March 22 2021

(In LM 1)
OPERATING – receiving payment from customers, payment of interest
expense / interest, operating expense
INVESTING – sale of old machinery / equipment, purchase of machinery /
equipment
FINANCING – loan granted by bank, additional investment, payment of
Principal, cash withdrawal

If “Net cash PROVIDED BY O/I/F activities” = Inflow is Bigger

If “Net cash USED FOR O/I/F activities” = Outflow Bigger

Accounts to close in Step 7 = Nominal Accounts will be closed to the Income Summary account, Income accounts normal balance
credit, so to close you debit them, then Income Summary Credit
- Expense Accounts, to close them, Credit cuz their normal balance is Debit
- Indirect Method, to close Income Summary account, Debit the amount from the result of business operations / the total amount in
the Income Statement
- Income Summary reflects the result of the business operations
- Post-Closing Trial Balance only reflects real accounts, cuz real account amounts are forwarded to the next accounting cycle, So
example Cash in Bank, the amount 187,450 is the Cash in Bank amount as of January 1, 2021 (Start of the new accounting cycle)
- 3 Types of Trial balance : 1st – Step 3 = Prep. Of Unadjusted Trial Balance consisting of Real, Nominal, and Mixed Accounts. 2nd –
Step 4: Worksheet Prep. Under this is Adjusted Trial Balance consisting of Real and Nominal accounts, and is the basis of the
amounts used in prepping diff financial statements. 3rd – Post-Closing Trial Balance, done after closing entries were made to check if
the open accounts in the general ledger which is now the real accounts, their totals are balanced
- Reversing Entries = Entries made at the end of accounting period, for convenience and consistency.
- Record reversing entries at the beginning of the accounting period to reverse some of the adjusting entries made on the
prior period. An optional step like the prepping of worksheet, this helps with convenience and consistency
- Only reverse accrual adjustments and deferral

MERCHANDISING BUSINESS
- Highlight of this type of business is à Functional Income Statement
- Operating Cycle = Cash à Buy Merchandise à Sell to customer à Collect from customer, then repeat again from the top
- Nature of Merchandising Business = “trading business”, an organization that is in buying and selling of goods / merchandise.
- Merchandise = goods purchased for resale in the form
- Gets its income through resale, at a profit of the merchandise purchased
- Activities in a Trading / Merchandising Firm = Purchasing & Handling & Returning of Goods Purchasing & Selling & Returning of
Goods Sold & Maintaining Adequate Stocks on Hand
- Purchasing
- Info of the kind, quality, quantity, and cost of goods bought, should be kept for the use of the management.
- Records of the supplies / merchandise bought are also kept
- Handling
- Cost of transporting and sorting of goods has a important relation to the price of goods bought and so should be
recorded properly
- Transportation cost include Freight, Express, Drayage, and Cartage
- Returning of Goods Purchased
 - Some of merch received may be of unsatisfactory quality and so it will be returned to the vendor.
- If not returned, may allow some reduction from original purchasing price
- Selling
- Goods purchased are sold at prices more than how much the seller buys it as. This provides adequate margin of profit
- Returning of Goods Sold
- Customers may return some of the merch they bought. So give deductions from original selling price to the sales returns
- Maintaining Adequate Stocks on Hand (MERCHANDISE INVENTORY / INVENTORY ON HAND)
- To always satisfy orders of customers, have stocks of merch available.
“Merchandise and Service Businesses are different from each other. Known cuz Merch Buss. use Functional Income Statement”
“Service Businesses use the Natural Form / Single Step Income Statement, where Income accounts are together and Expense
accounts are also together. To know if Net Income / Net Loss, minus Total Income from Total Expense.”
- Functional Income Statement or “Multiple Step Income Statement” has 2 major functions, “Can you sell anything if you didn’t buy
anything?” No.
- Seller (Black Hat) = the one who can’t sell if have not bought anything so need another function which is...
- Buyer (Teal Hat)
“Same person but 2 different roles”
Analogy: You own a grocery store, so you are both the Seller and Buyer. All the things in the store must be first bought before you
can sell them.
- Appreciate the Functional Income Statement
- the account titles here are from the Adjusted Trial Balance
ßAccounts here are arranged by Financial Statements Order, the Revenue
and Expense Accounts are different from the Service Business income and
expense accounts, but the rest are just the same. I.E. the account titles used
for the Statement of Financial Position
ßAccount titles on the RIGHT SIDE are the ones in the Statement of
Financial Position
ß Account Tiles on the LEFT SIDE are the ones used for Functional Income
Statement, these account titles are different from the ones used in Natural
Form Income Statement
- INCOME ACCOUNT OF MERHCNADISNG BUSINESS = “SALES”, shown through the paper receipts given to customers
ß There are “Notes” so there is “Pagsama-samahin ang Magkakapareho” account
titles
ß Net Sales Revenue reflects the Function of SELLER
- If we sell something then a customer returns it, we will accept it within 7 days
and we can also give discounts when we sell something
- As a SELLER we can’t sell if we have not bought anything... so that is now the
COST OF SALES / COST OF GOODS SOLD account à showing your function as a
BUYER
- this account reflects your PUHUNAN. EX: You buy and sell a pencil,
and at first you bought that pencil for 1 peso, this is the COST OF SALES. If you sell
it for P1.50, this amount is you SALES. The 50 cents that you TUBO from the pencil is the GROSS PROFIT / GROSS MARGIN.
- Interest Income and Dividend Income, cuz we are allowed to put our money in the bank to earn Interest or for Divident Income is
when you invest in Stocks and the company declared a Dividend, these are the other types of Income in “Note 3”.
- Adding the Gross Profit and Other Income leads to “Gross Profit and Other Operating Income”
- The “Operating Expenses” we classify it according to different functions. In Service Business, we do not differentiate the Operating
Expenses according to function, but in Merchandising Business we do.
- Administrative Expenses (Note 4) = Expenses directly related to office function
- EX: You are accountant, if the boss gives you your salary, that Salaries Expense is part of Administrative Expense. If a Cashier in
the store, the boss gives him his salary, that part of Distribution Expenses.
à PREPARE NOTE 1, Account titles needed: (The Sales; The Black Hat)

à PREPARE NOTE 2 (The Purchases; The Teal Hat)

- If Note 2 is prepared by the company it means they use the PERIODIC INVENTORY
SYSTEM...
- EX: You are the owner of a grocery store, and you see that the shelves for Sardines
are empty, so you buy again. Every time you buy again, you put it on the shelves
again, you just record it as “Purchases”. Its not like you record every time someone
buys a unit of it. But all the while, the goods / merchandise that you buy gets compiled
in “Purchases”
- “Merchandise Inventory, End” = At the end of the accounting period, you will close
your shop and then count the merchandise left in your grocery and then total / cost it.
This account tile is an asset still, cuz it is still in the grocery. Then the merchandise left that you counted will be the Merchandise
Inventory, beginning in the next accounting period.
- “Freight-In” = Freight; Transportation so, “Transportation-In”, the flow of goods goes in, these are the things you will sell, and these
goods become part of Cost of Sales.
- EX: I bought a lot of pencils and then I rode a Taxi, the Taxi fare is not considered Transportation Expense cuz YOU
RODE A TAXI TO BUY THE GOODS THAT YOU WILL SELL. The taxi fare you will add it to the Puhunan of the goods you’re selling.
- “Freight-Out” = Youre the one selling the goods; SELLER, so the goods are going out.

- In PERPETUAL INVENTORY SYSTEM, the ONLY account tiles you have are, “MERCHANDISE INVENTORY” and “COST OF SALES”

à PREPARE NOTE 3

à PREPARE NOTE 4 (Dividing Into Functions the Operating Expenses)

If “Depreciation Expense” doesn’t have the word “Office” at the start, it is immediately its GENERAL and ADMINISTRATIVE EXPENSE
à PREPARE NOTE 5
- Office Salaries Expense is your salary and Sales Salaries is like the salary of the cashier
- Commission Expense is like what you give you marketing personnel if they get a good quota.
- Interest Expense is highlighted in BLUE cuz it is a FINANCE COST.

à END IS THE FUNCTIONAL INCOME STATEMENT

à NEXT, PREPARE STATEMENT OF CHANGES IN OWNER’S EQUITY

- Net Income arrived at in the Functional Income Statement, is needed in the preparation for Statement of Changes in Owner’s Equity

à PREPARE THE STATEMENT OF FINANCIAL POSITION

- The account title “Merchandise Inventory, December 31” is an Asset account

- Merchandising Business is only different from Service Business in terms of the Functional Income Statement, but the rest of the
steps is the same format.
- PERIODIC = the balance in inventory account is known only at the beginning and end of the accounting period
- Ending Inventory is determined by physical count of the merchandise on hand at end of an accounting period
- A simpler system used in practice and is the only practical alternative for most businesses with a large number of
transactions.
March 29
LEARNING MODULE 2: NATURE and FORMATION of PARTNERSHIP BUSINESS
PARTNERSHIP – a contract where AT LEAST TWO or MORE PERSONS bind themselves to CONTRIBUTE MONEY, PROPERTY, or
INDUSTRY into a common fund with intention of DIVIDING PROFIT among themselves. (Article 1767 of Civil Code of the Philippines)
- should contribute at least Money, or, Property, or Industry, or even Competence
ß obvious that this is of a Partnership Business’s because it says “Partners’
Equity” which is different of the Sole Proprietorship Business’s “Owner’s Equity”
- difference lies in the Equity Portion of the Statement of Financial Position
- Partnership Formation, TWO KINDS of PARTNERSHIP FORMATION
1. TWO or MORE INDIVIDUALS form a business for the first time
- EX: Winnie wants to sell honey so wants to have a honey business. But he does
not want to be a sole proprietor, and so he invited Piglet. They both didn’t have a
business yet, they just agreed to do business palang. Then, they invited Tiger to join
the partnership, and gave Tiger a role to just do the service part of the business
which is selling to people.
- They didn’t have an existing business, the individuals just can together and wanted to form a partnership
- Winnie decided to invest 100K CASH into the business; Winnie contributed Money. Piglet will put up a little store in front
of her house; Piglet contributed PROPERTY / BUILDING. Tiger will do the service [art of the business; Tiger contributed INDUSTRY /
SERVICE.

- If the partner is investing INDUSTRY, then we record “Memorandum” entry.So there are 2 kinds of entry, 1st = Journal Entry, which is
the simple DEBIT and CREDIT. Then the 2nd = Memorandum Entry, a statement or sentence informing you of something
- From the Winnie Example: The record is “Winnie invested 100K Cash” – DEBIT Cash 100K, CREDIT Winnie, Capital 100K. “Piglet
invested Building worth 100K” so it’s a Property - DEBIT Building 100K, CREDIT Piget, Capital 100K. “Tiger invested Industry” –
DEBIT Memorandum Entry CREDIT Tiger is admitted as an industrial partner
2. An Individual forms a buss. with a sole proprietor or sole proprietorship converted into a partnership

LM 2: EXERCISE 2 – 3
Case A- On July 1, 2020, Rose, Guada and Marie decided to form the Argem Company, a general partnership. Rose invested cash
worth P 500,000 and a computer that cost her P 60,000 with Accumulated Depreciation of P 15,000. Guada invested office tables
and chairs worth P 100,000 and Marie invests her management expertise to the business operation.
- In Excel file, Tab Ex. 2-3 = July 1 DEBIT Cash 500K and Office Equipment CREDIT Rose, Capital
- Rules when there is a non-cash asset or property being invested: RULE IS = Property / Non-cash Asset invested must be
recorded in fair market value
- Since its not stated in the given about the Office Equipment being at fair market value, it only gave us Cost and
Accumulated Depreciation, so in the absence of fair market value we can record the non-cash asset / property, AT THEIR
CARRYING VALUE. But if fair market value is stated, then record it at fair market value.
- FORMULA OF CARRYING VALUE: COST – ACCUMULATED DEPRECIATION
- So Carrying Value of “Office Equipment” DEBIT 45K
- Then CREDIT Rose, Capital 545K, so that DEBIT and CREDIT amounts are equal
- Next, July 1 Guada invested Office Furniture and Fixtures – DEBIT Office Furniture and Fixture 100K CREDIT Guada, Capital 100K
- Last, July 1 Tiger invested Management Expertise, so this is a Memorandum type of Entry since this is under Contribution of Service
/ Industry. DEBIT Memorandum Entry CREDIT Maria is an Industrial Partner

Case B- On May 1, 2020, Romy and Vic formed a partnership contributing assets with the following agreed valuations:
Romy Vic
Building P1,500,000
Office Equipment 30,000 P220,000
Furniture and Fixture 50,000
The partners agreed that the partnership will assume the P 300,000 mortgage loan on Building and that Vic will contribute additional
cash to make his capital balances equal to 40% of the total partnership equity.
- In Excel File, Tab Ex. 2-3 = May 1 “Romy’s Investments and mortgage loan” DEBIT Building 1.5M and Office Equipment 30K
CREDIT Mortgage Payable 300K and Romy, Capital 1,230,000 (Got this amount cuz Total Debit; 1,530,000 minus Credit of 300K is
1,230,000)
- May 1 “Vic’s Investments and Cash” DEBIT Cash, Office Equipment 220K, and Furniture and
Fixtures 50K CREDIT Vic, Capital
- For DEBIT Cash, to compute is know the Total Partnership Capitalization which is 60% for
Ronny, 40% for Vic. If 60% of the Total Partnership Capital is 1,230,000, the 100% is computed
as 1,230,00 divided by 60% (0.6) = 2,050,000 (TOTAL PARTNERSHIP CAPITALIZATION).
Then now to compute the 40% 2,050,00 minus 1,230,000 = 820,000. Or also 2,050,000 x 40%, answer will just be the same.
- So CREDIT Vic, Capital = 820,000
- For the DEBIT Cash just compute by 820,000 minus the Total Debits so far [820K – (220K=50K)], so 550K

Remember the second type of Partnership Formation? = 2. An Individual forms a buss. with a sole proprietor or sole proprietorship
converted into a partnership

1st Step
- Can Winnie have an already existing honey business? YES, and that sole proprietorship business of Winnie currently does
A = L + OE
- If Winnie wants to Piglet and Tiger to join his plan in Partnership, this is not a snap of a finger action. So Winnie’s Assets
and Liabilities are properly valued in the first place so that the Capital will also be proper in value.
- If in the first place any of the three was not in properly valued, if Piglet and Tiger joins Winnie, Winnie’s Capital is currently
understated and Winnie is also Lugi. Then there is a accounts payable that was not recorded in Liabilities, so Winnie’s Capital is
Overstated. So before the new partners, Piglet and Tiger join Winnie, we should revalue Winnie’s assets and liabilities.
Mary will invest enough cash to give her 1/3 interest on the partnership’s total capitalization.
Required:
(1) Compute adjusted capital balance of Anne upon formation of the partnership.
- Francis, Capital 1,727,000 x 1.5% = 10,800, but look at the picture
“Allowance for Bad Debts” account is just 8K, so have to adjust/increase by 2,800.
- DEBIT Francis, Capital 2,800 CREDIT Allowance for Bad Debts 2,800
- We will INCREASE Allowance for Bad Debts so CREDIT
- this adjustment and ALL THE OTHER ADJUSTMENTS will AFFECT “Francis, Capital”, cuz as of rn it is currently understated.
- We INCREASED CONTRA-ASSET (Allowance for Bad Debts), so Capital will DECREASE cuz...
- The amount we will increase for Allowance of Bad Debts was taken from the Capital.
(2) The Landscaping Supplies Inventory is to be valued at 560K.
- In the picture, it says Landscaping Supplies is 550K, but the new agreed evaluation / fairly market value is 560K, so we should
INCREASE our ASSET. Then this will result to an INCREASE in CAPITAL to MAINTAIN the EQUALITY in DEBIT and CREDIT.
- DEBIT Landscaping Supplies 10K CREDIT Francis, Capital 10K
(3) A professional appraiser estimated that the furniture and equipment is worth
800K.
- REMEMBER HOW TO COMPUTE CARRYING VALUE: “COST – ACCUMULATED
DEPRECIATION” and amount derived from here will be the amount you will
compare to 800K.
- Carrying Value of “Furniture and Equipment” COST 1,000,000 ACCUMULATED
DEPRECIATION 100,000 = 900K
- Compare 900K with professional appraiser of 800K, so your ASSET will
DECREASE by 100K.
- Adjust through Contra-Asset account DEBIT Francis, Capital (to decrease) 100K CREDIT Accumulated Depreciation –
Furniture and Equipment 100K
- If in problem, given there is Carrying Value, Fair Market Value, and Professional Appraiser, will choose Professional Appraiser, It is
the most trusted.
à AFTER RE-EVALUATION / ADJUSTMENTS (did that 1st Step of revaluing and now DEBIT and CREDIT is equal, and it will now be
fair for all partner)

àNext step, Close Accounts for it to be “0” in value so that we can Transfer it to the Partnership books. This will CLOSE SOLE
PROPRIETORSHIP BOOKS
- Normal Bal. of Asset DEBIT so to CLOSE, CREDIT. Close CONTRA ASSET, DEBIT
- 2nd Step
- DEBIT Allowance for Bad Debts 10,800, Accumulated Depreciation –
Furniture and Equipment 200K, Accounts Payable 565K, Francis, Capital
1,634,200 CREDIT Cash 130K, Accounts Receivable 720K,
Landscaping Supplies 560K, Furniture and Fixture 1M
- CLOSE SOLE PROP. BOOKS CUZ THEY WILL INVEST NA IN THE
PARTNERSHIP BUSSS.
- All the CREDITED Accounts in the Closing Step, will be DEBITED then all the DEBITED Accounts will be CREDITED in the
PARTNERSHIP BOOKS, LITERALLY JUST SWITCHED THEM
- However, DO NOT include the Accumulated Depreciation – Furniture and Equipment Account cuz when we have to
record the Depreciable assets in the Partnership books, RECORD AT CARRYING VALUE.
- So, instead of the previously CREDITED Furniture and Equipment 1M, it is now DEBITED for 800K
- Computation for this: “Carrying Value Formula à COST – ACCUMULATED DEPRE. à Furniture and
Equipment 1,000,000 MINUS Accumulated Depreciation – Furniture and Equipment 200K= 800K Furniture and Equipment DEBIT in
PARTNERSHIP BOOKS, then DONT RECORD Accumulated Depre.. in PARTNERSHIP BOOKS
- WE STARTED A NEW BUSINESS NA, SO RECORD THE DEPRECIABLE ASSET IN ITS CARRYING VALUE.
- Given: “Pio is to invest cash which will make him an equal partner of Francis”, so DEBIT Cash 1,634,200 (Same amount as the
Francis, Capital) CREDIT Pio, Capital 1,634,200

3rd Step