Seeds of the Nations

FEUSONS ACCOUNTING TUTORIAL

DAY 1

Name ____________________________________

TOPIC: A.) Conceptual Framework and Elements of Financial Statements

PURPOSE AND STATUS

This Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements
for external users. The purpose of the Conceptual Framework is:

a.to assist Financial Reporting Standards Council (FRSC) in the development of future Philippine Financial Reporting
Standards (PFRSs) and in its review of existing PFRSs
b.to assist FRSC in promoting harmonization of regulations, accounting standards and procedures relating to the
presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments
permitted by PFRSs
c. to assist national standard-setting bodies in developing national standards
d.to assist preparers of financial statements in applying PFRSs and in dealing with topics that have yet to form the subject
of an PFRS
e.to assist auditors in forming an opinion on whether financial statements comply with PFRSs;
f. to assist users of financial statements in interpreting the information contained in financial statements prepared in
compliance with PFRSs; and

 This Conceptual Framework is not a PFRS and hence does not define standards for any particular measurement or
disclosure issue. Nothing in this Conceptual Framework overrides any specific PFRS. In case of conflict, the provisions of
specific PFRS prevail.

SCOPE

 The Conceptual Framework deals with:

1. the objective of financial reporting
2. the qualitative characteristics of useful financial information
3. the definition, recognition and measurement of the elements from which financial statements are
constructed; and
4. concepts of capital and capital maintenance

GENERAL PURPOSE FINANCIAL REPORTING: OBJECTIVE, USEFULNESS AND LIMITATIONS

 The objective of general purpose financial reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders and other creditors in making
decisions about providing resources to the entity.
 USERS of financial statements and their information needs? It is classified into two (1)_________(2)__________
 To a large extent, financial reports are based on estimates, judgments and models rather than exact depictions.*
 General purpose financial reports are not designed to show the value of a reporting entity; but they provide information
to help existing and potential investors, lenders and other creditors to estimate the value of the reporting entity.

UNDERLYING ASSUMPTION
 1. Going concern. The financial statements are normally prepared through this assumption.
Implicit in the going concern assumption are:
Entity concept-
Periodicity concept-
Stable Monetary Unit concept-

HOW DO FINANCIAL STATEMENTS BECOME USEFUL TO USERS?

 The Qualitative Characteristics are the qualities that make financial accounting information useful to users.
 If financial information is to be useful, it must be [both]:
 1. Relevant
----The ingredients of relevance are?
2. Faithfully represent what it purports to represent
----The ingredients of faithful representation are?
 The usefulness of financial information is enhanced if it is:
1. Comparable
2. Verifiable
3. Timely; and
4. Understandable.

ELEMENTS OF FINANCIAL STATEMENTS

 Financial statements portray the financial effects of transactions and other events by grouping them into broad classes
according to their economic characteristics. These broad classes are termed the elements of financial statements.
 The elements directly related to the measurement of financial position in the statement of financial position are assets,
liabilities and equity.
 The elements directly related to the measurement of performance in the statement of comprehensive income are
income and expenses.

previously known as the __________) which presents the income and expenses and resulting
profit(loss) and other comprehensive income(loss) for a specific period of time.
2._______________which summarizes the changes in owner’s equity for a specific period of time.
3._______________(previously known as____________) which reports the assets, liabilities, and owner’s equity at a
specific date.
4._______________which summarizes information about the cash inflows and outflows for a specific period of time.
5._______________(also known as notes to financial statements) which summarizes significant accounting policies
adopted by the entity including the financial reporting framework used, company information and additional disclosures
relating to amounts presented on the face of the financial statements.

NOTE: Financial statements are interrelated to each other.

THE ACCOUNTING EQUATION

 The basic accounting equation is:
 The accounting equation applies to all economic entities regardless of size, nature of business, or form of bus. org.
Note: effect of transaction is base on the Accrual basis of accounting.

 In proprietorships, there are four components of owner’s equity

a. Investments by Owner Income > Expenses= Profit or Net Income
b. Income(Loss) Income < Expenses= Loss or Net Loss
c. Drawings

THEN, WHAT IS ACCOUNTING??

TOPIC: B.) TRANSACTION ANALYSIS/ACCOUNTING CYCLE

 Three types of business entities according to structure:

NORMAL BALANCES
a._______________________
b._______________________ A L
c._______________________
 Three types of business entities according to purpose or activity are:
a._______________________ E R
b._______________________
c._______________________ D C

THE STEPS IN THE ACCOUNTING CYCLE

1. Analyzing the transaction DEBIT CREDIT
2. Journalizing the transactions in the journal
3. Posting the entries to the ledger
4. Preparing the unadjusted trial balance
5. Preparing the adjusting entries
 6. Preparing the financial statements
7. Preparing the closing entries
8. Preparing a post-closing trial balance
9. Preparing the reversing entries

Double-entry method of Bookkeeping

 Every business transaction affects at least two accounts.
 A method of recording the business transactions in terms of the dual effect on the accounting elements.
Account – an accounting device used to classify and store information about the increases and decreases in a particular
item.
Transactions- are accountable or economic events of an entity that are recorded.

1. Analyze the transaction

 Does the transaction affect the basic accounting equation?
- If yes, then it is an accountable event. Or otherwise.

Example:
1. FAR withdrew P 20,000 for his personal use.
2. The manager of Punong Kahoy Inc. went to Bahay Kubo to meet the vendor, Manong Amang, of dahon ng mga kahoy
to have a contract assessment prior to the delivery of the said goods, August 13, 2018. Terms and conditions were
embedded on the said the contract and it has a contract amount of P 1000.

2. Journalize the transaction

 General journal is also known as the book of original entries.

3. Posting the entries to the ledger

4. Preparing the unadjusted trial balance
 Trial balance – a listing of all the balances of the different accounts as of a given time.
 Is the equalled amount of balance is always correct?

5. Preparing the adjusting entries

 Why we need to have adjusting period? How it will affect the financial statement?

Types of adjusting entries:
1. ACCRUALS – means to recognize revenue earned and expenses incurred, regardless of inflow or outflow of
cash.
 Accrued expenses – expenses incurred during the accounting period but has not been paid and is still
unrecorded at year-end.
 Affects 3 concepts: (1) Expense recognition principle (2) liability recognition principle (3) accrual
basis assumption
 If not adjusted, Effect to Assets? Expense? Liabilities? Income? Equity?
Pro-forma entry:
Expense xx
Liability xx

 Accrued revenues – revenue earned during the accounting period for which no cash has been collected
yet.
 If not adjusted, Effect to Income? Expense? Assets? Equity?
-Affects 3 concepts: (1) income recognition (2) asset recognition principle (3) accrual basis
assumption
Pro-forma entry:
Asset xx
Income xx

2. DEFERRALS - receipts of assets or payments of cash in advance of revenue or expense recognition.

 Prepayments – cash paid not but not yet incurred.

  Opposite of accrued expense.
 3 concepts are involved: (1) expense recognition principle (2) asset recognition principle (3)
accrual basis assumption
Pro-forma entries:
Asset method: Expense method:
Original journal entry:
Prepaid expense xx Expense xx
Cash xx Cash xx

Adjusting entry:
Expense xx Prepaid expense xx
Prepaid expense xx Expense xx
Recognize the used portion Recognize the unused portion

 Deferred revenues – cash received but not yet earned.

 Opposite of accrued income.
 3 concepts are involved: (1) income recognition principle (2) liability recognition principle (3)
accrual basis assumption.
Pro-forma entries:
Liability method: Income method:
Original journal entry:
Cash xx Cash xx
Liability xx Income xx

Adjusting entry:
Liability xx Income xx
Income xx Liability xx
Recognize the earned portion Recognize the unearned portion

NOTE: the method mentioned above is based on the ORIGINAL entry and whatever method you may use in your
computations, you will always arrive at the same answer.

Practice 2:
Accrued expense
On September 1, 2015, ABC Co. issued a 6-month note to a supplier amounting to P 300,000, 12% interest per annum.
Also, there was an unpaid and unrecorded salaries at the end of the year dated December 31, 2015 amounting to P
25,000. Give the adjusting entries.

Accrued revenue
On October 1, 2015, DEF Co. received a 5-month note from a customer amounting to P 500,000, 10% interest per
annum. Record the adjusting entry as of December 31, 2015.

Prepayment
GHI Co. purchased a two-year insurance policy on August 1, 2015 for P 28,800. Give the adjusting entries as of
December 31, 2015 assuming the company uses:
a. Asset method
b. Expense method

Pre-collection
JKL Co. is engaged in constructing and renting office space to various businesses. On September 1, 2015 one tenant gave
P 240,000 cash for six month’s rent. Give the adjusting entries as of December 31, 2015 assuming the company uses:
a. Liability method
 b. Revenue method
Practice 1: Score:
The Accounting Equation
1. Mekanico invested P 200,000 to start an auto repair business.
2. Mekanico bought repair equipment from Monica co. on credit, P 100,000.
3. Mekanico bought shop supplies for cash, P 62,000.
4. Paid Monica co. partially, P 60,000.
5. Mekanico received a bank loan for business use, P 100,000.
6. Customers paid cash for auto repairs services rendered, P 25,000.
7. Repair services rendered on account, P 50,000.
8. Paid a month’s rent, P 10,000.
9. Pinuno made partial collections from customers’ accounts, P 30,000.
10. Victor Magtanggol paid the salaries and wages of laborers, P 15,000.
11. Billed a customer, P 6,000 and received a partial payment of P 2,000.
12. Shop supplies purchased, P 15,000 and made a down payment of P 5,000.
13. Shop supplies bought for cash and used, P 18,000.
14. Cardo withdrew P 20,000 for his personal use.
Assets = Liabilities + Owner’s Equity
Cash + Accounts + Supplies + Equipment = Accounts + Bank + Brian + Revenues - Expenses
receivable payable loan Villaluz,
Capital

1. 200,0 200,000
00
2. 100,000 100,000
3. 62,00 62,000
0
4.
5.
6
7
8
9
10
11
12
13
14
BALANCE

The accounting process steps 1 – 4

Lakas, a lawyer decided to open a law firm named Bagani Law Firm. The partial chart of accounts listed below
will be used for recording purposes.

Chart of Accounts
Assets Income
A101 Cash I301 Legal Fees Earned
A102 Accounts Receivable
A103 Prepaid Insurance Expenses
A104 Office Supplies E40 Salary Expense
1
A105 Furniture and Equipment E40 Advertising Expense
2
 E40 Utilities Expense
3
Liabilities E40 Miscellaneous Expense
4
L201 Accounts Payable
L202 Loan Payable

Owner’s Equity
O50 Coleen Garcia, Capital
1
O50 Coleen Garcia, Drawing
2

In December of the current year, the following transactions took place:

Dec 2 Lakas invested P 60,000 cash to put up her law firm.

.
4 A one-year insurance effective December 1 was paid, P 6,000.
6 Office furniture costing P 15,000 was purchased on account from Sarimaw
8 Office supplies costing P 2,500 was bought for cash.
11 Received from Vendeta Bank P 60,000 for loan applied to be used in her law practice.
14 Purchased on credit a desktop computer and printer for office use costing P 60,000
from Inday Inc.
16 Received P 12,500 cash for legal services rendered to JL Cruz.
18 Paid P 1,000 for Miscellaneous expenses incurred.
20 Received P 10,500 cash for legal services rendered to clients.
22 Advertising placed on a local paper for three months effective December 1 was paid, P
3,600.
24 Various clients were billed for legal services rendered, P 16,400.
25 Inday Inc. was partially paid, P 45,000.
26 Collected the accounts from various clients, P 7,500.
27 Light, water and telephone expenses for the month of December was paid, P 1,500.
28 The salary of the secretary was paid, P 5,500.
29 Lakas withdrew P 12,000 for personal use.
30 Received P 5,000 for legal services rendered.

Required:
a. Journalize the above transactions in the general journal.
b. Post each journal entry to the general ledger.
c. Prepare a trial balance at December 31 of the current year.