkeeping plus the analysis and interpretation of recarded daa Fhe Accounting Process: Oustine Form 1. Recording the tansactions 2, Classifying and Summarizing those transactions 3. Reporting and Interpreting the results obtained from the records which were classified and summarized. 4, Decision Making asichecourting ard dokkeeping Far Man Recounares Ap tempacan RRS 2‘Over the years, certain standards have been developed to help provide guidance in how financial information is processed and recorded. These standards are called the Generally Accepted Accounting Principles. These principles or rules form basis for improving the usefulness and reliability of accounting reports. In a sense, they are to standardize accounting. These principles are also called postulates, assumptions, among others. (Some of these principles are to be discussed later. Suffice to state at this point of discussion that there are guidelines or principles to be followed by Accounting, Systems. However, some ate actually incorporated in some of the discussions.) II. DOUBLE ENTRY BOOKKEEPING owners ‘A. The Accounting Equation ae Everything the business Owns = What the business Ow “lahat ng ari-arian" "galing saan?" creditorsilenders OR ASSETS = LIABILITIES + CAPITAL (claims of creditors) {claims of owners) NOTE: THE BUSINESS ENTITY IS VIEWED AS SEPARATE AND DISTINCT FROM ITS QWNER/S Elements of Accounting: ASSETS. They are the properties and rights owned by a business. LIABILITIES. They are monetary obligations of a business. CAPITAL. The owner's contribution to the business ‘THEREFORE: ASSETS == ——_LLABILITIES = CAPITAL ASSETS ‘CAPITAL = LIABILITIES Each of the categories in the above equation is made up of a number af accounts. Accounts, [remember!!1] are titles or names of different assets, liabilities and. capital. ‘Thus: ASSETS = = LIABILITIES + CAPITAL 1. Cash 1, Salaries payable 1, Original investment 2, Receivable 2. Loans + additional investinent 3. Land 3. Ble. ~ Owner's withdrawal 4. Building Net Income f Income 5. Bte Let Loss ftatement These accounts are used io record increases or decreases brought about by business transactions, “These inereases or decreases are accumulated systematically in order to ebiain the corvect amount (balance/sum) of each asset, liability and capital account that would appear in the financial statements. For this purpose @ separate record is kept for each of these accounts. Accordingly, all vansactions should be 3measurable or could be stated in terms of peso (Monetary Value Concept), In other ‘words, the tansaction rust have an effect to the elements of accounting, B. Rules of Debit and Credit Recording in the different assets, liabilities and capital accounts is done in such a way that the accounting equation is atwars dalarced. This means that the total assets are always equal to total liabilities plus capital, Thus, there are always two sides to the recording of a transaction, ‘The LEFT SIDE is known as DEBIT and the RIGHT SIDEis known as CREDIT. Or on T-form, th DEBIT (Dr) However, on entry form (General Journal): Debit (Account Name/Title) P 1,000.00 ‘Credit (Account Name/Title) P 1,000.00 To record...(explain or describe). State the transaction. é ‘The Accounting Equation on T-form, thus; ASSETS = LIABILITIES + CAPITAL Note: This presentation does not mean that Assets are always on the Debit side nor the Liabilities and Capital are always in the Credit side, It only means that these are the normal bakaces of these accounts, ‘That they are increased when placed in their normal batances. General Rules, thus: DEBIT 1, Increases Assets 2. Decreases Liabilities and Capital CREDIT 1, Increases Liabilities and Capital 2. Decreases Assetsasic Accounting and Bookkeeping Far Nan-Accountants AAW.bempacan T-ACCOUNT DRAWN : Let us visualize this presentation as guide for the succeeding discussions!! ASSETS 4 LIABILITIES + CAPITAL ASSETS LIABILITIES CAPITAL, DEBIT ‘CREDIT To decrease ‘To Increase OWNER, DRA OWNER, CAPITAL, DEBIT | CREDIT | DEBIT | CREDIT To Increase] Ta Decrease | To Decrease| To Increase DI c Tolncrease| To Decrease peat ‘CREDIT ‘To Decrease [To Increase REVENUES DEBIT | CREDIT To Decrease| To Increase EXPENSES DEBIT] CREDIT ‘To Increase] To Decrease Ina Tabular Form: These Rules: Thus; Normal Balance To Increase To Decrease Assets DEBIT CREDIT Contra -Assets CREDIT “These items are discussed in the Liabilities CREDIT later aisewssions! Capital CREDIT "Owner, Drawing DEBIT ‘one: Memorize these niles afte Revenues CREDIT derstanding the concept of Debil *Contra-Revenues Expenses CREDIT lord Crete CREDITExample of Journal Entries: Using the 3 major elements of accounting (Assets, Liabilities, and Capital) Situation: Assume that Pitolo and Putnak decided to establish a sari-sari store, Pitolo is to contribute P50,000,00 in cash while Putnak is to contribute a portion of his lot for the store building valued at P50,000.00. ‘They also agreed to obtain a P100,000.00 loan from Landbank which was later released, Finally, they agreed to construct a P100,000.00 worth, store building, Entries: On Journal Entry Form 1. Pitolo’s contribution Asset (cash) 50,000.00 Pitolo, Capital 50,000.00 To record the cash contribution of Pitolo. 2, Puinak’s contribution Assets (land) 50,000.00 Putnak, Capital 50,000.00 To record the land contribution of Putnak. 3. Loan from Landbanke Asset (cash) 100,000.00 Loans Payable 100,000.00 To record the loan obtained from Landbank. 4. Construction of Store Building Asset (building) 100,000.00 ‘Asset (cash) 100,000.00 ‘To record the cost of stare building constructed. Entries Summarized on the T-Format Assets = Liabilities + Capital 1. 50,000.00 (cash) 50,000.00 (Pitolo) 50,000.00 (Putnak) 3, 100,000.00 (cash) | 100,000.00 (loan) 4. (100,000.00) (cash) 100,000.00 (building) Totals: P200,000.00 = P100,000.00 + 100,000.00‘Some possible two-fold effects of transactions to the elements of accounting: Increase in Assets Increase in Liabilities 1 2. Increase in Assets Increase in Capital 3. Increase in Assets = Decrease in Other forms of Assets 4. Decrease in Assets = Decrease in Liabilities 5, Decrease in Assets = Decrease in Capital 6. Decrease in Liabilities nerease in Capital 7. Decrease in Liabilities = Increase in Other forms of Liabilities 8. Decrease in Capital Increase in Liabilities 9, Decrease in Capital = Inerease in Other Forms of Capital Note: These two-fold effects could be observed in the subsequent discussions C. Pro-Forma Financial Statements (Balance Sheet and Income Statement) Mbese two statements are the basie ouput af the Accounting Process. Ler us wad the subsequent discussions with this end fouspus) in mindy Balance Sheet ‘The Balance Sheet isa financial statement thal shows the financial position or condition or status of a business on a certain date, It shows the economic resources ("lahat ng ar?-arian") that belong to the company or business while showing the claims (owner and lender) against such resources as of a specific time (hung hanino gating ang mga ito"), Note: the accounting equation; Assets = Liabilities + Capital ‘This formula is actually embodied in the Balance Sheet ticome Steement ‘The Income Statement is a financial statement that show’ the results of operations of a business entity to specifie period of time. This stalement shows whether the business eamed a profit or loss ("Aume Aumeta ba io 0 hindi"), Nole the formula; Revenuellncome - Expenses = Net Income/Lass “This formula is actually embodied in the Income Statement, ‘Thus: Revenues> Expenses= Net Income Expenses > Revenues = Net Loss asic hecourting and donkkecping Far Man -ReconsRaees AAW LampacanHEADING Name of the Business Entity Balance Sheet Aso (a specific date) ASSETS. BODY: Current Assets Cash XXX Accounts Receivables XXX ss: Allowance for Bad Debts xx xxx Accrued Interest Receivable XXX Advances to Officers and Employees XXX Inventories XXX Prepayments~ Rents, Insuranoe XXX ‘Total Current Assets XXX Non-current Assets Land XXX Building xxx Machinery and Equipment MAX XXX Less: Accumulated Depreciation ax xx Long-term Investments ‘Other Non-current Assets (Organization Cost) xxx. ‘Total Non-current Assets xxx TOTAL ASSETS: 2x LIABILITIES and OWNER'S CAPITAL ‘Current Liabilities Accounts Payable XXX Salaries Payable naxx Uiilities Payable NXX ‘Taxes and Licenses xox Accrued Expenses (Salaries Payable) NXX “Total Current Liabilities we Non-current Liabilities Long-term Notes Payable XXX Loans xxx “Total Non-curreni Liabilities XXX ‘Total Liabilities xxx ‘Owner's Capital (Name of Owner), Capital naxx Add; Net Income NXX Deduct: Owner, Drawing naxx : Net Loss NXX XXX TOTAL LIABILITIES AND OWNER'S CAPITAL xxx asic Accourting and Soakiuging For NonsRccouarts Aan Lempscen aHEADING ‘Name of the Business Entity ‘Income Statement For the Year/ Month Ended (specific date) BODY: REVENUES Sales xxx Less: Sales Returns XXX Net Sales xxx LESS; EXPENSES ‘Cast of Sales: Beginning Inventory XXX Add: Purchases xax Less: Purchase Reums xxx xxx Freight-In wax Total Goods Available For Sale xxx Inventory, End xxx xxx GROSS PROFIT 7x Less: Other Expenses Salaries Expense xxx Supplies Expense xax “Taxes and Licenses xx Bad Debts Expense xxx Depreciation Expense xax ‘Toial Expenses xox NET INCOME aX Note: ‘These pro-forma statements are but very simple, Meaning, there are other formats with regard presentation; indention and account titles. Different types of business have their own unique account titles. Nonetheless, they give the same needed information, fv thts point you must be able to answer what are the basic Financial Statements and their uses or importance? aiid how are they presensed?, Selected Balance Sheet Accounts and Related Accounts The Assets and Liabilities are sub-elassified as either current or non-current (Current Assets are those readily converted into cash or sold or consumed within one year or normal operating cycle whichever is longer, while Current Liabilities are those obligations which are expected to be settled in one year or normal operating cycle. Non-current Assets are assets that are long term in nature which ordinarily exceeds one year, while Nom-current Liabilities are those to be payable more than one yeat Cashon Hand ‘This account is debited for all daily collections of cash. It is credited when cash is expended or disbursed, Accounts Receivable “This account represents price of goods sold on exeditThis account is debited for the amount of sale on account (on credit) or for other reeei vables. (Rent Receivable; Interest Receivable: etc) A subsidiary ledger is to be maintained for each of the business’ debiors, ‘Allowance for Bad Debts This is a contra-asset Account representing receivables doubtful ‘of collection, It is to be deducted to the Accounts Receivable account. Prepayments (Prepaid Rent, Prepaid Supplies, etc.) This accounts represents payments made in advance for expenses not yet ineurred (not yet due). This account is debited for prepaid rentals, taxes and other payments, Inventories ‘This account is debited for the value of the iterns purchased to be sold. Stock cards are to be maintained for each item to show inerease and decrease, Building; Machinery and Equipments “These accounts simply sefer to the costs afthe described Nan-current Assets, ‘Accumulaied Depreciation ‘This is a contra-asset account representing depreviations for past periods accumulated, It is to be deducted to the specific asset account to reflect the assers Net Book Value. Accounts Payable This account is Credited for purchases (inventories) on account. Itis Debited every time payments are made Unearned Rent Income “This account represents advance collections of cash for revenue the tuusiness is not yet entitled (not yet earned) Loans payable ‘This account is Credited for loans obtained. It is to be Debited every time it is paid, (Name), Capital “This account is to be credited for contribution of the owner, and for income, ‘This account is to be debited for withdrawals of the owner, and for lasses. (Name), Drawing This account represents withdrawals of owners and is debited for such wansaction, I is 1 be deducted to the (ame), Capital account to get the ending balance of the latter. ‘Selected Income Statement Accounts and Related Account Revenues Are inflows of economic benefits that result in increases in equity (capital), other than those contributions of owners. Sales Includes all sales of merchandise to customers, Sales Returns and Allowances “This account represents sales made to customers but returned. This is to bbe deducted to the sales account to get the Wer Sates. Service RevenueIncludes revenues from rendering services, among others, professional fees, media advertising commissions ‘Other Revenues ‘These include revenues from the use of the enterprise's resources, ‘They are: Interest Revenue; Rent Revenue; Royalty Revenue and Dividend Revenue, Gain on Sale of Assets Gain on the disposal or sale of assets other than merchandize for sale Expenses ‘Conversely, are the gross outflows of economic benefits resulting in decreases in equity, other than those relating to distributions to owners. ‘Cost af sales Refers to the costs of goods sold ‘Purchases ‘This account refers to goods being purchased to be sold. [WOZE: astead of debitine to the Merchandise iwentory Account See Accounting for Inventory Special Topic. Purchase Returns and Allowances ‘This account refers to goods purchased then returned to seller This is to be deducted to the purchases account to get the Wer Purchases. Freight-In “This account represents cast of delivery of goods purchased 10 be sold chargeable to the enterprise. This account is added 10 the purchases account to get the total goods available for sale. Distribution or selling expenses ‘Costs directly related to selling, advertising and delivery to customers, ‘Ordinarily, include Salesman's Salaries, Sales Commissions, Marketing Expenses, Freight-Out, etc. ‘Administrative expenses. ‘Costs of administering, the business and includes ordinarily includes all, ‘operating costs not related to selling and cost of goods sold. It includes Doubtful Accounts Exp., Office Supplies Exp., Professional fees, etc. ‘Other operating expenses Costs not directly related to the selling and administrative function. ‘These expenses include charges to income such as loss on sale of asset other than the products being sold. Income tax expense and Licenses Represents payment of Income Taxes with the BIR and other governmental fees Analysis of Transactions. Their two-fold effect on the Elements of Accounting and journalization using journal entry form.Lets assume that Dr, Samantha, a dentist tuned businesswoman, establishes a new business on May 2005 under the name Samantha General Merchandising. (Suvgestion: Try recontine tt on your own anplvine the alore-discussed rules of Debit and Gredit, and the Pitole wid Punak Mustration, Afterward, compare it io the answers ax aiscusseu, ‘These ate the business transactions entered into prior to the actual "buy-and-sell" transactions of the business 1. Dr, Sammi deposited in a bank P20,000.00 in the name of the business 2. Dr. Sammi purchased various office supplies to be used in the business at P1,000.00, issuing check no, I chargeable to the business’ account with the bank 3. The business purchased furniture and fistures worth P5,000.00 from a supplier who agreed 10 be paid in the near future, This kind of transaction is said to be purchase of epujoment on cecount ox charged purchase. ‘The business issued check no, 2 at P500,00t0 pay part of the payable ‘The proprietor, Dr, Sammi, withdraws P500,00 in cash for his persoua use. ‘The business 4errow'ed from the rural bank of La Trinidad P6,000.00 in. cash. ‘The business sold a furniture which was found un-useful to the operations of the business. It was sold at the price it was purchased at P900.00, however, it is collectible in the near furure by way of installment, This transaction is said to be a sale on account or charged sale. 8. The business collected one-half of the price of the furniture sold on account or charged sale ors Required: 1. Analyze the effect of the transactions to the elements of accounting and show their effect in a tabular form, 2. Using our answers in the tabular format provided, journalize the transactions applying the rules of debit and credit with explanation for every transaction. Basichecourting a Boxkkeeping Far Non kccourrs LW Larmpacan ‘Transaction 1, Dr. Sammi deposited in a bank P20,000,00 in the name of the business,sts initio Capita Cash {Accounts | Office | Furniture and =! Accounts} Loans Capital =| {Receivabld Supplies! Fixtures | Payable | Payable ! 20.009 ee Sows a aan | JOURNAL ENTRY: Cash (Asset) 20,000.00 Sammi, Capital (Capital) 20,000.00 ‘To record the investment of Dr, Doe Cash is debited because it is increased, The normal balance of an asset is debit and since the cash of the business is increased, it is thus debited. ‘Transaction 2. Dr. Sammi purchased various office supplies to be used in the business at P1,000.00, issuing, check no, I chargeable to the business" account with the bank. Assets Liabilities Capital Cash {Accounts | Office | Furniture and = { Accounts} Loans + { Capital | {Receivabld Supplies} Fixtures ‘Payable | Payable | i (1,000) | {1,000 | 5 ' i" ' JOURNAL ENTRY: ‘Office Supplies (Asset) 1,000.00 ‘Cash (Asset) 1,000.00 ‘To record the purchase of Office Supplies by cash payment. “Olfice Supplies is debited because it is increased while Cash is credited because it is decreased. ‘Transaction 3. The business purchased furniture and fixtures worth P5,000.00 from a supplier who agreed to be paid in the near future. This kind of transaction is said to be purchase of eguipment on account ot chatged purchase. sels Cash Accounts | Office | Furniture and =| Accounts} Loans + | Capital | 'Receivablq Supplies! Fixtures | Payable | Payable | 1 ' ' ‘5,000 ; 5000} ' JOURNAL ENTRY: Furniture and Fixtures (Asset) 5,000.00 Accounts Payable (Liability) 5,000.00 ‘To record the purchase of Furniture and Fixtures in account or an credit, BBy this purchase, the furniture and fixtures of the business ig increased and since it is on credit, its lability is also increased, Thus, Furniture and Fixtures is Debited While Accounts Payable is Credited to show both increase of Asset and Liability ‘Transaction 4. The business issued check no, 2 at P500.00 to pay part of the payable Assets Liabilities Capital Cash Accounts | Office | Furniture and =| Accounts! Loans + | Capital | {Receivable Supplies} Fixtures ‘Payable | Payable = | : (500) | ' ' 1 300) t H JOURNAL ENTRY: Accounts Payable (Liability) 500.00 ‘Cash (Asset) 500.00 ‘Torecord the partial payment of the accounts payable of the business. “By the partial payment of the Accounts payable, necessarily, cash is decreased and the liability is also decreased. Thus, Accounts Payable is debited while Cash is credited to record, both decrease, ‘Transaction 5, The proprietor, Dr, Sammi, withdraws P500,00 in cash for his personal use Assets Liabilities Capital Cash {Accounts | Office | Furniture and ={ Accounts! Loans + Capital | {Receivabld Supplies! Fixtures | Payable | Payable 1 (500) | ' ' i ' (500) | JOURNAL ENTRY: Sammi, Drawing (Capital) 500.00 ‘Cash (Asset) 500.00 ‘To.tecord the withdrawal of the proprietor of cash for his personal use. "By this transaction, the cash and capital are reduced. Thus, Cash is credited while Doe, Drawing is debited, The Drawing account is finally deducted to the capital account. ‘Transaction 6. The business Sorrow-ed from the rural bank of La Trinidad P6,000,00 in cash, Assets Liabilities Capital Cash; Accounts ; Office; Furitue and = Accounts; Loans >; Capial | | Receivabld Supplies} Fixtures {Payable } Payable | ' 6000} poJOURNAL ENTRY Cash (Asset) 6,000.00 Loans Payable (Liability) 6,000.00 ‘To record the loan obtained from the Rural Bank of La Trinidad. “By the loan obtained, the cash of the business is increased while consequently its liability is also increased. Thus, Cash is debited to record the increase while Loans Payable is credited to record the increase in liability ‘Transaction 7, ‘The business sold a furniture which was found un-useful to the operations of the business, It was sold at the price it was purchased at P900,00, however, itis collectible in the near future by way of installment, This transaction is said to be a sale on account or charged sal. Assets Liabilities Capital Cash | Accounts | Office | Furniture and =j Accounts; Loans yy Capital | | Receivabld Supplies! Fixtures {Payable | Payable ' {900} + (900) ‘ ‘ ‘ JOURNAL ENTRY Accounts Receivable (Asset) 900.00 Furniture and Fixtures (Asset) 900.00 ‘To record the sale of a furniture on account, "By this transaction the Furniture and Fixtures of the business is reduced while its receivables is increased, Thus, the Furniture and Fixtures account is credited to record the decrease while Accounts Receivable is debited to: record the increase. ‘Transaction 8. The business collected one-half of the price of the furniture sold on account or charged sale Assets Liabilities Capital Cash; Accounts + Office Receivatld Supplies (450) Furniture and = Accounts Loans +, Capital Fixtures | Payable JOURNAL ENTRY: Cash (Asset) 450.00 Accounts Receivable (Asset) 450,00 ‘To.record the receipt of payment collected from the revel vable. "By this collection, Cash is increased while Accounts Receivable is decreased. ‘Thus, Cash is debited while Accounts Receivable is credited, SUMMARY OF THESE TRANSACTIONS: 5Assets Liabilities Capital Cash 'Accounts | Office | Furniture and Accounts} Loans {Capital {Receivabld Supplies! Fixtures Payable | Payable 1.20,000 | 1 20,000 2.(1,000) | 1,000 3. 5,000 5,000 4,500) (500) 5.600) 7. 900 (900) 8.450 (450) 66,000 | 2B AAD 0 OO OO a OO THE ABOVE SUMMARY ON BALANCE SHEET FORM (Compare to pro-forma provided); Samantha General Merchandising Balance Sheet As of May xx, 20005 Assets Cash 24,450.00 Accounts Revei vable 450,00 Office Supplies 1,000.00 Euriture and Fixtures 4,100.00, Total Assets 30,000.00 Liabilities and Capital Liabilities Accounts Payable 4,500.00 Loans Payable 6,000.00 Total Liabilities 10,500.00 Capital Doe, Capital 19,500.00 Total Liabilities and Capital 30,000.00 ‘Simple Accounting Process on a Flow Chart: ‘General Journal ———~> General Ledger———— Financial Statements "Special Journals! 1. Balance Sheet Special Books 2, Income Statement “To be later discussed Topic VIt See Activity i! 11, THE RECORDING PHASE OF ACCOUNTING leThe General Journal. This is practically just a notebook to provide a permanent and complete record of business transactions, arranged in a chronological order (daily), It is where business transactions ate recorded (by Journal Entry) for the firsttime, Hence, itis also knownas the Book of Original Entry Journal Entries must be prepared in such a manner that it embodies the two-fold effect of ‘wansactions to the elements of accounting as previously illustrated. Sample Journal Entries: ‘A. Receipts of Cash 1, Owner's Contribution or Investment in the Business, Journal Entry: ‘Cash xox X, Capital xX ‘To record the contribution of ‘owner X, 2. Loans obtained from Financial Institutions, Journal Entry: ‘Cash xox Loans Payable! Liability XXX ‘To record the loan obtained from ‘bank X or ¥ Corporation. 3. Sales and Other Revenues Journal Entry: ‘Cash NXX Sales/ Revenue xox ‘To record the receipt of cash from sales, rent income, ete. 4 Payments received in payment for receivables. Journal Entry: ‘Cash NXX Accounts Receivable xox ‘To record the receipt of cash collected from debtors. 5. Pre-collected payments / Advance payments received Journal Entry: Cash xxx Uneared Income xxx ‘To-tecord advance payments recei ved, * All four transactions above increase cash, Thus, since itis an asset, it can be ‘observed that cash is has always been debited. 0B. Disbursements of Cash 1, Withdrawals of owners Journal Entry: X, Drawing XXX Cash xxx ‘To record the withdrawal of owner X far personal use, 2, Payment of Loans Journal Entry: Loans Payable xX ‘Cash XXX ‘To record the payment of the loan obtained, 3. Purchase of Merchandise and Other Assets Journal Entry: Purchases or the Specific Asset xxx Cash XXX ‘To record the purchase of merchandize or a specific asset 4, Payments for Payables Journal Entry: Accounts Payable! Liabilities xxx Cash XXX ‘To record the payment of Accounts Payable or specific liability. 5, Prepaid Expenses Journal Entry Prepaid Asset NAN ‘Cash XXX ‘To record the advance payment for expenses foregoing transactions above, cash is decreased, Thus, since cash is aan asset, itis credited to revard the decrease. C. Sale of Merchandize on accouns o1 on ered. Journal Entry: Accounts Receivable NAX Sales sox ‘To record sale of merchandise on account, Sasi hccouing are Borkkeening for Non-Aecourtares AxLampacan DePuchacotMechanne cn acca on ean Journal Entry:Purchases 2206 Accounts Payable XXX ‘To record purchase of merchandise on account or on credit E, Accounting for Doubtful Accounts or Bad Debts. Accounts Receivable should be presented in the financial statement at net realizable value. Meaning, accounts doubtful of collection should be deducted to it thru an allowance for Bad debts or allowance for doubtful accounts. Simply, this allowance represents a loss for the business for allowing credit ot charged sales Journal Entry: Lfaccount is but doubtfid of collection: Bad Debts Expense XXX Allowance for Bad Debts xxx ‘To record the accounts doubtful of collection. Finatty, if it is certain thar it is worthless: Allowance for Bad Debts xxx Accounts teceivable XXX ‘To record worthless accounts or accounts certain not to ‘be collected. A/Ris thus decreased. (Credited) ‘The “Allowance for Bad Debts" or “Allowance for Doubtful Accounts" is to be deducted to the Accounts Receivable, Thus, it is also “known as a coume-asset account. [**sce pro-forma B/S an page 8] ‘The Bad Debts Expense or Daubiful Accounts Expense is an Expense to be presented in the income statement, ("see pro-farma 1/S, page 9] F. Accounting for Purchases Returned and Sold Merchandise Returned ‘The Purchase Returns and Allowances Account. This account is being Credited (Gommal balance) tor merchandize purchase from suppliers but returned, ‘This account is a deduction to the Purchases account when computing the cost of goods sold. If the merchandise retumed were previously purchased by cash and there was cash refund, the journal entry would be: ‘Cash 500.00 Purchase Returns and Allowances 500.00 If the merchanulise were previously purchased on account ("utang"), the journal entry would be: Accounts Payable 500.00 Purchase Returns and Allowances 500,00 “*By this entry the Accounts Payable account is reduced because "“idinalih mania yung inuacne natin na goods" If the goods were purchase thru cash but the cash refund would soon be recei ved, the Debit would be to ACCOUNTS RECEIVABLE ("song ng supplior sa.ati"y 1HOWEVER, if the goods retumed were not merchandise but other assets, adjusoment must be made to such asset Mt would not be a Credit to the Purchase Returns and MMlowance Account but Credit to hat specific asset to decrease the same. ‘The Sales Returns and Allowances Account. This account, on the other hand, is being Debited /aorma/daiaee) for merchandise sold 1a customers but returned. This account is also but a deduction to the Sales account when computing the Net Income (see pro-forma Income Statement). If the merchandise was previously sold for cash and a cash refund was granted, the journal enty would be: Sales Returns and Allowances 600.00 ‘Cash 600,00 If the merchandise were previously sold on account, the journal entry would be: Sales Returns and Allowances 600.00 Accounts Receivable 600.00 "*By this entry, Note that the Accounts Receivable is also seduced. because "biuatit wile pune ibiventa natin ng wer G. Accounting, for Depreciation Properties of the business like its building, machine and other equipments, except land, are normally useful for certain number of years. Ordinarily, after such useful life, these assets could only be sold at a minimal amount, The difference between the original cost (capitalized cost) minus such minimal selling price must therefore be distributed to the periods benefited. The allocated portion is what is termed as the dlgarectamem expense for the petiod benefited, However, instead of deducting the allocated amount directly to the property account, an “Aecwmnulated Depreciation” accourn is to be maintained. This account is to be deducted to the related asset when presented in the balance sheet. Hence, it is also called a commrasser aceowar similar to the Allowance for Bad Debts account, On the other hand, the Depreciation Expense is to be presented as expense in the income statement, [**see presentation in the pro-forma F/S, page & & 9] Fixed assets are to be presented in the balance sheet at Mer Sood Valve Net Book ‘Value is computed by deducting the accumulated depreciation to the related fixed asset Inan equation: Depreciation Expense = Cost - Selling prive at the end of useful life Useful Life Journal Entry: Depreciation Expense xxx Accumulated Depreciation. XXX ‘To.tecord the depreciation for the period. **Note: Theve are actually other methods of accounting for Depreciation and Bad Debis H. To set up the amount of the Merchandize Inventory account to be presented in the Balance Sheet at the end of the accounting period (when F/S are to be prepared) AND to set- up the COGS to be presented in the Income Statement. Physical inventory count is needed for us to be able to determine the value of merchandise left and to be able for us to make this »entry. However, should the business maintain stock cards for these merchandise, the east of the remaining items may be provided by these stock cards. ‘The total recorded purchases (and freightin anct Purchave Retums and Allowances if these items are present) must also be computed to be able to make this entry, Journal Entry: Purchase Returns and Allowances NXN Merchandize Inventory, end xxx Cost of Goods Sold XXX Merchandize Inventory, Beginning XXX Freightin XXX Purchases xx ‘To setup the amount of merchandise inventory ‘o be presented in the balance sheet and setup the ‘Cast of Goods Sold, ‘This journal entry practically embodies the forgoing computation ot formula: Merchandize Inventory, Beginning, wx Add: Purchases xxx Less: Purchase Returns and Allowances xxx xx Freight XXX ‘Total Goods Available far Sale (TGAS) xx, Less: Merchandize Inventory, end NEN ‘Cost of Goods Sold. xox SOLD (COGS) Note: The TGAS could either be = “NOT SOLD (Mase inventory, End) It can be observed that in the journal entry, Merchandise Inventory Beginning, Purchases, and Freight-In are on one side of the entry, Whereas, on the formula, they are added to get the TGAS. On the other hand, Cost of Goods Sold and Merchandise Inventory End are on the other side, Whereas, on the formula, when the Cost of Goods Sold is added to the Merchandise Inventory End, TGAS would be the Total, ‘The "Freight-In" account is the cost of transportation incurred in purchasing, merchandise to be sold, It is added to the cost of merchandise purchased. Consequently, it is finally charged as expense in the income statement once the related goods were sold. We are practically sorting the TGAS to either COGS or MI end. Subsequently establishing these items in the books. Consequently, those already sorted items must be closed. Meaning, their amounts must be “aero-out", Thus, by chs enay, once posted and fooied, the PURCHASES, PURCHASE RETURNS AND ALLOWANCES, FREIGHT- IN anc MERCHANDISE INVENTORY heginning would "zero-out’ ‘Two Types of Journal Entry 1. Simple Journal Entry ‘Contains one Debit and one Credit eg. CASH xxx 2ACCOUNT RECEIVABLE Xxx 2. Compound Journal Entry ‘Contains one Debit and two or more Credits; or two or more Debits and one Credit; or two or mare Debits and two or mote Credits. However, éacain) the Total Debits of the enty MUST EQUAL the Total Credits of that same foumal Enn ¢g, DEPRECIATION EXP 500.00 ACCUM, DEP'N- BUILDING 300.00 ACCUM. DEP'N-DISPLAY RACKS, 200.00 OR COST OF GOODS SOLD 5,025.00 MERCHANDIZE Invty., END 35,025.00 MERCHANDIZE Invty., BEG 30,000.00 10,000.00 50.00 IV. THE CLASSIFYING PHASE OF ACCOUNTING The General Ledger. ‘his is also just a notebook containing each of the accounts, ordinarily one account title an each page Wo summatize the recorded transactions in the General Journal and obtain each account's balances. This book is also known as the Book of Final Entry, Subsidiary Ledgers, This is also a notebook to show the company’s receivable from each of its specific debtors (4 ceounrs Receivable Subsidiary Ledgers) and to show the company's liabilities to each of its specific creditors (Accounts Pavable Subsidiary Ledgers), \n other words, it itemizes the balances of Accounts Receivable and Accounts Payable contained in the ledger. Posting itis the process by which the journal entties are transferred to the appropriate accounts in the general ledger in a systematic manner. fpoting ‘Simply, itis the process of totaling each specific acoaunt's Debit and Credit side, To end with taking the difference between the Debit and Credit side of the account and is written in the side where the amount is greater This is done to all Accounts (Cash; Accounts Receivable: Accounts Payable: X, Capital; etc. . ‘Ordinarily, this is done using a pencil and in small figures. Sample Accounts in the General Ledger : Posting example : Thus; CASH 101 ~--- (dae Paiticulars Debit [ Date Particulars ‘CreditACCOUNTS RECELV AB Date Particulars Debit] Date Particulars 103 + Each of the different accounts would appear as presented in the general ledger * However, for easier presentation and speedier preparation, the T-Accounts can be used as ledger accounts. Thus: CASH ACCOUNTS RECEIVABLE (Debit) (Credit) (Debit) (Credit) Jan1 10,000.00 ACCOUNTS PAYABLI CAPITAL (Debit) (Credit) (Credit) [——— | Tant 19,000.00 (GENERAL JOURNAL: Date Particulars PRT Debit ‘Credit Jan__[1 [Cash 101 | 10,000.00, Elvie, Capital iH 10,000.00 CAPITAL. 301 =-t- Date Particulars Debit Date Particulars ‘Credit ja ] 1 | Contibution- Elvie 10,000.00 n empire Beceem fer Non -Aeccournarts AAW.tempacen The Trial Balance Simply, this is a statement containing the Accouns contained by the Batee Sheer aid Income Statement but merely presenting the amounts in a Debit and Credit column. Otherwise viewed, it presents the balances of itemized Accounts (Cash; AJR: AJP; Etc) totaled or footed in the General Ledger in a Debit and Credit format 2BPro-forma, thus: Naine of Business Trial Balance Date DEBIT RED! Cash NAX Accounts Receivable Nax Allowance for Bad Debts xox Prepaid Rent (etc) Nax Merchandize Inventory NAX Land NaX Furniture and Fixtures xax Accumulated Depreciation- F&F XXX Building xx Accumulated Depreciation Bldg. NXX Accounts Payable xox Loans Payable NXX Unearned Income (pre-collections) naxx Capital xox Owner Drawing, xax Sales xx Other Revenues XXX Cost of Goods Sold xax xxpenses (list them all) NAX ‘otal, x0 xe ‘The Total Debit must EQUAL TO the Total Credit, Otherwise, there is an error in the recording or posting of entries ‘This statement helps in the easier preparation of the Balance Sheet and Income Statement. The balances (amounts) contained in this statement are actually the balances that will be placed in the two statements, THIS MANUALIS NOTFOR SALE THIS MANUAL IS NOTFOR SALE THIS MANUALISNOT FORSALE SR PSST LS ‘The Balance Sheet of JYRA GROCERIES after the first month of its operations appears as follows: [Note: The Net Income for the month of January has been added to Jyra, Capital] JYRA GROCERIES Balance Sheet uMASOF January 31, 2005 ASSETS Current Assets Cash P16,550.00 Accounts Receivable 35,550.00 Merchandize Inventory 45,000.00 P 97,100.00 Non-current Assets Display Racks 35,500.00 Less: Accumulated Depreciation 1500.00 34,000.00 Building 145,000.00 Less: Accumulated Depreciation _25,000,00 120,000.00 Land 100,000,00___254,000.00 TOTAL ASSETS: P351,100.00 LIABILITIES AND OWNER'S CAPITAL (Current Liabilities Accounts payable P18,550,00 Non-current Liabilities Loans Payable 20,000.00 ‘Owner's Capital Jyra, Capital 312,550.00 TOTAL LIABILITIES and OWNER'S CAPITAL 351,500.00 ‘These are the transactions for the month of February: The following are some of the Accounts in the Business General Ledge ‘On the first week of February, sold merchandize at P17,550.00 ‘On the same week, the business purchased merchandise on account (“utang") worth P15,550.00 Paid to various suppliers for purchase previously made on account ("“inutang") P8,540.00. Received from debtors ("may utang") P16,950. ‘Sold merchandise totaling P19,950.00 for the second week of the month. Purchased from various suppliers P 18,590.00. For the third and fourth week, sold merchandise amounting to P12,000,00 Depreciation for the month was at P800.00; P600.00 for the Building, and P200,00 for the Display Racks Paid Eleciticity and. Water at P600,00 and P700.00 respectively. Merchandize Inventory at the end of the month per Physical Count was at 39,500.00 SALES, COST OF GOODS SOLD, PURCHASES, LIGHT AND WATER EXPENSE, DEPRECIATION EXPEN! RECORDING: 1, Cash 17,550.00 Sales 17,550.00 2. Purchases 15,550.00 Accounts Payable 15,550.00 3. Accounts Payable 8,540.00 3B‘Cash 8,540.00 4. Cash 16,950.00 Accounts Receivable 16,950.00 5. Cash 19,950,00 Sales 19,950.00 6, Purchases 18,590.00 ‘Cash 18,590.00 7. Cash 12,000.00 Sales 12,000.00 8, Depreciation 800.00 Accumulated Depreciation- Display Racks 200.00 Accumulated Depreciation- Building 600.00 9. Electricity and Water 1,300.00 ‘Cash 1,300.00 10, Cast of Goods Sold 39,640.00 Merchandize Inventory, End 39,500.00 Merchandise Inventory, Beg, 45,000.00 Purchases 140.00 POSTING TO THE LEDGER: (Represented by the T-Accounts) Cash Accounts Receivable Merchandise Invty, Display Racks b.16,550) 8540 _bb.35,550] 16,950 bb.45,000] 45,000 bi.35,500 17,550 18,590 __18,600 39,500 35,500] 16,950 1,300 39,506 19.95 12, Accumulate Dep't DR Building AccumulatedDep'n~ B 54,570 bb.1.500 ib, 8) ‘bb.25,000 200 145, ‘600 1,700 25,400 Land ‘Accounts Payable Sales Purchases 100, bb.18,550 17,550 15,550 100, 8540 15,550 19.950 18,990 34,140 25,560 Loans Pay. C: 25 Eos 312,500 DOIT YOURSELF 1, Prepare a Trial Balance using the format above. 2. Prepare a Balance Sheet and an Income Statement using the pro-forma provided. Adjustments or Adjusting Entries 1. Accounting for prepayments Prepayments are EXPENSES ser ver ticwrreet (not yet due) but pact i advance. For example, rentals paid in advance as payment for rent far the space being rented by the business, Among others, these EXPENSES include Prepaid Supplies, Prepaid Rent, cic. Note: Supplies are different from Merchandize Inventory. Twa Methods of Accounting: %1. Asset Method In this method, upon payment for Supplies, an asset is recognized (Prepaid Supplies), Thus, this entry Prepaid Supplies 10,000.00 Cash 10,000.00 ‘To-record the payment for Supplies. BUT, when Financial Statements are to be prepared, the Prepaid Supplies must be adjusted for the portion already used. Taking the above entry, assuming that upon counting the supplies at the end of the period (maybe end of a month, year, etc.), only P5,000.00 worth of The Prepaid Supplies were left, an entry must be made to reflect the same, Thus, this entry: ‘Supplies Expense 5,000.00 Prepaid Supplies 5,000.00 ‘To adjust the Prepaid Supplies to reflect the remaining portion as well as the used part as expense. By this entry, when they are finally posted in the ledger, it would reflect a P5,000.00 balance for Prepaid Supplies which would be presented in ‘the Balance Sheet, On the other hand, that used portion of P5,000.00 would be presented in the Income Statement as Supplies Expense. 2. Expense Method In this methad, conversely, upon payment for Supplies, it would be recorded immediately as an expense (Supplies Expense), Thus, this entry: ‘Supplies Expense 10,000.00 Cash 10,000.00 ‘To-tecord the payment for Supplies. Also, when Financial Statements are to be prepared, the recorded ‘Supplies Expense should be reviewed and adjusted if there are Supplies not yet used. So, when it is found out that P5,000.00 worth of Supplies are still remaining, an entry must be made to adjust to such findings. Thus, this entry Prepaid Supplies 5,000.00 Rent Expense 5,000.00 ‘To adjust the recorded Supplies Expense and set-up the remaining portion as Prepaid Supplies. Syne cnnye when Wey oe Tally Powel ine Teleer, would seflect a P5,000.00 balance for Prepaid Supplies which would be presented in the Balance Sheet. Qn the other hand, the Supplies Expense would give a 5,000.00 balance. **I1 can be observed from the above ilustwation that regardless of the method to be used, the output would still be the same! PREPAID SUPPLIES P5,000.00 & SUPPLIES EXPENSE P5,000.00 22. Accounting for Pre-collections Pre-collections are Collections of cash for INCOME sev ver earned (the business entity is not yet entitled) but received ix advance. For example, rental payments received in advance or payments received for services not yet rendered, Twa Methods of Accounting: 1. Llability Method Under this method, upon receipt of the advance rental, it would be secotded.as a liability (Umearned Rent Income), Thus, this entry: ‘Cash 10,000.00 Unearned Rent Income 10,000.00, ‘To record the receipt of Advance rental BUT when Financial Statements are to be prepared, the Unearned Rent Income must be adjusted to reflect the earned portion and recognize it already as Income. Thus, assuming that the advance rental received was for two months and F/S are to be prepared at the end of the first month, this entry should be made: Unearmed Rent Income 5,000.00 Rent Income 5,000.00 ‘To recognize the eamed portion (1 month) of the advance rental recei ved as income By this entry, when they are finally posted in the ledger, it would reflect a balance of P5,000.00 for Unearned Rent income and P5,000.00 for Rent Income. 2. Income Method Under this method, upon receipt of the advance rental payment, it would already be regarded as an Income (Rent Income), ‘Thus, this entry: Cash 10,000.00 Rent Income 10,000.00 ‘To record the receipt af advance rental, ALSO, when Financial Statements are to be prepared, the previously secorded Rent Income must be reviewed and adjusted for the unearned portion, ‘Thus, adopting the assumption above that 1 month rental has already been earned, This entry: Rent Income 5,000.00 Unearned Rent Income 5,000.00 ‘To adjust the Rent Income and recognize the Uneared portion of the advance rental recei ved. By this entry, when it is finally posted in the ledger, the Rent Income account would show a P5,000.00 balance (Credit P10,000-Debit P5,000) While Unearned Rent Income would shaw P5,000.00 balance as well, It can be observed from the above illuswation that regardless of the method to be used, the output would still be the sare! UNEARNED RENT INCOME P5,000.00 & RENT INCOME P5,000.00 283. Accrual Accounting for Income and Expense Accrual Accounting requires us to secognive (record) income when camed (the business entity is already entitled) regardless of wken recerved (the cash payrvent) AND to recognize expenses when incurred (itis already due) regardless of when pai. ‘Thus these entries: INCOME is EARNED Accrued Rent Receivable (Asset) 1,500.00 Rent Income 1,500.00 ‘To record the Rent Income already earned but not yet received. And WHEN PAYMENT (Cash) IS FINALLY RECEIVED Cash 1,500.00 Accrued Rent Receivable 1,500.00 ‘To-tecotd the receipt of cash payment for rent "It can actually be observed that the recognition of the Rent as Income is made before the eash payment is received, Lets axsume that the business has a Loans Payable with a bank, To comply with axcrual, weneed lo recognize interest that ts already due although we are to pay it dater Thus: EXPENSEis INCURRED) DUE Interest Expense 200.00 Accued Interest Payable (Liability) 200.00 ‘To-tecord the Interest already due. And WHEN THE INTEREST IS ALREADY PAID ‘Acctued Interest Payable 200.00 Cash 200.00 ‘Toxecord the payment of the interest due. *** The idea is to present or reflect in the Financial Statements those income which the business is already entitled AND to show the expenses already due ‘but not yet paid by the business entity. 4. Adjusting Entries for Errors in Recording Adjusting eniries ate but made to correct errors previously recorded to reflect or show the correct balances of accounts, For instance, assuming we have previously recorded a collection from a debtor (AJR) as Sales rather than as a deduction to A/R, making this enwy: ‘Cash 10,000.00: Sales 10,000.00 ‘To record... ‘The supposeto be/ "correct" entry should have been: ‘Cash 50,000.00 »Accounts Receivable 50,000.00 Tosecord. ‘Consequently, the Accounts Receivable and Sales Accounts are overstated by P 10,000.00. Thus to adjust the balances, we need to reduce both by P10,000.00. ‘Thus, this correcting entry: Sales 50,000.00 “Accounts Receivable 50,000.00 Tocomett..... By this entry, when it is posted, it would reduce the balances of Sales and Accounts Receivable to their correct balances, **°This simple illustration is but to showhow it is done, Corsecting entries must therefore bemade with the end in mind, Meaning, if these entries are made, when they are posted in ‘the ledger, the accounts adjusted would reflect their correct balances, The Corvect Entry somehow was made, ‘Try making the T-aecounts for the above accounts to find out Closing Entries Income Statement accounts are temporary accounts (Nominal Accounts). Meaning, they are to be transferred to the Capital Account (Thru Net Income or Net Loss) when financial statements ate to be prepared. Thus and entries are to be made for their transfer and consequently making their balances zero, An "Income and Expense Summary" account is to be maintained to facilitate the closing of these accounts. ‘The amounts for these entries are the amounts footed or totaled in the ledger. Consequently, (again) when they are finally posted to the ledger, their balances would "zero out" 1, To close Revenue accounts, Journal Entry: Sales xox Rent Income wx ‘Other revenue accounts wx Sales Returns and Allowances xox Income and Expense sunimaty wx ‘To close revenue and related accounts. 2. To close Expense accounts. Journal Entry: Income and Expense summary xx Rent Expense XXX ‘Taxes and Licenses xx, ‘Other expenses XK “To close expense accounts 3. To close the Cost of Goods Sold Account as previously computed and set-up, Note that the Cost of Goods Sold Account is an Expense account Journal Entry:Income and Expense Summary sex ‘Cost of Goods Sold xxx ‘To.cost of goods sold account to ‘the income summary account, ‘The balance of the income summary account when totaled or posted in the ledger represents either Net Income or Net Loss. Hence; the forgoing closing entries in a summarized form would thus look: TOTAL REVENUE NEX TOTAL EXPENSES XXX ‘COST OF GOODS SOLD xxx INCOME and EXPENSE SUMMARY XXX S* This would be the journal eno when the TOTAL REVENUE is GREATER THAN the TOTAL EXPENSES, The balance of the income summany account actually represents NET INCOME, TOTAL REVENUE Xxx INCOME and EXPENSE SUMMARY XXX TOTAL EXPENSES xxx COST OF GOODS SOLD XXX “* Fis would be the journal exny when the FOTAL EXPENSES is GREATER THAN the TOTAL REVENUE. The balance of she income summary account here represents NEF LOSS. 4, Closing the Net Income or Net Lass represented by the Income Summary to the Capital Account. By this entry, the Owner's Capital is either increased or decreased. On the other ‘hand, when the Income Summary is posted in the ledger and totaled, it would "zero-out", ‘When Net Income: The ledger balance of the Income Summary account is Credit Journal Entry: INCOME and EXPENE SUMMARY wx CAPITAL vox nar woul be metered See ‘Capital of the owner would be increased considering, ‘that he profited in his business, Thus, It can be observed that the capital of the ‘owner is credited, As a result, it is increased considering that the normal tralance af the account is credit ‘When Net Lass: The ledger balance of the Income Summary account is Debit. Journal Entey: X, CAPITAL XXX INCOME and EXPENSE SUMMARY xxx This time, the Capital of the owner would be decreased considering ‘that the business did not profit, Thus, the capital of the owner is debited to 31decrease it for the sustained loss. Note that the Normal balance of the capital account is credit, 5. Closing or deducting the Drawing Account to the capital Account: Journal Entry: X, CAPITAL NXX X, DRAWING XXX ‘Obviously, the Capital account is decreased. In effect, thus, the owner can have for himself part of the Net Income by simply withdrawing, **When these Closing Entries are posted in the specific ledger accounts and then ate finally footed or computed, their balances would be "zero", LET US ILLUSTRATE THE ABOVE DISCUSSIONS BY THIS EXAMPLE: ‘The following Zrial Sataice Appears in the Books af Aleie Supplles nut Groceries prepared atthe end of the ‘month ot Apri Elvie Supplies and Groceries ‘Trial Balance ‘Apeil 30, 2005 Debit Credit Cash 15,000.00 Accounts Receivable 25,000.00 Merchandize Inventory 50,000.00 Prepaid Office Supplies 5,000.00 lay Racks 30,000.00 Accumulated Depreciation- display racks 5,000.00 Building 100,000.00 Accumnilated Depreciation: bldg. 10,000.00 Land 100,000.00 Accounts Payable 20,000.00 Uneamed Rent Ine 10,000.00 Loans Payable 30,000.00 Elvie, Capital 250,000, 00 ESCO Nowe, Net income has Been transferred (0 the Elvie, Capel account, Hence, 10 Income and Expense Accounts in the Tria! Balance, ‘The followingare some of the Accountslisted in the Books of the Business in addition to the accounts as listed in the forgoing trial balance: Elvie, Drawing, Purchases: Cost of Goods Sotd: Office Sunplies Expense: Water Expense: Electricity Exnense: Depreciation Expense: Bad Debts Expense; Sates: and Rent Poarme. ‘The Business hadthe following business transactions forthe month of May 1. Sold Merchandize totaling 30,000.00 on the first week of May. 2, Purchased Merchandize worth | 7,000.00.0n the first week af May 3. Paid 5,000.00 to Various Creditors, 4. Received 12,000.00 from Debtors. 5. Sold Merchandise totaling, 7,500.00 an the second week of May. 6. Purchased merchandize from various suppliers on accountworth 9,500.00 7. Paid 500.00 to Creditors 8. Sold Merchandize totaling 1 2,500.00 on the third week of May 9. Purchased Merchandize fram various suppliers worth 8,500.00 10, Purchased Office Supplies worth 1,500.00rt Sold Merchandize to 18 500.00 on the fourth week of May 12. Records show thatthe Uneamed Rent Income pestains to advance rental payment made by the lessee forthe Office Spaceson the secand floor. This rental payment is for the month of May and forthe month of June, 13, Physical count shows that the Office Supplies left only amounts to 2,500.00, 14, Water Bill forthe month was paid, 500.00. 15, Electric Bill was alsa paid, 600100 16. The depreciation forthe month of May is computed at 500.00; 300.00 forthe building; 200.00 forthe Display Rack 17, Aging the Accounts Receivable showsthat 300.00 are doubtful of collection 18, Elvie madea withdrawal of 2,000.00 for personal use. 19. Interest due for the loans payable wasat P30,00 20, Updating al stack cards for the Merchandise, it was found out that Merchandise Inventory at theend of the Month was at 40,000,00. Required 1, Record the foregoing transactionsin joumal entry form with explanations, 2, Compute the Cost of Goods Sold and Set-upCOGS and MI, End (Joumal Entry for#20), 3. Make T-Aconunts for the specific accounts and past the recarded transactions. 4. Using the pro-forma financial statements as guide, prepare a Balance Sheet and an Income Statement forthe month May. JOURNAL ENTRIES: PURCHASES $500 casi 30,000 CASE 8,500 SALES 30,000 | to. OFFICE SUP. EXP 1,500 PURCHASES 17,000 CASHEL 1,500 CASHEL 17,900 | [la ACCOUNTS REC 8,500 B. ACCOUNTS PAY 5,000 SALES 8,500 CASHEL 5,000 | 12, UNEARNED RENT INC. 5,000 H.CASH 12,000 RENT INCOME 5,000 "ACCOUNTS REC. 12,000. | /3. OFFICE SUP. EXP 2,500 b.cast, 7,500 PREPAID OF. SUP. 2,500 SALES 7,500 | |ld. WATER EXPENSE 500 PURCHASES 9,500 CASH 500 ACCOUNTS PAY 9.500 | 15. ELECTRICITY EXP on [7 ACCOUNTS PAY, 500 CASHEL co CASHEL 500 hs. DEPRECIATION EXP 500 CASH 12,500 ACCUM.DEFN-DisplayRtacks 300 SALES 12,500 ACCUM. DEFN-Bldg 200 37. BAD DEBTS EXP. 300 0. COST OF GOODS SOLD 45,000 ALLOW. FOR BalDebts 300 MERCHANDISE INVTY.E 40,000 MERCHANDIZE INVTY,B 50,000 18. ELVIE, DRAWING. 2,000 PURCHASES 35,000 CASH. 2,000 ; |}+SEE COMPUTATION OF COGS. 19, INTEREST EXP 30 ACCRUEDINT. PAYABLE 30 COMPUTATION OF THE COST OF GOODS SOLD: Merchandise Inventory, Beginning 50,000.00 ‘Add: Purchases 35,000.00 Freight- In 0.00 35,000.00 Total Goods Available for Sale 85,000.00 Less: Merchandise Inventory, End 40,000.00 Cestet-Geeds Sekt 45, 808.60- [GENERAL LEDGER: T-ACCOUNTS (No Spedal Journals used) ‘CASH "ACCOUNTS RECEIVABLE PREPAID OFFICE MERCHANDISE SUPPLIES INVENTORY 600 ALLOWANCE FOR BADDEBTS _BUIL 10,0007 0 1p. 20000 ‘ef, 250,000 INTINCOME COST OF GOODS OFFICE SUPPLIES: ‘EXPENSE SOLD Lb 5900 20. oT 13.2500 ~ 000. }-——— 500---~ PURCHASE WATER “ELECTRICITY DEPRECIATION INTEREST BADDEBTS XFENSE EXPENSE EXPENSE EXPENSE EXPENSE EyEvie Supplies and Groceries ‘Trial Balance May 31,2005 DEBIT CREDIT Cash 41,400.00 ‘Accounts Receivable 21,500.00 Allowance for Bad Debts 340,00 Merchandize Inventory 40,000.00 Prepaid Office Supplies 2,500.00 Display Racks 30,000.00 Accumnilated Depreciation- display racks 5,200.00 Building 100,000.00 Accumulated Depreciation- bldg. 10,300.00 Land 100,000.00 Accounts Payable 24,000.00 ‘Uneamed Rent Income 5,000.00 Accrued Interest Payable 30.00 Loans Payable 30,000.00 Elvie, Capital 250,000.00 Elvie, Drawing 2,000,00 Sales 58,500.00 Rent Income 5,000.00 Cost of Goods Sold 45,000.00 Office Supplies Expense 4,000.00 Water Expense 500.00 Electricity Expense 40.00 Depreciation Expense 500.00 Bad Debts Expen: 300.00 AAntewst Expense 0 Total 388,330.00 388,330.00 PREPARE A BALANCE SHEET AND AN INCOME STATEMENT USING. STATEMENTS AS GUIDE!DOIT YOURSELF! HE PRO-FORMA V. THE SUMMARISING PHASE OF ACCOUNTING The Trial Balance ‘A trial balance serves as a resting device to make sure that transactions were recorded applying the rules of Debit and Credit while facilitating the preparation of Aémaveiat Staten ents Trial Balnces maybe prepared before Adjusting Eniries, after Adjusting Entries, before Closing Entries and after Closing Entries Use of Work sheets ‘A worksheet is simply a paper where we could work on adjustments. It shows the Unedjusted Balances, the Adjustments for these accounts then the Adjusted Baknces. Ordinarily, worksheets are yellow pages that comes in different columns (4 columns; 5 columns, and soon..). 35Balance Sheet and Income Statement ‘As earlier stated, these two statements are the basic output of the Accounting Process (Bookkeeping). Otherwise viewed, they are the most important output for the different users as discussed on the onset, (May I please refer you to our previous Notes and Discussions!) VI. THE SPECIAL BOOKS Due to the enormity of transactions, in tum, showed that making Journal Entries for each transaction is taxing (“mahirap"), these special books are the solution {o that problem, These books aim to decongest the General Journal, Noie; the business entity has the discretion to use 1 or more or all of these special journals depending. on the number of these classes of wansactions as will be later diseussed, 1, Cash Receipts Journal All transactions involving the receipt of cash are to be recorded in this Special Journal instead of recording them each in the General Journal, Merely posting the amounts to the different columins is what is required. Thus, the two-fold effect of the transactions should nonetheless be analyzed, Date [ Cash | Descriptio | Sale | Other ‘AUR | Provides column for each Account nof Trans. | s Revenues Whi isa source of east x x Touals (oa x ex = Instead of making the journal entry In the General Journal, we are to post ihe amounts directly in this Journal taking note the supposed Journal Entry. Thus, we are to post the cash collected to the cash column then posting its pair (in the supposed joumal entry) to the appropriate column, Accordingly, when we are to "totalize” the different columns, the total Cash collected would equal the Total Sales + the Total Revenues +the Total A/R collections + the Total of the Other Sources of Cash, 2, Cash Disbursement Journal It may seem obvious (by its name) that this Special Journal would also contain all transactions involving the disbursement of Cash. Merely posting the amounts to the different colurnns is what is also required. Date | Cash | Descriptio | Puchases | Othe | AP] Rew | Provides cohumator exch nof Trans, Expenses Exp. | Aocount which shows the dishursements of Cash = Kw wk x [x x Tals ax ee = [=| x x Similar with the CR], instead of making a journal entry in the General Journal, ‘we are simply to post the supposed journal entry ditectly in this table. Similarly, when we "totalize each column, the Total Cash disbursed would EQUAL the Total 6Purchases in cash + the Total Expenses (itemized-one specific expense account. per column) + the Total payments for A/P + Total of the other caluns 3. Sales Journal For this Special Journal, all transactions involving sale of Merchandize On Account (“utang") are to be recorded in this book, Date | Sales | Description of ‘Ase outs ‘Transaction Receivable HX Xxx XN Xxx XxX! Xxx Totals (xx)? (sonx)2 Similarly, the amounts of Sales on account are merely posted in the table as shown. 4. Purchases Journal Finally, for this forth Special Journal, all transactions involving Purchases On Account are to be recorded in this book. Date ] Purchases ] Description of | Accounts Transaction Payable xa XR NX XN xX XK Totals fax)? ext ‘Same procedure for this group of transactions. ‘Consequently, with these special books, the transactions that are to be recorded in the General Journal would be reduced. Again, it is actually for the purpose of reducing the voluminous recording that these books are designed and used. Thus, oily transactions not covered by these special journals (those chosen to be used by the entity) are to be recorded in the General Journal, Such transactions would therefore include Recording of Depreciation, Bad Debts, Adjusting and Correcting Enities, etc The Totals of the different Accounts contained in each of the different columns of these special journals are now the amounts to be posted in each of the Specific Accounts ti the General Ledger (T-Account, Example, thus. HAN CBs Others 7**Note: additional columns to each of the journals above should be provided bby the entity, if needed, These journals are but the standard formats Books of Original Entry TRANSACTIONS SUPPORTING Docs 1. General Journal (G]) ‘Others Journal Voucher 2. Cash Receipts Jounal (CRJ} Cash Receipts Official Revei pts 3. Cash Disburseinent Journal (CDJ}Cash Payments Dis, Vouchers 4, Purchases Journal (P]) Purchases on account Purchase Invoice 5. Sales Journal (ST) Sales on account Sales Invoice AGAIN, LET US USE THE ELVIE PROBLEM TO ILLUSTRATE THE USE OF THE FOREGOING SPECIAL JOURNALS!! (Take note of the transactions!) ‘Cash Reseipts Journal Date Cash] Description | Sales] Accounts] Other of Trans, Receivable _| Revenues May [1 | 30,000 | Sate 30,000 2 [12,000 | From Nicotai 12,000 5 17.500 [ee 7.500 812,500 50,000 Taal 62,000 50,00 | 12,000 10 __] ‘Cash Disbursement Journal Date ‘Cosh | Description | Puchases | AP | OS | Flex. | Wares | Dre of Trans. Exp. | Exp. | Exp | wing May [2 [17.000 | Tengsan | 17000 3__| 5900 | Ea Dealer 5000) 509 a Yan Fi 98,500 a5éeom 5500 191,500 Ete. 1,500 T4500, 500 15600) rn 182,000) 2000, Total 35,600 35,500 | 5500 | 1,500 | 00 | 500 | 200% Purchases Journal Sales Journal DATE [PURCHASES | DESCRIPTION [AP DATE SADE DRCRTON [awe May [| 9500 Tiong'San [9500 | [May [11 [#500 | ToJenjen 8.500) Tata [| 9500 9500 5500 8500 1 ‘The total per account's column would be posted in the General Ledger together with the entries in the General Journal, 38NOTE: the preparation of the Balance Sheer and Macome Staten ent But presenting Mose accounts int the Triat Batance in a formatted form (see proforma), DOL ¥FOURSELFH! General Journal May transactions: 12. Unearned Rent Income 5,000.00 Rent Income 5,000.00 13, Office Supplies Expense 2,500.00 Prepaid Office Supplies 2,500.00 16. Depreciation Expense 500.00 Accumulated Depreciation-Blde 300.00 Accumulated Depreciation-Display Racks 200.00 17, Bad Debts Expense 300.00 Allowance for Bad Debts 300.00 19, Interest Expense 30,00 Accrued Interest Payable 30,00 20. Cost of Goods Sold 45,000.00 Merchandise Invty, End 40,000.00 Merchandize Invty, Beg. 50,000.00 Purchases 35,000.00 |GENERAL LEDGER: T- ACCOUNTS (with use af Special Books) casi ACCOUNTS RECEIVABLE PREPAID OFFICE MERCHANDISE be. INVENTORY FI, 2,500, bb. $0,000 =6].80, 000 ALLOWANCE FORBAD DEBTS BUILDING ACCUM. DEPNBldg. rt DISPLAY RACKS ACCUM. ac LAND ACCOUNTS OT] JUNEARNED RENTINC. ACCRUED INTERESTPAY LOANSPAYABLE EL! CAPITAL 10,000 }._30 30,000) 250/000 73,000 =~ ELVIE,DRAWING SALES INT INCOME COST OF GOODS OFFICE SUPPLIES EXPENSE Dy “3 2.500 = -4.000--|---- PURCHASE WATER ELECTRICITY DEPRECIATION INTEREST BADDEBTS EXPENSE EXPENSE EXPENSE EXPENSE EXPENSE 125,500, lp. 9,500 =a 4 - m0 . » INOTE: THE TRIAL BALANCE WOULD APPEAR AS. PREVIOUSLY PRESENTED.N closing journal entries then post the same to the General Ledger (or the T-Accounts). Discover that the Income Statements accounts together with the Drawing account would indeed “zero-out". The TRIAL BALANCE AND THE FINANCIAL STATEMENTS would be THE SAME as that prepared in the illustration without the use of ‘Special Journals, VIL. SOME IMPORTANT CONCEPTS IN ACCOUNTING 1. MONETARY VALUE Roughly, this concept basically requires us to record transactions quantifiable in terms of money (pesos), Thus, the elements of accounting must be stated in terms ‘of money (pesos). Moreover, devaluation of peso should ordinarily be ignored. 2. ENTITY CONCEPT As previously discussed, this concept requires that the business entity must be viewed as separate and distinct from the owners, and the people constituting the ‘management team 3. GOING CONCERN ‘This concept allows us to view the entity as continuing its operations indefinitely. Consequently, assets are to be recorded at cost. However, Property Plant and Equipment are being reduced with the use of the Accumulated Depreciation account. 4. CONSERVATISM ‘This concept states that when alternatives exist as per recognition of items, the alternative that would result to lesser Income would be chosen. However, this concept must not be applied to deliberately understate net income. 5. CONSISTENCY ‘This concept requires us to use what has been previously adapted as accounting method for a specific item. (eg. Expense Method of Accounting for Prepayments, Liability Method of Accounting, for Pre-collections, ete) 6. MATERIALITY ‘Considering the financial condition of the business entity, expenses which are ‘not significant are not needed t be capitalized and amortized or depreciated to the periods benefited. This concept is also known.as the doctrine of convenience because it can be observed that the aforesaid expenses are recorded immediately as an expense rather than capitalizing it, Thus, the recording of amortization or depreciation is dispensed with, T. TIME PERIOD Business could go on for a couple of years, thus, this concept requires that financial Statements must be prepared at the end of every accounting period. Normally, accounting periods are af equal length (ordinarily, one year) 8. ACCRUAL ACCOUNTING Usually, financial statements are prepared following this concept of accounting, This concept requires that iecome i recognized when earned regardless of when received, wheveas expenses ae ake recognized when incurred regardless of when paid. 40START of NEXT ACCOUNTING PERIOD : Reversing Entries To comply to the above-discussed Consistency Principle: adjustments made to establish the un-expired or unused portion of a prepaid expense; and to establish the unearned potion of a pre-collected income, are to be reversed when the business entity is using the ‘expense method of accounting for prepayments and the income method of accounting for pre- collections, These Reversing Entries are but the reverse of the Adjusting Entries made, Thus, these Reversing Enuies: Supplies Expense/ Rent Expense xxx Prepaid Supplies/ Prepaid Rent XxX y this entry, the Prepaid Asset is now charged as an expense to be consistent in using the Expense Method of accounting for prepayments. OF course under that method, it is required for us to immediately record as an expense the payment for such items, Unearned Rent Income 2008 Rent Income (XXX **By this entry, on the other hand, the Unearned Rent Income is now converted to Rent Income to be consistent in using the Income Method of accounting for pre-collections. Under that method, to reiterate, Income is to be immediately recognized upon receipt of the cash the business is not yet entitled. LET US TAKE FOR EXAMPLE THE ELVIE PROBLEM, this entry should be made (in the General Journal) at the start of the next accounting period to comply with the CONSISTENCY Principle. Take note: Elvie Supplies and Groceries is using the Expense Method of Accounting for Prepayments and the Income method of Accounting for Pre-collections, Moreover, take note that on your prepared Balance Sheet, the balances of Prepaid Office Supplies and Unearned Rent Income are P2,500, P5,000 respectively. Thus, these reversing entries: 1, Office Supplies Expense 2,500.00 Prepaid Office Supplies 2,500.00 ‘To immediately record as Office Supplies Expense the Prepaid ‘Office Supplies as adjusted at year-end to comply with the consistency principle. 2. Uneamned Rent Income 5,000.00 Rent Income 5,000.00 To immediately record as Rent Income the Unearned Rent Income as adjusted ai the end of the period to comply with the consistency principle. Note: These are but the Reversing Entries for this illustrated problem, aiVIII. SPECIAL TOPICS ‘A. CASH ! Petty Cash Accounting For safety purpases, businesses depasit their cash to banks and maintain checking accounts, However, a minimal amount of cash is being maintained by the business to defray small expenses (Checks are issued for larger expenses), Thus, this accounting for that minimal amount ordinarily referred to as a Petty Cash Fund. ‘TO SET UP THE FUND: Petty Cash 10,000.00, ‘Cash in Bank 10,000.00 ‘To record the issuance of check to cashier to set-up a petty cash fund. “Payments Using the Petty Cash need not be recorded immediately ax disbursed, However, when the Fety Cash is to be replenished (palitan yung nagamit na pera ng petty cash") @ chect must he issued for that amount and this entry to be mate: Expenses (those paid) 2,000.00 ‘Cash in Bank 2,000.00 To record the teplenishment of the Peny Cash and record the expenses as well. *"Bui when BS are to be prepared, an atiusiment ts (0 be mate io reflect che actual Petty Cash on Hard. Expenses (those paid) 5,000.00 Peity Cash 5,000.00 ‘Toadjust the Petty Cash to reflect actual amount left, ‘TO INCREASETHE PETTY CASHFUND: Petty Cash 4,000.00 ‘Cash in Bank 4,000.00 ‘To record the issuance of a check to increase the Petty ‘Cash. ‘TO DECREASE THE FUND ‘Cash in Bank 6,000.00 Petty Cash 6,000.00 ‘To record the deposit of a part of Petty Cash Fund, EE TAAB. MERCHANDISE INVENTORY : Periodic System of Accounting Characteristics: 1. Uses the PURCHASES ACCOUNT when recording the purchase of merchandise to be sold instead of DEBITING the Metchandize Inventory Account. 2. Conducts physical counting of merchandise when F/S are to be prepared then multiplying them to their cost per item to get the amount of merchandise to. be shown in the Balance Sheet. 3. The COST OF GOODS SOLD is computed and set-up in the books when the F/S are to be prepared. ‘The Cost of Good Sold Formula (Accounting Form): Merchandize Inventory, Beginning, xxx Add: Purchases xax Freight-In xox Total Goods Available for Sale (TGAS) xxx Less: Merchandize Inventory, end. NXX ‘Cost of Goods Sold NXX _—+ SOLD (COGS) Note: The TGAS could either be on NOT SOLD (Mdse Inventory, End) "Refer to the entry setting-up the Merchandise Inventory and COGSwhen preparing the Financial Statements (Recording Phase Letter H) asic Aang sod ack fox Nan Acces paw Lampe 8C. PAYROLL Preparation Sample Format: Elvie Supplies and Groceries Monthly Payroll Date 1D | Name [Designation] REGULAR WORK | OVERTIME WORK | Total] Withholding] SSS] Medicase[Pag-ibig] Total | Take Home No. Hs | Rate] Pay | His | Rate! Pay} Pay| Taxes | Com] Cont. | Cont. |Deduetions | Pay 00| Aisha Manage} 00} Edriane [Cashier Computations: 1. Regular Work & Overtime Work Hrs worked X Rate/hr = Pay 2. Total Pay = Pay for Regular Work + Pay for Overtime Work 3. Withalding Tax A table is available for this deduction. Refer to Topic on Basic Taxation. 4. For the different contributions, a table is also provided for by the different agencies concerned for employee's contributions. 5. Total Deductions = Withholding Taxes + Total Deductions 6, Take Home Pay = Total Pay - Total Deductions, ***Loan Premiums, Labor Dues, etc, may also be presented as deductions depending on the entity's policies or CBA’s, Journal Entry Salaries Expense xxx The Entity would be responsible for emitting those witiheld Cash (Take Home Pay Paid) we fier the S85, MED snd Pan bigeomutb. fe Employer With. Taxes Pay ax tins: a ane oe SSS, Med, Pag-ibig Cont. Payable XXX Salaries Expense wx 88, MED. and Pag-ibig Payable so “To record Employer's contrib. 4D. BASIC TAXATION : Individual Taxpayer ‘Corporation (Domestic) and. General Co- Partnership Gross Income = ———+ Vator % Tax NetIncome = ———> 32% Tax *The Dividends Income is subject to 10% Tax to be withheld by the issuing Corp. or Partnership. Consequently, the individual taxpayer would not include such Dividends Income to his Taxable Income when filing his Income Tax Return. Professional Partnership Gross Income ———+ No Tax NetIncome ——+ No Tax Sole Proprietorship Gross Income —__, Net Income Vat or % Tax Individual Taxpayer —— _ Reweives this as "Dividend Incoine dividual Taxpayer % Tax —|— + Hiis share would be included as part of his other income to be considered in getting his Taxable Income | Added as Income from. business to be considered in getting his Taxable Income The Taxable Income of the Individuat iv subject to Schedutar Tax. This Table: Not aver P10,000.00 ‘Over P10,000 but Not over 30,000 ‘Over P30,000 but Not over P70,000 ‘Over P70,000 but Not over P 140,000 ‘Over P140,000 but Not over P250,000 ‘Over P250,000 but Not over P500,00 Over P500,00 5% S00 —-+10% of excess over P10,000 P2500 +15% of excess over P30,000 P8,500 +20% of excess over P70,000 P22,500 +25% of excess over P140,000 P50,000. +30% of excess over P250,000 P125,000 +32% of excess over P500, Sale of Real Property Subject to Capital Gains Tax of 6% Computation of Taxable Income: Gross Income xxx Add Other meme vy ‘Total Less: Allowable Deduction XXXX XXX, Allowable Personal Exemptions NOX XXX Taxable Income NRX Professional Partnerships- establish for the practice of profession (eg. CPA Firms; Law Firms; etc.) General Co-Partnership- established for business undertakings (ordinary business) Allowable Personal Exemptions (One year income)Single 20,000.00 Head of the Family 25,000.00 Married 32,000.00 Plus P8,000,00per dependent child, maximum of four (4), In effect, a married taxpayer with four dependent (18yrs and below) would be entitled to a total of P64,000,00 as allowable Personal Exemption. ‘Otherwise said, P64,000,00 of his Taxable Income for a year will not be subject to Tax. ‘Who are subject to the 10% Value Added Tax? Among others: 1, Those Persons who registered under the Value~ Added Tax System, 2. Those Persons who are engaged in the business of selling, or leasing goods or services whose gross sales or gross receipts during a year or in any twelve month period exoeed P550,000.00 (Registered or Not under VAT) ‘Gross Receipts/ Sales X 10% = Vat Payable Vatis an indirect tax, meaning, it maybe transferred to the consumers, ‘That VAT imposed. to consumer in so far as the consumer is concerned is called an INPUT WAT Which a Var Registered consumer may deduct to his! her own VAT PAYABLE (Output Vat). ‘Who are subject to the 3% Percentage Tax? Among others: 1. Any person whose Gross Receipts or Sales does not exceed P550,000.00 a year or any 12 month period (but not less than P100,000?) and who is not VAT Registered. 2. Professionals- CPA'S, LAWYERS, ETC 3. Domestic carriers and keepers of garages Note: There are minimum Gross Receipts established by law. Withholding Tax Instead of paying the tax of one year's total income at the end of the year ('minsanan"), they designed this method estimating the taxes to be paid at the end of the year and allocated this to each pay day (as withholding tax deduction). Therefore, when these deductions per payday are added it would EQUAL the tax you are Suppose to pay at the end of the year for your one-year income, The difference would either be a Tax Refund or a Tax Deficiency, A table is provided for these categorized deductions asic hecourting aed Goxkooping tar Non-heceoutarts AAW Laman D. A Cooperative's Accounting Equation 6ASSETS: = LIABILITIES + STATUTORY RESERVES +MEMBERS'CA PITAL ‘The Accounting, Equation is fundamentally the same to other forms of business organizations except that there are Statutory Reserves. Nonetheless, the composition of the Assets, Liabilities and Capital are but the same. ‘The Statutory Reserves are those required by law (by a Statute) to be set aside from the Net Income for specific purposes. It is composed ordinarily of the following accounts; 1, THE GENERAL RESERVE FUND This account represents 10% of net surplus allocated for the stability of the ‘cooperative and to meet future net loss, 2. LAND AND BUILDING FUND This account represents 10% of net surplus allocated for land and building and community projects 3, EDUCATIONAL AND TRAINING FUND This account represents 5% of net surplus allocated for training of members and officers of the cooperative. JOKE TAYM!!!! REPUBLIKANG PILIPINAS ‘OPISINA NG PANGULO MABUHAY ANG WIKANG PILIPINO! FILIPINO ACCOUNTING TERMS ACCOUNTING (PAGTUTUOS) ENGLISH ‘FILIPINO ‘Asset ‘si Fised Asset Ang Nukatiik Liguid Asset Abing Tamutols Writen OF Aset ‘Azing Pinta Cx- 0 Time Oras ng Pagal Depreciation Paghalasasng Ari Fully Depreciated Astet ‘Asing Laspag ne Laspag na Easing Asset ‘AringGanadaps Non-Earming Ast AringHaldsdona ‘Owed Aset Saziling Axi (Other Asset ‘Avinglis Miscellaneous Astet Mga Aring Pimgesma-sara Exons Entry Mali ans Pinasck DDauble Entry Dulawa ang Pimacatan Mukipke Estey Labas-Pasok (Comrecting Entry Reversing Entry Ieanama ang Pagpasck Binabictad ang Pinasek Tangible Ast ‘ring Nasasat Dispensed Nilahasan Unlispensed Hindi Nilahasan Franen Astet Basichccourting a Backkeeping for Non-Aecourtarts ‘Aring Pimtigas AAW LLampacan LS Activity 1 (Concepts/Terms) Objective: Fo help us remember the basic terminologies and basic concepts af the course. a7Identification: The economic resources the business owns. Monetary obligations of the business Owner’ investment in the business, The Accounting Fguation. The ff sideal an Accounting Enwry, ‘The siete.side of an Accounting Entry. The sonmat balance of an Asser, The nozmat balance of a £iabidiry. The aormat balance of Capit! Account. 10, Are being recorded affecting the Elements of Accounting. 1, Elements of Accounting. 12. Ibis defined a5 the "arr of recording, classifying and summarising tu a Slenificant manner and in tens of money, sransactions and events which are in part at least ef afinanctal character, and interpreting the results thereof”. 13. It is defined as "dhe systematic an chronological recording of business wrensactions or evens in accordance with established accounting rales ane procedures”. 14. Itis and accounting concept thal requires us to view the business entity as ‘Separate and distinct from its owner or owners, 15, The ougurof the Accounting Process. 16. The specific ouspur of the Accounting Process that shows the financial condition or status of the business entity 17. The specific oufpur atthe Accounting Process showing the results of operations of the business 18, The names or dines of different Assets, Liabilities, and Capital. 19. Formuia 0 compute Net facome. 20. It is where recording is done for the first time and is technically termed S008 of original enwy, so oe st on en etal Objective: To help us appreciate the concept of a financial wansaction and the Entity Concept in accounting and so we can easily identity the transactions to be recorded, Determine what kind of transaction: Put an “X" mark (External) (Internal) 1. A, Band C agreed tn edits a "Fara Supp ast. A contributed P250,000,00. .... B contributed house and fot worth P 300,000.00. € contributed P100,000.00. The partners engaged D wo manage the business , with the approval of the partners hired X and ¥ as bookkeeper and cashier, respectively. 7. After a year of operations, the cashier died 8, Payment af salaries of employees, 9, Sold some goods to a buyer 10, Purchased goods froma supplier. . 11. A purchased a Porsche car for his personal use worth 3M... 12, B, on the other hand, bought a Caliber 45 gun for protection as he was receiving death threats lately, worth 40,000.00... 13, The partners hited a security guard to waich over the store SREduring the night... a 14. The parmers bought a Caliber 38 for the security guard (P25,000.00)... made additional contribution to the business (P150,000,00). Objective: Ta help us memorize the different Account titles referring to Assets, Liabitities, Revenues and Expenses Identify: Asset, Liability, Revenues, and Expenses. 1, Cash 9, Rent Expense 2. Salaries expense 10, Accounts Receivable 3. Sales 11, Land A. Rent Income 12. Building 5, Interest Income 13, Depreciation Expense 6. Interest Expense 14, Bad Debts Expense 7. Accounts Payable 15, Freight-Out 8, Salaries Payable ACTIVITY IL. Application: Doit on your own without referring to the illustrated answers until you have completed all the requirements The following Fria! Bakmce Appears in the Books of Fibie Supptes and Groceries prepared at the end of the month of April Elvie Supplies and Groceries ‘Trial Balance ‘April 30,2005 Debit Credit Cash 15,000.00 Accounts Receivable 25,000.00 Merchandize Inventory 50,000.00 Prepaid Office Supplies 5,000.00 Display Racks 30,000.00 Accumulated Depreciation- display racks 5,000.00 Building 100,000.00 Accumulated Depreciation bldg. 10,000.00 Land 100,000.00 Accounts Payable 20,000.00 Uneamed Rent Income 10,000.00 Loans Payable 30,000.00 Elvie, Capital 250,000.00 Total 325,000.00 __ 325,000.00 Note: Net income has been tansferred 1 the Fivie, Capital account, Hence. ne Income and. Fixpense Accounts in the Triat Batance. ‘The following are some of the Accounts listed in the Books of the Business in addition to the accounts as listed in the forgoing tial balance; Livie. Danving: Purchases: Cost of Goods Sold- Office Supplies Expense: Water Expense: Fiecwicin Expense; Depreciation Expense; Bat Debis Expense, Sates, and Rent income‘The Business had the following business transactions for the month of May. Sold Merchandize totaling 30,000.00 on the first week of May. Purchased Merchandize warth 17,000.00 an the first week af May Paid 5,000.00 to Various Creditors. Received 12,000.00 fram Debtors. Sold Merchandise totaling 7,500.00 on the second week of May. Purchased merchandize from various suppliers on accountworth 9,500.00 Paid 500.00 to Creditors ‘Sold Merchandize totaling 12,500.00 on the third week of May Purchased Merchandize fram various suppliers worth 8,500.00 Purchased Office Supplies worth 1 500.00 Sold Merchandize totaling 500.00 on the fourth week of May Records show thatthe Uneamed Rent Income pertains to advance rental payment made by the lessee forthe Office Spaceson the second floor, This rental payment is for the month of May and forthe month of June. Physical count shows that the Office Supplies left only amounts to 2,500.00. Water Bill forthemanth was paid, 500.00, Electric Bill was also paid, 600.00 ‘The depreciation forthe month of May is computed at 500,00; 300.00 forthe building; 200.00 forthe Display Rack, ‘Aging the Accounts Receivable showssthat 300.00 are doubiful of collection Elvie madea withdrawal af 2,000.00 for personal use. Interest due for the loans payable wasat P30,00 Updating all stock cards for the Merchandise, it was found out that Merchandise Inventory at the end of the Month was at 40,000.00, Required: Record the foregoing transaction sin journal entry form with explanations. Compute the Cost of Goads Sold and Set-up COGS and MI, End (Joumal Entry for#20), Make T- Accounts for the specific accounts and post the recorded transactions, Using the pro-forma financial statements as guide, prepare a Balance Sheet and an Income Statement forthe month May. asic hecourting ard dokkoeping Far Man Recounares AW. Larmpacan