PAS 18: REVENUE

✓Income encompasses both Revenue and Gains.

REVENUE is income that arises in the course of ORDINARY ACTIVITIES OF AN ENTITY and is referred to by a variety of
different names including sales, fees, interest, dividends and royalties.*

GAINS on the other hand results from “peripheral**” or related activities, such as selling a fully Depreciated Asset (Zero Book-
Value).

EXAMPLE 1
You disposed of your fully depreciated printer but was able to make P65.00 out of it.

Asset:
EPSON Printer P9,000.00
Acc. Dep. (9,000.00)
Book Value -0-

JOURNAL ENTRY:

DR. Acc. Dep.- EPSON 9,000.00

DR. Cash 65.00
CR. EPSON Printer 9,000.00
CR. Gain on Disposal of Asset 65.00

EXAMPLE 2

You sold your 60% depreciated EPSON Printer for P4,000.

Asset:
EPSON Printer P9,000.00
Acc. Dep. 60% (5,400.00)
Book Value 3,600.00

JOURNAL ENTRY:

DR. Acc. Dep.- EPSON 5,400.00

DR. Cash 4,000.00
CR. EPSON Printer 9,000.00
CR. Gain on Disposal of Asset 400.00

To simplify it:

Income is a broader term than Revenue and Gains.

*PAS18
** “peripheral” accountingcoach.com

INDIRECT LABOR

Indirect labor is the cost of any labor that supports the production process, but which is not directly involved in the
active conversion of materials into finished products.*

It is the compensation of employees or workers who DO NOT physically convert raw materials into finished goods.**

Indirect labor also refers to worker’s hours that are spent on working on projects that cannot be traced back to specific
production units or products. In other words, indirect labor is employee work that can’t be billed to goods produced. ***

Examples of Indirect Labor are Salaries of plant managers and engineers, wages of forklift operators, maintenance and
inspection labor, machine helpers.

It forms part of Manufacturing Overhead (Factory Overhead), thus, a part of the cost of the product.

Partnership by Estoppel

"Partners who are not partners to each other but are partners as to third persons."

As part of the financial reporting, "assessing cash flow prospects" is interpreted to mean
A. Cash basis accounting is preferred over accrual basis accounting.
B. Information about the financial effects of cash receipts and cash payments is generally considered the best indicator
of an entity's present and continuing ability to generate favorable cash flows.
C. Over the long run, trends in revenue and expenses are generally more meaningful than trends in cash receipts and
disbursements. ☑
D. None of the above is correct.

When classifying assets as current and noncurrent

A. The amount at which current assets are carried and reported must reflect realizable cash value.
B. Prepayments for items such as insurance are included in "other assets" rather than as current assets as they will
ultimately be expensed.
C. The time period by which current assets are distinguished from noncurrent assets is determined by the seasonal nature of the
business.
D. None of the choices is true.

A limited partnership has Dimi, as general partner, Tilor, as limited partner, and Kiti, as an industrial partner contributing
P50,000; P50,000 and services, respectively. The partnership failed and after disposing all its assets to partnership
debts, there still remains a note payable in the sum of P30,000. Against whom can the creditor demand payment?
A. Dimi-P30,000 B. Tilor-P0 C. Kiti- P0
B. Dimi-P15,000 B. Tilor-P15,000 C. Kiti- P0
C. Dimi-P15,000 B. Tilor-P0 C. Kiti- P15k ☑
D. Dimi-P10,000 B. Tilor-P15,000 C. Kiti- P10,000
Because Tilor is limited, he is not Liable for the liabilities of the partnership

Situation 1 A commits the crime of theft and is asked to return the car to its owner B. If before the car is delivered to B,
it is destroyed by flood. Is A's liability extinguished?
Situation 2 Using the above statement, A had previously asked the owner to accept the car, but the owner without any
justifiable reason, refused to accept the car and it is destroyed by flood. Is A's liability extinguished?
A. Yes, Yes B. Yes, No
C. No, Yes D. No, No

When the debtor of a debtor is ordered not to pay the latter so that preference would be given to the latter's creditor.
A. Garnishment B. Interpleader
C. Injunction D. Attachment
The correct answer is A (Garnishment).

A ordered B, a 10 year old boy to climb a high slippery mango tree with the promise to give him a part of the fruits. B fell
while climbing and was seriously injured. Is A liable?
A. Yes B. No

A is obligated to deliver his only car to B on March 10, 2019. If A does not deliver and on March 15, 2019, a typhoon
destroys the car,
a. A is not liable because the obligation is extinguished.☑
b. A is liable because he is in delay.
c. A and B will divide the loss equally.
d. A's obligation is converted into a monetary obligation.

Demand is necessary inorder to put the debtor in delay.

Statement 1: If a person obligated to do something fails to do it, the same shall be executed at his cost.
Statement 2: Those who in the performance of their obligations are guilty of fraud, negligence, or delay and those who
in any manner contravene the tenor thereof, are liable for damages.
a. True, True ☑
b. True, False
c. False, True
d. False, False

Noli De Caspapaya obligated himself to deliver to Ted Nylon the following

1. 2018 Sing-It Yamaha Organ
2. Malagona passenger Jeepney with engine No. 69 and chassis No. 88
Statement 1: In case Noli failed to deliver the Organ, the court may compel Noli to deliver the Organ plus damages.
Statement 2: In case Noli failed to deliver the jeepney, the court may compel him to deliver the jeepney plus damages.
a. True, True ☑
b. True, False
c. False, True
d. False, False

When the actual amount of damage cannot be ascertained

a. Exemplary
b. Liquidated
c. Temperate☑
d. Moral

Damages awarded to set an example

a. Exemplary ☑
b. Liquidated
c. Nominal
d. Moral

Damages awarded to vindicate a right

a. Liquidated
b. Actual
c. Nominal ☑
d. Exemplary

Damages awarded for mental and physical anguish

a. Moral ☑
b. Exemplary
c. Nominal
d. Temperate

Nadine Gue borrowed money from James Red payable on February 28, 2019. If Nadine failed to pay on due date, will
she be in delay?
a. Yes, because there is stipulation as regards to the date.
b. Yes, if the obligation is in writing.
c. No, because demand has not been made by James.☑
d. No, if Nadine has the money to pay James.

No demand, no delay

Debtor's default in real obligation

a. Mora accipiende
b. Mora solvendi ex-re
c. Mora Dela Torre
d. Mora solvendi ex persona
???

Where demand by the creditor shall be necessary in order that delay may exist?
a. When time is of the essence of the contract.
b. When demand would be useless.
c. When the obligor has expressly acknowledged that he is in default.
d. When the obligor has requested for an extension of time. ☑

If Kathryn Bernardez is obligated to give Daniel Padriñas 10 kilos of sugar, which of the following is not correct?
a. Daniel can demand that Kath obtain the sugar and deliver it to him.
b. Daniel can just buy 10 kilos of sugar and charge the expenses to Kath.
c. Kath can insist on just paying Daniel damages or the monetary value of the sugar.☑
d. Daniel may require another person to deliver the sugar and charge the expense to Kath.
 Your Ex again, a Frenchman arrived in the Philippines on January 1, 2017 and continued to live and engage in
business (hindi sayo, of course) in the Philippines. He went on a tour of Southeast Asia from August 1 to November 5,
2017. He returned to the Philippines on November 6, 2017 and stayed until April 15, 2018 when he returned to France.
He earned during his stay in the Philippines a gross income of P3,000,000.00 from his investments in the country. For
the year 2017, what was the status of your ex? Do you even care? Bakit, mahal mo pa?
a. A non-resident alien not engaged in trade or business in the Philippines.
b. A non-resident alien engaged in trade or business in the Philippines.
c. A resident alien not engaged in trade or business in the Philippines.
d. A resident alien engaged in trade or business in the Philippines.

The element of the audit planning process most likely to be agreed upon with the client before implementation of the
audit strategy is the determination of the
a. Timing of inventory observation procedures to be performed. ☑
b. Evidence to be gathered to provide a sufficient basis for the auditor's opinion.
c. Procedure to be undertaken to discover litigation, claims, and assessments.
d. Pending legal matters to be included in the inquiry of the client's attorney.

An auditor compares 2018 revenues and expenses with those of the prior period and investigates all changes
exceeding 10%. By this procedure, the auditor would be most likely to learn that
a. An increase in property tax rates has not been recognized in the client's accrual.
b. The 2018 provision for uncollectible account is in adequate because of worsening economic conditions.
c. Fourth quarter payroll taxes were not paid.
d. The client changed its capitalization policy for small tools in 2018. ☑

Your Ex, a french citizen permanently residing in the Philippines, received several items during the taxable year. Which
among the following is not subject to Philippine income taxation?
a. Consultancy fees received for designing a computer program and installing the same in the Shanghai facility of a
Chinese firm.
b. Interest from his deposits in a local bank of foreign currency earned abroad converted to Philippine peso.
c. Dividends received from an American corporation which derived 60% of it annual gross receipts from the Philippine sources for
the past 7 years.
d. Gains derived from the sale of his condominium unit located in The Fort, Taguig to another resident alien.

What accounts would be debited and credited when the wages for indirect laborers are recorded?
DEBIT CREDIT
a. Factory Overhead Wages payable
b. Factory Overhead Payroll ☑
c. Payroll Accrued Payroll
d. Work in Process Payroll

The hardest test in life is having the patience to wait for the right moment. Sometimes when things are falling apart,
they are actually falling in place. Let's be at ease knowing that what was meant for us will never miss us, and what
misses us was never meant for us. Keep moving forward, staying patient and thinking positively. —Francis Kong,
Passion, Purpose, Productivity

Controllable Costs and Uncontrollable

Costs
YES ACCOUNTING·MONDAY, FEBRUARY 11, 2019

Costs, when categorized in relation to persons regulating them, can be classified into:

1. controllable costs and

2. uncontrollable costs.

Controllable Costs
 Controllable costs are costs that can be influenced or regulated by the manager or head responsible for it.

For example: direct materials, direct labor, and certain factory overhead costs are controlled by the
production manager. Another example: the sales manager has control over the salary and commission of
sales personnel.

Uncontrollable Costs

From the term itself, uncontrollable costs are those that are not under the control of a specified manager.
These cannot be influenced by decisions or actions of the manager. These costs are imposed by the top
management or allocated to several departments. For example, a company-wide advertising cost that is
allocated by the central office to different departments is not under the control of the department heads.

Other examples include depreciation, insurance, share in rent, share in organization-wide security costs,
etc.

Example
To effectively evaluate the performance of the production department of ABC Company, the
management accountant wants to determine the controllable and uncontrollable costs from the following
items:

1. Direct materials

2. Direct labor

3. Factory overhead and other charges

1. Indirect materials

2. Indirect labor (supervision)

3. Depreciation

4. Insurance

5. Allocated repairs and maintenance

6. Allocated rent and utilities expense

Solution: The controllable costs are: direct materials, direct labor, indirect materials, and indirect labor
(supervision). Depreciation, insurance, allocated repairs and maintenance, and allocated rent and utilities
expense are not under the influence of the production manager. Under responsibility accounting, managers
are evaluated based on costs that they can control. Hence, uncontrollable costs are ignored in evaluating
managers.

Product Costs and Period Costs

YES ACCOUNTING·MONDAY, FEBRUARY 11, 2019

Costs, when categorized according to the timing of charge against revenue, can be classified into:

1. product costs and

2. period costs.

Product Costs

Product costs refer to inventoriable costs. These costs are included as part of inventory and are charged
against revenues as cost of sales only when sold. In other words they are initially classified as assets and
are transferred to expense when they are sold.

All manufacturing expenses (i.e., direct materials, direct labor, and factory overhead) are product costs.
Direct materials, direct labor, and factory overhead are combined to form the products to be sold, hence
the term "product costs".

In the accounting records, the cost of finished products is accumulated in an inventory account - usually
"Finished Goods Inventory". When goods are sold, the cost is transferred from "Finished Goods
Inventory" in the balance sheet to "Cost of Sales" (or Cost of Goods Sold) in the income statement.

Period Costs

Period costs are charged immediately against revenue. Unlike product costs, they are classified as
expenses right away. They are not included in inventory.

Period costs include selling and distribution expenses, and general and administrative expenses. These
costs are presented directly as deductions against revenues in the income statement.

Example

Classify the following costs as (PR) product costs or (PE) period costs.

1. Salaries of factory workers

2. Social security - factory workers

3. Travel expense- executives

4. Rework costs of defective products

5. Fringe benefits - administrative

6. Legal fees

7. Insurance on office building

8. Overtime - factory workers

9. Advertising expense

10. Leather in producing shoes

Answers: (1) PR; (2) PR; (3) PE; (4) PR; (5) PE; (6) PE; (7) PE; (8) PR; (9) PE; (10) PR
 Direct Costs and Indirect Costs
YES ACCOUNTING·MONDAY, FEBRUARY 11, 2019

Costs, when categorized according to traceability to the product or cost object, can be classified into:

1. direct costs and

2. indirect costs.

Direct Costs

Direct costs are those that can be easily traced to or associated directly with a specific cost object. A cost
object is something for which cost is measured such as a specific product, a specific department or a
specific branch.

For example, ABC Company produces plastic food containers. The cost of plastic used in production can
be easily traced to the food containers. However, the cost spent for electricity is not directly traceable to
the food containers since such cost was not used solely for the production of the product.

Examples of direct costs include direct materials, direct labor, and other costs incurred for a particular
product such as advertising and promotion costs for, say "Product A".

If the cost object is a department or a branch, all costs that can be associated directly to a particular
department or branch are direct costs. For example, salaries of sales personnel are directly traceable to the
selling department of the organization. Also, the salaries of the sales personnel of "Branch A" can be
traced directly to that branch.

Indirect Costs

Indirect costs are difficult to trace directly to a specific cost object. These costs are commonly shared by
multiple products, different departments, or branches; hence, such costs cannot practically be traced to a
cost object.

Examples of indirect costs include factory overhead costs, organization-wide advertising, taxes, and other
common or joint costs.

Example

Classify the following costs as (D) direct costs or (ID) indirect costs in relation to a specific product.

1. Glue in book production

2. Income tax

3. Factory supplies

4. Wood in making furniture

5. Training and development

6. Machine maintenance

7. Leather in manufacturing shoes

8. Supervisor's salary

9. Depreciation of factory equipment

10. Direct labor

Answers: (1) ID; (2) ID; (3) ID; (4) D; (5) ID; (6) ID; (7) D; (8) ID; (9) ID; (10) D
Q: AFAR
A private college received an offer from a CPA who is an alumnus to teach a one-semester AFAR course at no cost.
This contribution of service
a. need only be disclosed in the footnotes to the financial statements.
b. be recorded as an asset with an equivalent amount recorded in the unrestricted fund balance.
c. be recorded as a revenue with an equivalent amount recorded as an expenditure.
d. need not be recorded if the service is for a period less than one academic year.
The correct answer is C.

Q: Auditing Theory
Analytical procedures used in planning should focus on:
A. Evaluating the adequacy of evidence gathered concerning unusual balances.
B. Testing individual account balances that depend on accounting estimates.
C. Enhancing the auditor’s understanding of the client’s business.
D. Identifying material weaknesses in the control structure.
CORRECT ANSWER: C

ith the following given information only:

"P acquired for himself one (1) sack of Dinorado rice (P3,000) in exchange of half of a sack of Rosana (P1,600) and
P1,400 cash."
There had been a _________ because_________?
Barter, because the amount exchanged is equivalent to the amount given/received.

If its a Sale, there could be a profit or loss.

To October 2018 CPALE takers, please read this and hopefully will help you in Audit (Auditing Theories). This
appeared twice (exact same questions, shuffled choices) in October 2016 CPALE:
Comfort Letter
What is a 'Comfort Letter'
A comfort letter is a written document that provides a level of assurance that an obligation will ultimately be met. In its traditional
context, a comfort letter is given to organizations or persons of interest by external auditors regarding statutory audits, statements,
and reports used in a prospectus. The comfort letter will be attached to the preliminary statements as assurance that it will not be
materially different from the final version.
Also known as "letter of comfort" or "solvency opinion."
In other practical uses, comfort letters are often issued by auditors to lenders as solvency opinions on whether a borrower can meet
the payment obligations of a loan. They are opinions, not guarantees, that the underlying company will remain solvent.
Comfort letters can also be issued to underwriters as an obligation to carry out "reasonable investigation" into offerings of
securities. These letters of comfort will ensure that the reports conform to generally accepted accounting principles (GAAP). This
helps the underwriter better understand aspects of the financial data which might not otherwise be reported, such as changes to
financial statements and unaudited financial reports.
Yet another broad category of comfort letter application is parent company to subsidiary, whereby a parent company can, for
example, issue a letter of comfort on behalf of a subsidiary that needs to borrow from a bank in its locale, or provide a letter to a
supplier of a subsidiary that wishes to transact a large purchase order of raw materials.
Read more: Comfort Letter https://www.investopedia.com/terms/c/comfort_letter.asp…

Comfort Letter
REVIEWED BY WILL KENTON

Updated Apr 10, 2019

What Is a Comfort Letter?
A comfort letter is a written document that provides a level of assurance that an obligation will
ultimately be met. In other words, it assures the financial soundness or backing of an individual
or entity. A comfort letter is also known as "letter of comfort" or "solvency opinion."

Understanding Comfort Letters

In its traditional context, a comfort letter is given to organizations or persons of interest by
external auditors regarding statutory audits, statements, and reports used in a prospectus. The
Securities and Exchange Commission (SEC) requires a prospectus to be filed for an investment
offering for sale to provide details about the offering to the public. After a full audit is done, the
comfort letter is often attached to the preliminary statements of a prospectus as assurance that it
doesn't contain misleading or false information and that the offering will not be materially
different from the final version.

KEY TAKEAWAYS

 A comfort letter assures the financial soundness or backing of an individual or entity.

 Comfort letters can be issued by auditors, accounting firm, and companies.
 A comfort letter does not represent a commitment on behalf of the issuer.
Other Types of Comfort Letters
In other practical uses, comfort letters are often issued by auditors to lenders as solvency
opinions on whether a borrower can meet the payment obligations of a loan. They are opinions,
not guarantees, that the underlying company will remain solvent.

Comfort letters can also be issued to underwriters from accounting firms as an obligation to
carry out "reasonable investigation" into offerings of securities. These letters of comfort will
ensure that the reports conform to generally accepted accounting principles (GAAP). This helps
the underwriter better understand aspects of the financial data that might not otherwise be
reported, such as changes to financial statements and unaudited financial reports.

Yet another broad category of comfort letter application is parent company to a subsidiary. For
example, a parent company can issue a letter of comfort on behalf of a subsidiary that needs to
borrow from a bank in its locale. It could also provide a letter to a supplier of a subsidiary that
wishes to transact a large purchase order of raw materials.

Internal Controls
REVIEWED BY WILL KENTON

Updated Apr 19, 2019

What Are Internal Controls?
Internal controls are the mechanisms, rules, and procedures implemented by a company to
ensure the integrity of financial and accounting information, promote accountability and prevent
fraud. Besides complying with laws and regulations, and preventing employees from stealing
assets or committing fraud, internal controls can help improve operational efficiency by
improving the accuracy and timeliness of financial reporting.

Volume 0%

Internal Controls

How Internal Controls Work

Internal controls have become a key business function for every U.S. company since the
accounting scandals in the early 2000s. In their wake, the Sarbanes-Oxley Act of 2002 was
enacted to protect investors from fraudulent accounting activities and improve the accuracy and
reliability of corporate disclosures. This has had a profound effect on corporate governance, by
making managers responsible for financial reporting and creating an audit trail. Managers found
guilty of not properly establishing and managing internal controls face serious criminal penalties.

Importance to Auditors
The auditor’s opinion that accompanies financial statements is based on an audit of the
procedures and records used to produce them. As part of an audit, external auditors will test a
company’s accounting processes and internal controls and provide an opinion as to their
effectiveness.

Internal audits evaluate a company’s internal controls, including its corporate governance and
accounting processes. They ensure compliance with laws and regulations and accurate and
timely financial reporting and data collection, as well as helping to maintain operational efficiency
by identifying problems and correcting lapses before they are discovered in an external audit.
Internal audits play a critical role in a company’s operations and corporate governance, now that
the Sarbanes-Oxley Act of 2002 has made managers legally responsible for the accuracy of its
financial statements.

The U.S. Congress passed the Sarbanes-Oxley Act of 2002 to protect investors from the
possibility of fraudulent accounting activities by corporations, which mandated strict reforms to
improve financial disclosures from corporations and prevent accounting fraud.
Operational Efficiency
No two systems of internal controls are identical, but many core philosophies regarding financial
integrity and accounting practices have become standard management practice. While internal
controls can be expensive, properly implemented internal controls can help streamline
operations and increase operational efficiency, in addition to preventing fraud.

KEY TAKEAWAYS

 Internal controls are the mechanisms, rules, and procedures implemented by a company
to ensure the integrity of financial and accounting information, promote accountability and
prevent fraud.
 Besides complying with laws and regulations, and preventing employees from stealing
assets or committing fraud, internal controls can help improve operational efficiency by
improving the accuracy and timeliness of financial reporting.
 Internal audits play a critical role in a company’s internal controls and corporate
governance, now that the Sarbanes-Oxley Act of 2002 has made managers legally
responsible for the accuracy of its financial statements.
Preventative Versus Detective Controls
Internal controls are typically comprised of control activities such as authorization,
documentation, reconciliation, security and the separation of duties. And they are broadly
divided into preventative and detective activities.

Preventive control activities aim to deter errors or fraud from happening in the first place and
include thorough documentation and authorization practices. And the separation of duties
ensures that no single individual is in a position to authorize, record, and be in custody of a
financial transaction and the resulting asset. Authorization of invoices and verification of
expenses are internal controls. In addition, preventative internal controls include limiting physical
access to equipment, inventory, cash and other assets.

Detective controls are backup procedures that are designed to catch items or events that have
been missed by the first line of defense. Here, the most important activity is reconciliation, used
to compare data sets, and corrective action is taken upon material differences. Other detective
controls include external audits from accounting firms and internal audits of assets such as
inventory.

Disadvantages of Internal Controls

Regardless of the policies and procedures established by an organization, only reasonable
assurance may be provided that internal controls are effective and financial information is
correct. The effectiveness of internal controls is limited by human judgment. A business will
often give high-level personnel the ability to override internal controls for operational efficiency
reasons, and internal controls can be circumvented through collusion.

[Fast Fact: Auditing techniques and control methods from England migrated to the
United States during the Industrial Revolution. In the 20th century, auditors' reporting
practices and testing methods were standardized.]

This a board exam question from Financial Accounting and Reporting (FAR):
In arriving at its profit before tax for the year ended December 31, 2017, Jerry Company has accrued royalties
receivable of P250,000 and interest payable of P200,000. Both royalties and interest are dealt with on a cash basis in
tax computations.
Q1. What is the net temporary difference on December 31, 2017?
Q2. What kind of temporary difference is it: Deductible/ Taxable?
Sample answer: P200,000 Taxable
👇😉
The Correct answer is P50,000 TAXABLE Temporary Difference.
Royalties Income P250,000
Interest Expense (P200,000) = P50,000

PARTNERSHIP FORMATION

Which between the two values below should be taken FIRST when valuing a partner's contribution to the
partnership?

A. Fair Market Values of the Assets contributed and/or Liabilities assumed.

B. Amounts/ values set by the contributing partner.

Hello! The correct answer is letter A.

In a partnership formation, the assets contributed to and/or liabilities assumed by the partnership shall be valued
accordingly as per partners' agreement. In the absence of which, the respective fair market values shall be taken.
Letter B is incorrect because the value was set only by the contributing partner with no clear sign of others' agreement
to it.

This is a board exam question from Auditing:

As part of obtaining understanding of internal controls, an auditor is not required to:
A. Consider factors that affect the risk of material misstatements.
B. Ascertain whether internal control policies and procedures, have been placed in
operation.
C. Identify the types of potential misstatements that may occur.
D. Obtain knowledge about the operating effectiveness of internal control.
☝☝
D 👈👈😁 is the correct answer.

This is a board exam question from Audit:

When the continuing auditor intends to use information about the entity and its environment obtained in prior periods,
the auditor should:
A. Seek permission with the client in using the prior period information obtained by the
auditor.
B. Determine whether to equitably reduce the audit fee due to lower audit effort
expended during the engagement.
C. Determine whether changes have occurred that may affect the relevance of
such information in the current audit.
(☝Correct answer☝)
D. Assess control risk as “high” for the assertions affected by the prior period
information.

This is a board exam question from MAS:

Which of the two is the primary reason for adopting TQM?
A. Greater customer satisfaction.
B. Reduced delivery time and charges + greater employee satisfaction.
(This post will be edited after some while for the answer update.)
POST UPDATE:
THE CORRECT ANSWER IS LETTER A.

The primary purpose for adopting TQM is for greater customer satisfaction. ☺

Maglibang ng konti: This is a board exam question from RFBT (Business Law):
Mr. San authorized Mr. Soy to sell his car for P200,000 with 5% agent’s commission. Mr. Soy sold the car to Mr. Dy for
P250,000. For how much is Mr. Soy accountable to Mr. San?
A. P200,000
B. P190,000
 C. P250,000 👈 correct answer
D. P240,000
Kc lahat ng makukuha ni agent ay mapupunta sa principal.
Art. 1891 (RA 386 - Civil Code of the Philippines)

Every agent is bound to render an account of his transactions and to deliver to the principal whatever he may have received
by virtue of the agency, even though it may not owing to the principal.

How Do We Say We Study?

These:
1. Read- and- Read,
2. Re-read-and-Re-Read, and
3. Answer contents of Accounting questions.
We believe that the ones who "survive" the Accountancy program are those who are "familiar" with all the accounting concepts and
questions, and not necessarily those who are called "brainy" during their SHS/ HS years.
Find yourself test banks. Many review schools and universities give free soft copies of review materials.
What can you say? How do you study?

Manufacturing and Non-Manufacturing

Costs
YES ACCOUNTING·THURSDAY, SEPTEMBER 13, 2018

Costs, when categorized according to function, can be classified into:

1. manufacturing costs and

2. non-manufacturing costs.

Manufacturing Costs

Manufacturing costs refer to those that are spent to transform materials into finished goods.
Manufacturing costs include direct materials, direct labor, and factory overhead.

Direct materials - cost of items that form an integral part of the finished product. They refer to the major
parts or ingredients. Examples include wood in furniture, steel in automobile, water in bottled drink, fabric
in shirt, etc.

Direct labor - cost of labor expended directly upon the materials to transform them into finished goods.
Direct labor refers to salaries and wages of employees who work to convert the raw materials to finished
goods.

Factory overhead - also called manufacturing overhead, refers to all costs other than direct materials and
direct labor spent in the production of finished goods. Factory overhead includes indirect materials such
as cost of nails, thread, glue, etc.; indirect labor such as salary of the supervisor; and factory expenses
such as rent of the factory space, depreciation of factory equipment, utilities expense of the factory,
factory supplies, etc.

Manufacturing costs are also known as factory costs or production costs.

Non-manufacturing Costs
 Non-manufacturing costs refer to those incurred outside the factory or production department. These are
costs are not needed in transforming materials into finished goods. Non-manufacturing costs include:
selling expenses and general expenses.

Selling Expenses - also called Selling and Distribution Expenses. Examples include advertising costs,
salaries and commission of sales personnel, storage costs, shipping and delivery, and customer service.

General Expenses - also called General and Administrative Expenses. Examples are: executive salaries,
salaries of administrative staff, accounting expenses, legal expenses, research and development, and other
costs related to general administration of the organization.

Example

Classify the following costs as either M: manufacturing (DM: direct materials, DL: direct labor, FOH:
factory overhead) or N: non-manufacturing (SE: selling expense, GE: general expense).

1. Factory supplies

2. Salary of production supervisor

3. Legal expense

4. Freight-out (delivery expense)

5. Marketing samples

6. Glue used in production

7. Wood in producing furniture

8. Salary of the company president

9. Advertising

10. Administrative office rent

11. Salary of factory workers

12. Depreciation of factory building

13. Depreciation of office equipment

14. Depreciation of display racks inside the store

15. Freight-in

Answers: (1) M-FOH; (2) M-FOH; (3) N-GE; (4) N-SE; (5) N-SE; (6) M-FOH; (7) M-DM; (8) N-GE; (9)
N-SE; (10) N-GE; (11) M-DL; (12) M-FOH; (13) N-GE; (14) N-SE; (15) M-DM

Types of Costs: Cost Classifications

YES ACCOUNTING·THURSDAY, SEPTEMBER 13, 2018

Costs can be classified into different categories for different purposes.

Costs may be categorized according to their:

1. management function,
2. ease of traceability,

3. timing of charge against revenue,

4. behavior in accordance with activity, and

5. relevance to decision making.

According to Management Function

1. Manufacturing costs - incurred in the factory to convert raw materials into finished goods. It includes
cost of raw materials used (direct materials), direct labor, and factory overhead.

2. Nonmanufacturing costs - not incurred in transforming materials to finished goods. These include
selling expenses (such as advertising costs, delivery expense, salaries and commission of salesmen) and
administrative expenses (such as salaries of executives and legal expenses).

According to Ease of Traceability

1. Direct costs - those that can be traced directly to a particular object of costing such as a particular
product, department, or branch. Examples include materials and direct labor. Some operating expenses
can also be classified as direct costs, such as advertising cost for a particular product.

2. Indirect costs - those that cannot be traced to a particular object of costing. They are also called
common costs or joint costs. Indirect costs include factory overhead and operating costs that benefit more
than one product, department, or branch.

According to Timing of Charge against Revenue

1. Product costs - are inventoriable costs. They form part of inventory and are charged against revenue,
i.e. cost of sales, only when sold. All manufacturing costs (direct materials, direct labor, and factory
overhead) are product costs.

2. Period costs - are not inventoriable and are charged against revenue immediately. Period costs include
non-manufacturing costs, i.e. selling expenses and administrative expenses.

According to Behavior in Accordance with Activity

1. Variable costs - vary in total in proportion to changes in activity. Examples include direct materials,
direct labor, and sales commission based on sales.

2. Fixed costs - costs that remain constant regardless of the level of activity. Examples include rent,
insurance, and depreciation using the straight line method.
3. Mixed costs - costs that vary in total but not in proportion to changes in activity. It basically includes a
fixed cost potion plus additional variable costs. An example would be electricity expense that consists of a
fixed amount plus variable charges based on usage.

According to Relevance to Decision Making

1. Relevant cost - cost that will differ under alternative courses of action. In other words, these costs refer
to those that will affect a decision.

2. Standard cost - predetermined cost based on some reasonable basis such as past experiences, budgeted
amounts, industry standards, etc. The actual costs incurred are compared to standard costs.

3. Opportunity cost - benefit forgone or given up when an alternative is chosen over the other/s.
Example: If a business chooses to use its building for production rather than rent it out to tenants, the
opportunity cost would be the rent income that would be earned had the business chose to rent out.

4. Sunk costs - historical costs that will not make any difference in making a decision. Unlike relevant
costs, they do not have an impact on the matter at hand.

5. Controllable costs - refer to costs that can be influenced or controlled by the manager. Segment
managers should be evaluated based on costs that they can control.

Cost Accounting vs. Managerial

Accounting
YES ACCOUNTING·WEDNESDAY, SEPTEMBER 12, 2018

Cost accounting is often associated with managerial accounting. Management accountants need to
understand cost and its concepts. Cost concepts are useful in many areas of managerial accounting, such
as in cost-benefit analysis, investing and financing decisions, performance evaluation, and many others.

Despite the presence of overlapping topics, cost accounting and managerial accounting are two different
branches having different study focus.

Cost Accounting

Cost accounting is defined as "a systematic set of procedures for recording and reporting measurements of
the cost of manufacturing goods and performing services in the aggregate and in detail. It includes
methods for recognizing, classifying, allocating, aggregating and reporting such costs and comparing them
with standard costs." (IMA)

Cost accounting focuses on the accumulation of costs incurred and allocating or assigning such costs to
products or departments.

Managerial Accounting
Managerial accounting (or management accounting) "involves partnering in management decision-
making, devising planning and performance management systems, and providing expertise in financial
reporting and control to assist management in the formulation and implementation of an organization’s
strategy." (IMA)

It is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and

communication of financial information, which is used by management to plan, evaluate, and control
within an organization.

Difference between Cost Accounting and Managerial Accounting

Based from the definitions given above, the difference between the two lies in their functions. The main
function of cost accounting is cost accumulation and allocation to determine cost values. Managerial
accounting, on the other hand, provides information (including cost information) to the members of the
management for decision-making purposes.

Financial accounting, another distinct branch of accounting, also utilizes cost accounting concepts. Cost
accounting provides the needed values to be reported in the financial statements, especially in the
computation and presentation of cost of sales.

What is Managerial Accounting?

YES ACCOUNTING·WEDNESDAY, SEPTEMBER 12, 2018

Managerial accounting is the branch of accounting that deals with providing accounting information that
is useful to managers in decision-making. Unlike financial accounting, it does not focus on following
reporting standards. Rather, it makes use of principles from different fields of business to cater to
management needs.

Managerial accounting, or management accounting, focuses on providing information for use by internal
users.

Internal users pertain to those working within the company, specifically the management.

As defined by the American Accounting Association,

"Managerial accounting involves the application of appropriate techniques and concepts in processing
information to assist management in establishing plans and making rational decisions towards the
achievement of the organization's objectives."

Line and Staff Function

There are two broad functions in an organization: line and staff. Line function is the one that is directly
involved in the core operations of the company such as sales and production. Staff function, on the other
hand, provides advisory and support to the organization.

Generally, management accountants exercise staff functions. They support the company by providing
information to enable decisions which are vital for the company's performance and continuity.
 The Chief Management Accountant (or controller) exercises line function over his or her subordinates,
and performs staff functions to the other members of the management.

The Management

1. Top management - The top management or administrative level consists of the Chief Executive Officer
(CEO) and the board of directors (BOD). The CEO is also called the managing director or president, and
is selected by the board of directors from among themselves. The BOD is selected by the shareholders to
represent them in managing the company. The top level management is in-charge with the overall
direction of the company. They set company goals, policies and long-term plans.

2. Middle management - Also known as executory management, the middle-level management consists of
departmental heads and branch managers. They implement and execute the plans and policies set by the
top managements. The middle management is the intermediary between the top and low level
management. They report to the top management as well as communicate the plans of the top level to the
lower levels.

3. Low level management - The low level management or front-line management is responsible in directing
and controlling the day-to-day operations of the company. They report directly to the middle management.
The lower level management consists of supervisors, foremen, and officers who are in-charge of directing
workers and employees.

Chief Management Accountant (Controller)

The Chief Management Accountant or Controller, sometimes "Comptroller" especially in government

agencies, is mainly responsible for the accounting aspects of management planning and control. The
controllership department carries out the following functions:

1. Planning and control - such as making budgets and determining expectations regarding future outcomes
of alternative courses of action

2. Internal reporting and interpreting - accumulating and summarizing financial data and disclosing its
implications to different levels of management

3. Evaluation and consulting - assessing different alternatives giving advice to the management to come up
with appropriate decisions

4. Tax administration - supervising the formulation and implementation of tax policies and procedures of
the organization and evaluating implications of tax-related decisions

5. External reporting - preparation of financial statements in accordance with appropriate accounting

standards to meet the information needs of external users, especially the government

6. Protection of assets - implementing internal controls, insurance and performing internal audits to protect
the company from losing its assets because fraud, theft, natural disasters, etc.

7. Economic appraisal - assessing the value the economic and social and government influences, and
interpret their effects or impact on the business
Often compared to the controllership function is the treasurership function. Both the controller and the
treasurer report directly to the company's head of finance. While the controller's functions involve internal
finance and accounting, the treasurer's responsibilities involve external finance and cash functions.

The functions of the treasurer include: (1) provision of capital, (2) investor relations, (3) short-term
financing, (4) banking and custody, (5) credit and collections, (6) investments, and (7) insurance.

Conclusion

Managerial accounting processes economic information to aid the management in making decisions. It is
not mandatory yet very important. Without managerial accounting, a business would suffer in information
deficiency leading to uninformed decisions that are detrimental to the entity's performance and even to its
existence.

THE COMPANY SELLS MERCHANDISE FOR P5,233.33%, NET OF 12.35% SALES DISCOUNT. THE AMOUNT
CONTAINS 35.22% PROFIT.
PREPARE JOURNAL ENTRIES USING THE PERPETUAL INVENTORY SYSTEM.

SEE ANSWER BELOW:

The term "for P5,233.33" refers to the cash that the seller accepted from the purchaser. It was already deducted of
12.35% discount, that is, the P5,233.33 is only 87.65% of the total Sales.
To compute for the sales,
Sales= 100%
Cash = .8765 of Sales
Discount = .1235 of Sales
100% Sales = 87.65% Sales + 12.35% Sales
or
1S = 0.8765S + 0.1235S
1S = P5,233.33 + 0.1235S
1S - 0.1235S = P5,233.33
0.8735S = P5,233.33
S= P5,970.71
or straight away
Cash = 0.8765 of Sales
Cash = 0.8765S
P5,233.33 = 0.8765S
P5,970.71 = S
The first part of the Journal entry therefore is
Cash. P5,233.33
Sales Discount. 737.38
Sales. P5,970.71
The final part of the Journal Entry is the update for the inventory since we use the Perpetual Inventory System.
The P5,233.33 Cash received contains a profit of 35.22%. If we remove that profit, what remains is the cost of the merchandise sold
(COGS).
To compute for the COGS
P5,233.33 x 0.3522 = P1,843.18
P5,233.33 - P1,843.18 = P3,390.15.
COGS = P3,390.15
The final part of the journal entry is
COGS P3,390.15
Merchandise Inventory. P3,390.15
NOTE: Do not be confused with the basis of the "contains profit of 35.22%". It refers ONLY to the P5,233.33 Cash received and
not to the 100% Sales (as the manner of some was to calculate for the gross profit based on 100% Sales and finally compute for the
COGS.)
#KAYA #KAKAYANIN
Yes Accounting Pop Quiz:
On July 1, 2013 an asset was acquired for ₱30,000. Its useful life was expected to be 10 years and the salvage value is
expected to be ₱0. On January 1, 2017, the company realized the asset would be useful for only three more years. The
company uses the straight-line method of depreciation. The Depreciation Expense for the year 2018 will be
₱__________.
You think you know the answer? See full mechanics here:
CASH DISCOUNTS:
Net Method and Gross Method
Cash Discounts are given by the seller to encourage the buyer to pay soonest. Usually expressed as
2/10, n/30, or
1/10, n/30, or
5/5, n/10 or however stated in the contract.
Depending from whose point of view, Cash discounts are termed:
1. SALES DISCOUNTS from the Seller's viewpoint, and
2. PURCHASE DISCOUNTS from the purchaser's viewpoint.
There are two methods a purchaser can account for the cash discounts.
EXAMPLE
Yes! Company purchased 200 pieces of powerbanks from Metochondria. The seller gave Yes! trade discounts of 2% and 3% and
also offered 3% cash discount if Yes! pays within 15 days. Each powerbank is priced at P1,400.00.
First, calculate the invoice price.
P1,400.00 x .98 x .97 = P1, 330.84
1. Gross Method - Merchandise purchased are recorded on gross invoice price. No cash discounts are deducted on the date of
purchase.

ENTRY: DATE OF PURCHASE

DR. Purchases P1,330.84
CR. A/P P1, 330.84

ENTRY: DATE OF PAYMENT

DISCOUNTS AVAILED
DR. A/P P1,330.84
CR. CASH P1,290.91
CR. PURCH. DISC. P39.93

ENTRY: DATE OF PAYMENT

DISCOUNTS MISSED
DR. A/P P1,330.84
CR. CASH P1,330.84

2. NET METHOD- Merchandise purchased are recorded on "net cash to pay" with the assumption that THE COMPANY MUST
AVAIL THE CASH DISCOUNTS. Therefore, on the date of purchase, the Purchases are recorded net of the cash discounts.
ENTRY: DATE OF PURCHASE
DR. Purchases P1,290.91
CR. A/P P1,290.91
ENTRY: DATE OF PAYMENT
DISCOUNTS AVAILED
DR. A/P P1,290.91
CR. CASH P1,290.91

ENTRY: DATE OF PAYMENT

DISCOUNTS MISSED
DR. A/P P1,290.91
DR. PURCH. DISC. LOST P39.93
CR. CASH P1,330.84
Purchase Discount Lost is treated as other expenses and not as deduction in calculating GAS.
***
Net Method is disscussed in higher accounting as in the Intermidiate Accounting (previous Financial Accounting) and other
disciplines

TRADE DISCOUNT WITH DEFINITION OF TERMS

Trade discounts are given to attract and encourage customers to purchase the products because of the lowered price
or markdowns from the list price.
Trade discounts are usually expressed in percentages of savings/ markdowns such those we see in Lazada and SM
Supermarkets. (See image below for example.)
Example:
Yes! Company is a merchandiser. With the shirts' previous price of P200.00 each, the company would not buy. But sometime later,
the shirts were marked "On SALE! 30.5% OFF"
This catches the company. Yes! buys 100 pieces.
How much will Yes! pay?
List Price P 200.00
x Trade discount 30.5%
=
Trade Discount
in Peso P61.00.
INVOICE PRICE is
P200.00 - P61.00 = P139.00.
#SHORTCUTTECHNIQUE
P200.00 x 69.50% = P139.00
Therefore the company only pays P139.00 per shirt instead of P200.00 saving to itself P61.00 each. Since Yes! bought 100 pieces,
he is paying P139.00 x 100 pieces = P13,900.00.
The journal entry for the purchase will be (Periodic):
DR. Purchases P13,900.00
CR. Cash P13,900.00
We do not use the List Price in our entry nor the Trade Discount appears in the entry. What we use is the Invoice Price or the price
that appears in the Receipt.
There are trade discounts expressed as this:
TRADE DISCOUNT OF 20%, 30.50% or
TRADE DISCOUNT OF 20% and 30.50%
or
TRADE DISCOUNT OF 30.50%, 20%, or
TRADE DISCOUNT OF 30.50% and 20%
(ALL THE FOUR ABOVE ARE THE SAME, IT DOES NOT MATTER WHICH ORDER)
To calculate the total Trade discount and the Amount that will appear in the Invoice in the previous example:
P200.00 x 30.50% = P61.00 Trade Disc.
P200.00- P61.00 = P139.00
P139.00 x 20% = P27.80 Trade Disc.
P139.00 - P27.80 = P111.20 INVOICE PRICE.
#SHORTCUTTECHNIQUE
P200.00 x 69.50% x 80% = P111.20.
DEFINITION OF TERMS:
LIST PRICE- Manufacturer's, distributor's, or retailer's quoted, published, or displayed price on which quantity, seasonal, or other
discounts are computed. Also called manufacturer's suggested retail price (MSRP).*
INVOICE- A document, made by the seller and issued to the buyer, so as to authorize the sale. It contains the details of the goods
and contains the name and address of the parties to transaction, price, discount, date, and place of delivery.**
INVOICE PRICE- The price that the buyer must pay the seller as indicated in the invoice.
RECEIPT- a simple official acknowledgment, that the goods or services have been received. It is prepared by the vendor and given
to the consumer.**
Do share to/ tag your classmates and friends! :)

NEXT: CASH DISCOUNTS. #KAYA #KAKAYANIN

Note: Images as attached are sourced from the internet and are solely for academic purposes.
INVASIVE SURGERY
#TAX #TAXATION
#KAYA #KAKAYANIN
The section 46 of the R.A. 10963 or the TRAIN (Tax Reform for Inclusion and Acceleration) inserts a new section to the NIRC,
Section 150, as an amendment. The title of this new “Section 150” is “NON-ESSENTIAL SERVICES.”
INVASIVE SURGERY is now subject to 5% Excise Tax on Gross Receipts. Excise Tax being a tax on harmful and non-essential
goods/ services.
Definitions:
INVASIVE- Involving Entry into the living body (either by incision or by insertion of an instrument).
COSMETIC-
1. used or done in order to improve a person's appearance
2. done in order to make something look better
3. not important or meaningful.
Merriam-Webster Dictionary.
Nevertheless, such update does not apply to invasive surgeries or procedures done to correct damages resulting from accidents,
diseases and the like.
“Section 150-A. Non-essential Services. – There shall be levied, assessed, and collected a tax equivalent to five percent (5) based
on the GROSS RECEIPTS from the performance of, net of excise tax and VAT, on INVASIVE COSMETICS procedures,
surgeries, and body enhancements directed SOLELY towards improving, altering, or enhancing the patient’s appearance AND DO
NOT MEANINGFULLY PROMOTE PROPER FUNCTION OF THE BODY OR PREVENT OR TREAT ILLNESS OR
DISEASE: Provided, That this tax shall not apple to procedures NECESSARY TO AMELIORATE a deformity arising from, or
directly related to, A CONGENITAL OR DEVELOPMENTAL DEFECT or abnormality, a PERSONAL INJURY ARISING
FROM ACCIDENT or trauma, or disfiguring disease, tumor, virus or infection: ...”

What is Footing?
Definition:
Footing means getting the sum of the amounts entered in the debit and credit columns of an account. It is useful in
computing for account balances.
Purpose of Footing
Every account has a debit column and a credit column. The debit column is on the left side of the account while the credit column is
on the right. Amounts are entered to these columns as business transactions are recorded and posted. Once all transactions are
recorded and posted, the account balances are computed. Account balances are the amounts that are reported in the financial
statements.
To get the balance of an account, all amounts on the debit column are added. All amounts on the credit column are also added. This
process is known as "footing". The account balance is then computed by getting the difference between total debits and total
credits.

Accounts Receivable Confirmation

#AUDIT #AUDITING
Common Accounts Receivable Frauds:
1. LAPPING- delaying the recording of a customer's payment and use the money for other purpose.
Ex:
Customer A will avail himself discounts if he pays on or before August 20, 2018. On August 18, A pays but the employee MADE
NO JOURNAL ENTRY.
Customer B will avail himself discounts if he pays on or before August 25, 2018. On August 19, B pays. The employee diverted the
Payment of B and made it AS IF the Payment of A.
Journal Entry:
August 19, 2018
DR. Cash xxx
CR. A/R- Customer A xxx
2. DIVERSION OF PAYMENT OF WRITTEN-OFF A/R
The employee keeps to himself the payment of the written-off Accounts Receivable. He does not record the Recovery and the
eventual payment.
The same scheme is used for slow-paying and long-outstanding (old) accounts because the company does not typically track them.
3. FICTITIOUS A/R and SALES
The purpose is to get a bigger commisions that are based on sales amounts. Also, this is to inflate/exaggerate Sales to make the
company look more attractive to investors and owners.
______
______
✓ To check the faithfulness of the presentation as to the Accounts Receivable, the auditor sends out a CONFIRMATION LETTER
to the debtors.
✓A confirmation letter is signed by the company officer, but is sent by the auditor himself.
✓The letter requests the debtor to confirm the amounts he owes to the company "as of the date specified" in the letter.
✓Typically sent to
Primarily, large amounts A/R.
Secondarily, overdue A/R.
Both with simultaneous random selection of smaller amounts A/R.
✓Higher quality evidence than that obtain from the internal.
2 TYPES OF CONFIRMATION
1. Postive Confirmation
The letter requests the debtor to respond to the information contained in the letter: be it a CONFIRMATION, or a DENIAL.
2. Negative Confirmation
The letter requests the debtor to respond or contact the auditor only if there is an issue with the information contained.
No response = presumption of debtor's agreement to the information.
✓No Confirmation = more efforts to obtain confirmation.
✓No more way to Obtain Confirmation = Investigation of Cash receipts.
Payments might have been made but no Collection was recorded. That is why the A/R still exists.
✓What if the Debtor disgrees with what is contained in the letter? Such that,
A/R, per Confirmation Letter, is P100,000 but the debtor replies that he only owes the company P80,000?
If this is the case, the Auditor usually will ask the company to reconcile the difference.
PAS 18: REVENUE
✓Income encompasses both Revenue and Gains.
REVENUE is income that arises in the course of ORDINARY ACTIVITIES OF AN ENTITY and is referred to by a
variety of different names including sales, fees, interest, dividends and royalties.*
GAINS on the other hand results from “peripheral**” or related activities, such as selling a fully Depreciated Asset (Zero Book-
Value).
EXAMPLE 1
You disposed of your fully depreciated printer but was able to make P65.00 out of it.
Asset:
EPSON Printer P9,000.00
Acc. Dep. (9,000.00)
Book Value -0-
JOURNAL ENTRY:
DR. Acc. Dep.- EPSON 9,000.00
DR. Cash 65.00
CR. EPSON Printer 9,000.00
CR. Gain on Disposal of Asset 65.00
EXAMPLE 2
You sold your 60% depreciated EPSON Printer for P4,000.
Asset:
EPSON Printer P9,000.00
Acc. Dep. 60% (5,400.00)
Book Value 3,600.00
JOURNAL ENTRY:
DR. Acc. Dep.- EPSON 5,400.00
DR. Cash 4,000.00
CR. EPSON Printer 9,000.00
CR. Gain on Disposal of Asset 400.00
To simplify it:
Income is a broader term than Revenue and Gains.
*PAS18
** “peripheral” accountingcoach.com
PART I
FOB DESTINATION:
The ownership to the merchandise will ONLY be transfered to the buyer if IT HAS REACHED THE DESTINATION
POINT.
✓What if the merchandise is lost while in transit, who suffers the loss?
-Since the ownership is not transferred yet, THE SELLER SUFFERS the loss.
✓On the date of inventory count, to whom will the merchandise inventory belong? Buyer or Seller?
-The merchandise shipped FOB Destination, while in transit on the date of inventory count, is INCLUDED in the merchandise of
the SELLER.
FOB DESTINATION FREIGHT PREPAID
-The seller shoulders the costs and pays the shipping expenses for inventory.
The Entries will be:
Example:
Selling Price: P10,000.00
Shipping Fee: P250.00
Date of sale:
DR. A/R P10,000.00
DR. Transportation Out P250.00
CR. Sales P10,000.00
CR. Cash P250.00
Date of Payment:
DR. Cash P10,000.00
CR. A/R P10,000.00
FOB DESTINATION FREIGHT COLLECT
-the buyer shoulders the costs to accomodate the seller. In effect, the shipping company will collect the shipping costs from the
buyer. On the payment date, the buyer will deduct the amount from the payment.
Example:
Selling Price: P10,000.00
LBC Shipping Fee: P250.00
ENTRIES:
Date of Sale:
DR. A/R P9, 750
DR. Transportation Out P250.00
CR. SALES P10,000.00
The shipping fee is deducted from the amount the seller can collect from the buyer because he owes it to him. The buyer is paying
for the expense of the seller. Therefore, the seller has to reimburse buyer in a form of reduction to the amount that seller can collect.
The Transportation Out is also recognised though no payment happened yet. As per Accrual Basis: we recognise Expense when
incurred, not when payment is made.
Date of Payment:
DR. CASH P9,750.00
CR. A/R P9,750.00.
What is Variable Overhead Spending Variance?
'Variable Overhead Spending Variance' Definition:
In variance analysis, the total variable overhead variance may be split into: spending varianceand efficiency variance.
The variable overhead spending variance refers to the variance that arises from the difference between the actual and
budgeted (standard) variable overhead rate.
Budgeted Factory Overhead Rate
For better control and faster recording of overhead costs, a standard rate may be used and applied based on machine hours, labor
hours, or some other applicable basis. This is known as budgeted factory overhead rate or application rate.
For further control, an application rate may be established separately for variable and fixed overhead costs.
Formula
The formula for variable factory overhead (VFOH) spending variance is:
VFOH spending variance = (AR - BR) x AB
where:
AR = actual rate,
SR = budgeted rate, and
AB = actual allocation base.
It may also be expressed as: (AR x AB) - (BR x AB), or Actual VFOH - (BR x AB), since the actual cost is equal to the actual rate
multiplied by the actual allocation base.
The budgeted rate (BR) is equal to the budgeted cost divided by the budgeted allocation base. The actual rate (AR) is equal to
actual cost divided by actual base.
The most commonly used allocation bases are: labor hours and machine hours. Generally, labor hour is adopted by labor-intensive
industries, and machine hour by capital-intensive industries. Other bases are also used.
Example
XYZ Company has a variable factory overhead budget of ₱1,320,000 in producing 120,000 units of its product. One unit requires
2.75 labor hours to complete -- a total of 330,000 hours. Hence, the application rate for VFOH is ₱4 per labor hour (1,320/330).
Last month, XYZ produced 9,600 units and employed 29,000 direct labor hours. The actual variable factory overhead is ₱121,800.
Compute for the variable spending variance.
VFOH spending variance
=(AR - BR) x AB
=(₱4.20 - ₱4.00) x 29,000 hours
=₱5,800 unfavorable
The actual rate of ₱4.20 is computed by dividing the total actual VFOH cost by the actual base (₱121,800 divided by 29,000 hours).
The variance may also be computed as:
VFOH spending variance
=Actual VFOH - (BR x AB)
=₱121,800 - (₱4.00 x 29,000 hours)
=₱5,800 unfavorable
Favorable and Unfavorable VFOH Spending Variance
If the actual rate is higher than the budgeted rate, the company paid more dollars per allocation base than it anticipated; hence, the
variance is unfavorable. If the actual rate is lower than the budgeted rate, the variance is favorable.

What is an Income Statement?

Income Statement – a.k.a. Profit and Loss Statement
The Income Statement, also referred to as Profit and Loss (P&L) Statement, shows an entity's results of operations for a particular
period.
It presents an entity's revenues and expenses, and the resulting net income or net loss.
This lecture presents an Income Statement example and provides important points you need to know in preparing and
understanding the said report.
Income Statement Example
Here is a sample income statement of a service type sole proprietorship business. Let us name the company Strauss Printing
Services. (REFER TO IMAGE)
All amounts are assumed and simplified for illustration purposes.
[Explanation and Pointers]
1. An income statement shows the net income or net loss of a business. This is achieved by deducting all expenses from all income.
2. A typical income statement starts with a heading which consists of three lines. The first line presents the name of the company;
the second describes the title of the report; and the third states the period covered in the report.
3. Notice that the third line is worded "For the Year Ended..." This means that the income statement presents information for a
specific span of time. In the above example, the period covers 1 year that ends on December 31, 2017. Hence, the amounts
presented in the report are income and expenses from January 1, 2017 to December 31, 2017.
4. Income accounts are presented before expenses. In the above statement, the income account is Service Revenue. Other income
accounts for service type businesses include Professional Fees, Rent Income, Tuition Fees, etc.
5. Expenses are presented after the income accounts. It is a good practice to arrange expenses according to amount (largest to
smallest). Some users who are interested in the company's expenses are concerned about the size of each expense. Arranging the
expenses from largest to smallest results in a more useful and organized report. Nonetheless, Miscellaneous Expense or Sundry
Expense is presented last.
6. If income exceeds expenses, there is a net income. If expenses exceed income, there is a net loss. Notice how computations are
presented. A single line is drawn every time an amount is computed. The resulting amount is double-ruled when it is no longer
followed by any operation. For example, P57,100 (the net income).
7. The income statement complies with the accrual basis of accounting. Income is recognized when earned regardless of when
collected. Expenses are recognized when incurred regardless of when paid.
This means that income and expenses presented in the income statement have been earned and incurred, respectively. Nonetheless,
it does not mean that they have all been collected or paid.
8. International accounting standards suggest that companies should present other comprehensive income in their financial
statements. A Statement of Comprehensive Income shows the contents of an income statement followed by a list of "other
comprehensive income".
9. Other comprehensive income includes gains and losses that cannot be reported as profit and loss, such as unrealized gains and
losses, and revaluation surplus. This is taken up in higher financial accounting studies.
10. When the company does not have other comprehensive income, the contents of the income statement and the statement of
comprehensive income are the same. In any case, international accounting standards favor the use of the title "Statement of
Comprehensive Income".
Statement of Comprehensive Income (REFER TO IMAGE)
Here's a sample Statement of Comprehensive Income, which includes other comprehensive income. This topic is taken up in higher
accounting so you need not worry about it yet.
LESSON 001: Introduction to Adjusting Entries: Purpose, Types, and Composition
Adjusting entries, or adjusting journal entries (AJE),are made to update the accounts and bring them to their correct
balances. The preparation of adjusting entries is an application of the accrual concept of accounting and the matching
principle.
The accrual concept states that income is recognized when earned regardless of when collected and expense is
recognized when incurred regardless of when paid.
The matching principle aims to align expenses with revenues. Expenses should be recognized in the period when the
revenues generated by such expenses are recognized.
Purpose of Adjusting Entries
The main purpose of adjusting entries is to update the accounts to conform with the accrual concept. At the end of the
accounting period, some income and expenses may have not been recorded, taken up or updated; hence, there is a
need to update the accounts.
If adjusting entries are not prepared, some income, expense, asset, and liability accounts may not reflect their true
values when reported in the financial statements. For this reason, adjusting entries are necessary.
Types of Adjusting Entries
Generally, there are 4 types of adjusting entries. Adjusting entries are prepared for the following:
1. Accrued Income – income earned but not yet received (LESSON 002)
2. Accrued Expense – expenses incurred but not yet paid (LESSON 003)
3. Accrued Income – income received but not yet earned (LESSON 004)
4. Prepaid Expense – expenses paid but not yet incurred (LESSON 005)
Also, adjusting entries are made for:
5. Depreciation (LESSON 006)
6. Doubtful Accounts or Bad Debts, and other allowances (LESSON 007)
Composition of an Adjusting Entry
Adjusting entries affect at least one nominal account and one real account.
A nominal account is an account whose balance is measured from period to period. Nominal accounts include all
accounts in the Income Statement, plus owner's withdrawal. They are also called temporary accounts or income
statement accounts.
Examples of nominal accounts are: Service Revenue, Salaries Expense, Rent Expense, Utilities Expense, Mr. Gray
Drawing, etc.
A real account has a balance that is measured cumulatively, rather than from period to period. Real accounts include all
accounts in the balance sheet. They are also called permanent accounts or balance sheet accounts.
Real accounts include: Cash, Accounts Receivable, Rent Receivable, Accounts Payable, Mr. Gray Capital, and others.
All adjusting entries include at least a nominal account and a real account.
Note: "Adjusting entries" refer to the 6 entries mentioned above. However, in some branches of accounting (especially
auditing), the term adjusting entries could refer to any entry that aims to adjust incorrect account balances.
As a result, there is little distinction between "adjusting entries" and "correcting entries" today. In the traditional sense,
however, adjusting entries are those made at the end of the period to take up accruals, deferrals, prepayments,
depreciation and allowances.

LESSON 002: Adjusting Entry for Accrued Revenue

Accrued income (or accrued revenue) refers to income already earned but has not yet been collected.
At the end of every period, accountants should make sure that they are properly included as income, with a corresponding
receivable.
When a company has performed services or sold goods to a customer, it should be recognized as income even if the amount is still
to be collected at a future date.
If no journal entry was ever made for the above, then an adjusting entry is necessary.
Pro-Forma Entry
The adjusting entry to record an accrued revenue is:
[Debit] Receivable account*
[Credit] Income account**
*Appropriate receivable account such as Accounts Receivable, Rent Receivable, Interest Receivable, etc.
**Income account such as Service Revenue, Rent Income, Interest Income, etc.
Here's an Example
In our previous set of transactions, assume this additional information:
On December 31, 2017, Gray Electronic Repair Services rendered ₱300 worth of services to a client. However, the amount has not
yet been collected. It was agreed that the customer will pay the amount on January 15, 2018. The transaction was not recorded in
the books of the company as of 2017.
In this case, we should make an adjusting entry in 2017 to recognize the income since it has already been earned. The adjusting
entry on Dec. 31 would be:
Dr. Accounts Receivable 300.00
Cr. Service Revenue 300.00
Here are some more illustrations.
More Examples: Adjusting Entries for Accrued Income
Example 1: Company ABC leases its building space to a tenant. The tenant agreed to pay monthly rental fees of ₱2,000 covering a
period from the 1st to the 30th or 31st of every month. On December 31, 2017, ABC Company did not receive the rental fee for
December yet and no record was made in the journal.
Under the accrual basis, the rent income above should already be recognized because it has already been earned even if it has not
yet been collected. The adjusting journal entry on Dec. 31 would be:
Dr. Rent Receivable 2,000.00
Cr. Rent Income 2,000.00
Example 2: ABC Company lent ₱9,000 at 10% interest on December 1, 2017. The amount will be collected after 1 year. At the end
of December, no entry was entered in the journal to take up the interest income.
Interest is earned through the passage of time. In the case above, the ₱9,000 principal plus a ₱900 interest will be collected by the
company after 1 year. The ₱900 interest pertains to 1 year.
However, 1 month has already passed. The company is already entitled to 1/12 of the interest, as prorated. Therefore the adjusting
entry would be to recognize ₱75 (i.e. ₱900 x 1/12 ) as interest income. The adjusting journal entry on Dec. 31 would be:
Dr. Interest Receivable75.00
Cr. Interest Income 75.00
The basic concept you need to remember is recognition of income. When is income recognized? Under the accrual concept of
accounting, income is recognized when earned regardless of when collected.
If the company has already earned the right to it and no entry has been made in the journal, then an adjusting entry to record the
income and a receivable is necessary.
5454
10 Comments
LESSON 003: Adjusting Entry for Accrued Expenses
Accrued expenses refer to expenses that are already incurred but have not yet been paid.
At the end of period, accountants should make sure that they are properly recorded in the books of the company as an
expense, with a corresponding payable account.
Here's the rule. If a company incurred, used, or consumed all or part of an expense, that expense or part of it should be
properly recognized even if it has not yet been paid.
If such has not been recognized, then an adjusting entry is necessary.
Pro-Forma Entry
The pro-forma adjusting entry to record an accrued expense is:
[Debit] Expense account*
[Credit] Liability account**
*Appropriate expense account (such as Utilities Expense, Rent Expense, Interest Expense, etc.)
**Appropriate liability account (Utilities Payable, Rent Payable, Interest Payable, Accounts Payable, etc.)
For Example
For the month of December 2017, Gray Electronic Repair Services used a total of ₱1,800 worth of electricity and water.
The company received the bills on January 10, 2018. When should the expense be recorded, December 2017 or
January 2018?
Answer – in December 2017. According to the accrual concept of accounting, expenses are recognized when incurred
regardless of when paid. The amount above pertains to utilities used in December.
Therefore, if no entry was made for it in December then an adjusting entry is necessary.
Dr. Utilities Expense1,800.00
Cr. Utilities Payable 1,800.00
In the adjusting entry above, Utilities Expense is debited to recognize the expense and Utilities Payable to record a
liability since the amount is yet to be paid.
More Examples: Adjusting Entries for Accrued Expense
Example 1: VIRON Company entered into a rental agreement to use the premises of DON's building. The agreement
states that VIRON will pay monthly rentals of ₱1,500. The lease started on December 1, 2017. On December 31 of the
same year, the rent for the month has not yet been paid and no record for rent expense was made.
In this case, VIRON Company already incurred (consumed/used) the expense. Even if it has not yet been paid, it
should be recorded as an expense. The necessary adjusting entry on Dec. 31 would be:
Dr. Rent Expense1,500.00
Cr. Rent Payable 1,500.00
Example 2: VIRON Company borrowed ₱6,000 at 12% interest on August 1, 2017. The amount will be paid after 1
year. At the end of December, the end of the accounting period, no entry was entered in the journal to take up the
interest.
Let's analyze the above transaction.
VIRON will be paying ₱6,000 principal plus ₱720 interest after a year. The ₱720 interest covers 1 year. At the end of
December, a part of that is already incurred, i.e. ₱720 x 5/12 or ₱300. That pertains to interest for 5 months, from
August 1 to December 31. The adjusting entry on Dec. 31 would be:
Dr. Interest Expense300.00
Cr. Interest Payable 300.00
Expenses are recognized when incurred regardless of when paid. What you need to remember here is this: when it has
been consumed or used and no entry was made to record the expense, then there is a need for an adjusting entry.

LESSON 004: Adjusting Entry for Unearned Revenue

Unearned revenue (also known as deferred revenue or deferred income) represents revenue already collected but not
yet earned.
Hence, they are also called "advances from customers".
Following the accrual concept of accounting, unearned revenues are considered as liabilities.
It is to be noted that under the accrual concept, income is recognized when earned regardless of when collected.
And so, unearned revenue should not be included as income yet; rather, it is recorded as a liability. This liability
represents an obligation of the company to render services or deliver goods in the future. It will be recognized as
income only when the goods or services have been delivered or rendered.
At the end of the period, unearned revenues must be checked and adjusted if necessary. The adjusting entry for
unearned revenue depends upon the journal entry made when it was initially recorded.
There are two ways of recording unearned revenue:
(1) the liability method, and
(2) the income method.
Liability Method of Recording Unearned Revenue
Under the liability method, a liability account is recorded when the amount is collected. The common accounts used
are: Unearned Revenue, Deferred Income, Advances from Customers, etc. For this illustration, let us use Unearned
Revenue.
Suppose on January 10, 2017, ABC Company made ₱30,000 advanced collections from its customers. If the liability
method is used, the entry on Jan. 10 would be:
Dr. Cash30,000.00
Cr. Unearned Revenue 30,000.00
Take note that the amount has not yet been earned, thus it is proper to record it as a liability. Now, what if at the end of
the month, 20% of the unearned revenue has been rendered? This will require an adjusting entry.
The adjusting entry will include: (1) recognition of ₱6,000 income, i.e. 20% of ₱30,000, and (2) decrease in liability
(unearned revenue) since some of it has already been rendered. The adjusting entry on Jan. 31 would be:
Dr. Unearned Revenue6,000.00
Cr. Service Income 6,000.00
We are simply separating the earned part from the unearned portion. Of the ₱30,000 unearned revenue, ₱6,000 is
recognized as income. In the entry above, we removed ₱6,000 from the ₱30,000 liability. The balance of unearned
revenue is now at ₱24,000.
Income Method of Recording Unearned Revenue
Under the income method, the accountant records the entire collection under an income account. Using the same
transaction above, the initial entry for the collection on Jan. 10 would be:
Dr. Cash 30,000.00
Cr. Service Income 30,000.00
If at the end of the year the company earned 20% of the entire ₱30,000, then the adjusting entry on Jan.31 would be:
Dr. Service Income24,000.00
Cr. Unearned Income 24,000.00
By debiting Service Income for ₱24,000, we are decreasing the income initially recorded. The balance of Service
Income is now ₱6,000 (₱30,000 - 24,000), which is actually the 20% portion already earned.
By crediting Unearned Income, we are recording a liability for ₱24,000.
Notice that the resulting balances of the accounts under the two methods are the same (Cash: ₱30,000; Service
Income: ₱6,000; and Unearned Income: ₱24,000).
Another Example
On December 1, 2017, DRG Company collected from TRM Corp. a total of ₱60,000 as rental fee for three months
starting December 1.
Under the liability method, the initial entry would be:
Dr. Cash60,000.00
Cr. Unearned Rent Income 60,000.00
On December 31, 2017, the end of the accounting period, 1/3 of the rent received has already been earned (prorated
over 3 months).
We should then record the income through this adjusting entry on Dec. 31:
Dr. Unearned Rent Income20,000.00
Cr. Rent Income 20,000.00
In effect, we are transferring ₱20,000, one-third of ₱60,000, from the Unearned Rent Income (a liability) to Rent Income
(an income account) since that portion has already been earned.
If the company made use of the income method, the initial entry would be:
Dr. Cash 60,000.00
Cr. Rent Income 60,000.00
In this case, we must decrease Rent Income by ₱40,000 because that part has not yet been earned. The income
account shall have a balance of ₱20,000. The amount removed from income shall be transferred to liability (Unearned
Rent Income).
The adjusting entry would be:
Dr. Rent Income40,000.00
Cr. Unearned Rent Income 40,000.00
Conclusion
If you have noticed, what we are actually doing here is making sure that the earned part is included in income and the
unearned part into liability. The adjusting entry will always depend upon the method used when the initial entry was
made.
If you are having a hard time understanding this topic, I suggest you go over and study the lesson again. Sometimes, it
really takes a while to get the concept. Preparing adjusting entries is one of the most challenging (but important) topics
for beginners.

LESSON 005: Adjusting Entries for Prepaid Expense

Prepaid expenses (a.k.a. prepayments) represent payments made for expenses which have not yet been incurred.
In other words, these are "advanced payments" by a company for supplies, rent, utilities and others that are still to be
consumed. Hence, they are included in the company's assets.
Expenses are recognized when they are incurred regardless of when paid. Expenses are considered incurred when
they are used, consumed, utilized or has expired.
Because prepayments they are not yet incurred, they are not recorded as expenses. Rather, they are classified as
current assets since they are readily available for use.
Prepaid expenses may need to be adjusted at the end of the accounting period. The adjusting entry for prepaid
expense depends upon the journal entry made when it was initially recorded.
There are two ways of recording prepayments:
(1) the asset method, and
(2) the expense method.
[Asset Method]
Under the asset method, a prepaid expense account (an asset) is recorded when the amount is paid. Prepaid expense
accounts include: Office Supplies, Prepaid Rent, Prepaid Insurance, and others.be
Illustration: Gray Electronic Repair Services made this entry to record the purchase of service supplies:
Dr. Service Supplies 1,500.00
Cr. Cash 1,500.00
Take note that the amount has not yet been incurred, thus it is proper to record it as an asset.
Suppose at the end of the month, 60% of the supplies have been used. Thus, out of the ₱1,500, ₱900 worth of supplies
have been used and $600 remain unused. The ₱900 must then be recognized as expense since it has already been
used.
In preparing the adjusting entry, our goal is to transfer the used part from the asset initially recorded into expense – for
us to arrive at the proper balances shown in the illustration above.
The adjusting entry will include: (1) recognition of expense and (2) decrease in the asset initially recorded (since some
of it has already been used). The adjusting entry would be:
Dec 3:
Dr. Service Supplies Expense 900.00
Cr. Service Supplies 900.00
The "Service Supplies Expense" is an expense account while "Service Supplies" is an asset. After making the entry, the
balance of the unused Service Supplies is now at ₱600 (₱1,500 debit and ₱900 credit). Service Supplies Expense now
has a balance of ₱900. Now, we've achieved our goal.
[Expense Method]
Under the expense method, the accountant initially records the entire payment as expense. If the expense method was
used, the entry would have been:
Dr. Service Supplies Expense 1,500.00
Cr. Cash 1,500.00
Take note that the entire amount was initially expensed. If 60% was used, then the adjusting entry at the end of the
month would be:
Dec 31:
Dr. Service Supplies 600.00
Cr. Service Supplies Expense 600.00
This time, Service Supplies is debited for ₱600 (the unused portion). And then, Service Supplies Expense is credited
thus decreasing its balance. Service Supplies Expense is now at ₱900 (₱1,500 debit and ₱600 credit).
Notice that the resulting balances of the accounts under the two methods are the same (Cash paid: ₱1,500; Service
Supplies Expense: ₱900; and Service Supplies: ₱600).
Another Example:
GVG Company acquired a six-month insurance coverage for its properties on September 1, 2017 for a total of ₱6,000.
Under the asset method, the initial entry would be:
Sep 1:
Dr. Prepaid Insurance 6,000.00
Cr. Cash 6,000.00
On December 31, 2017, the end of the accounting period, part of the prepaid insurance already has expired (hence,
expense is incurred). The expired part is the insurance from September to December. Thus, we should make the
following adjusting entry:
Dec 31:
Dr. Insurance Expense 4,000.00
Cr. Prepaid Insurance 4,000.00
Of the total six-month insurance amounting to ₱6,000 (₱1,000 per month), the insurance for 4 months has already
expired. In the entry above, we are actually transferring ₱4,000 from the asset to the expense account (i.e., from
Prepaid Insurance to Insurance Expense).
If the company made use of the expense method, the initial entry would be:
Sep 1:
Dr. Insurance Expense 6,000.00
Cr. Cash 6,000.00
In this case, we must decrease Insurance Expense by ₱2,000 because that part has not yet been incurred (not
used/not expired). Insurance Expense shall then have a balance of ₱4,000. The amount removed from the expense
shall be transferred to Prepaid Insurance. The adjusting entry would be:
Dec 31:
Dr. Prepaid Insurance 2,000.00
Cr. Insurance Expense 2,000.00
Conclusion
What we are actually doing here is making sure that the incurred (used/expired) portion is included in expense and the
unused part into asset. The adjusting entry will always depend upon the method used when the initial entry was made.
If you are having a hard time understanding this topic, I suggest you go over and study the lesson again. Sometimes, it
really takes a while to get the concept. Preparing adjusting entries is one of the challenging (but important) topics for
beginners.

LESSON 006: Adjusting Entry for Depreciation Expense

When a fixed asset is acquired by a company, it is recorded at cost (generally, cost is equal to the purchase price of the
asset). This cost is recognized as an asset and not expense.
The cost is to be allocated as expense to the periods in which the asset is used.This is done by recording depreciation
expense.

There are two types of depreciation – physical and functional depreciation.

Physical depreciation results from wear and tear due to frequent use and/or exposure to elements like rain, sun and
wind.
Functional or economic depreciation happens when an asset becomes inadequate for its purpose or becomes
obsolete. In this case, the asset decreases in value even without any physical deterioration.
Understanding the Concept of Depreciation
There are several methods in depreciating fixed assets. The most common and simplest is the straight-line depreciation
method.
Under the straight line method, the cost of the fixed asset is distributed evenly over the life of the asset.
For example, ABC Company acquired a delivery van for ₱40,000 at the beginning of 2012. Assume that the van can be
used for 5 years. The entire amount of ₱40,000 shall be distributed over five years, hence a depreciation expense of
₱8,000 each year.
Straight-line depreciation expense is computed using this formula:
(Depreciable Cost minus Residual Value) divided by Estimated Useful Life
Depreciable Cost: Historical or un-depreciated cost of the fixed asset
Residual Value or Scrap Value: Estimated value of the fixed asset at the end of its useful life
Useful Life: Amount of time the fixed asset can be used (in months or years)
In the above example, there is no residual value. Depreciation expense is computed as:
= (₱40,000 – ₱0) / 5 years
= ₱8,000 / year
With Residual Value
What if the delivery van has an estimated residual value of ₱10,000? The depreciation expense then would be
computed as:
= (₱40,000 – ₱10,000) / 5 years
= ₱30,000 / 5 years
= ₱6,000 / year
How to Record Depreciation Expense
Depreciation is recorded by debiting Depreciation Expense and crediting Accumulated Depreciation.
This is recorded at the end of the period (usually, at the end of every month, quarter, or year).
The entry to record the ₱6,000 depreciation every year would be:
Dec 31:
Dr. Depreciation Expense 6,000.00
Cr. Accumulated Depreciation 6,000.00
Depreciation Expense: An expense account; hence, it is presented in the income statement. It is measured from period
to period. In the illustration above, the depreciation expense is ₱6,000 for 2012, ₱6,000 for 2013, ₱6,000 for 2014, etc.
Accumulated Depreciation: A balance sheet account that represents the accumulated balance of depreciation. It is
continually measured; hence the accumulated depreciation balance is ₱6,000 at the end of 2012, ₱12,000 in 2013,
₱18,000 in 2014, ₱24,000 in 2015, and ₱30,000 in 2016.
Accumulated depreciation is a contra-asset account. It is presented in the balance sheet as a deduction to the related
fixed asset.

Depreciation for Acquisitions Made Within the Period

The delivery van in the example above has been acquired at the beginning of 2012, i.e. January. Therefore, it is easy to
calculate for the annual straight-line depreciation. But what if the delivery van was acquired on April 1, 2012?
In this case we cannot apply the entire annual depreciation in the year 2012 because the van has been used only for 9
months (April to December). We need to prorate.
For 2012, the depreciation expense would be: ₱6,000 x 9/12 = ₱4,500.
Years 2013 to 2016 will have ₱6,000 annual depreciation expense.
In 2017, the van will be used for 3 months only (January to March) since it has a useful life of 5 years (i.e. April 1, 2012
to March 31, 2017).
The depreciation expense for 2017 would be: $6,000 x 3/12 = $1,500, and thus completing the accumulated
depreciation of $30,000.
2012 (April to December) ₱4,500
2013 (entire year) 6,000
2014 (entire year) 6,000
2015 (entire year) 6,000
2016 (entire year) 6,000
2017 (January to March) 1,500
Total for 5 years ₱30,000

LESSON 007: Adjusting Entry for Bad Debts Expense

Companies provide services or sell goods for cash or on credit. Allowing credit tends to encourage more sales.
However, businesses that allow credit are faced with the risk that their receivables may not be collected.
Accounts receivable should be presented in the balance sheet at net realizable value, i.e. the most probable amount
that the company will be able to collect.
Net realizable value for accounts receivable is computed like this:
Accounts Receivable (Gross Amount) ₱100,000
Less: Allowance for Bad Debts* 3,000
Accounts Receivable (Net Realizable Value) ₱ 97,000
*Allowance for Bad Debts (also often called Allowance for Doubtful Accounts) represents the estimated portion of the
Accounts Receivable that the company will not be able to collect.
Take note that this amount is an "estimate". There are several methods in estimating doubtful accounts.The estimates
are often based on the company's past experiences.
To recognize doubtful accounts or bad debts, an adjusting entry must be made at the end of the period. The adjusting
entry for bad debts looks like this:
Dec 31:
Dr. Bad Debts Expense xx
Cr. Allowance for Bad Debts xx
Bad Debts Expense (a.k.a. Doubtful Accounts Expense): An expense account; hence, it is presented in the income
statement. It represents the estimated uncollectible amount for credit sales/revenues made during the period.
Allowance for Bad Debts (a.k.a. Allowance for Doubtful Accounts): A balance sheet account that represents the total
estimated amount that the company will not be able to collect from its total Accounts Receivable.
What is the difference between Bad Debts Expense and Allowance for Bad Debts?
Bad Debts Expense is an income statement account while the latter is a balance sheet account. Bad Debts Expense
represents the uncollectible amount for credit sales made during the period.
Allowance for Bad Debts, on the other hand, is the uncollectible portion of the entire Accounts Receivable.
You can also use Doubtful Accounts Expense and Allowance for Doubtful Accounts in lieu of Bad Debts Expense and
Allowance for Bad Debts. However, it is a good practice to use a uniform pair. Some say that Bad Debts have a higher
degree of uncollectibility that Doubtful Accounts. In actual practice, however, the distinction is not really significant.
Here's an Example:
Gray Electronic Repair Services estimates that ₱100.00 of its credit revenue for the period will not be collected. The
entry at the end of the period would be:
Dec 31:
Dr. Bad Debts Expense 100.00
Cr. Allowance for Bad Debts 100.00
Again, you may use Doubtful Accounts. Just be sure to use a logical (and uniform) pair every time. For example:
Dec 31:
Dr. Doubtful Accounts Expense 100.00
Cr. Allowance for Doubtful Accounts 100.00
If the company's Accounts Receivable amounts to ₱3,400 and its Allowance for Bad Debts is ₱100, then the Accounts
Receivable shall be presented in the balance sheet at ₱3,300 – the net realizable value.
Accounts Receivable (Gross Amount) ₱ 3,400
Less: Allowance for Bad Debts 100
Accounts Receivable - Net Realizable Value ₱ 3,300

PART II
FOB SHIPPING POINT:
The ownership to the merchandise will immediately transfer to the buyer once the merchandise is shipped.
✓What if the merchandise is lost while in transit, who suffers the loss?
-Since the ownership is already transferred to the buyer, THE BUYER HIMSELF SUFFERS the loss.
✓On the date of inventory count, to whom will the merchandise inventory belong? Buyer or Seller?
-The merchandise shipped FOB Shipping Point, while in transit on the date of inventory count, is INCLUDED in the merchandise
of the BUYER.
FOB SHIPPING POINT FREIGHT COLLECT
-The buyer shoulders the costs and pays the shipping costs for inventory.
Example:
Selling Price: P10,000.00
Shipping Fee: P250.00
FROM THE SELLER'S VIEWPOINT:
Date of Sale
DR. A/R P10,000.00
CR. Sales P10,000.00
The Seller does not bear/shoulder the transportation costs, therefore he does not record Transpotation Out in his books.
Date of Collection
DR. Cash P10,000.00
CR. A/R P10,000.00
FROM THE BUYER'S VIEWPOINT:
Date of Purchase
DR. Purchases P10,000
DR. Transportation In P250
CR. Accts Payable P10,000
DR. Cash P250
Since the buyer shoulders the transportation costs, he records it in his books the Transportation In.
Date of Payment
DR. A/P P10,000
CR. Cash P10,000.
FOB SHIPPING POINT FREIGHT PREPAID
-the buyer shoulders the costs and does record the Transportation In in his books, BUT FOR THE MEANTIME the seller pays for
the shipping costs, as an accomodation to the buyer.
In effect, the buyer has to reimburse the seller for the transportation costs. On the payment date, the buyer will add the amount to
the payment.
Example:
Selling Price: P10,000.00
LBC Shipping Fee: P250.00
FROM THE SELLER'S VIEWPOINT:
Date of Sale:
DR. A/R P10,250
CR. SALES P10,000
CR. Cash P250
The shipping fee is added to the amount the seller can collect from the buyer.
Again, no Transportation Out is recognised because the seller does not shoulder the shipping costs anyway. He is merely
accomodating the buyer so he pays the shipping company for now.
Date of Collection
DR. CASH P10,250
CR. A/R P10,250
FROM THE BUYER'S VIEWPOINT:
Date of Purchase
DR. Purchases P10,000
DR. Transportation In 250,00
CR. Accts Payable P10,250
Per Accrual Principle, the buyer will recognise Transportation In although no payment has been made yet.
Date Of Payment
DR. A/P P10,250
CR. Cash P10,250
*Payment for the merchandise (P10,000) + Reimbursement to the seller (P250)
HOW TO BECOME A CPA
How to Become a CPA: What It Really Takes
The Certified Public Accountant (CPA) is the professional title given to accountants who have met specific requirements
and passed the CPA licensure exam.
“All CPAs are accountants but not all accountants are CPAs.”
Apparently, the first step to become a CPA is to get into a good school and earn a degree in accounting. Having a
degree is the most basic qualification towards getting certified.
Then, candidates must pass other sets of rigorous requirements. Here are some practical tips and motivation boosters
to help you get those letters beside your name.
1. Know the Requirements
This may sound very basic; but, it is really important to know the requirements. The certification rules vary in different
countries. The board of accountancy in your area implements and observes them. These requirements are generally
classified into education, experience, and examination qualifications.
The board of accountancy requires a bachelor’s degree in accounting. The certification also requires that you complete
and pass the CPA licensure exam. Candidates are required to pass each exam part with a grade not lower than 65%.
Additional rules and conditions may be set by the board. (Refer to R.A. 9298)
The exam consists of six subjects, namely:
a. Financial Accounting and Reporting
b. Advanced Financial Accounting and Reporting
c. Regulatory Framework for Business Transactions
d. Taxation
e. Management Advisory Services
f. Auditing
The rules really do vary so it is important that you check the specific requirements observed by the board of
accountancy. They will also be able to guide you in the application process.
Now, we want to talk more on the personal-motivational aspect of becoming a CPA.
2. Preparing for the Exam
The CPA Exam is tough. The low passing rates in the previous examinations prove it. However, no exam is too hard
with the right preparation. To pass, you need to allocate sufficient study time to your schedule.
Depending on mastery and level of understanding, some may need to devote plenty of time. And candidates faced with
other responsibilities will need to find balance in managing time. Here's the point. Whatever amount of time you
allocate, make sure it is sufficient and worthwhile.
But how much time is sufficient? It depends upon how proficient you already are with the exam areas and your ability to
learn. If you are having a hard time understanding the topics, then you might need to stay in front of that lamp a little
longer (and focus a little harder). Nonetheless, some say that the time you allocate should not be less than 20 hours
per week for 5-6 months of preparation.
Obtain a list of the topics covered in the exam and study the items. Changes to the CPA exam are made every time so
stay updated. Go to a review school. The reviewers and the study guides they provide will help you pass the board
exam.
To the students who are still working on their bachelor’s degree: please do not take your college subjects for granted!
Study the concepts and absorb them into your system now so that you won't have a hard time in your formal review
later.
In preparing for the exam, answer as many problems as you can and understand the theory behind them. You may get
surprised to find questions in the actual exams that are similar to those you already have encountered. That is because
accounting problems are based on accounting concepts. And they will always be. So study, understand and practice.
Keep in mind that what separates passers from non-passers is proper preparation.
3. Pushing Yourself. . . Consistently
The hardest part of the CPA Exam preparation is fueling yourself to go further. This won’t be much of a problem if you
are disciplined enough. However, many of us are not. We tend to get lazy after solving four or five problems. We plan
but act as if we are not up to something. We procrastinate and later realize we don't have enough time.
Clearly, you need to break those habits if you want to become a CPA. There is a proper time for everything. Study
when it is time to study and sleep when it is time to sleep. Take breaks in between your study hours but not to the point
that you are already wasting precious hours. You have to balance everything.
Do not let distractions take you off the track. Focus. You are headed towards the prize. Remind yourself of the rewards
after you pass the exam. Stay motivated and act on it.
4. Inside the Examination Room
During the actual examination, say a little prayer before starting the exam. Be positive but not overly confident.
Manage your time well. Don't use much of it by trying to answer very difficult questions. Answer as many items
confidently as possible. Your goal is to accumulate as much points as you can. The examiners don't give penalties for
incorrect answers so it is in your advantage to attempt to respond to every question; do not leave any item blank.
Please do not get sick on the exam day. Be careful not to catch a cold or digestion problems, or anything! Get enough
rest the night before your exam. You will need a great deal of concentration and presence of mind inside the
examination room so you must prepare both mentally and physically.
Make sure your calculator is in good condition. Have the batteries replaced. You don't want it to go crazy or give up
while you are taking your life-changing exam.
CONCLUSION
The CPA license is awarded to a select few – those who really deserve it. It is a symbol of excellence and an emblem
of achievement. Moreover, it is a platform that will introduce you to bigger career opportunities. Like anything worth
chasing however, it requires some work! So, there you go. Stay excited. Believe in yourself; have faith and act on it.
You will make it. Let us end this long pep talk with a quote from Paulo Coelho.
"When you want something, all the universe conspires in helping you achieve it."
– The Fifth Mountain
Article adapted from AccountingVerse

INDIRECT LABOR
Indirect labor is the cost of any labor that supports the production process, but which is not directly involved in the
active conversion of materials into finished products.*
It is the compensation of employees or workers who DO NOT physically convert raw materials into finished goods.**
Indirect labor also refers to worker’s hours that are spent on working on projects that cannot be traced back to specific production
units or products. In other words, indirect labor is employee work that can’t be billed to goods produced. ***
Examples of Indirect Labor are Salaries of plant managers and engineers, wages of forklift operators, maintenance and inspection
labor, machine helpers.
It forms part of Manufacturing Overhead (Factory Overhead), thus, a part of the cost of the product.
[MANAGEMENT ADVISORY SERVICES]
What is Variable Overhead Efficiency Variance?
'Variable Overhead Efficiency Variance' Definition:
In variance analysis, the total variable overhead variance may be split into two: spending variance and efficiency variance. The
variable overhead efficiency variance refers to the variance that arises due to the difference between the standard variable overhead
allocation base and actual base.
Allocation Base and Application Rate
In standard costing, factory overhead is applied based on a certain allocation base. The most common allocation bases for factory
overhead are:direct labor hours and machine hours. Other bases are also used (especially in activity-based costing).
Example: A company has a production budget of 20,000 units. Each unit requires 4 labor hours to complete. The company has a
factory overhead budget of ₱400,000. Using labor hours as base, the budgeted FOH application rate would be ₱5 per labor hour, i.e.
the FOH budget of ₱400,000 divided by the budgeted allocation base of 80,000 hours.
Standards are used to facilitate better control and speed up the recording process. To better manage accounts, standards may be
established separately for variable and fixed factory overhead.
Formula
The formula for variable factory overhead (VFOH) efficiency variance is:
VFOH efficiency variance = (AB - SB) x BR
where:
AB = actual allocation base,
SB = standard base, and
BR = budgeted rate.
It may also be expressed as:
(AB x BR) - Applied VFOH, or (AB x BR) - (SB x BR).
The applied variable factory overhead is equal to (SB x BR).
Example
XYZ Company has a variable factory overhead budget of ₱1,320,000 in producing 120,000 units of its product. One unit requires
2.75 labor hours to complete -- a total of 330,000 hours. Hence, the application rate for VFOH is ₱4 per labor hour (1,320/330).
Last month, XYZ produced 9,600 units and employed 29,000 direct labor hours. The actual variable factory overhead is ₱121,800.
Compute for the variable efficiency variance.
VFOH efficiency variance
=(AB - SB) x BR
=(29,000 - 26,400) x ₱4
=₱10,400 unfavorable
The standard allocation base of 26,400 is computed by multiplying the number of units produced by the standard time required to
produce a unit (9,600 units x 2.75 hours).
The variance may also be expanded and expressed as:
VFOH efficiency variance
=(AB x BR) - (SB x BR)
=(29,000 x ₱4) - (26,400 x ₱4)
=₱10,400 unfavorable
Favorable and Unfavorable VFOH Efficiency Variance
If the actual allocation base is greater than the standard, the company used more of it (more hours) than expected. Hence, the
variance is unfavorable. If the actual base is less than the standard base, the variance is favorable.
Correcting Entries – For Errors Made in the Journal
When an error is discovered in the accounting records, it should be corrected immediately to prevent the processing of
wrong data which results to unreliable financial statements.
A correcting entry is a journal entry whose purpose is to rectify the effect of an incorrect entry previously made.
To illustrate how to prepare correcting entries, here are some examples.
On December 5, 2017, Gray Electronic Repair Services paid ₱370 registration and licensing fees for the business.
The correct entry is:
Dec5:
Dr. Taxes and Licenses 370.00
Cr. Cash 370.00
Suppose the bookkeeper, for whatever reason, debited Transportation Expense instead of Taxes and Licenses.
The entry made was:
Dec5:
Dr. Transportation Expense 370.00
Cr. Cash 370.00
Upon analysis, the Transportation Expense is overstated (higher than in should be) because the bookkeeper recorded
transportation expense but it was not really a transportation expense.
Also, Taxes and Licenses is understated (lower than it should be). The amount should have been recorded but was not
recorded under this account.
To correct these errors, we should make an entry to offset the effects.
Transportation Expense is overstated therefore we should decrease it; Taxes and Licenses is understated therefore we
should increase it.
The Cash account was credited in the entry made. Was the entry made to Cash correct? Look at the correct entry. Is it
proper to have Cash credited? Yes. Therefore, we have no problem with the Cash account.
Now, to increase Taxes and Licenses, we debit it. To decrease Transportation Expense, we credit it.
Remember that to increase/record an expense, we debit it; to decrease an expense, we credit it.
The correcting entry would then be:
Dec31
Dr. Taxes and Licenses 370.00
Cr. Transportation Expense 370.00
Note: The correcting entry is dated when the error is discovered. In this case, we assumed that it was discovered and
corrected on December 31.
If an explanation or annotation is required, it would be something like: "To correct error made on taxes and licenses" or
"To record correction of error on entry made for taxes and licenses."
After making this entry, Transportation Expense will zero-out (₱370 debit and ₱370 credit) and Taxes and Licenses will
now have a balance of ₱370.00, thus making our records correct.
Another Example
Let us assume the bookkeeper made another error.
On December 17, the company collected a receivable from a customer, ₱1,650.00. Suppose the bookkeeper recorded
it at ₱1,560.00 instead of ₱1,650.00.
This was the entry made:
Dec17:
Dr. Cash 1,560.00
Cr. Accounts Receivable 1,560.00
What is the correct entry? The entry should have been:
Dec17:
Dr. Cash1,650.00
Cr. Accounts Receivable 1,650.00
How will we correct this? Cash is understated because the accountant recorded ₱1,560 instead of ₱1,650. Accounts
Receivable is also overstated because it was reduced by ₱1,560 only but should have been reduced by ₱1,650.
ANALYSIS: We should then increase Cash and reduce Accounts Receivable by ₱90.
The correcting entry would be:
Dec31:
Dr. Cash 90.00
Cr. Accounts Receivable 90.00
Another way of doing it (and an easier one) is to look at the entry made and correct entry. Upon analysis, you will see
that the amount debited to Cash is less that what should have been debited. The same goes for the amount credited to
Accounts Receivable. Cash should then be debited by ₱90 more and Accounts Receivable should be credited by ₱90
more.
Recap: Steps in Making Correcting Entries
The steps in preparing correcting entries may be summed up as follows:
1. Determine the entry made. – What was the erroneous/wrong entry made?
2. Determine the correct entry. – What entry should have been made?
3. Analyze #1 and #2 to come up with the correcting entry.
Steps 1 and 2 may be interchanged. Nonetheless, you need to know the entry made and the correct entry (should-be
entry) before you can come up with the correcting entry.
What is Accounting?
Accounting is famously known as the "language of business". Through the financial statements, the end-product reports
in accounting, it delivers information to different users.
Accounting is a means through which information about a business entity is communicated.
Accounting Definition
Technical definitions of accounting have been published by different accounting bodies. The American Institute of Certified Public
Accountants (AICPA) defines accounting as:
"the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which
are, in part at least of financial character, and interpreting the results thereof."
Though I am not a fan of technical definitions, I believe that studying the statement above will give us a better understanding of
accounting.
1. Accounting is considered an art
Accounting is considered an art because it requires the use of skills and creative judgment. One has to be trained in this discipline to
be able to perform accounting functions well.
Accounting is also considered a science because it is a body of knowledge. However, accounting is not an exact science since the
rules and principles are constantly changing (improved).
2. Accounting involves interconnected "phases"
Recording pertains to writing down or keeping records of business transactions. Classifyinginvolves grouping similar items that
have been recorded. Once they are classified, information is summarized into reports which we call financial statements.
3. Concerned with transactions and events having financial character
For example, hiring an additional employee is qualitative information with no financial character. Hence, it is not recorded.
However, the payment of salaries, acquisition of an office building, sale of goods, etc. are recorded because they involve financial
value.
4. Business transactions are expressed in terms of money
They are assigned amounts when processed in an accounting system. It is not enough to record that the company paid salaries. It
must include monetary figures – say for example, ₱20,000 salaries expense.
5. Interpreting the results
Interpreting results is part of the phases of accounting. Information is useless if they cannot be interpreted and understood. The
amounts, figures, and other data in the financial reports have meanings that are useful to the users.
By studying the definition alone, we learned some important concepts in accounting. It also gave us an idea of what accountants do.
You may not notice but the simple things you do and encounter everyday can actually be related to some level of accounting. You
make budgets, count change and check the receipts from the supermarket. You may also have listed things you spent your money
with at one point in your life.
We are surrounded by business – from managing our own money to seeing profit statements of big corporations. And where there is
business, there sure is accounting.
Reversing Entries - Part 2 (UNEARNED INCOME & PREPAID EXPENSE)
In part 1, we had an introduction to reversing entries and discussed examples for accrued income and accrued
expense.
In this part, we will cover the two other types of entries that can be reversed:
a. unearned income and
b. prepaid expense.
Reversing Entry for Unearned Income
If the income method is used in recording unearned income, reversing entries can be prepared.
Take note that adjusting entries for unearned income recorded using the liability method are NEVER reversed.
Example: ABC Company recorded customer advances amounting to ₱5,000 in December 1, 2017. The company uses the income
method in recording unearned income.
Dec1:
Dr. Cash5,000.00
Cr. Service Revenue 5,000.00
At the end of 2017, the company rendered ₱2,000 worth of services. We need to set-up the unearned income of ₱3,000 and bring
Service Revenue to its correct balance (₱2,000). The adjusting entry would be:
Dec31:
Dr. Service Revenue3,000.00
Cr. Unearned Revenue 3,000.00
At the beginning of 2018, the following reversing entry can be prepared:
Jan1:
Dr. Unearned Revenue3,000.00
Cr. Service Revenue 3,000.00
Notice that the adjusting entry is simply reversed.
At the end of 2018, Service Revenue will again be checked to see if there is any unearned portion and if an adjusting entry is
necessary.
Reversing Entry for Prepaid Expense
If the expense method is used in recording prepaid expense, reversing entries can be prepared. Adjusting entries for prepaid
expense under the asset method are NOT reversed.
Example: On December 1, 2017, ABC Company paid ₱7,500 of rent for 3 months starting December 1. The expense method was
used in recording this transaction.
Dec1:
Dr. Rent Expense7,500.00
Cr. Cash 7,500.00
At the end of 2017, 1 month worth of rent has already expired. Prepaid Rent should be set-up for the remaining 2 months. The
adjusting entry would be:
Dec31:
Dr. Prepaid Rent5,000.00
Cr. Rent Expense 5,000.00
At the beginning of 2018, the following reversing entry can be prepared:
Jan1:
Dr. Rent Expense5,000.00
Cr. Prepaid Rent 5,000.00
Again, notice that the adjusting entry is simply reversed.
At the end of February, the entire rent paid has already expired. We do not need to make an entry here since we already prepared a
reversing entry.
Nonetheless, Rent Expense will be reviewed at the end of the year. Rent Expense and all other expenses will be checked to see if
there are any unexpired portions which will require adjusting entries.
Author's Notes:
And there you have the four types of adjusting entries that can be reversed. We've covered all of them and provided examples to
guide you. Again, if you are having a hard time understanding the process, don't worry. It requires some time and a little effort for
the concepts to sink in. After all, the process will always be the same.
Reversing Entries - Part 1 (ACCRUED INCOME & ACCRUED EXPENSES)
Reversing entries are made at the beginning of the new accounting period to enable a smoother accounting process.
This step is "optional" and is especially useful to companies that use the cash basis method.
In this step, adjusting entries made at the end of the previous accounting period are simply reversed, hence the term
"reversing entries".
However, not all adjusting entries qualify for this step.
The only types of adjusting entries that may be reversed are those that are prepared for the following:
1. accrued income,
2. accrued expense,
3. unearned revenue using the income method, and
4. prepaid expense using the expense method.
Adjusting entries for unearned revenue under the liability method and for prepaid expense under the asset method are
never reversed. Adjusting entries for depreciation, bad debts and other allowances are also never reversed.
Reversing Entry for Accrued Income
Example: ABC Company is to receive ₱3,000 interest income at the end of February 2018. It covers 3 months starting
December 1, 2017. At the end of 2017, the accountant properly made an adjusting entry for one month's worth of
accrued income.
Dec31:
Dr. Interest Receivable1,000.00
Cr. Interest Income 1,000.00
At the beginning of 2018, the accountant can prepare this reversing entry:
Jan1:
Dr. Interest Income1,000.00
Cr Interest Receivable 1,000.00
The adjusting entry is simply reversed. Debit what was credited and credit what was debited.
When the ABC Company receives the interest income at the end of February, the accountant will then prepare this
journal entry:
Feb28:
Dr. Cash3,000.00
Cr. Interest Income 3,000.00
Notice that Interest Income is credited for ₱3,000. Now you might be asking this: Under the concept of accrual, the
interest income to be recognized in 2018 should be ₱2,000. Then why credit ₱3,000 Interest Income?
Very good. Well, in the reversing entry at the beginning of the period, Interest Income was already debited for ₱1,000.
So if we combine them (₱1,000 debit and 3,000 credit), then we'll end up with ₱2,000 Interest Income which is the
correct amount to be recognized in 2018.
We said that reversing entries are optional. If the accountant did not make a reversing entry at the beginning of the
year, the accountant will have this entry upon collection of the income.
Feb28:
Dr. Cash3,000.00
Cr. Interest Receivable 1,000.00
Cr. Interest Income 2,000.00
Note: Actually, if you combine the reversing entryand journal entry for collection. You'll come up with the journal entry
above.
Reversing Entry for Accrued Expense
Example: Suppose that ABC Company and its lessor agrees that ABC will pay rent at the end of January 2018,
covering a 3-month period starting November 1, 2017. The entire amount is ₱6,000.
At the end of December 2017, the accountant properly prepared this adjusting entry for two months worth of rent
expense (Nov 1 to Dec 31):
Dec31:
Dr. Rent expense4,000.00
Cr. Rent payable 4,,000.00
At the beginning of 2018, the accountant can prepare this reversing entry:
Jan1:
Dr. Rent Payable4,000.00
Cr. Rent Expense 4,000.00
Again, notice that the adjusting entry is simply reversed.
When the company pays the entire rent, the accountant will then prepare this journal entry:
Jan31:
Dr. Rent Expense6,000.00
Cr. Cash 6,000.00
In effect, Rent Expense for 2017 is ₱2,000 even if the accountant debits ₱6,000 upon payment. This is because of the
reversing entry which includes a credit to Rent Expense for ₱4,000.
If the accountant did not make a reversing entry at the beginning of the year, the accountant will have this entry upon
payment of the rent.
Jan31:
Dr. Rent Payable4,000.00
Cr. Rent Expense2,000.00
Cr. Cash 6,000.00
There you have the first two types of adjusting entries that can be reversed. If you are having trouble understanding the
process, don't worry. It requires some time and a little effort for the concepts to sink in. In part 2, we'll take a look at the
other two types.
WHAT IS A BALANCE SHEET?
Balance Sheet – a.k.a. Statement of Financial Position

A balance sheet shows the financial position or condition of a company as of a certain date. It is also called Statement of Financial
Position.

Financial position pertains to the resources owned and controlled by the company (assets), and the claims against them (liabilities
and capital).
Hence, if you have a report that presents a company's assets, liabilities and capital, then you are probably looking at a company's
balance sheet.
Balance Sheet Example
Here is a sample balance sheet for Strauss Printing Services, a service type sole proprietorship business. (REFER TO IMAGE)
All amounts are assumed and simplified for illustration purposes.
[Explanation and Pointers]
1. A Balance Sheet shows the financial position or condition of the company; thus, it is also called "Statement of Financial
Position".
2. A typical balance sheet starts with a heading which consists of three lines. The first line presents the name of the company; the
second describes the title of the report; and the third states the date of the report.
3. Notice that the third line is worded "As of..." Unlike the other components of the financial statements which cover a span of time
("For the period ended.."), the balance sheet presents information as of a certain date (at a specific point in time). In the above
example, the contents of the balance sheet pertain to the financial condition of the company on December 31, 2017.
4. A balance sheet summarizes the assets, liabilities, and capital of a company. Assets refer to properties owned and controlled by
the company. Liabilities are obligations to creditors, lenders, etc. And capital represents the portion left for the owners of the
business after all liabilities are paid. For detailed lessons about assets, liabilities and capital, check out the Elements of Accounting.
5. Assets and liabilities are classified as either current or non-current. Current assets are properties that will be converted into cash
within 12 months or within the operating cycle of the business. Current liabilities are due within 12 months or within the operating
cycle. Non-current assets and non-current liabilities are those that do not meet the above qualifications.
6. "Total assets" and "total liabilities and capital" should always be equal.
7. The capital amount, P147,100 for Strauss, Capital, was actually taken from the Statement of Owner's Equity.
8. The balance sheet may be presented in two forms: account form and report form. In account form, assets are presented on the left
side while liabilities and capital are presented on the right. In report form, assets are presented first and then followed by liabilities
and capital. The example above is presented using the report form.
9. Good accounting form suggests that a single line is drawn every time an amount is computed. It signifies that a mathematical
operation has been completed. The "total assets" and "total liabilities and capital" amounts are double-ruled.
EMPTIO REI SPERATAE
REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS -
Latin for "Sale of Future Thing."

Professional Skepticism
- is an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due
to error or fraud, and a critical assessment of audit evidence. #Auditing
'Pag tinanong ka ng jowa mo kung bakit mo sya pinaghihinalaan sabihin mo skeptic kalan

MANAGEMENT BY EXCEPTION
COST ACCOUNTING: Management By Exception is a concept in which material differences
between #expected performance and #actualperformance are investigated, whether FAVORABLE or UNFAVORABLE.
SUNK COST
MANAGEMENT ADVISORY SERVICES
A sunk cost is a cost that has already been incurred and thus cannot be recovered. A sunk cost differs from future costs
that a business may face, such as decisions about inventory purchase costs or product pricing.
Sunk costs (Past Costs) are excluded from future business decisions, because the cost will be the same regardless of the outcome of
the decision.
FUNERAL EXPENSE
TAXATION: Funeral expenses are those incurred in connection with the interment or burial of the deceased. These
expenses must be duly supported by receipts, invoices, or other evidences to show that they were actually incurred.
The amount deductible from Gross Estate is the ACTUAL FUNERAL EXPENSE (whether paid or unpaid) up to the time
of interment, or an amount EQUAL TO FIVE PERCENT OF THE GROSS ESTATE, whichever is lower, but in NO
CASE to EXCEED P200,000. [Rev. Regs. No. 2-2003; Sec. 86 [A] (1) [a], NIRC]
LAND
FINANCIAL ACCOUNTING & REPORTING: Land in general (with the assumption that all other things remain constant) is an
asset the physical form of which does not depreciate, and its monetary value is expected to increase overtime (Appreciation).

DECEDENT
TAXATION: Decedent is the person who died and whose property is transmitted through succession.
"Decedent is a general term applied to the person whose property is transmitted through succession, whether or not he
left a will."
(Art. 775, Civil Code of he Philippines)