Professional Documents
Culture Documents
Basic Acctg Module 07
Basic Acctg Module 07
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Example: San Miguel Corporation, RFM Corporation, and Sara Lee Philippines,
Inc. Unilever Philippines, Inc.
BUSINESS
ORGANIZATION OR PERFORMS OR FEE
ENTITY RENDERS SERVICES
SELL
BUSINESS BUY GOODS/ GOODS/M
ORGANIZATION MERCHANDISE DSE. PROFIT
OR ENTITY
BUSINESS SELL
ORGANIZATION BUY RAW FINISHED FINISHED
OR ENTITY MATERIALS PRODUCTS GOODS
MANUFACTURING PROCESS
PROFIT
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DEFINITIONS OF ACCOUNTING
Accounting is a service activity. Its function is to provide quantitative
information, primarily financial in nature, about economic entities that is
intended to be useful in making economic decisions. (Financial Reporting Standard
Council)
Accounting is the art of recording, classifying, summarizing in a
significant manner and in terms of money, transactions, and events which are in
part at least of a financial nature, and interpreting the result thereof. (American
Institute of Certified Public Accountants)
Accounting is the art of measuring, communicating, and interpreting the
financial activity of a business.
From the above definitions of accounting the student must understand
that accounting is both a process and an art. Its ultimate objective is to provide
the users of financial information that may be used in their decision making.
BUSINESS TRANSACTIONS
Business transaction refers to activity or event taking place in business,
which is expressed in terms of money. The business transactions are economic
activities that are measured and finally reported by accountants through
financial reports or statements.
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BASIC FINANCIAL STATEMENTS3
1. Balance Sheet / Statement of Financial Position
2. Income Statement / Statement of Recognized Income / Statement of
Activities
3. Statement of Changes in Equity
4. Cash Flow Statement
5. Notes to Financial Statements
ELEMENTS OF ACCOUNTING4
1. Assets
2. Liabilities
3. Equity
4. Income
5. Expenses
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PAS 1 Presentation of Financial Statement, Philippine Financial Reporting Standards.
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Ibid.
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The Framework-Elements of Financial Position, Philippine Financial Reporting Standards.
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The Framework-Elements of Financial Position, Philippine Financial Reporting Standards.
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1. It is probable that an outflow of resources embodying economic
benefits will result from the settlement of a present obligation
2. The amount at which the settlement will take place can be measured
reliably.
Examples of Liabilities: Accounts Payable, Notes Payable, Mortgage
Payable, Loans Payable
How may a liability be settled?
1. by payment of cash
2. by transfer of non-cash asset
3. by providing service/s
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Ibid.
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The Framework-Elements of Financial Position, Philippine Financial Reporting Standards.
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Ibid.
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COMPONENTS OF FINANCIAL STATEMENTS
1. Balance Sheet - shows the financial position of the company. The financial
position of an enterprise is affected by the economic resources it controls, its
financial structure, its liquidity and solvency, and its capacity to adapt to
changes in the environment in which it operates. It presents three (3) major
categories: a) Assets, b) Liabilities, and c) Owner's Equity. It presents the
financial status of business or enterprise at a particular point in time.
The Balance Sheet reflects the elements that are directly related to
financial position, these are the assets, liabilities and owner’s equity.
Net Income (Net Loss) - the excess (deficit) of revenue over expenses for an
accounting period.
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PAS 7, Cash Flow Statement-Fundamental Principles, Philippine Financial Reporting Standards.
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It has three categories of information: operating, investing and financing
activities.
Financing activities are activities that alter the equity capital and
borrowing structure of the enterprise.
DOUBLE-ENTRY BOOKKEEPING
In accounting each transaction affects at least two items in the financial
accounting records. The double entry system of recording is based on this
principle of duality.
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The Framework-Notes and Supplementary Schedule, Philippine Financial Reporting Standards.
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1. = no effect + no effect
2. = + no effect
3. = no effect +
4. = no effect +
5. no effect = + no effect
6. no effect = +
7. no effect = +
8. no effect = no effect +
Note that each transaction affects at least two items in the equation (all
items may be affected) and the combination varies. These notwithstanding, the
equality of the equation must be maintained always. In accounting, when the
"equality" is maintained it is said to be in "balance".
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4.) certain external events other than transfers that reduce the market price or
utility of assets,
5.) shifts or allocations of costs of different asset categories or to expenses in
production, and
6.) casualties
In exchanges, asset decreases may be accompanied by increases in other
assets (e.g., a purchase for cash), decreases in liabilities (e.g., payment of debt), or
increases in expenses.
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REVENUE ARISES FROM
1.) exchanges accompanied by increases in assets
2.) exchanges accompanied by decreases in liabilities (e.g., unearned revenue)
ASSETS
Current Assets - are cash; cash equivalent; assets held for collection, sale, or
consumption within the enterprise's normal operating cycle; or assets held for
trading within the next 12 months12. All other assets are noncurrent. The current
assets are presented in the order of "liquidity". Liquidity means the characteristic
of an asset to be easily converted into cash.
1. Cash on Hand - refers to coins, currencies, bank drafts, and customer's
checks awaiting deposits that are kept in a safe deposit box or in a cash
box within the enterprise. These cash items must be available for use in
the current operations.
2. Cash in Bank - money deposited in a bank which may be a savings or
demand deposits.
3. Accounts Receivable - consist of open accounts with customers for
uncollected revenues, unbilled services already rendered or accrued as
long as the revenue has been earned.
4. Allowance for Bad debts - also termed as "Allowance for Doubtful
Accounts". This is a contra-asset account that is deducted from a principal
asset account which is accounts receivable. All the outstanding accounts
from the customers are not certain to be collected fully, hence the business
usually provide for uncollectible portion of the accounts receivable as bad
debts or doubtful accounts.
Accounts Receivable P xxx
Less: Allowance for Bad Debts (xxx)
Net Realizable Value P xxx
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PAS 1, Presentation of Financial Statements-Balance Sheet, Philippine Financial Reporting Standard.
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5. Notes Receivables - are collectible amounts from the customer that are
supported by written formal promises to pay a certain amount on demand
or at a certain future time.
6. Office Supplies Unused - refers to the portion of office supplies purchased
that are still capable of utilization by the enterprise in the immediately
succeeding accounting period. This is classified as "prepayments" or
"prepaid expense" because the cost has already been paid and has future
benefits.
7. Prepaid Rent - refers to advance rental payment/s that will benefit the
business.
LIABILITIES
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CURRENT LIABILITIES are those to be settled within the enterprise's normal
operating cycle or due within 12 months, or those held for trading, or those for
which the entity does not have an unconditional right to defer payment beyond
12 months. Other liabilities are noncurrent13.
1. Accounts Payable - liability representing the amount owed to a creditor
usually arising from the purchase of goods, materials or supplies.
2. Notes Payable - a liability evidenced by a formal promise to pay written in
a note.
3. Unearned Service Fees - payments for services that are received in
advance from the client's but the enterprise or business has not yet
rendered the services.
4. Salaries Payable - obligation of the enterprise to pay its employees for
their services already rendered to the business.
5. SSS, PHILHEALTH, Withholding taxes Payable - these are obligations due
to different agencies or institutions of the government such as the Social
Security System and Bureau of Internal Revenue.
6. Rent Payable - obligation of the enterprise as the lessee of the premises to
pay the lessor, the owner of the place being rented.
7. Other Payables - other obligations of the business that must be settled
within one year.
OWNER'S EQUITY
1. Owner's Equity - is the account used to reflect the equity of the proprietor
in the business. It refers to the owner's investment in the enterprise.
2. Owner's Drawings - this account is used to refer to withdrawals by the
proprietor of some earnings of the business for personal use.
3. Income and Expense Summary - is a temporary account used to
summarize the effects of revenues/income and expenses to the equity
accounts of the proprietor.
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PAS 1, Presentation of Financial Statements-Balance Sheet, Philippine Financial Reporting Standard.
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REVENUES
1. Service Income - refers to revenue account in a service-type business
organization. It reflects the gross earnings of the enterprise before all
expenses of operations are deducted.
2. Other Income - other income earned by the business which is not directly
related with its main operations such as interest income, rental income,
and commission income.
EXPENSES
The caption "Operating Expenses" is often used. The operating expenses for
service-type business operations include all costs of services that are used or
consumed in the operations of the business.
1. Salaries Expense - refers to the cost of service rendered by the employees
of the business. It may include the cost of living allowances, 13 th month
pay, and other employee fringe benefits.
2. Rent Expense - refers to the cost of renting office space used by the
business in its operations.
3. Supplies Expense - refers to the cost of office stationery, coupon bond,
envelopes, ball pens and other office supplies that are already used by the
business.
4. Utilities Expense - refers to the cost of light and water and telephone
services consumed in the business operations.
5. Taxes and Licenses - refers to payments that are required by the Bureau of
Internal Revenue and the local Municipality or City where the business is
located. Payments to different government instrumentality as regards the
proper registration of the business are also included in this account.
6. Transportation Expenses - refers to cost incurred by officers and
employees for transportation in line with the operations, e.g., meeting
with the clients.
7. Representation and Entertainment - costs incurred in accommodating the
customers or clients. Also included are the costs when officers or
employees represent the business in official transactions.
8. Depreciation Expense - refers to the portion of the cost of depreciable
property that is charged against current operations.
9. Doubtful Accounts Expense - refers to the amount of account receivables
that is estimated to be uncollectible and is charged against current year's
operations.
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10. Insurance Expense - refers to the premium chargeable to current year's
operation on fire insurance coverage, motor vehicles insurance coverage
and other insurance plans.
11. SSS, PHILHEALTH, EC Expenses - refers to the contribution of the
enterprise as the employer of the employees in the Social Security System,
PHILHEALTH and Employees Compensation.
12. Miscellaneous Expenses - refers to other costs in relation to the conduct of
the business operations that are normally incurred but each of the
amounts is not significant enough to be given accounting recognition
individually. These amounts are grouped together and are called
"miscellaneous expenses".
CLASSIFICATION OF ACCOUNTS
A. According to Financial Statement Presentation
1. REAL ACCOUNTS - Balance Sheet accounts
a. assets
b. liabilities
c. capital
2. NOMINAL ACCOUNTS - Income Statement accounts
a. revenues/income
b. expenses
B. Whether Principal or Auxiliary
1. PRINCIPAL ACCOUNTS - accounts that can stand alone
e.g., cash, accounts receivable, service income, sales
2. AUXILIARY ACCOUNTS - accounts that are aids or subsidiary to the
main or principal accounts.
a. adjunct account - added to the principal account
b. contra account - deducted from the principal account
e.g., allowance for doubtful accounts, accumulated depreciation
C. Whether Permanent or Temporary
1. PERMANENT - accounts that are not closed at the end of the
accounting period
2. TEMPORARY - accounts that are closed at the end of the accounting
period.
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Rule 3: A credit entry increases a liability.
Rule 4: A debit entry decreases a liability.
Rule 5: A credit entry increases owner's equity.
Rule 6: A debit entry decreases owner's equity.
The terms debit and credit are not synonymous with increase or decrease.
They simply refer to the position that the entries take in an account, which is
either the left side or the right side.
BUSINESS PAPERS
The bases of recording transactions in books of accounts are documents
called business papers. Some common business papers are the official receipts,
invoices, cash vouchers, checks, statements of accounts, and promissory notes.
1.) OFFICIAL RECEIPTS - An official receipt is a document which gives
evidence to a transaction involving a receipt of cash. The document gives
information on the amount of cash received, the person from cash was received,
the date of receipt and the reason for such receipt.
2.) INVOICE - An invoice is a document which gives evidence to a transaction
involving the rendering of sales or services giving information as to the name
and address of the customer or client, the date the sales or services were made,
the terms of sales or service, the amount and other particulars about such sales or
services. An invoice is called a sales invoice from the point of view of the seller
and a purchase invoice from the point of view of the buyer.
3.) CASH VOUCHER - A cash voucher is a document which gives evidence to a
transaction involving payment of cash. This document gives information as to
the name and address of the payee, the date of payment, the amount paid, and
an explanation for such payment.
4.) CHECK - A check is prepared whenever payment is to be made from cash in
bank.
5.) STATEMENT OF ACCOUNT - A statement of account is a bill presented by
a creditor requesting payment for sales or services.
6.) PROMISSORY NOTE - A promissory note is a written promise made by a
maker (debtor) promising to pay the payee (creditor) a certain sum in money at a
fixed or determinable future time.
ACCOUNTING CYCLE
The accounting cycle refers to a series of sequential steps or procedures
performed to accomplish the accounting process. It is referred to as a "cycle"
because this is repeated each accounting period.
The accounting period may be any of the following:
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1. Calendar-period - the accounting period starts on January 1 and ends
December 31 of the same year.
2. Fiscal year - the accounting period starts at any date except the first
calendar date and end one year thereafter.
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maintained in the next year. These reversing entries are recorded at the
beginning of the next accounting period and are optional.
JOURNALIZATION
The first step in the bookkeeping process is journalization. Bookkeeping
refers to the systematic recording of transactions in the books of the enterprise.
JOURNALIZATION is the process of recording transactions and events in
a chronological order in the book of original entry called the journal.
A general journal is a two-column journal with the following columnar
headings: date, particular, F, debit and credit. These columnar headings are used
to provide the following information about the transaction:
1. Date - This refers to the date when the transaction occurred.
2. Particulars - This refers to the names or titles of accounts where
changes have been caused by the transaction. A brief explanation of the
event is also recorded.
3. F - F stands for 'folio' and is used as a reference guide to indicate the
ledger account to which an entry has been posted.
4. Debit - This is a money column used to record the debit amount of the
entry.
5. Credit - This is also a money column used to record the credit amount
of the entry.
GUIDELINES ON JOURNALIZATION
The following guidelines will be useful in recording transactions in a two-
column general journal.
1. A complete journal entry includes the following data: the date, debit and credit
accounts, debit and credit amounts, and a brief explanation of the transaction.
When an entry has two or more debits or credits, the entry is a compound
journal entry.
2. The date in a general journal includes the year, month, and day when the
transaction occurred. These complete data are recorded on the first entry of every
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journal page. Unless there is a new- year or month on the journal page, it is
sufficient to record only the day for subsequent entries.
3. The debit account is recorded at the extreme left of the particulars column. If
there are two or more debit accounts, these are all placed alongside the extreme
left margin.
4. The credit account is recorded with a half-inch indention from the extreme left
margin of the particulars column to distinguish it from the debit account. All
credit accounts are similarly placed. It is important to note that all debit accounts
are recorded before the credit accounts.
5. The explanation of the transaction must be brief and concise. This is also
placed with an indention of one inch from the extreme left margin of the
particulars column.
6. Usually a line is left free between journal entries.
7. When recording the peso amounts in the money columns no commas or period
need to be used. The journal money columns are designed with specific boxes for
each amount. To illustrate P 1,234,567.89 will be recorded in the money column
as:
P 1 2 3 4 5 6 7 .89
8. A peso sign may be placed before the first amount in a money column. No
other peso sign in necessary as all numbers in money columns are presumed to
be in pesos.
9. When transactions do not include centavos, the centavo column may be left in
blank. Dashes (-) or ciphers (00) may also be used.
POSTING PROCEDURES
1. Based on the first debit entry in the journal, look for the account in the general
ledger.
2. On the debit side date column, copy the date.
3. Copy the amount in the debit column.
4. Insert the journal page number in the folio column of the ledger.
5. Insert the ledger account number in the folio column of the journal.
6. Repeat steps 1 to 5 until all the accounts have been posted or transferred from
the journal to the ledger.
Steps number 4 and 5 is called cross reference. It facilitates the tracing of an
entry to and from the journal and ledger. Also, if the F columns are both filled
up, it signifies that an entry has already been posted. The folio column in the
journal will be gradually filled up as the postings are made.
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TRIAL BALANCE
At this point we should test the accuracy of our journalizing and posting
process by preparing a trial balance. A trial balance is a list of accounts with
ledger balances. The following are the steps in determining the balances of the
ledgers:
1. Total the debit column and record it in small figures in pencil directly
underneath the last debit amount. This is called pencil footing. It is done in
pencil and the figure is small to distinguish it from the regular entry and to
permit erasures if the figure is not correct.
2. Total the credit column and record it in small pencil figures directly under the
last credit column amount.
3. Extract the balance: if a debit balance, place it in the explanation column debit
side in line with the last debit posting in small pencil figure (see cash ledger); and
if a credit balance, place it in the explanation column credit side in line with the
last credit posting.
4. You may not pencil foot if there is a single debit or credit amount only.
The trial balance gives the data needed in preparing the financial
statements.
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See to it that the debit totals is equal to the credit totals. If it is not so, then
errors like transferring from the journal to the ledger on the wrong side (cash
debit was posted to the cash credit) or wrong amount (cash debit 40,000 was
posted to the debit of the cash ledger 400,000) or wrong footings or wrong
balances were copied in the trial balance.
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ITEMS FOR ADJUSTMENTS
In a service-type business there are at most six items for adjustments. The
number of adjusting entries of course depends on the volume of transactions of a
particular enterprise. These are the following: (1.) Adjustment for Prepaid
Expenses; (2) Adjustment for Accrued Income or Revenue; (3) Adjustment for
Accrued Expense; (4) Adjustment for Depreciation; (5) Adjustment for Bad
Debts; (6) Adjustment for Unearned Revenues/ Deferred Income.
THE WORKSHEET
Worksheet is a tool that facilitates the preparation of the financial
statements. It is the device that efficiently summarizes the data in the unadjusted
trial balance and the adjustments to come up with the financial statements on
time.
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b.) SUBTRACT - when the unadjusted balance is not the same as
the adjustment (debit and credit, or credit and debit)
6.) Extend the asset, liability and owner's equity amounts from the adjusted
balance columns to the balance sheet columns. Extend the revenue and expense
amounts to the income statement columns. Total the balance sheet and income
statement columns.
7.) Note that the initial totals of the income statement and balance sheet columns
are not equal. The difference between the total credits and the total debits in the
income statement is the net income or net loss of the period.
a.) NET INCOME - total credits is greater than total debits. (Revenues >
Expenses)
b.) NET LOSS - total debits is greater than total credits. (Revenues <
Expenses)
Enter the net income in the DEBIT column of the income statement and
compute the final column totals. The income statement now has an equal total
debits and credits.
Enter the net loss in the CREDIT column of the income statement and
compute the final column totals. The income statement now has an equal total
debits and credits.
8.) Enter the net income in the credit column of the balance sheet and compute
the final column totals. The balance sheet must now have equal total debits and
credits. If the result is net loss, enter the amount of net loss in the debit column
of the balance sheet and get the final column totals.
9.) Double rule the column totals.
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CLOSING ENTRIES
Closing entries are done at the end of the accounting period in order to
bring the temporary accounts into zero balances. TEMPORARY accounts are the
nominal accounts or the income statement accounts. These are cleared of all
outstanding balances in the general ledger so that at the start of the next
accounting period the revenue and expense accounts will be opened for
recording of new transactions covering the new accounting period.
Aside from income statement accounts other temporary accounts are: (1)
owner's drawing account, (2) Income and Expense Summary account.
Permanent accounts or the balance sheet accounts are not closed because
their balances will be carried over to the next accounting period.
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REVERSING ENTRIES
This is the last step in the accounting cycle. On the first day of the next
accounting period, some adjusting entries need to be reversed. This is called
reversing entries simply because the debit entries are credited while the credit
entries are debited.
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