REVIEW OF ACCTG CYCLE - A B C D E & Corporation

Introduction to Accounting
and Business
© Copyright 2004 South-Western, a division

PowerPoint Presentation by Douglas Cloud of Thomson Learning. All rights reserved.
Professor Emeritus of Accounting
Pepperdine University
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Objectives
1. Describe the nature of a business.
After studying this
2. Describe the chapter,
role of accounting
you shouldin business.
3. Describe the importance
be ableofto:
business ethics and
the basic principles of proper ethical conduct.
4. Describe the profession of accounting.
5. Summarize the development of accounting
principles and relate them to practice.
6. State the accounting equation and define each
element of the equation.
Objectives
7. Explain how business transactions can be
stated in terms of the resulting change in the
basic elements of the accounting equation.
8. Describe the financial statements of a
proprietorship and explain how they interrelate.
9. Use the ratio of liabilities to owner’s equity to
analyze the ability of a business to withstand
poor business conditions.
Types of Businesses
Manufacturing Business
Product
General Motors Cars, trucks, vans
Intel Computer chips
Boeing Jet aircraft
Nike Athletic shoes and apparel
Coca-Cola Beverages
Sony Stereos and television
Types of Businesses
Merchandising Business
Product
Wal-Mart General merchandise
Toys “R” Us Toys
Circuit City Consumer electronics
Lands’ End Apparel
Amazon.com Internet books, music, video
retailer
Types of Businesses
Service Business
Product
Disney Entertainment
Delta Air Lines Transportation
Marriott Hotels Hospitality and lodging
Merrill Lynch Financial advice
Sprint Telecommunication
There are three types of
business organizations
✓ Proprietorship
✓ Partnership
✓ Corporation
A proprietorship Advantages
is owned by one • Ease in organizing
individual. • Low cost of
organizing
Disadvantage
Joe’s • Limited source of
financial resources
• Unlimited liability
Advantages
A partnership is • More financial
owned by two or resources than a
more individuals. proprietorship.
• Additional
management skills.
Joe and Marty’s Disadvantage
• Unlimited liability.
A corporation is
organized under state Advantage
or federal statutes as a • The ability to obtain
separate legal entity. large amounts of
resources by issuing
stocks.
J & M, Inc. Disadvantage
• Double taxation.
Business Strategies
Under a differential strategy, a business

designs and produces products or services
that possess unique attributes or
characteristics which customers are willing
to pay a premium price.
Maytag
Tommy Hilfiger
Business Stakeholders
A business stakeholder is a person or

entity having an interest in the
economic performance of the business.
The Process of
Providing Information
STAKEHOLDERS
Internal: External:
Identify
Owners, Customers,
1 stake-
holders.
managers, creditors,
government
employees
Assess
stakeholders’
2 informational
needs.
The Process of
Design the
Record accounting
economic Accounting
information
4 data about
business
Information
System
3 system to meet
stakeholders’
activities needs.
and events.
The Process of
STAKEHOLDERS
Internal: External:
Owners, Customers,
managers, creditors,
employees government
Prepare
accounting
5 reports for
stakeholders.
Accounting
Information
System
Business Ethics
1. Avoid small ethical lapses.

Sound
2. Focus on your long-term
Principles that reputation.
form the
3. You may expect to suffer
foundation for adverse personal
ethical consequences for holding
behavior to an ethical position.
Profession of Accounting
Accountants employed by a business firm or

a not-for-profit organization are said to be
engaged in private accounting.
Accountants and their staff who provide

services on a fee basis are said to be
employed in public accounting.
Generally Accepted
Accounting
Principles (GAAP)
The business entity concept
limits the economic data in
the accounting system to
data related directly to the
activities of the business.
The cost concept is the
basis for entering the
exchange price, or cost
of an acquisition in the
accounting records.
The objectivity concept
requires that the accounting
records and reports be based
upon objective evidence.
The unit-of-measure
concept requires that
economic data be
recorded in dollars.
The Accounting Equation
Assets = Liabilities + Owner’s Equity
The resources
owned by a
business
The rights of the

creditors, which
represent debts
of the business
The rights of the

owners
What is a business
transaction?
A business transaction is an economic event or

condition that directly changes an entity’s financial
condition or directly affects its results of operations.
On November 1,
2005, Chris
Clark begins a
business that will
be known as
NetSolutions.
a. Chris Clark deposits $25,000 in a bank
account in the name of NetSolutions.
Assets = Owner’s Equity

Cash Chris Clark, Capital
= 25,000 Investment
a. 25,000
by Chris
Clark
b. NetSolutions exchanged $20,000 for land.
Assets = Owner’s Equity

Cash + Land Chris Clark, Capital
Bal. 25,000 = 25,000
b. –20,000 +20,000
Bal. 5,000 20,000 25,000
c. During the month, NetSolutions purchased
supplies for $1,350 and agreed to pay the
supplier in the near future (on account).
Owner’s
Assets = Liabilities + Equity
Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
=
Bal. 5,000 20,000 25,000
c. + 1,350 + 1,350
Bal. 5,000 1,350 20,000 1,350 25,000
d. NetSolutions provided services to
customers, earning fees of $7,500 and
received the amount in cash.
Owner’s
Bal. 5,000 1,350 20,000 = 1,350 25,000
d. + 7,500 + 7,500 Fees
earned
Bal. 12,500 1,350 20,000 1,350 32,500
e. NetSolutions paid the following
expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
Owner’s
Bal. 12,500 1,350 20,000 1,350 32,500
e. – 3,650 –2,125 Wages
=
– 800 Rent
– 450 Util.
– 275 Misc.
Bal.8,850 1,350 20,000 1,350 28,850
f. NetSolutions paid $950 to
creditors during the month.
Owner’s
Bal. 8,850 1,350 20,000 = 1,350 28,850
f. – 950 – 950
Bal. 7,900 1,350 20,000 400 28,850
g. At the end of the month, the cost
of supplies on hand is $550, so
$800 of supplies were used.
Owner’s
Bal. 7,900 1,350 20,000 = 400 28,850
g. – 800 – 800 Supplies
expense
Bal. 7,900 550 20,000 400 28,050
h. At the end of the month, Chris
withdrew $2,000 in cash from the
business for personal use.
Owner’s
Bal. 7,900 550 20,000 = 400 28,050
h. –2,000 –2,000 With-
drawal
Bal. 5,900 550 20,000 400 26,050
Effects of Transactions on Owner’s Equity
Owner’s Equity
Decreased by Increased by
Owner’s Owner’s
withdrawals investments
Expenses Revenues
Net
income
Accounting reports, called
financial statements,
provide summarized
information to the owner.
Financial Statements
• Income statement—A summary of the revenue
and expenses for a specific period of time.
• Statement of owner’s equity—A summary of
the changes in the owner’s equity that have
occurred during a specific period of time.
• Balance sheet—A list of the assets, liabilities,
and owner’s equity as of a specific date.
• Statement of cash flows—A summary of the
cash receipts and disbursements for a specific
period of time.
NetSolutions
Income Statement
For the Month Ended November 30, 2005
Fees earned $7 500 00
Operating expenses:
Wages expense $2 125 00
Rent expense 800 00
Supplies expense 800 00
Utilities expense 450 00
Miscellaneous expense 275 00
Total operating expenses 1 135 00
To the statement
Net income $3 050 00
of owner’s equity
NetSolutions
Statement of Owner’s Equity
Chris Clark, capital, November 1, 2005 $ 0
Investment on November 1 $25 000 00
From the income
Net income for November 3 050 00
statement
$28 050 00
Less withdrawals 2 000 00
Increase in owner’s equity 26 050 00
To
Chris Clark, capital, November 30, 2005
the $26 050 00
balance sheet
NetSolutions
Balance Sheet From the
November 30, 2005 statement of
Assets Liabilities owner’s equity
Cash $ 5 900 00 Accounts Payable $ 400 00
Supplies 550 00 Owner’s Equity
Land 20 000 00 Chris Clark, cap. 26 050 00
Total liabilities and
Total assets $26 450 00 owner’s equity $26 450 00
This balance sheet presented

using the account form
When the balance sheet displays
the liabilities and owner’s equity
below the assets, the report form is
being used.
NetSolutions
Statement of Cash Flows
Cash flows from operating activities:
Cash received from customers $ 7 500 00
Deduct cash payments for expenses
and payments to creditors 4 600 00
Net cash flow from operating activities 2 900 00
Cash flows from investing activities:
Cash payment for acquisition of land (20 000 00 )
Cash flows from financing activities:
Cash received as owner’s investment $25 000 00
Deduct cash withdrawal by owner 2 000 00
Net cash flow from financing activities 23 000 00
Net cashShould
flow and Nov.
match 30, 2005
Cash on thecash bal. sheet
balance $ 5 900 00
Statement of Cash Flows
Cash Flows from Operating Activities—This section
reports a summary of cash receipts and cash payments
from operations.
Cash Flows from Investing Activities—This section
reports the cash transactions for the acquisition and sale
of relatively permanent assets.
Cash Flows from Financing Activities—This section
reports the cash transactions related to cash
investments by the owner, borrowings, and cash
withdrawals by the owner.
Tools for Financial
Analysis and Interpretation
The ratio of liabilities to owner’s equity
allows owners like Chris Clark to analyze
the firm’s ability to withstand poor
business conditions.
Ratio of liabilities Total Liabilities

=
to owner’s equity Total owner’s equity (or total
stockholders’ equity)
Tools for Financial
Analysis and Interpretation
Ratio of
$400
liabilities to =
owner’s equity $26,050
Ratio of
liabilities to = 0.015
owner’s equity
The End
Analyzing Transactions

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Objectives
1. Explain why accounts
After studyingare
thisused to record
and summarize the
chapter, effects
you shouldof transactions
on financial statements.
be able to:
2. Describe the characteristics of an
account.
3. List the rules of debit and credit and the
normal balances of accounts.
4. Analyze and summarize the financial
statement effects of transactions.
Objectives
5. Prepare a trial balance and explain how
it can be used to discover errors.
6. Discover errors in recording
transactions and correct them.
7. Use horizontal analysis to compare
financial statements from different
periods.
Each financial statement
item, called an account, is
included in the ledger.
A group of
accounts for a
business entity is
called a ledger.
A list of the
accounts in a ledger
is called a chart of
accounts.
Major Account Classifications
Assets are Liabilities are debts

resources owned owed to outsiders
by the business. (creditors).
Cash Accounts
Supplies payable
Building Notes payable
Accounts Wages payable
receivable
Liabilities are often identified
Assets are on the balance sheetare
Liabilities by debts
titles
owed payable
resources owned that include .
to outsiders
by the business. (creditors).
Cash Accounts
Supplies payable
Building Notes payable
Accounts Wages payable
receivable
Owner’s Revenues are Expenses are the
equity is the increases in using up of assets
owner’s right to owner’s equity as or consuming of
the assets of the a result of selling services to
business. services or generate revenue.
Chris Clark, products. Rent Expense
Capital Fees Earned Salary Expense
Chris Clark, Fares Earned Utilities
Drawing Commission Expense
Revenue
To assist you in learning,
an account can be drawn
to resemble the letter T.
The T-Account
Cash
The T-account has a title.

The T-Account
Cash
Left side
debit
The left side of the account is the debit side.

The T-Account
Cash
Left side Right side
debit credit
The right side of the account is the credit side.

The T-Account
Cash
3,750 850
4,300 1,400
2,900 700
2,900
Typical entries
Balancing a T-Account
Cash
First, foot
the debit 3,750 850
side. 4,300 1,400
2,900 700
10,950 2,900
Cash
3,750 850
4,300foot the
Next, 1,400
2,900
credit side. 700
10,950 2,900
5,850
Subtract total credits
Cash from total debits to
obtain the account
3,750 balance.
850
4,300 1,400
2,900 700
5,100 10,950 2,900
5,850
Transactions and Balance
Sheet Accounts
(A) On November 1, Chris Clark
deposits $25,000 in a bank account in
the name of NetSolutions.
JOURNAL Page 1
Post.
Date Description Ref. Debit Credit
2005
1 Nov. 1 Cash 25 000 00
2 Chris Clark, Capital 25 000 00
3 Invested cash in NetSolutions.
4
(A) On November 1, Chris Clark
deposits $25,000 in a bank account in
the name of NetSolutions.
Effects of this entry in the Ledger
Cash Chris Clark, Capital

Nov. 1 25,000 Nov. 1 25,000
(B) On November 5,
NetSolutions bought land
for $20,000, paying cash.
4
5 5 Land 20 000 00
6 Cash 20 000 00
7 Purchased land for building
8 site.
9
10
(B) On November 5,
NetSolutions bought land
for $20,000, paying cash.

Cash Land
Nov. 1 25,000 Nov. 5 20,000 Nov. 5 20,000
(C) On November 10, NetSolutions
purchased supplies on account
for $1,350.
10
11 10 Supplies 1 350 00
12 Accounts Payable 1 350 00
13 Purchased supplies on account.
14
15
16
(C) On November 10, NetSolutions
purchased supplies on account
for $1,350.

Supplies Accounts Payable
Nov. 10 1,350 Nov. 10 1,350
(F) On November 30, NetSolutions
paid creditors on account, $950.
30
31 30 Accounts Payable 950 00
32 Cash 950 00
33 Paid creditors on account.
34
35
36
(F) On November 30, NetSolutions
paid creditors on account, $950.

Cash Accounts Payable
Nov. 1 25,000 Nov. 525,000 Nov. 30 950 Nov. 10 1,350
18 7,500 30 3,650
30 950
Rules of Debit / Credit Balance
Sheet Accounts
Debits Credits
Asset accounts………. Increase (+) Decrease (-)
Liability accounts…… Decrease (-) Increase (+)
Owner’s equity
(capital) accounts…. Decrease (-) Increase (+)
Balance Sheet Accounts
ASSETS LIABILITIES
Asset Accounts Liability Accounts
Debit for Credit for Debit for Credit for
increases decreases decreases increases
(+) (-) (-) (+)
OWNER’S EQUITY
Owner’s Equity Accounts
Debit for Credit for
decreases increases
(-) (+)
(D) On November 18, NetSolutions
received fees of $7,500 from
customers for services provided .
14
15 18 Cash 7 500 00
16 Fees Earned 7 500 00
17 Received fees from customers.
18
19
20
(D) On November 18, NetSolutions
received fees of $7,500 from
customers for services provided .

Cash Fees Earned
Nov. 1 25,000 Nov. 5 25,000 Nov. 18 7,500
18 7,500
(E) Throughout the month, NetSolutions
incurred the following expenses:
wages, $2,125; rent, $800; utilities,
$450; and miscellaneous, $275 .
18
19 30 Wages Expense 2 125 00
20 Rent Expense 800 00
21 Utilities Expense 450 00
22 Miscellaneous Expense 275 00
23 Cash 3 650 00
24 Paid expenses.
(E) Throughout the month, NetSolutions
incurred the following expenses:
wages, $2,125; rent, $800; utilities,
$450; and miscellaneous, $275 .
Cash Wages Expense
Nov. 1 25,000 Nov. 525,000 Nov. 30 2,125
18 7,500 30 3,650
Rent Expense Utilities Expense

Nov. 30 800 Nov. 30 450
Miscellaneous Expense
Nov. 30 275
In every entry the sum of
the debits always equal
the sum of the credits.
(G) On November 30, a count revealed
that $800 of the supplies inventory
had been used.
25
26 30 Supplies Expense 800 00
27 Supplies 800 00
28 Supplies used during
29 November.
30
31
(G) On November 30, a count revealed
that $800 of the supplies inventory
had been used.

Supplies Supplies Expense
Nov. 10 1,350 Nov. 30 800 Nov. 30 800
Double-Entry Accounting
“ Double-entry accounting is based on a simple
concept: each party in a business transaction
will receive something and give something in
return. In bookkeeping terms, what is received
is a debit and what is given is a credit. The T
account is a representation of a scale or
balance.”
Scale or Balance T account
Left Side Right Side

Receive Give
Luca Pacioli DEBIT CREDIT
Developer of
Double-Entry Receive Give
Accounting DEBIT CREDIT
Rules of Debit / Credit Income
Statement Accounts
Expense Accounts Revenue Accounts
Debit for Credit for Debit for Credit for
increases decreases decreases increases
(+) (-) (-) (+)
Income Statement Accounts
Debits Credits
Revenue accounts…… Decrease (-) Increase (+)
Expense accounts…… Increase (+) Decrease (-)
Withdrawals
by the
Owner
(H) On November 30, Chris Clark
withdrew $2,000 in cash from
NetSolutions for personal use.
JOURNAL Page 2
Post.
2005
1 Nov. 30 Chris Clark, Drawing 2 000 00
2 Cash 2 000 00
3 Chris Clark withdrew cash for
4 personal use.
(H) On November 30, Chris Clark
withdrew $2,000 in cash from
NetSolutions for personal use.

Cash Chris Clark, Drawing
Nov. 1 25,000 Nov. 525,000 Nov. 30 2,000 Nov. 10 1,350
18 7,500 30 3,650
30 950
30 2,000
Normal Balances of Accounts
Increase
(Normal Balances) Decreases
Balance sheet accounts:

Asset Debit Credit
Liability Credit Debit
Owner’s Equity:
Capital Credit Debit
Drawing Debit Credit
Income statement accounts:
Revenue Credit Debit
Expense Debit Credit
Flow of Business Transactions
Transaction Transaction Document
1 authorized 2 takes place 3 prepared
Entry recorded Entry posted to

4 in journal 5 ledger
System to Analyze Transactions
1. Determine whether an asset, a liability,
owner’s equity, revenue, or expense account
is affected by the transaction.
2. For each account affected by the transaction,
determine whether the account increases or
decreases.
3. Determine whether each increase or decrease
should be recorded as a debit or a credit.
Journalizing
and Posting
Dec. 1 NetSolutions paid a premium of
$2,400 for a comprehensive insurance
policy covering two years.
JOURNAL Page 2
Post.
2005
1 Dec. 31 Prepaid Insurance 2 400 00
2 Cash 2 400 00
3 Paid premium on two-year
4 policy.
JOURNAL Page 2
Post.
2005
1 Dec. 1 Prepaid Insurance 2 400 00
2 Cash 2 400 00
4 policy.
ACCOUNT Prepaid Insurance ACCOUNT NO. 15

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2005
Dec. 1 2 400 00 2 400 00
JOURNAL Page 2
Post.
2005
1 Dec. 1 Prepaid Insurance 15 2 400 00
2 Cash 2 400 00
4 policy.
ACCOUNT Prepaid Insurance ACCOUNT NO. 15

Balance
Post.
2005
Dec. 1 2 2 400 00 2 400 00
JOURNAL Page 2
Post.
2005
2 Cash 2 400 00
4 policy.
ACCOUNT Cash ACCOUNT NO. 11

Balance
Post.
2005
Nov. 30 2 2 000 00 5 900 00
Dec. 1 2 400 00 3 500 00
JOURNAL Page 2
Post.
2005
2 Cash 11 2 400 00
4 policy.
ACCOUNT Cash ACCOUNT NO. 11

Balance
Post.
2005
Nov. 30 2 2 000 00 5 900 00
Dec. 1 2 2 400 00 3 500 00
Dec. 1 NetSolutions paid rent for December,
$800.
14 1 Rent Expense 52 800 00

15 Cash 11 800 00
16 Paid rent for December.
17
Dec. 1 NetSolutions receives $360 for three
month’s rent beginning December 1.
14 1 Cash 14 360 00
15 Unearned Rent 23 360 00
16 Received advanced payment
17 For three months’ rent of land.
Dec. 4 NetSolutions purchased office
equipment on account from Executive
Supply Co. for $1,800.
18 4 Office Equipment 18 1 800 00

19 Accounts Payable 21 1 800 00
20 Purchased office equipment on
21 account.
Dec. 6 NetSolutions paid $180 for a
newspaper advertisement.
21 6 Miscellaneous Expense 59 180 00

22 Cash 11 180 00
23 Paid for newspaper ad.
24
Dec. 11 NetSolutions paid creditors $400.
24 11 Accounts Payable 21 400 00

25 Cash 11 400 00
26 Paid creditors on account.
27
Dec. 13 NetSolutions paid a receptionist and
part-time assistant $950 for two
weeks’ wages.
JOURNAL Page 3
Post.
2005
1 Dec. 13 Wages Expense 51 950 00
2 Cash 11 950 00
3 Paid two week’s wages.
4
Dec. 16 NetSolutions received $3,100 from
fees earned for the first half of
December.
5 16 Cash 11 3 100 00
6 Fees Earned 41 3 100 00
8
Dec. 16 Fees earned on account totaled
$1,750 for the first half of
December.
9 16 Accounts Receivable 12 1 750 00

10 Fees Earned 41 1 750 00
12
Dec. 20 NetSolutions paid $900 to Executive
Supply Co. on the $1,800 debt owed
from the December 4 transaction.
13 20 Accounts Payable 21 900 00

14 Cash 11 900 00
15 Paid part of amount owed to
16 Executive Supply Co.
Dec. 21 NetSolutions received $650 from
customers in payment of their
accounts.
18 21 Cash 11 650 00
19 Accounts Receivable 12 650 00
20 Received cash from customer
21 on account.
Dec. 23 NetSolutions paid $1,450 for
supplies.
22 23 Supplies 14 1 450 00
23 Cash 11 1 450 00
24 Purchased supplies.
25
Dec. 27 NetSolutions paid the receptionist
and part-time assistant $1,200 for
two weeks’ wages.
27 27 Wages Expense 51 1 200 00

28 Cash 11 1 200 00
29 Paid two weeks’ wages.
30
Dec. 31 NetSolutions paid its $310 telephone
bill for the month.
31 31 Utilities Expense 54 310 00

32 Cash 11 310 00
33 Paid telephone bill.
34
Dec. 31 NetSolutions paid its $225 electric
bill for the month.
JOURNAL Page 4
Post.
2005
1 Dec. 31 Utilities Expense 54 225 00
2 Cash 11 225 00
3 Paid utility bill.
4
Dec. 31 NetSolutions received $2,870 from
fees earned for the second half of
December.
5 31 Cash 11 2 870 00
6 Fees Earned 41 2 870 00
8
Dec. 31 NetSolutions earned $1,120 on
account for the second half of
December.
9 31 Accounts Receivable 12 1 120 00

10 Fees Earned 41 1 120 00
11 Recorded fees earned on
12 account.
Dec. 31 Chris Clark withdrew $2,000 for
personal use.
14 31 Chris Clark, Drawing 32 2 000 00

15 Cash 11 2 000 00
16 Chris Clark withdrew cash
17 for personal use.
Trial Balance
NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Chris Clark, Capital 25 000 00
Chris Clark, Drawing 4 000 00
Fees Earned 16 340 00
Wages Expense 4 275 00
Rent Expense 1 600 00
Utilities Expense 985 00
Supplies Expense 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00
NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Supplies 2 000 00
Prepaid Insurance Balance 2 400 00
Land Sheet 20 000 00
Accounts Payable Items 900 00
42 600 00 42 600 00
NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Supplies 2 000 00
Land 20 000 00
Fees Earned Statement 16 340 00
Rent Expense
of Owner’s 1 600 00
Utilities Expense Equity 985 00
Supplies Expense Item 800 00
42 600 00 42 600 00
NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Supplies 2 000 00
Land 20 000 00
Wages Expense Income 4 275 00
Utilities Expense
Statement 985 00
Supplies Expense Items 800 00
42 600 00 42 600 00
Errors that will not cause the
trial balance to be unequal:
1. Failure to record a transaction or to post a
transaction.
2. Recording the same erroneous amount
for both the debit and the credit parts of a
transaction.
3. Recording the same transaction more
than once.
4. Posting a part of a transaction correctly
as a debit or credit but to the wrong
account.
Correction
of Errors
Error Correction Procedure

1. Journal entry is incorrect Draw a line through the error
but not posted. and insert correct title or
amount.
Correction
of Errors

1. Journal entry is correct
2. incorrect Draw a line through the error
not posted.
but posted incorrectly. and insert
posted correct
error title or
and post
amount.
correctly.
Correction
of Errors

3. Journal entry is incorrect Journalize and post a
and posted correcting entry.
Correcting Errors – An Example
On May 5, a purchase of office equipment on

account was incorrectly journalized and posted
as shown.
Journal – As recorded and posted

Date Description Debit Credit
May 5 Supplies 12,500
Accounts Payable 12,500
What would be the necessary

correcting entry?

as shown.


May 5 Office Equipment 12,500

as shown.


May 5 Office Equipment 12,500
Supplies 12,500
Financial Analysis and
Interpretation
Comparing an item in a current
statement with the same item in
prior statements is called
horizontal analysis.
J Holmes, Attorney-at-Law
Income Statement
For the Year Ended December 31, 2005 and 2006
Increase (Decrease)
2006 2005 Amount Percent
Fees earned $187,500 $150,000 $37,500 25.0%
Operating expenses:
Wages expense $ 60,000 $ 45,000 $15,000 33.3%
Rent expense 15,000 12,000 3,000 25.0%
Utilities expense 12,500 9,000 3,500 38.9%
Supplies expense 2,700 3,000 (300) (10.0)%
Misc. expense 2,300 1,800 500 27.8%
Total operating
expenses $ 92,500 $ 70,800 $21,700 30.6%
Net income $ 95,000 $ 79,200 $15,800 19.9%
The End
The Adjusting Process

NVTech Inc.
Objectives
1. Explain how the matching concept relates to
Afterofstudying
the accrual basis this
accounting.
2. Explain why chapter, you should
adjustments are necessary and
be able
list the characteristics of to:
adjusting entries.
3. Journalize entries for accounts requiring
adjustment.
4. Summarize the adjustment process and
prepare an adjusted trial balance.
5. Use vertical analysis to compare financial
statement items with each other and with
industry averages.
The Matching Concept
Reporting Revenue and Expenses
TWO METHODS
Cash Basis of Accounting

Accrual Basis of Accounting
Under the cash basis for the
accounting period concept, revenues
and expenses are reported in the
income statement in the period in
which cash is received or paid.
Under the accrual basis for the
accounting period concept, revenues
are reported in the income statement in
the period in which they are earned.
Accrual Basis of Accounting
✓ Revenue reported when
earned
✓ Expense reported when
incurred
✓ Properly matches revenues
and expenses in
determining net income
✓ Requires adjusting entries at
end of period
The matching concept supports
reporting revenues and related
expenses in the same period.
Paid $10,000 for Sold the

an advertising advertised
campaign for a $10,000
product.
$10,000
product thataswill expensed in
recorded an
be introduced 2005 to match
asset in
2003.
2005. revenues
2004 2005
NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Supplies 2 000 00
Land 20 000 00
Accounts Payable
Unearned Rent
Unadjusted 900 00
360 00
Chris Clark, Capital trial 25 000 00
Fees Earned balance 16 340 00
42 600 00 42 600 00
NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Supplies 2 000 00
Land 20 000 00
Fees Earned Assets 16 340 00
42 600 00 42 600 00
NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Supplies 2 000 00
Land 20 000 00
Wages Expense Liabilities 4 275 00
42 600 00 42 600 00
NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Supplies 2 000 00
Land 20 000 00
Utilities Expense Owner’s 985 00
Miscellaneous Expense Equity 455 00
42 600 00 42 600 00
NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Supplies 2 000 00
Land 20 000 00
Supplies Expense Revenue 800 00
42 600 00 42 600 00
NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Supplies 2 000 00
Land 20 000 00
Chris Clark, Capital Expenses 25 000 00
42 600 00 42 600 00
NetSolutions
Chart of Accounts
Balance Sheet Income Statement
1. Assets 4. Revenue
11 Cash 41 Fees Earned
12 Accounts Receivable 42 Rent Revenue
14 Supplies
5. Expenses
15 Prepaid Insurance
51 Wages Expense
17 Land
52 Rent Expense
18 Office Equipment
53 Depreciation Expense
19 Accumulated
54 Utilities Expense
Depreciation19 Accumulated
55 Supplies Expense
Depreciation
2. Liabilities 56 Insurance Expense
21 Accounts Payable 59 Miscellaneous Expense
22 Wages Payable
23 Unearned Rent
3. Owner’s Equity
31 Chris Clark, Capital
32 Chris Clark, Drawing
Deferred
Expenses
(Prepaid
Expenses)
NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Supplies 2 000 00
Land Some of these supplies
20 have
000 00
Office Equipment been used. On December 31,00a
1 800
Unearned Rent
count reveals that $760 of 360 00
Chris Clark, Capital supplies are on hand. 25 000 00
42 600 00 42 600 00
Supplies (balance on trial balance) $2,000
Supplies on hand, December 31 – 760
Supplies used $1,240
2005
1 Dec. 31 Supplies Expense 55 1 240 00
2 Supplies 14 1 240 00
3
4
Supplies 14 Supplies Expense 55

Bal. 2,000 Dec. 31 1,240 Bal. 800
760 Dec. 31 1,240
2,040
NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Supplies 2 000 00
Land 20 000 00
Accounts Payable
The prepayment for 24 months of900 00
Unearned Rent insurance does not reflect that 360 00
Chris Clark, Drawing December’s insurance4 000 has
00
Fees Earned theoretically expired. 16 340 00
42 600 00 42 600 00
4 31 Insurance Expense 56 100 00
5
6
7
Prepaid Insurance 15 Insurance Expense 56

Bal. 2,400 Dec. 31 100 Dec. 31 100
2,300
Note: You probably have the idea of

how posting flows, so the rest of
the slides will omit the arrows.
Effect of Omitting Adjustment
Deferred
Revenue
(Unearned
Revenue)
NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Supplies
Prepaid Insurance
Three months’ rent, $360, was
2 000 00
2 400 00
Land received on December 1. 00
20 000 As of
Accounts Payable December 31, only $120 has been 900 00
Unearned Rent earned. 360 00
42 600 00 42 600 00
7
31 Unearned Rent 23 120 00
8
Rent Revenue 42 120 00
9
10
Unearned Rent 23 Rent Revenue 42

Dec. 31 120 Bal. 360 Dec. 31 120
240
Accrued
Expenses
(Accrued
Liabilities)
NetSolutions 25
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable At the end of December,
2 220 00 accrued
Supplies 2 000 00
Prepaid Insurance
wages amounted to $250.
2 400 00
Land Currently, Wages Expense
20 000 00 is
Office Equipment 1 800
understated and there is 00
no liability
Unearned Rent shown for these wages. 360 00
42 600 00 42 600 00
10 31 Wages Expense 51 250 00
11 Wages Payable 22 250 00
12
13
Wages Payable 22 Wages Expense 51

Dec. 31 250 Bal. 4,275
Dec. 31 250
Accrued
Revenues
(Accrued Assets)
NetSolutions 29
Trial Balance
December 31, 2005
Cash 2 065 00
Supplies 2 000 00
Prepaid Insurance NetSolutions provided 2$500
400 00
Land 20 000 00
Office Equipment in services during December
1 800 00
Accounts Payable for which the customer has 900 00
Chris Clark, Capital
not been billed. 25 000 00
42 600 00 42 600 00
13 31 Accounts Receivable 12 500 00
14 Fees Earned 41 500 00
15
16
Accounts Receivable 12 Fees Earned 41

Bal. 2,220 Bal. 16,340
Dec. 31 500 Dec. 31 500
2,720 16,840
Fixed
Assets
Land
Land has an infinite life; therefore,

it does not depreciate.
Building
A building has a limited life, so it must be depreciated.

The contra account used in the adjusting entry is
Accumulated Depreciation—Building
Equipment
Because equipment has a limited life, it

depreciates. The contra account used is
Accumulated Depreciation—Equipment
NetSolutions estimates the
depreciation on its office equipment
to be $50 for the month of December.
16
17 31 Depreciation Expense 53 50 00
18 Accumulated Depreciation—
19 Office Equipment 19 50 00
Accumulated Depreciation—
Office Equipment
19 Depreciation Expense 53
Dec. 31 50 Dec. 31 50
NetSolutions’ balance sheet
would show the office
equipment at cost, less the
accumulated depreciation.
Office equipment $1,800

Less accumulated
depreciation 50 $1,750
Book
value
Summary of Basic Adjustments
NetSolutions’ Adjusted
Trial Balance for
December 31, 2005
NetSolutions 41
Adjusted Trial Balance
December 31, 2005
Cash 2 065 00
Supplies 760 00
Land 20 000 00
Accumulated Depreciation 50 00
Wages Payable 250 00
Rent Revenue 120 00
Continued
NetSolutions 42
Trial Balance
December 31, 2005 (Continued)
Supplies Expense 2 040 00
Insurance Expense 100 00
43 400 00 43 400 00
Vertical Analysis
and
Interpretation
J. Holmes, Attorney-at-Law
Income Statements
For the Years Ended December 31, 2005 and 2006
2006 2005
Amount Percent Amount Percent
Fees earned $187,500 $150,000
Operating expenses:
Wages expense $60,000 $45,000
Rent expense 15,000 12,000
Utilities expense 12,500 9,000
Supplies expense 2,700 3,000
Miscellaneous exp. 2,300 1,800
Total operating
expenses $92,500 $70,800
Net income $95,000 $79,200
2006 2005
Fees earned $187,500 100.0% $150,000 100.0%
Operating expenses:
Wages expense $60,000 $45,000
Rent expense 15,000 12,000
Total operating
expenses $92,500 $70,800
Net income $95,000 $79,200
2006 2005
Fees earned $187,500 100.0% $150,000 100.0%
Operating expenses: $60,000
Wages expense $60,000 32.0% $45,000
$187,500
$15,000
Rent expense 15,000 8.0% 12,000
$187,500
Total operating
expenses $92,500 $70,800
Net income $95,000 $79,200
2006 2005
Fees earned $187,500 100.0% $150,000 100.0%
Operating expenses:
Wages expense $60,000 32.0% $45,000 30.0%
Rent expense 15,000 8.0% 12,000 8.0%
Utilities expense 12,500 6.7% 9,000 6.0%
Supplies expense 2,700 1.4% 3,000 2.0%
Miscellaneous exp. 2,300 1.2% 1,800 1.2%
Total operating
expenses $92,500 49.3% $70,800 47.2%
Net income $95,000 50.7% $79,200 52.8%
The End
Completing the
Accounting Cycle

NVTech Inc.
Objectives
1. Review the seven basic steps of the accounting
cycle. After studying this
2. Prepare a work sheet.you should
chapter,
3. Prepare financial bestatements
able to: from a work sheet.
4. Prepare adjusting and closing entries from a
work sheet.
5. Explain what is meant by the fiscal year and the
natural business year.
6. Analyze and interpret the financial solvency of a
business by computing working capital and the
current ratio.
Seven Basic Steps of the
Accounting Cycle
1. Transactions are analyzed and recorded in the journal.
2. Transactions are posted to the ledger.
3. A trial balance is prepared, adjustment data are
assembled, and an optional work sheet is completed.
4. Financial statements are prepared.
5. Adjusting entries are journalized and posted.
6. Closing entries are journalized and posted.
7. A post-closing trial balance is prepared.
Assets are commonly divided into classes
and that two of these classes are current
assets and property, plant, and equipment.
That’s correct. Cash and other
assets that are expected to be
converted into cash, sold, or
used up usually in less than a
year are current assets.
Well… besides cash, there’s
notes receivable, accounts
For example? receivable, supplies, and other
prepaid items.
There are some exceptions, but
that’s basically correct. Assets such
So, assets
as office equipment, machinery, that have a life
over a year
buildings, and land would appear are listed under
property,
under that heading. plant, and
equipment.
Liabilities due usually within one
year or less and that are to be paid
out of current assets are called
current liabilities.
 Accounts payable
 Wages payable
 Interest payable
 Unearned fees
Liabilities not due for
more than a year usually
are long-term liabilities.
✓Mortgage note
payable
✓Mortgage payable
✓Bond payable
The work sheet is a useful device
for understanding the flow of
accounting data from the
unadjusted trial balance to the
financial statements.
The Work Sheet
Trial Balance Adjustments Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr
Prepared from the general ledger.

Accounts are listed in the following
order: assets, liabilities, owner’s
equity, revenues, and expenses.
The Work Sheet

Adjustments are entered here. Two

possibilities:
1. Deferrals – Existing balances are
changed.
2. Accruals – New information is
entered.
The Work Sheet

Adjustments are combined with

the trial balance. Account
balances are now adjusted.
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220
3 Supplies 2,000
4 Prepaid Insurance 2,400
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360 The Unadjusted
9 Chris Clark, Capital 25,000
10 Chris Clark, Drawing 4,000 Trial Balance
11 Fees Earned 16,340
12 Wages Expense 4,275
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800
16 Miscellaneous Expense 455
17 42,600 42,600
18
19
20
21
22
(a) The Supplies account has a debit of
$2,000. A count of supplies at the end of
the period reveals that $760 is on hand.
Therefore, $1,240 in supplies was used
during the two-month period.
NetSolutions
Work Sheet
Adjusted
1 Cash 2,065
3 Supplies 2,000 (a) 1,240
5 Land 20,000
8 Unearned Rent 360
10 Chris Clark, Drawing 4,000
15 Supplies Expense 800 (a) 1,240
17 42,600 42,600
18
19
20
21
22
(b)The Prepaid Insurance account has a
debit balance of $2,400, which
represents prepayment of insurance for
24 months beginning December 1.
Thus, the insurance expense for this
month is $100 ($2,400 ÷ 24).
NetSolutions
Work Sheet
Adjusted
1 Cash 2,065
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 100
5 Land 20,000
8 Unearned Rent 360
17 42,600 42,600
18 Insurance Expense (b) 100
19
20
21
22
Accounts are added as needed.
(c) The Unearned Rent account has a credit
balance of $360, which represents the
receipt of three-months’ rent beginning
with December 1. Thus, the rent revenue
for December is $120.
FOR
RENT
NetSolutions
Work Sheet
Adjusted
1 Cash 2,065
3 Supplies 2,000 (a) 1,240
5 Land 20,000
8 Unearned Rent 360 (c) 120
17 42,600 42,600
19 Rent Revenue (c) 120
20
21
22
(d) Wages accrued but not paid at
the end of December total $250.
NetSolutions
Work Sheet
Adjusted
1 Cash 2,065
3 Supplies 2,000 (a) 1,240
5 Land 20,000
12 Wages Expense 4,275 (d) 250
17 42,600 42,600
20 Wages Payable (d) 250
21
22
(e) Fees accrued at the end of
December, but not recorded, total
$500.
NetSolutions
Work Sheet
Adjusted
1 Cash 2,065
2 Accounts Receivable 2,220 (e) 500
3 Supplies 2,000 (a) 1,240
5 Land 20,000
11 Fees Earned 16,340 (e) 500
17 42,600 42,600
21
22
(f) Depreciation of the office
equipment is $50 for December.
NetSolutions
Work Sheet
Adjusted
1 Cash 2,065
3 Supplies 2,000 (a) 1,240
5 Land 20,000
11 Fees Earned 16,340 (e) 500
17 42,600 42,600
21 Depreciation Expense (f) 50
22 Accum. Depreciation (f) 50
NetSolutions
Work Sheet
Adjusted
To make more
Trial Balance space,
Adjustments Trial Balance
1 Cash 2,065 let’s remove the
3 Supplies 2,000 heading.(a) 1,240
5 Land 20,000
11 Fees Earned 16,340 (e) 500
17 42,600 42,600
Adjusted 31
1 Cash 2,065
3 Supplies 2,000 (a) 1,240
5 Land 20,000
11 Fees Earned 16,340 (e) 500
17 42,600 42,600
Depreciation Expense (f) 50
21
22 Accum. Depreciation
Summed (f) 50
23 and 2,260 2,260
24
25 ruled
Next, the unadjusted Trial
Balance columns and the
Adjustments columns are
combined to determine the
amounts displayed in the
Adjusted Trial Balance.
Adjusted 33
1 Cash 2,065
3 Supplies 2,000 (a) 1,240
5 Land 20,000
11 Fees Earned 16,340 (e) 500
17 42,600 42,600
23 2,260 2,260
24
25
Adjusted 34
1 Cash 2,065 2,065
2 Accounts Receivable 2,220 (e) 500 2,720
3 Supplies 2,000 (a) 1,240 760
4 Prepaid Insurance 2,400 (b) 100 2,300
5 Land 20,000 20,000
6 Office Equipment 1,800 1,800
7 Accounts Payable 900 900
8 Unearned Rent 360 (c) 120 240
9 Chris Clark, Capital 25,000 25,000
10 Chris Clark, Drawing 4,000 4,000
11 Fees Earned 16,340 (e) 500 16,840
12 Wages Expense 4,275 (d) 250 4,525
13 Rent Expense 1,600 1,600
15 Supplies Expense 800 (a) 1,240 2,040
17 42,600 42,600
18 Insurance Expense (b) 100 100
19 Rent Revenue (c) 120 120
20 Wages Payable (d) 250 250
21 Depreciation Expense (f) 50 50
22 Accum. Depreciation (f) 50 50
23 2,260 2,260 43,400 43,400
24
25
The Work Sheet
Adjusted TB Income State. Balance Sheet

Revenue and expense balances in

the Adjusted Trial Balance column
are extended to the Income
Statement column.
The Work Sheet
Adjusted TB Income State. Balance Sheet

Asset, liability, owner’s equity, and

drawing balances in the Adjusted
Trial Balance column are extended
to the Balance Sheet column.
To make room on the slides for
the Income statement and
Statement of Financial Position
columns, the Trial Balance and
Adjustments columns have been
removed.
Adjusted
Trial Balance Income Statement Statement of FP
38
1 Cash 2,065
3 Supplies 760
5 Land 20,000
8 Unearned Rent 240
15 Supplies Expense 2,040
17
18 Insurance Expense 100
19 Rent Revenue 120
20 Wages Payable 250
21 Depreciation Expense 50
22 Accum. Depreciation 50
23 43,400 43,400
24
25
Now, let’s extend the balances
from the Adjusted Trial Balance
column.
Adjusted 40
1 Cash 2,065 2,065
2 Accounts Receivable 2,720 2,720
3 Supplies 760 760
4 Prepaid Insurance 2,300 2,300
5 Land 20,000 20,000
8 Unearned Rent 240 240
11 Fees Earned 16,840 16,840
12 Wages Expense 4,525 4,525
15 Supplies Expense 2,040 2,040
17
18 Insurance Expense 100 100
19 Rent Revenue 120 120
20 Wages Payable 250 250
21 Depreciation Expense 50 50
22 Accum. Depreciation 50 50
23 43,400 43,400
24
25
These four
columns are
summed.
Adjusted 42
1 Cash 2,065 2,065
2 Accounts Receivable 2,720 2,720
3 Supplies 760 760
4 Prepaid Insurance 2,300 2,300
5 Land 20,000 20,000
8 Unearned Rent 240 240
11 Fees Earned 16,840 16,840
12 Wages Expense 4,525 4,525
15 Supplies Expense 2,040 2,040
17
18 Insurance Expense 100 100
19 Rent Revenue 120 120
20 Wages Payable 250 250
21 Depreciation Expense 50 50
22 Accum. Depreciation 50 50
23 43,400 43,400 9,755 16,960 33,645 26,440
24
25
The difference between the
Income Statement column
totals is the net income (or net
loss) for the period.
The difference between the
Balance Sheet column totals is
also the income (or net loss)
for the period.
Income Statement Balance Sheet
9,755 16,960 33,645 26,440

7,205 7,205
16,960 16,960 33,645 33,645
Net Income Net Income

NetSolutions
Income Statement
For Two Months Ended December 31, 2005
Fees earned $16,840

Rent revenue 120
Total revenues $16,960
Expenses:
Wages expense $ 4,525
Supplies expense 2,040
Rent expense 1,600
Utilities expense 985
Insurance expense 100
Depreciation expense 50
Miscellaneous expense 455
Total expenses 9,755
Net income $ 7,205
Every amount on this income statement was taken from the

Income Statement column of the work sheet.
NetSolutions
Statement of Owner’s Equity
Chris Clark, Capital, November 1, 2005 $ 0

Investment on November 1, 2005 $25,000
Net income for November and December 7,205
$32,205
Less withdrawals 4,000
Increase in owner’s equity 28,205
Fromfrom
Chris Clark, Capital, December 31, 2005Either the$28,205
the
Balance Sheet
income
debit column
statement of
or the
thework
worksheet.
sheet.
NetSolutions
Statement of Financial Position
December 31, 2005
Assets Liabilities
Current assets: Current liabilities:
Cash $ 2,065 Accounts payable $900
Accounts receivable 2,720 Wages payable From the
250
Supplies 760 Unearned rent Statement
240
Prepaid insurance 2,300 Total liabilities $ 1,390
Total current assets $ 7,845
of Owner’s
Property, plant, and Equity
equipment:
Land $20,000
Office equip. $1,800
Less accum.
depreciation 50 1,750 Owner’s Equity
Total property, plant Chris Clark, Capital 28,205
and equipment 21,750 Total liabilities and
Total assets $29,595 owner’s equity $29,595
Adjusting and Closing Entries
Adjusting entries are recorded

in the journal at the end of the
accounting period.
If a work sheet has been
prepared, the data for
these entries are in the
Adjustments columns.
The Closing Process
Income Summary
Expenses are Revenues are
2 transferred to
Income Summary 1 transferred to
Income Summary
Net Income or Net Loss is
3 transferred to Owner’s Capital
OWNER’S CAPITAL
Drawings are transferred to

4 Owner’s Capital
Income Summary
Expenses are Revenues are
2 transferred to
Income Summary 1 transferred to
Income Summary
The
Net Income
Income orSummary
Net Loss is
3 transferred
account to Owner’s
does not appearCapital
on
the financial statements.
OWNER’S CAPITAL
Drawings are transferred to

4 Owner’s Capital
The Closing Process
Wages Expense Fees Earned
Bal. 4,525 Income Summary Bal. 16,840
Rent Expense Rent Revenue

Bal. 1,600 Bal. 120
Depreciation Expense
Bal. 50 Note: The
Utilities Expense balances shown
Chris Clark, Capital
Bal. 985 are adjusted
Bal. 25,000
Supplies Expense balances before
Bal. 2,040 closing. The
Insurance Expense following
Bal. 100 sequence
Chris Clark, Drawing
Miscellaneous Expense demonstrates the
Bal. 4,000
Bal. 455
closing process.
The Closing Process
Bal. 4,525 Income Summary 16,840 Bal. 16,840

Rent Expense 16,960 Rent Revenue
Bal. 1,600 120 Bal. 120
Bal. 50
Utilities Expense
Bal. 985 Chris Clark, Capital Debit each revenue
Bal. 25,000
Supplies Expense account for the
Bal. 2,040
amount of its
Insurance Expense
Bal. 100
balance, and credit
Chris Clark, Drawing Income Summary
Bal. 4,000
Bal. 455 for the total
revenue.
The Closing Process
Bal. 4,525 4,525 Income Summary 16,840 Bal. 16,840

Rent Expense 9,775 16,960 Rent Revenue
Bal. 1,600 1,600
120 Bal. 120
Bal. 50 50
Utilities Expense
Bal. 985 985 Chris Clark, Capital Debit Income
Bal. 25,000
Supplies Expense Summary for the
Bal. 2,040 2,040
total expenses and
Insurance Expense
Bal. 100
credit each expense
100
Chris Clark, Drawing account for its
Bal. 455 455
Bal. 4,000 balance.
The Closing Process

1,600 7,205
Bal. 1,600 120 Bal. 120
Bal. 50 50
Utilities Expense
Bal. 985 985 Chris Clark, Capital Debit Income
Bal. 25,000
Supplies Expense
7,205
Summary for the
2,040
Bal. 2,040 amount of its
Insurance Expense
Bal. 100 100
balance (in this
Chris Clark, Drawing case, the net
Bal. 4,000
Bal. 455 455 income) and credit
the capital account.
The Closing Process

Bal. 1,600 1,600 7,205
120 Bal. 120
Bal. 50 50
Utilities Expense
Bal. 985 985 Chris Clark, Capital Debit the capital
4,000 Bal. 25,000
Supplies Expense
7,205
account for the
2,040
Bal. 2,040 balance of the
Insurance Expense
Bal. 100 100
drawing account,
Chris Clark, Drawing and credit drawing
Bal. 4,000 4,000
Bal. 455 455 for the same
amount.
Review of the Closing Process
Bal. 4,525 4,525

4,525 Income Summary 16,480 Bal. 16,840
16,840
Rent Expense 9,775 16,960
16,960 Rent Revenue
Bal. 1,600 1,600
1,600 7,205
120 Bal.
120 120
Bal. 50 50
50
Utilities Expense
Close Revenues
Bal. 985 985
985 Chris Clark, Capital
4,000 Bal. 25,000
4,000 Close Expenses
Supplies Expense
7,205
7,205
Bal. 2,040 2,040
2,040 Close Income Summary
Insurance Expense
Bal. 100 100
100 Close Drawing
Chris Clark, Drawing
Bal. 4,000 4,000
Bal. 455 455
445
After the closing entries
are posted, all of the
temporary accounts have
zero balances.
Post-closing Trial Balance
NetSolutions
Post-Closing Trial Balance
December 31, 2005
Cash 2 065 00
Supplies 760 00
Land 20 000 00
Accumulated Depreciation 50 00
Wages Payable 250 00
29 645 00 29 645 00
Financial Analysis for
NetSolutions
Working Current Current
= –
Capital Assets Liabilities
Working
= $7,845 – $1,390
Capital
Working $6,455
Capital =
NetSolutions
Current Current Current
Ratio = Assets ÷ Liabilities
Current
Ratio = $7,845 ÷ $1,390
Current
= 5.6
Ratio
NetSolutions
This ratio implies that
NetSolutions is able to pay its
current liabilities.
NetSolutions
Current Current Current

ratio = Assets ÷ Liabilities
Current
= $7,845 ÷ $1,390
ratio
Current
= 5.6
ratio
NetSolutions
NetSolutions can use the current ratio to
make comparisons across companies and
with industry averages.
The End
Basic
Accounting
System
Analysis
Design
Implementation
Manual Accounting
Systems
General Ledger and Subsidiary Ledgers
General Ledger
Cash 11 Accounts Receivable

Subsidiary Ledger
Accts. Rec. 12 Customer Accounts
A B C D
Supplies 14 Accounts Payable

Subsidiary Ledger
Accts. Pay. 21 Creditor Accounts
A B C D
Special Journals
SELLING
Providing services on account
recorded in Revenue journal
Receipt of cash from any source
recorded in Cash receipts journal
BUYING
Purchase of items on account
recorded in Purchases journal
Payment of cash for any purpose
recorded in Cash payments journal
The Revenue Journal
Revenue Journal Page 35
Invoice Post Accts. Rec. – Debit
Date No. Account Debited Ref. Fees Earned – Credit
1 1
2 2
3 3
4 4
5 5
6 6
All sales on account are recorded in

this journal. Each sales invoice is
listed in numerical order.
The Revenue Journal
2006
1 Mar. 2 615 MyMusicClub.com 2 2 0 0 00 1
2 2
3 3
4 4
5 5
6 6
Performed services on credit to

MyMusic.com, $2,200.
The Revenue Journal
2006
2 2
3 3
4 4
5 5
6 6
Notice that only one line is

required to make the entry.
Posting from the Revenue Journal
2006
2 2
3 3
4 4
5 5
6 6
To update the MyMusicClub.com account,

the $2,200 debit is posted to the accounts
receivable subsidiary ledger.
2006
2 2
3 3
4 4
Accounts Receivable Subsidiary Ledger
5 5
MyMusicClub.com
6 6
Date Item P.R. Debit Credit Balance
2006
Mar. 2 R35 2,200 2,200
2006
2 2
3 3
4 4
5 5
MyMusicClub.com
6 6
2006
Mar. 2 R35 2,200 2,200
This procedure is repeated for each posting

to the accounts receivable subsidiary ledger.
2003
2006
2 6 616 RapZone.com 1 7 5 0 00 2
3 18 617 Web Cantina 2 6 5 0 00 3
4 27 618 MyMusicClub.com 3 0 0 0 00 4
5 5
6 6
Assume that similar entries were

journalized and posted during the
month of March.
2006
2 6 616 RapZone.com 1 7 5 0 00 2
3 18 617 Web Cantina 2 6 5 0 00 3
4 27 618 MyMusicClub.com 3 0 0 0 00 4
5 5
31 9 6 0 0 00
6 6
On March 31, the revenue journal is

totaled and ruled.
Posting the Revenue Journal Total
2006
2 6 616 RapZone.com 1 7 5 0 00 2
3 18 617 Web Cantina 2 6 5 0 00 3
4 27 618 MyMusicClub.com 3 0 0 0 00 4
5 5
31 9 6 0 0 00
6 6
Next, the revenue journal’s total

($9,600) is posted to the general ledger.
GENERAL LEDGER
ACCOUNT Accounts Receivable Account No. 12
Post. Balance
Date Item Ref. Dr. Cr.
Dr. Cr.
2006
Mar. 1 Balance 3 400 00
31 R35 9 600 00 13 000 00
Revenue Journal, page 35

2006
2 6 616 RapZone.com 1 7 5 0 00 2
3 18 617 Web Cantina 2 6 5 0 00 3
4 27 618 MyMusicClub.com 3 0 0 0 00 4
5 5
31 9 6 0 0 00
6 (12)(41) 6
By placing the account number here, we

indicate that $9,600 has been debited to
Accounts Receivable in the general ledger.
GENERAL LEDGER
ACCOUNT Fees Earned Account No. 41
Post. Balance
Date Item Ref. Dr. Cr.
Dr. Cr.
2006
Mar. 31 R35 9 600 00 9 600 00
2006
2 6 616 RapZone.com 1 7 5 0 00 2
3 18 617 Web Cantina 2 6 5 0 00 3
4 27 618 MyMusicClub.com 3 0 0 0 00 4
5 5
31 9 6 0 0 00
6 (12)(41) 6
Placing “41” here indicates that $9,600 has

been posted to the credit side of Fees
Earned in the general ledger.
The Cash Receipts Journal
All transactions that involve
the receipt of cash are
recorded in the cash receipts
journal.
CASH RECEIPTS JOURNAL Page 14

Other Accounts
Post Accounts Receivable Cash
Date Account Credited Ref. Cr. Cr. Dr.
2006
Mar. 1 Rent Revenue 400 400
NetSolutions received $400 cash

on March 1 for the month’s rent.

Other Accounts
2006
19 Web Cantina 3,400 3,400
28 MyMusicClub.com 2,200 2,200
30 RapZone.com 1,750 1,750
During March, NetSolutions collected

cash from three customers.
Posting the Cash Receipts Journal

Other Accounts
2006
19 Web Cantina 3,400 3,400
30 RapZone.com 1,750 1,750
Each account under “Accounts

Receivable Cr.” is posted to the accounts
receivable subsidiary ledger.

Other Accounts
2006
19 Web Cantina 3,400 3,400
30 RapZone.com 1,750 1,750

Web Cantina
2006
Mar. 1 Bal. 3,400
18 R35 2,650 6,050
19 3,400 2,650

Other Accounts
2006
19 Web Cantina  3,400 3,400
30 RapZone.com 1,750 1,750

Web Cantina
2006
Mar. 1 Bal. 3,400
18 R35 2,650 6,050
19 CR14 3,400 2,650
After all journalizing and
posting to the accounts
receivable subsidiary ledger for
the month is complete, the
columns are totaled.
Other Accounts
2006
19 Web Cantina  3,400 3,400
28 MyMusicClub.com  2,200 2,200
30 RapZone.com  1,750 1,750
31 400 7,350 7,750
The total “Cash Dr.” column

equals the total of the two
credit columns.
Other Accounts
2006
19 Web Cantina  3,400 3,400
30 RapZone.com  1,750 1,750
31 400 7,350 7,750
GENERAL LEDGER
Account: Accounts Receivable No. 12
The three circled
Date Item P.R. items are Balance
Debit Credit
2006
posted to1 the
Mar. Bal general
 ledger. 3,400
Let’s post 31Accounts
R35 9,600
Receivable.13,000
Other Accounts
2006
19 Web Cantina  3,400 3,400
30 RapZone.com  1,750 1,750
31 400 7,350 7,750
GENERAL LEDGER
Account: Accounts Receivable No. 12
2006
Mar. 1 Bal  3,400
31 R35 9,600 13,000
31 CR14 7,350 5,650
Other Accounts
2006
19 Web Cantina  3,400 3,400
30 RapZone.com  1,750 1,750
31 400 7,350 7,750
( ) (12)
The $7,750 total in the Cash

Debit column is posted to
Cash in a similar manner.
The $400 credit to Rent Revenue
could have been posted earlier, but
posting it at the same time as other
general ledger accounts is proper.
A completely posted cash

receipts journal is shown in
the next slide.
Posted Cash Receipts Journal
Other Accounts
2006
Mar. 1 Rent Revenue 42 400 400
19 Web Cantina  3,400 3,400
30 RapZone.com  1,750 1,750
31 400 7,350 7,750
( ) (12) (11)
GENERAL LEDGER
Accounts ACCOUNT Accounts Receivable No. 12
Receivable Date Item P.R. Debit Credit Balance
Control Mar. 1 Bal  3,400
31 R35 9,600 13,000
Account 31 CR14 7,350 5,650
If the accounts receivable

account in the general ledger
only shows summary totals,
where are the individual
customer balances?
GENERAL LEDGER
Accounts ACCOUNT Accounts Receivable No. 12
Control Mar. 1 Bal  3,400
31 R35 9,600 13,000
Account 31 CR14 7,350 5,650
MyMusicClub.com
3/2 R35 2,200 2,200
3/27 R35 3,000 5,200
3/28 CR14 2,200 3,000
Accounts
RapZone.com
Subsidiary 3/6
3/30
R35 1,750
CR14 1,750
1,750
--
Ledger Web Cantina
3/1 Bal. 3,400
3/18 R35 2,650 6,050
3/19 CR14 3,400 2,650
The purchases journal is
designed for recording all
purchases on account.
Journalizing in the Purchases Journal
PURCHASES JOURNAL Page 11
Accts. Other
Post Payable Supplies Accounts Post
Date Account Credited Ref. Cr. Dr. Dr. Ref. Amount
2006
Mar. 3 Howard Supplies 600 600
On March 3, 2003, NetSolutions

purchased supplies from Howard
Supplies, $600.
Posting the Purchases Journal
Accts. Other
2006
Accounts Payable Subsidiary Ledger

Howard Supplies
Date Item P.R. Dr. Cr. Balance
2006
Mar 3 the accounts payable
To keep 600 600
subsidiary ledger current, this entry

is posted on March 3.
Accts. Other
2006
Accounts Payable and Supplies will

be posted as totals.
Accts. Other
2006
7 Donnelly Supplies 420 420
On March 7, NetSolutions
purchased supplies from Donnelly
Supplies, $420.
Accts. Other
2006
Accts. Other
2006
12 Jewett Bus. Sys. 2,800 Off. Equip. 2,800
Because
On March there
12, isn’t a special purchased
NetSolutions column for
office
Office
equipment
Equipment,from
thisJewett
purchase
Business
was
recorded under “Other
Systems, Accounts Dr.”
$2,800.
Accts. Other
2006
19 Donnelly Supplies 1,450 1,450
27 Howard Supplies 960 960
Now, let’s look at the rest of March’s entries

(assume that all postings to the accounts payable
subsidiary ledger have been made).
Totaling the Purchases Journal
Accts. Other
2006
31 6,230 3,430 2,800
At the end of March, all columns are totaled

$6,230 = $3,430 + $ 2,800
and equality of debits and credits is verified.
Accts. Other
2006
31 6,230 3,430 2,800
The next step is to post to the

general journal.
Accts. Other
2006
31 6,230 3,430 2,800
GENERAL LEDGER
ACCOUNT Accounts Payable No. 21
Mar. 1 Bal 1,230
31 P11 6,230 7,460
Accts. Other
2003
31 6,230 3,430 2,800
(21)
GENERAL LEDGER
ACCOUNT Accounts Payable No. 21
Mar. 1 Bal 1,230
31 P11 6,230 7,460
Accts. Other
2003
12 Jewett Bus. Sys. 2,800 Off. Equip. 18 2,800
31 6,230 3,430 2,800
(21) (14)
Supplies is posted as a total of $3,430

to general ledger account 21. Office
Equipment is posted individually.
Accts. Other
2006
12 Jewett Bus. Sys. 2,800 Off. Equip. 18 2,800
31 6,230 3,430 2,800
(21) (14) ( )
NetSolutions had only one entry in the

“Other Accounts Dr.” column. If there were
others, they would be posted individually.
Therefore, the total is not posted. A check
mark indicates that the total was not posted.
The Cash Payments
Journal
All payments are
recorded in the cash
payments journal.
NetSolutions makes all
payments by check.
Let’s make all of the
cash payment journal
entries for March.
CASH PAYMENTS JOURNAL PAGE 7
Other Accounts
Ck. Post Accounts Payable Cash
Date No. Account Debited Ref. Dr. Dr. Cr
2006
Mar. 2 150 Rent Expense 1,600 1,600
On March 2, NetSolutions paid

the rent for March by issuing
Check No. 150 for $1,600.
Other Accounts
2006
15 151 Grayco Supplies 1,230 1,230
On March 15, issued Check No. 151 to

Grayco Supplies on account, $1,230.
Other Accounts
2006
15 151 Grayco Supplies  1,230 1,230
Accounts Payable Subsidiary Ledger

Let’s postGrayco
to the accounts payable
Supplies
Date Item P.R. Dr. Cr. Balance
subsidiary Mar.
ledger
3 Bal.
at this time to keep1,230
the creditor’s
15 account current.
CP7 1,230 ---
Other Accounts
2006
15 151 Grayco Supplies  1,230 1,230
21 152 Jewett Business Sys. 2,800 2,800
On March 21, issued Check No.

152 as payment on account to
Jewett Business Systems, $2,800.
Other Accounts
2006
15 151 Grayco Supplies  1,230 1,230
21 152 Jewett Business Sys.  2,800 2,800
22 153 Donnelly Supplies. 420 420
On March 22, issued Check No.

153 as payment on account to
Donnelly Supplies, $420.
Other Accounts
2006
15 151 Grayco Supplies  1,230 1,230
22 153 Donnelly Supplies.  420 420
30 154 Utilities Expense 1,050 1,050
On March 30, issued Check No. 154 as

payment for utility bill, $1,050.
Other Accounts
2006
15 151 Grayco Supplies  1,230 1,230
31 155 Howard Supplies 600 600
On March 31, issued Check

No. 155 on account to Howard
Supplies, $600
Other Accounts
2006
15 151 Grayco Supplies  1,230 1,230
31 155 Howard Supplies  600 600
31 2,650 5,050 7,700
The journal is ruled, summed, and

verified for equality of debits and
the “Cash Cr.” column.
Other Accounts
2006
Mar. 2 150 Rent Expense 52 1,600 1,600
15 151 Grayco Supplies  1,230 1,230
30 154 Utilities Expense 54 1,050 1,050
31 155 Howard Supplies  600 600
31 2,650 5,050 7,700
( ) (21) (11)
Individual items in the “Other Accounts Dr.”

column are posted. Then the totals for “Accounts
Payable Dr.” and “Cash Cr.” are posted.
Accounts Payable
Control
Accounts Payable
GENERAL LEDGER
Accounts Payable ACCOUNT Accounts Payable No. 12
(Controlling) Mar. 1 Bal 1,230
31 P11 6,230 7,460
31 CP7 5,050 2,410
Donnelly Supplies
Mar 2 P11 420 420
19 P11 1,450 1,870
22 CP7 420 1,450
Accounts
Jewett Business
Payable Grayco Supplies
SystemsSubsidiary
also has Mar 1 Bal. 1,230
15 CP7 1,230 0
a zero balance, so
Ledger --
Howard Supplies
that account was Date Item P.R. Debit Credit Balance
Mar 3 P11 600 600
omitted for space 27 P11 960 1,560
31 CP7 600 960
reasons.
Advantages of a Computerized
Accounting System Over a
Manual Accounting System
1. Computerized systems simplify the record-
keeping process.
2. Computerized systems are generally more
accurate.
3. Computerized systems provide management
current account balance information to
support decision making.
The Revenue and Collection
Cycle in QuickBooks
From Exhibit 10, page 203 of textbook
Mail invoice to
customer
The End
Corporate Accounting with
Conceptual Framework and
Accounting Standards
Dr. Fe R. Ochotorena, CPA, LPT,CFMP
15-1
The Corporate Form of Organization
Three primary forms of business organization
Proprietorship Partnership Corporation
Special characteristics of the corporate form:

1. Artificial being created by law
2. Separate legal entity
3. Limited Liability
4. Transferability of interest
5. Board of Directors
6. Perpetual existence
15-2
Advantages of a Corporation
Easy
Continuous ownership Easy to Limited
Existence transfer raise capital liability
Disadvantages of a corporation
Double
taxation
Government
regulation
15-3
Fundamental Changes of Revised Corporation
Code (RA No. 11232 in February 2019)
Revised Code Old Code
The Revised Code The Old Code had

removes the minimum prescribed a minimum of
number of incorporators 5 incorporators but not
required to establish a more than 15).
corporation.
The Revised Code added a

new section that permits an
individual to form a one-
person corporation.
15-4
The Revised Code Old Code requires that

removes the minimum 25% of the authorized must
capital stock requirement be subscribed and 25% of
for stock corporations, the subscribed must be paid
except as otherwise but it should not be less
specifically provided by than P5,000)
special law.
15-5

The Revised Code now The Old Code had
provides that a corporation prescribed a maximum
shall have perpetual
corporate term of 50 years
existence unless its articles of
incorporation provides and required corporations to
otherwise. amend their articles of
The Revised Code expressly
incorporation (AOI) to
allows a corporation whose extend the corporate life for
term has expired to apply with another fifty-year period.
the SEC for a revival of its
corporate existence, together
with all the rights and
privileges under its certificate
15-6of incorporation.
Extended period to commence corporate operations.
The Revised Code now The Old Code had only

allowed corporations five allowed two years.
years from incorporation to
commence operations
15-7
Delinquent corporations
A corporation that had Under the Old Code, such
commenced its business inactivity was already cause
may now be placed by the for the revocation of the
SEC under delinquent status certificate of incorporation.
if it had become inoperative
for a period of at least five
years.
15-8

Lifting the ban on corporate donations
for political parties or candidates.
The Revised Code now Old Code states that no

expressly bans only foreign corporation, domestic or
corporations from giving foreign, shall give donations
such donations. in aid of any political party
or candidate or for purposes
of partisan political activity.
15-9
The Revised Code

provides that no corporate
name shall be allowed if it is
’not distinguishable’ from
that already reserved or
registered for the use of
another corporation, or if
such name is already
protected by law.
15-10
Remote Participation
The Revised Code now allows the voting by stockholders in
absentia but only if the corporate by-laws authorize voting
through such means. Members of the board of directors or
trustees of every corporation to participate in meetings through
remote communication such as videoconferencing,
teleconferencing or other alternative modes of communication
that allow them reasonable opportunities to participate.
15-11
Changes of Revised Corporation Code
❑ Arbitration agreements embedded in articles of
incorporation or by-laws. The Revised Code
allows for an arbitration agreement to be
provided in the articles of incorporation (AOI)
or by-laws of a corporation. With such an
agreement in place, disputes between the
corporation, its stockholders or members that
arise from the implementation of AOI or by-laws
or from intra-corporate relations shall now be
referred to arbitration.
⚫ Disputes involving criminal offenses or the
interests of third parties remain non-arbitrable.
15-12
❑ Corporations vested with public interest are
those whose securities are registered with the SEC,
those listed with an exchange, those with assets of
at least 50 Million Pesos and having 200 or more
holders of shares (with each holding at least 100
shares of a class of its equity shares), banks and
quasi-banks, non-stock savings and loan
associations, pawnshops, corporations engaged in
money service business, preneed, trust and
insurance companies, and financial intermediaries.
❑ The provision requires that at least 20% composition
of the boards of these corporations be independent
15-13
directors.
⚫ An independent director, in corporate governance,

refers to a member of a board of directors who
does not have a material relationship with a
company and is neither part of its executive team
nor involved in the day-to-day operations of the
company.
⚫ An incorporator must own at least one share of

stock to be considered a stock corporation.
15-14
What is a Corporation
15-15
Fundamental Share Rights
Preemptive
right to maintain
Right percentage
to vote. ownership.
Right to share Right to share

in profits when in distribution of
dividends are assets if company
declared. is liquidated.
15-16
In the absence of restrictive provisions, each share carries the
following rights:
1. To share proportionately in profits and losses.
2. To share proportionately in management (the right to vote
for directors).
3. To share proportionately in assets upon liquidation.
4. To share proportionately in any new issues of shares of the
same class—called the preemptive right.
Preemptive right- to maintain one’s proportional

interest in the corporation through purchase of
additional ordinary shares if and when it is
15-17 issued.
Kinds of Corporation
A. As to Membership Holdings
* Stock Corporation
* Non-stock corporation
B. As to Purpose
* Public Corporation
* Private Corporation
* Quasi-Public
C. As to Compliance of Law
* De Jure Corporation
* De facto Corporation
D. As to Law of Creation
* Domestic Corporation
15-18
* Foreign Corporation
Kinds of Corporation
E. As to Extent of Membership
* Open corporation
* Closely-held corporation or Family corporation
Publicly-held corporations
whose shares are widely
owned by the general public.
Privately-held corporations
whose shares are owned by
only a few individuals.
15-19
Share Capital (Capital Stock)
Share Capital – this is a shareholders’ equity account credited
when the shares are fully paid and stock certificate is issued.
Preference share capital Ordinary share capital

(Preferred Stock) (Common Stock)
It entitles the holder to enjoy It entitles the holder to an

priority as to distribution of equal or pro-rata division of
dividends and distribution of profits without any
assets upon corporate preference or advantage
liquidation. over any class of shares. It
is referred to “residual
equity”.
15-20
Benefits of Owning Share Capital
Ordinary shares represent the residual corporate interest.

◆ Has voting rights
◆ Receives the benefits of success.
◆ Not guaranteed dividends nor assets upon dissolution.
Preference shares are created by contract, when

shareholders’ sacrifice certain rights (No voting rights) in
return for other rights or privileges, usually dividend
preference.
15-21
Issuance of shares (fully paid)
Sole Proprietorship Corporation

Cash Cash
A, Capital Ordinary share capital
Building (@fmv) Building

A, Capital Ordinary share capital
15-22
Issuance of shares on Account/ Installment
Subscription Receivable – is an account title

debited at the subscription price when a
subscription is received for a number of shares and
credited when collected or defaulted. This is a
current asset if it is collectible within one year. If
there is no call date, it is a contra shareholders’
equity account to be deducted from subscribed
share capital.
Subscribed Share Capital – this is a shareholders’

equity account credited when the shares are not
yet paid in full. It is debited when a stock
certificate is issued.
15-23
Issuance of shares (partially paid or on account)
Ordinary share subscription receivable

Subscribed Ordinary share
Cash
Ordinary share subscription receivable
Payment of subscription
Subscribed Ordinary share

Ordinary share capital
issuance of certificate for fully paid shares
15-24
ACCOUNTING TERMINOLOGIES
Share premium (Additional Paid-in Capital)-

this account is credited for contribution or
payment in excess of par or stated value.
Treasury shares – this account is debited for
shares subsequently reacquired by the
corporation from the shares it has originally
issued, with the intention of reissuing or
retiring.
⚫ Watered stock - shares in a corporation that
are sold at a price that is highly inflated/higher
when compared with the book value of the
company’s assets.
15-25
Equity
Par value shares
⚫ Peso amount per share or No-par value but with
nominal value is stated in the stated value shares
Articles of Incorporation and on ⚫ Peso amount per share
the face of the stock certificate is stated in the
⚫ Par value has no relationship to articles of
market value. incorporation but not
in the face of the
No par value and no stated stock certificate.
value ⚫ Corporations can
• Nominal value is not assign a stated value
designated in both Articles per share (treated
of Incorporation and in the as if par value).
Stock Certificate (not less
than P5)
15-26
Accounting Terminologies
Delinquent subscription – a subscription where a
subscriber fails to pay in full after repeated
demand by the corporation.
Highest Bidder – a bidder who is willing to pay the
entire unpaid subscriptions plus any expenses
that may be incurred in connection with the
delinquency sale and is willing to take the least
number of shares declare as delinquent.
Pre-operating expenses (organization costs) –
costs incurred by the corporation directly
related to organizing a corporation. (professional
fees of lawyer, accountants, and promoters,
licenses and incorporation fees, printing costs)
15-27
U.S. GAAP vs. IFRS
Use of the Term Reserves and

Other Terminology Differences
• Capital stock: • Share capital:

➢ Common stock ➢ Ordinary shares
➢ Preferred stock ➢ Preference shares
➢ Paid‐in capital in excess of ➢ Share premium - ordinary
par - common shares
➢ Paid‐in capita in excess of ➢ Share premium - preference
par - preferred shares
15-28
U.S. GAAP vs. IFRS (Equity Section)
Use of the Term Reserves and
Other Terminology Differences
❑ Contributed Capital : ❑ Share capital

Paid –in capital ➢ Ordinary shares
➢ Preferred stock ➢ Preference shares
➢ Common stock ❑ Reserves
Additional Paid-in capital ➢ Share premium
➢ Paid‐in capital—excess of ➢ RE Appropriation
par ➢ Other Comprehensive
➢ Paid‐in capital—excess of Income
stated value
➢ Other Paid-in Capital
❑ Retained Earnings
❑ Retained Earnings (Earned Capital)
Appropriated
15-29
Unappropriated (Free)
Legal Capital
Legal Capital – is the minimum permanent
investment required by law to protect the creditors.
This cannot be distributed to the shareholders in the
lifetime of the corporation. This is called the Trust
Fund Doctrine.
Legal capital is . . .
▪ The portion of shareholders’ equity that must
be contributed to the firm when share is
issued.
▪ The amount of capital, required by law, that
must remain invested in the business.
▪ Refers to par value, stated value, or full
amount paid for no-par value shares.
15-30
Legal Capital
Components of Legal Capital:

Issued Preference Share Capital
Issued Ordinary Share Capital
Subscribed Preference Share Capital
Subscribed Ordinary Share Capital
Share Premium (APIC) – in excess of stated
value
Note: Share Premium (APIC) in excess of par is

excluded
15-31
Corporate Law
Corporation must submit Articles of incorporation and By-
laws to the Securities & Exchange Commission (SEC).
Corporate Records
1. Books of accounts (Journals, ledgers, vouchers & other

documents)
2. Minutes of all meeting of directors and shareholders
3. Stock & transfer books ( Shareholders’ journal,

shareholders’ ledger & subscribers’ ledger)
15-32
Stock and Transfer Books
1. Authorization is recorded in the General

Journal
2. Subscription of shares is recorded in the
General Journal
3. Collection of subscription is recorded in the
Cash Receipts Book ( if paid in cash)
4. Issuance of shares is also recorded in the
general journal.
15-33
Aside from the accounting records, the share

transactions are also recorded in the Stock and
Transfer Books.
1. Shareholders’ Journal – is a register used to note
down the number of shares issued and the number of
shares transferred. Issued shares are recorded (right
side) specifying to whom it is issued, certificate
number and number of shares issued and the
signature of the shareholder. Cancelled shares are
recorded (left side) specifying to the shareholder who
cancelled it, certificate number and number of shares
cancelled. No peso amounts are recorded and there
are no debits or credits.
15-34
2. Shareholders’ Ledger – is a subsidiary ledger
containing the accounts of the shareholders. It is made
up of two sections – the Certificate Issued Section
(right side) and the Certificate Cancelled Section (left).
The total number of shares in this ledger should tally
with the total issued shared found in the shareholders’
journal. No peso amounts are recorded and there are
no debits or credits.
3. Subscribers’ Ledger - is a subsidiary ledger
containing the accounts of the subscribers. The left
side contais the shares subscribed or the value of
subscrition collectible. The right side contains the
payments made by the subscriber.
15-35
The balance of each subscriber’s account when

totalled must tally with the balance of the
subscription receivable in the general ledger.
15-36
SHAREHOLDERS’ JOURNAL
Total Signa
CERTIFICATE CANCELLED CERTIFICATE ISSUED No. of ture
shares
Date Who Ledger Cert. No. of Left In whose Ledger Number No. of
surrendered Folio No. shares by Name Folio Cert Shares
Mr. A 001
Ms. Y 002
Mrs. V 003
004
15-37
SHAREHOLDERS’ LEDGER
Name :
Address :
CERTIFICATE CANCELLED CERTIFICATE ISSUED
Date PR Cert. No. of Date PR Cert. No. of
No. shares No. shares
15-38
Subscribers’ Ledger
Name :
Address:
SHARES SUBSCRIBED SHARE PAYMENTS
Date No. of No. of Value Date No. of What Amount
Installments Installment
Shares Shares Paid
5 P500,000 1 P100,000
1 100,000
15-39
Stock Certificate
CERTIFICATE NO.
OCHOTORENA APPLIANCE,INC.
AUTHORIZED SHARE CAPITAL P5,000,000
This certifies that ________________________ is the owner of

____________ shares of the share capital of
OCHOTORENA APPLIANCE , INC.
Transferrable only on the books of the Corporation by the holder

hereof in person or by Attorney upon surrender of this Certificate
properly endorsed.
In witness whereof, the said Corporation has caused this Certificate

To be signed by its duly authorized officers and to be sealed with the
Seal of the Corporation.
This ____ day of_______, 20___
CORPORATE
SEAL Secretary President
15-40
Share Transactions
Authorization – recording of the maximum number of
shares a corporation as fixed by the Articles of
Incorporation.
Sale (issued) – when a shareholder pays in full and
stock certificate is issued
Subscription – a down payment is usually required
with the balance payable on fixed dates or upon call of
Board of Directors
Collection of Subscription – it may paid in cash,
property or service
Issuance of Certificate – once the subscription is fully
collected, a certificate is issued
15-41
Share Transactions
Reacquisition of shares – it is when the

corporation purchase or redeem the shares that
were originally issued with the intention of either
reselling or retiring them later. These are called
treasury shares. Treasury shares are therefore
issued but no longer outstanding.
Outstanding shares are shares issued and still in
hands of shareholders.
15-42
Authorized, Unissued,
Issued and Outstanding Shares
Authorized shares are the maximum

number of shares of capital stock that
can be sold to the public.
Issued Unissued
shares are shares are
authorized authorized
shares of shares of
stock that stock that
have been never have
sold. been sold.
15-43
Authorized, Unissued,
Issued and Outstanding Shares
Outstanding shares are
Authorized issued shares that are
Shares owned by stockholders.
Outstanding Unissued
Issued Shares Shares
Shares
Treasury Treasury shares are
Retired shares Shares issued shares that
have the same have been reacquired
status as Retired by the corporation.
authorized but Shares
unissued
15-44 shares.
Equity
Preference Shares
Account
Contributed or
Share Premium
Share Capital Account
Ordinary Shares
Account
Reserves
Three Primary Account
Sources of Assets –
Equity Retained Earnings
Account
Liabilities =
Equity
Less:
Treasury Shares
Account
15-45
Equity
(IFRS) Owners’ equity section on a

company’s Statement of Financial Position
consists of
⚫ Share capital
⚫ Reserves
⚫ Retained earnings
Share capital or contributed capital is the total

amount of cash and other assets paid to the
company by shareholders
15-46
Equity
Retained earnings represent net profit that is

retained in a company
Reserves – Other gains and losses not included
in net income (Other Comprehensive Income)
Revaluation Surplus
Unrealized gain on FA @ FVOCI
Foreign translation adjustment
Unrealized loss on derivative instruments
Increase in minimum pension liability
Share Premium
15-47
Equity
Issuance of Shares
Shares authorized - Shares sold - Shares issued
Accounting problems:
1. Par value shares.
2. No-par shares.
3. Shares issued in combination with other securities.
4. Shares issued for non-cash assets.
5. Costs of issuing shares.
15-48
METHODS OF ACCOUNTING
FOR SHARES
Memorandum Entry Method Journal Entry Method

Authorized to issue 5,000 Ordinary Unissued Ordinary Shares 500,000
Shares at a par value of P100 Authorized Ordinary Shares 500,000
Cash 10,000 Cash 10,000

Ordinary share capital 10,000 Unissued share capital 10,000
Subscriptions Receivable Subscriptions Receivable

Subscribed Ordinary shares Subscribed Ordinary shares
Cash Cash
Subscriptions Receivable Subscriptions Receivable
Subscribed Ordinary Shares Subscribed Ordinary shares

15-49 Ordinary share capital Unissued Ordinary shares
Equity
Illustration: Video Electronics Corporation is organized

with 10,000 ordinary shares authorized without par value. If
Video Electronics issues 500 shares for cash at P10 per
share, it makes the following entry.
Cash 5,000
Ordinary Share Capital 5,000
15-50
Equity
Illustration: Some countries require that no-par shares

have a stated value. If a company issued 1,000 of the
shares with a P5 stated value at P15 per share for cash, it
makes the following entry.
Cash 15,000
Ordinary Share Capital 5,000
Ordinary Share Premium 10,000
15-51
Equity
Shares Issued with Other Securities

Two methods of allocating proceeds:
◆ Proportional method.
◆ Incremental method.
15-52
Equity
Ravonette Corporation issued 300 shares of P10 par value ordinary
shares and 100 shares of P50 par value preference shares for a lump
sum of P13,500. The ordinary shares have a market value of P20 per
share, and the preference shares have a market value of P90 per
share.
Number Amount Total Percent

Ordinary shares 300 x $ 20.00 = $ 6,000 40%
Preference shares 100 x 90.00 9,000 60%
Fair Market Value $ 15,000 100%
Allocation: Ordinary Preference Proportional

Issue price $ 13,500 $ 13,500 Method
Allocation % 40% 60%
Total $ 5,400 $ 8,100
15-53 LO 3
Equity
Ravonette Corporation issued 300 shares of P10 par value ordinary
shares and 100 shares of P50 par value preference shares for a lump
sum of P13,500. The ordinary shares have a market value of P20 per
share, and the preference shares have a market value of 90 per share.
Journal entry (Proportional):
Cash 13,500
Preference shares (100 x P50) 5,000
Preference Share premium 3,100
Ordinary shares (300 x P10) 3,000

Ordinary Share premium 2,400
15-54
Equity
(Variation): Ravonette Corporation issued 300 shares of P10 par value
ordinary shares and 100 shares of P50 par value preference shares for a
lump sum of P13,500. The ordinary shares have a market value of P20
per share, and the value of preference shares are unknown.
Number Amount Total

Ordinary shares 300 x $ 20.00 = $ 6,000
Preference shares 100 x -
Fair Market Value $ 6,000
Allocation: Ordinary Preference Incremental

Issue price $ 13,500
Ordinary (6,000)
Method
Total $ 6,000 $ 7,500
15-55
Equity
BE15-4 (Variation): Ravonette Corporation issued 300 shares of P10
par value ordinary shares and 100 shares of P50 par value preference
shares for a lump sum of P13,500. The ordinary shares have a market
value of P20 per share, and the value of preference shares are unknown.
Journal entry (Incremental):

Cash 13,500
Preference shares (100 x P50) 5,000
Share premium - preference 2,500
Ordinary shares (300 x P10) 3,000
Share premium - ordinary 3,000
15-56
Equity
Shares Issued in Noncash Transactions

The general rule: Companies should record shares
issued for services or property other than cash at the
◆ fair value of the non-cash assets or services

received.
◆ If the fair value of the non-cash assets or services

cannot be measured reliably, use the fair value of
the shares issued.
15-57
Equity
Illustration: The following series of transactions illustrates

the procedure for recording the issuance of 10,000 shares of
P10 par value ordinary shares for a equipment for Marlowe
Company, in various circumstances.
1. Marlowe cannot readily determine the fair value of the

equipment, but it knows the fair value of the shares is
P140,000.
Equipment 140,000
Share Capital—Ordinary (10,000 X p10) 100,000
Share Premium—Ordinary 40,000
15-58
Equity

shares, but it determines the fair value of the equipment
is P150,000.
Equipment 150,000
Share Capital—Ordinary 100,000
15-59
Equity

shares nor the fair value of the equipment. An
independent consultant values the patent at P125,000
based on discounted expected cash flows.
Equipment 125,000
15-60
Equity
Costs of Issuing Stock

Direct costs incurred to sell shares, such as
◆ underwriting costs,
◆ accounting and legal fees,
◆ printing costs, and
◆ taxes, should reduce the proceeds received from the
sale of the shares.
15-61
Previous Incorporation Requirements (25%-25% Rule)
Removed under the Revised Corporation Code)
Par Value Share No-Par Value shares
Authorized 100,000 @ P5 par Authorized 100,000 no par
1st rule : 1st rule:
Required subscription 100,000 x 25% = 25,000 shares
100,000 x 25% = 25,000 x Subscription price P6* =
P5 par P150,000
P125,000 x 25%
25% 2nd rule P37,500
2nd rule: P31, 250
Required payment
* Assumed subscription price
15-62
Equity
Reacquisition of Shares (Treasury Shares)
◆ Shares issued by a corporation but subsequently
reacquired by the corporation and held for possible
future reissuance or retirement.
◆ Reduces the number of outstanding shares but does
not affect the number of issued shares
◆ Reported as a contra-equity account, not as an asset.
◆ Treasury shares are not entitled to receipt of dividends
◆ Retained Earnings must be appropriated equal to the
cost of treasury shares acquired
15-63
Equity
Purchase of Treasury Shares
Two acceptable methods:
◆ Cost method (more widely used).
◆ Par or Stated value method.( no longer

applicable under PFRS)
Treasury shares reduces equity.
15-64
Equity
Illustration: Pacific Company issued 100,000 shares of P1 par

value ordinary shares at a price of P10 per share. In addition, it
has retained earnings of P300,000.
Illustration 15-3
15-65
Illustration: Pacific Company issued 100,000 shares of P1
par value ordinary shares at a price of P10 per share. In
addition, it has retained earnings of P300,000.
On January 20, 2012, Pacific reacquires 10,000 of its
shares at P11 per share. Pacific records the reacquisition as
follows.
Cost Method
Treasury Shares 110,000

Cash 110,000
15-66
Equity
Illustration: The equity section for Pacific after purchase of the

treasury shares.
15-67
Equity
Sale of Treasury Shares
◆ Above Cost
◆ Below Cost
Both increase total assets and equity.
15-68
Equity
Sale of Treasury Shares above Cost. Pacific acquired 10,000

treasury shares at P11 per share. It now sells 1,000 shares at
P15 per share on March 10. Pacific records the entry as follows.
Cash 15,000
Share Premium—Treasury 4,000
15-69
Equity
Sale of Treasury Shares below Cost. Pacific sells an

additional 1,000 treasury shares on March 21 at P8 per share, it
records the sale as follows.
Cash 8,000
15-70
Equity
Illustration: Assume that Pacific sells an additional 1,000

shares at P8 per share on April 10.
Cash 8,000
Retained Earnings 2,000
15-71
Equity
Retiring Treasury Shares

Decision results in
◆ cancellation of the treasury shares and
◆ a reduction in the number of shares of issued
shares.
15-72
Equity
Retired remaining 300 shares of treasury stock.
Cost Method Par Value Method
OSC 300 OSC 300

Share Premium-OSC 2700 Treasury Shares 300
Retained Earnings 300
Treasury Shares 3300
(300 @ P1 par) (300 shares @ P1 par)

( 300 @ P9)
(300 @ P11 cost)
15-73
Share Split
Share Split (Split Up) and Reverse Share Split (Split Down)
◆ To reduce the market value of shares.
◆ No entry recorded for a share split.(or memo)
◆ Decrease par value and increased number of shares.
.
15-74
Share Splits
Share splits change the par value per share and the
number of shares outstanding, but the total par
value is unchanged, and no journal entry is required.
Assume that a corporation had 3,000shares of

P2 par value common stock outstanding
before a 2–for–1 share split.
Before After
Split Split
Increase
Common Stock Shares 3,000 6,000
Decrease
Par Value per Share $ 2.00 $ 1.00
No
Total Par Value $ 6,000 $ 6,000
Change
15-75
Conversion of Preference Shares
Preference share capital, P50 par, 100, 000

issued and outstanding P5,000,000
Ordinary share capital, P1 par, 500,000 issued & outstanding 500,000
Preference share premium 1,000,000
Ordinary share premium 250,000
Retained Earnings 10,000,000
Total Equity P16,750,000
15-76
Conversion of Preference Shares
Case 1
On December 31, 2012, 1,000 shares of

preference shares (par P50) are exchanged for
4,000 ordinary shares (par P1)
Dec 31, 2012

Preferred Shares, P50 par 50,000
Share Premium- PSC, P10 10,000
OSC, P1 par 4,000
Paid-in Capital from Conversion
of PSC to OSC 56,000
15-77
Case 2
On December 31, 2012, 1,000 shares of

preference shares (par P50) are exchanged for
4,000 ordinary shares (par P20)
Dec 31, 2012

Preference Shares, P50 par 50,000
Share Premium-PSC, P10 10,000
OSC, P20 par 80,000
15-78
Reacquisition of shares by Donation
Donated share - refers to share capital received

by the corporation by way of donation from its
shareholder.
Upon receipt of the donation, memorandum

entry is prepared in the books. When the
donated share is sold, cash is debited and
Donated Capital or Paid-in capita from Donation
is credited.
15-79
Reacquisition by Donation
Transactions: Entries:
100 shares were received Received from shareholders
from shareholders by way of 100 shares as donation
Donation
Shares were sold at P40 Cash 4,000

each Donated Capital 4,000
15-80
Reacquisition by Donation
Treasury shares may be acquired by donation.

Alternative approach ( instead of memorandum entry)
Upon receipt: Treasury shares xx

Donated Capital xx
(Based on fair value of shares at the date of donation)
Upon sale :
Cash xx
Treasury shares xx
PIC from sale of TS xx
15-81
Retained Earnings
The net income through the years are
accumulated in this account and distributed to
shareholders as dividends.
Retained Earnings
Net Loss for the Net income for the period
period
Dividends Reversal of Appropriations
Appropriations
Income & Expense Summary…………………………xx

Retained Earnings…………………………………..xx
15-82
Factors Affecting Retained Earnings
Decreases
•Some changes in
accounting
•Error principles/policies
corrections •Cash and share
•Prior period dividends
adjustments
•Treasury stock
•Net loss
15-83
Dividend Policy
Types of Dividends
1. Cash dividends 4. Liquidating dividends

2. Scrip Dividend 5. Share dividends
3. Property dividends
All dividends, except for share dividends,

reduce the total equity in the corporation.
15-84
Dividend Dates
Declaration Date
Board declares dividends. Record a Liability
Date of Record
Stockholders holding shares on this date will
receive the dividend. (No entry)
Date of Payment
Record the dividend payment to stockholders.
15-85
Dividend Policy
Cash Dividends
◆ Board of directors vote on the declaration of cash
dividends.
◆ Peso dividend or percentage dividend
◆ A declared cash dividend is a liability.
◆ Companies do not Three dates:

declare or pay cash a. Date of declaration
dividends on treasury b. Date of record
shares. c. Date of payment
15-86
Dividend Policy
Liability/Scrip Dividend
It also known as “deferred cash dividend”. It is declared

when the corporation has sufficient Retained Earnings
balance but not sufficient funds at time for a cash
dividend. The payment normally includes the principal
amount and an interest at a specified date.
15-87
Dividend Policy
Illustration: Roadway Freight Corp. on June 10 declared a

cash dividend of 50 cents a share on 1 million shares, par P5
payable July 16 to all shareholders of record June 24.
At date of declaration (June 10)

Dividends Payable 500,000
At date of record (June 24) No entry
At date of payment (July 16)

Dividends Payable 500,000
Cash 500,000
15-88
Property Dividend
 Distributions of
non-cash assets.
 Record at fair value
of non-cash asset.
 Recognize gain or
loss for difference
between book value
and fair value.
15-89
Dividend Policy
Illustration: Trendler, Inc. transferred to shareholders some of its

investments (held-for-trading) in securities costing P1,250,000 by
declaring a property dividend on December 28, 2010, to be
distributed on January 30, 2011, to shareholders of record on
January 15, 2011. At the date of declaration the securities have a
fair value of P2,000,000. Trendler makes the following entries.
At date of declaration (December 28, 2010)
Equity Investments 750,000

Unrealized Holding Gain or Loss—Income 750,000
Retained Earnings 2,000,000
Property Dividends Payable 2,000,000
15-90
Dividend Policy
Illustration: Trendler, Inc. transferred to shareholders some of its

investments (held-for-trading) in securities costing P1,250,000 by
declaring a property dividend on December 28, 2010, to be
distributed on January 30, 2011, to shareholders of record on
January 15, 2011. At the date of declaration the securities have a
fair value of P2,000,000. Trendler makes the following entries.
At date of distribution (January 30, 2011)
Property Dividends Payable 2,000,000

Equity Investments 2,000,000
15-91
Dividend Policy
Liquidating Dividends
- a return to shareholders of a portion of
contributed capital.
Any dividend not based on earnings reduces
amounts paid-in by shareholders. Therefore, the
dividend declared is in excess of retained earnings, the
implication is that there is a return of capital which is not
legal or binding as per Corporation Code of the
Philippines unless the corporation is in the terminating
stage.
15-92
Dividend Policy
Illustration: McChesney Mines Inc. issued a “dividend” to its

ordinary shareholders of P1,200,000. The cash dividend
announcement noted that shareholders should consider P900,000
as income and the remainder a return of capital. McChesney Mines
records the dividend as follows.
Date of declaration

Dividends Payable 1,200,000
15-93
Dividend Policy
Illustration: McChesney Mines Inc. issued a “dividend” to its

ordinary shareholders of P1,200,000. The cash dividend
announcement noted that shareholders should consider P900,000
as income and the remainder a return of capital. McChesney Mines
records the dividend as follows.
Date of payment
Dividends Payable 1,200,000

Cash 1,200,000
15-94
Dividend Policy
Share Dividends (Bonus Issue)

◆ Issuance by a company of its own shares to
shareholders on a pro rata basis, without receiving
any consideration.
◆ When share dividend is less than 20 percent of the

ordinary shares outstanding, company transfers fair
market value from retained earnings (small share
dividend).
15-95
Dividend Policy
Distribution of additional shares to owners.
No change in total No change in

shareholders’ equity. par values.
All shareholders retain same

percentage ownership.
Small Large
Share dividend – less Share dividend 20% or
than 20% more
Record at current fair Record at par
value of share. value of share.
15-96
Dividend Policy
Illustration: Vine Corporation has outstanding 1,000 shares of

P100 par value ordinary shares and retained earnings of P50,000. If
Vine declares a 10 percent share dividend, it issues 100 additional
shares to current shareholders. If the fair value of the shares at the
time of the share dividend is P130 per share, the entry is:
Date of declaration
Ordinary Share Dividend Distributable 10,000
15-97
Dividend Policy
Illustration: Vine Corporation has outstanding 1,000 shares of

P100 par value ordinary shares and retained earnings of P50,000. If
Vine declares a 10 percent share dividend, it issues 100 additional
shares to current shareholders. If the fair value of the shares at the
time of the share dividend is P130 per share, the entry is:
Date of distribution
Ordinary Share Dividend Distributable 10,000
15-98
Dividend Policy
Share Dividend (Bonus Issue)
Small Share Dividend - Less than 20% of the
number of shares previously outstanding.
► Market value transferred from retained earnings to

contributed capital
◆ Large Share Dividend – 20% or more of the number

of shares previously outstanding.
► Par value transferred from retained earnings to

contributed capital.
15-99
Dividend Policy
Illustration: Rockland Steel, Inc. declared a 30 percent share
dividend on November 20, payable December 29 to shareholders of
record December 12. At the date of declaration, 1,000,000 shares,
par value P10, are outstanding and with a fair value of P200 per
share. The entries are:
15-100
RETAINED EARNINGS
1. Unappropriated (Free)
2. Appropriated (Restricted)
Appropriation of Retained Earnings

1. Legal Restrictions/Appropriations
2. Contractual Restrictions/Appropriations
3. Discretionary or Voluntary Appropriations
15-101
RETAINED EARNINGS
A. Legal Appropriation
Retained Earnings xx
Appropriated for Treasury Shares xx
B. Contractual Appropriation
Appropriated for Bonds and Stock Redemption xx
C. Discretionary Appropriation
Appropriated for Plant Expansion xx
Appropriated for Contingencies xx
15-102
RETAINED EARNINGS
Cancellation of appropriation:
Retained Earnings Appropriated for……xx

15-103
Presentation and Analysis of Equity
Presentation of Equity
15-104
Presentation and Analysis of Equity
Presentation of Statement of Changes in Equity

Illustration 15-13
15-105
◆ Both IFRS and U.S. GAAP use the term retained earnings. However,
IFRS relies on the term “reserve” as a dumping ground for other types
of equity transactions, such as other comprehensive income items as
well as various types of unusual transactions related to convertible debt
and share option contracts. U.S. GAAP relies on the account
Accumulated Other Comprehensive Income (Loss).
◆ Under IFRS, it is common to report “Revaluation Surplus” related to
increases or decreases in items such as property, plant, and equipment;
mineral resources; and intangible assets. The term surplus is generally
not used in U.S. GAAP.
15-106
Preference Shares
Features often associated with preference shares.

1. Preference as to dividends.
2. Preference as to assets in the event of liquidation.
3. Convertible into ordinary shares.
4. Callable at the option of the corporation.
5. Non-voting.
15-107
Preference Shares
Features of Preference Shares
◆ Cumulative
A corporation may attach
◆ Participating whatever preferences or
◆ Convertible restrictions, as long as it
◆ Callable/Redeemable does not violate its
country’s incorporation
law.
The accounting for preference shares at issuance is

similar to that for ordinary shares.
15-108
Types of Preference Shares
Has the right to receive

Cumulative accumulated dividends before
any dividends may be paid to
common shareholders.
Dividends on cumulative preference shares that are
passed are referred to as dividends in arrears.
Non- Has no right to “passed”

Cumulative dividends.
Has claim to a portion of

Participating common dividends after
receiving preferred dividends.
15-109
Types of Preference Shares
Permits the holder to

Convertible exchange preference shares
for ordinary shares.
Permits the issuing company

Callable to redeem the preference shares
Permits the holder to redeem

the shares—usually with some
Redeemable restrictions.
15-110
Preference Shares
Convertible preference shares – preference shares
that can be converted into ordinary shares at the
option of the shareholder.
Cumulative preference shares – when preference
shares are entitled to the payment of past years’
unpaid dividends or dividends in arrears before
the payment of current year’s dividends.
Non-cumulative preference shares – when
preference shares are not entitled to payment of
dividends in arrears but to current year’s
dividend only.
15-111
Preference Shares
Participating preference shares – Holders are

entitled to share equally with ordinary
shareholders in any profit distribution above
prescribed rate
Non-participating preference shares – when
preference shares are not entitled to any
dividend in excess of the regular rate.
Redeemable Preference Shares –Issuing company
can call or redeem preference shares at
specified future dates and at stipulated prices
15-112
Preference Shares
1. If the preference shares are noncumulative and nonparticipating:
Illustration: In 2011, Mason Company is to distribute P50,000 as

cash dividends, its outstanding ordinary shares have a par value of
P400,000, and its 6 percent preference shares have a par value of
P100,000.
15-113
Preference Shares
2. If the preference shares are cumulative and non-participating,

and Mason Company did not pay dividends on the preference
shares in the preceding two years:
P100,000.
15-114
Preference Shares
3.If the preference shares is noncumulative and is fully participating:
15-115
Preference Shares
4. If the preference shares are cumulative and fully participating,
and Mason Company did not pay dividends on the preference
shares in the preceding two years:

P100,000.
15-116
Preference Shares
5. Assume that P162,582 dividends(Total Retained Earnings) was
declared. Assume that the 5 percent preference share are
cumulative, participating up to 8 percent, and that dividends for three
years before the current year are in arrears.
2,000sh 4,000sh
Total Dividend /
$34.50 $23.39
15-117 Dividend per share
Book Value Per Share
⚫ Illustration: Troy Co. has cash dividends of P100,000 and

net income of P500,000, and no preference shares
outstanding.
Amount each share would receive if the company were

liquidated on the basis of amounts reported on the balance
sheet.
15-118
If the corporation issues both Preference and

Ordinary Shares:
Book Value per share = Shareholders/ Equity- Preferred Dividends

Outstanding # of Ordinary Shares
15-119
This represents the equity of shareholder expressed in peso share.
Book value per share is computed as net assets divided by
outstanding shares at the end of the year. The computation
becomes more complicated if a company has preference shares.
2,000sh 4,000sh
$6.00 $6.00
15-120
BASIC EARNINGS PER SHARE
It is the amount earned during a given period on

each ordinary share outstanding. Companies
report earnings per share only for ordinary
shares.
Of the myriad facts and figures generated by
accountants, the single accounting number that is
reported most frequently in the media and receives
by far the most attention by investors and creditors
is Earnings Per Share.
Basic EPS = Net Income
Outstanding # of Ordinary shares
15-121
Preference Shares Included in Capital Structure
Preference Share Dividends
Subtracts the current-year preference share dividend
from net income to arrive at income available to ordinary
shareholders.
Preference dividends are subtracted on cumulative

preference shares, whether declared or not.
15-122
Preference Share Included in Capital Structure
Earnings Available to Ordinary Shareholders

Net income
Less: Current period’s cumulative preference
share dividends (whether or not declared)
Less: Noncumulative preference share
dividends (only if declared)
Net income available to ordinary shareholders
15-123
Basic Earnings Per Share
15-124
Basic Earnings Per Share
Computation of Earnings per Share—Simple Capital

Structure
15-125

REVIEW OF ACCTG CYCLE - A B C D E &amp; Corporation

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REVIEW OF ACCTG CYCLE - A B C D E &amp; Corporation

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Introduction to Accounting

© Copyright 2004 South-Western, a division

Under a differential strategy, a business

A business stakeholder is a person or

1. Avoid small ethical lapses.

Accountants employed by a business firm or

Accountants and their staff who provide

Assets = Liabilities + Owner’s Equity

Assets = Liabilities + Owner’s Equity

The rights of the

Assets = Liabilities + Owner’s Equity

The rights of the

A business transaction is an economic event or

Assets = Owner’s Equity

Assets = Owner’s Equity

This balance sheet presented

Ratio of liabilities Total Liabilities

© Copyright 2004 South-Western, a division

Assets are Liabilities are debts

The T-account has a title.

The left side of the account is the debit side.

The right side of the account is the credit side.

Effects of this entry in the Ledger

Cash Chris Clark, Capital

Effects of this entry in the Ledger

Effects of this entry in the Ledger

Effects of this entry in the Ledger

Effects of this entry in the Ledger

Rent Expense Utilities Expense

Effects of this entry in the Ledger

Scale or Balance T account

Left Side Right Side

Effects of this entry in the Ledger

Balance sheet accounts:

Entry recorded Entry posted to

ACCOUNT Prepaid Insurance ACCOUNT NO. 15

ACCOUNT Prepaid Insurance ACCOUNT NO. 15

ACCOUNT Cash ACCOUNT NO. 11

ACCOUNT Cash ACCOUNT NO. 11

14 1 Rent Expense 52 800 00

18 4 Office Equipment 18 1 800 00

21 6 Miscellaneous Expense 59 180 00

24 11 Accounts Payable 21 400 00

9 16 Accounts Receivable 12 1 750 00

13 20 Accounts Payable 21 900 00

27 27 Wages Expense 51 1 200 00

31 31 Utilities Expense 54 310 00

9 31 Accounts Receivable 12 1 120 00

14 31 Chris Clark, Drawing 32 2 000 00

Error Correction Procedure

Error Correction Procedure

Error Correction Procedure

On May 5, a purchase of office equipment on

Journal – As recorded and posted

What would be the necessary

On May 5, a purchase of office equipment on

Journal – As recorded and posted

Date Description Debit Credit

On May 5, a purchase of office equipment on

Journal – As recorded and posted

Date Description Debit Credit

© Copyright 2004 South-Western, a division

Cash Basis of Accounting

Paid $10,000 for Sold the

REVIEW OF ACCTG CYCLE - A B C D E & Corporation

REVIEW OF ACCTG CYCLE - A B C D E & Corporation