Financial Accounting and Reporting

BASIC ACCOUNTING ELEMENTS Transactions – an exchange of value between two

Assets – the resources owned by the entity parties in terms of money.
Assets are sub-divided into classifications:
• Current Assets- convertible to cash The Basic Accounting Equation
within a year.
o Cash Assets = Liabilities + Equity
o Accounts Receivable
o Notes Receivable
o Inventories – merchadise used Example :
for the purpose of selling. Assets = P100,000
o Supplies – used to run the Liabilities = - P60,000
entity’s business processes.
o Prepaid Expenses – Expenses Debit Credit
paid in advance.
o Short-term Investments
• Non-Current Assets- convertible to cash Assets Liabilities
more than a year
o Furnitures and Fixtures.
o Tools Expenses Equity
o Equipments
o Office Equipments
Loss
Liabilities – the responsibilities owed by the entity

Liabilities are sub-divided into two classifications: Equity = P40,000

Current Liabilities and Non-Current Liabilities.
• Accounts Payable Accounting Elements’ Normal Balances
• Notes Payable Assets: Debit
• Accrued Expenses – Expenses incurred Liabilities: Credit
but ot yet paid Equity: Credit
• Deferred Revenues – Payment received Expenses: Debit
but service not yet rendered Loss: Debit
• Mortgage Payable
• Accrued Liabilities Example:
Assets = Liabilities + Equity Assets = 100
100 = 70 + N Liabilties = 70
Equity (Capital) – the residual interest when you 100 = 70 +30
deduct your total liabilities to your total assets. Equity = N
Equity = 30
It’s the owners’ claims in the assets of the
business. In a T-
Account:
Equity is called: Debit Credit
• Owner’s Equity/Equity (Sole
100 70
Proprietorship)
• Partners Equity (Partnership)
• Stockholders’ Equity (Corporation) ________ N=30__________
• Initial Investments
• Additional Investments
• Share in net income/loss 100 100
• Drawings/Withdrawals

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 Examples:
Examples: • Sales of P100,000 for cash.
Effect: Increase in asset (Cash) and
• A company has a reported asset of increase in equity (Sales).
P100,000 and liabilities amounting - In an accounting equation;
to P60,000, how much is the Assets = Liabilities + Equity
company’s total equity? Cash P100,000 = *no effect* +
Sales P100,00
- In an accounting equation: - In a T-Account;
Assets = Liabilities + Equity
P100,000 = P60,000 + N
DEBIT CREDIT
P100,000 = P60,000 + P40,000 ASSETS Liabilities
- In a T-account CASH P100,000 *no effect*
Debit Credit Equity
Sales P100,000
A =100,000 L= 60,000
TOTAL: P100,000 P100,000
________ E= 40,000___

Example #2:
100,000 100,000
• Paid salaries expense for P50,000.

Effect: Decrease in Asset (Cash); Decrease in

Effects of Revenue and Expenses Transactions to
Equity (Expense)
Asset, Liabilities
1 and Owner’s Equity.
- In an accounting equation:
Assets = Liabilities + Equity
Transaction: an exchange of value between two
(P50,000) = -o- + (P50,000)
parties in terms of money.
(P50,000) = (P50,000)
Effects: Increase or decrease in Asset, Liabilities
- In a T-account:
and Equity accounts.
• Increase, Decrease or No Effect. DEBIT CREDIT
ASSETS Liabilities
Note:
CASH (P50,000) *no effect*
A transaction that has an effect in both assets and
Equity
liabilities/owner’s equity will result to an increase
Expense
to either liabilities or owner’s equity and asset.
(P50,000)
(Should have same effect if it affects different
TOTAL: 0
elements.)
0
A transaction that will affects both the asset will
result to an increase and decrease in asset.
Example #3:
(Different effect when it affects one element only)
Revenues (+) • Purchased equipment for cash
A=L+E Expenses (-) P100,000.
Revenues includes Drawings (-)
sales (manu/merch) Effect: Increase in asset (Equipement),
or professional fees (service). Decrease In assets (Cash), No effect to
Liabilities and Equity.

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In a accounting equation: DEBIT CREDIT
Assets = Liabilities + Owner’s Equity
P100,000 = -o- + -o-
*DECREASE IN *Increase in
(P100,000)
EQUITY = DEBIT equity = credit
0 =0
________ ________
In a T-account:
Balance
DEBIT CREDIT
ASSETS Liabilities EQUITY
EQUIPMENT *no effect*
P100,000 Equity Purchased Equipments on account for
Cash *no effect* P20,000.
(P100,000) Effect: Assets (+) = Liabilities (+) + Equity (-o-)
0
Example #2:
TOTAL: 0 Paid the account for P100,000.
*this shows that if a transaction affects one Effect: Assets (-) = Liabilities (-) + Equity (-o-)
element only, there must be an increase and
decrease effect (opposite effect). Example #3:
Purchased Merchadise for P100,000.
Elements of Financial Position (Balance
Sheet) – Normal Balances
Debit Credit
DEBIT CREDIT
*Drawings/ *Initial
Withdrawal Investments
*INCREASE IN *Decrease in *Net Loss *Additional
ASSET = DEBIT asset = credit Investments
________ ________ *Net Income
________ ________
BALANCE Balance
(if on account)
ASSETS
Effect: Assets (+) =Liabilites (+) + Equity (-o-)
DEBIT CREDIT 1
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(if in cash)
*DECREASE IN *Increase in Effect: Assets: Inven. (+) = Liabilities (-o-) +
LIABILITY = DEBIT liability = credit Equity (-o-)
________ ________ Cash (-)

Balance Example #4:

Purchased furnitures and fixtures for P20,000
LIABILITIES cash.
Effect:
Example
1 #1: Assets: Furnitures & Fixtures (+) — DR
Cash (-). — CR
Debit Credit
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80 100
8 In a journal entry:
________ ________ DR Furnitures and Fixtures P20,000
Balance 2 Balance 20 Cr Cash P20,000
ASSET
LIABILITIES
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Example #5: On February, the entry would be:
Paid the account for P20,000. Date Transaction Debit Credit
Effect: Feb. Cash P 100,000
Assets: Cash (-) — CR P
Liabilities: Accounts Payable (-) — DR Accounts 100,000
Receivable
In a journal entry:
Dr Accounts Payable P20,000 Cash Basis Method:
Cr Cash P20,000 Date Transaction Debit Credit
Feb. Cash P
100,000
P 100,000
Accrual Concept of Recognizing Revenue Service
and Expense Income

Revenue Recognition Matching Principle

• Revenue: inflow of assets from
sales of goods and services to
costumers, measured by cash
expected to be received from
costumers.
Expense should be recognized (recorded) as
they are incurred to produce revenue.
An expense is the outflow or using up of
assets in generation of revenues.

When will you record the revenue?
Accrual Method/Concept: Income must be
recognized when it is earned regardless when
it is received. As well as expense, when it is
incurred.
Example: Incurred the service of Meralco in
January 1-31 to be paid on February worth
P3,500.
Accrual Method:

Cash Basis Method: Income is recognized Date Transaction Debit Credit

when it is received. In expense, when it is
incurred Jan Utilities P 3,500
Expense
Thus, according to the accounting system, Accrued P 3,500
accrual method should be used. However, it Expense
depends on the entity’s terms. Cash Basis Method:
Date Transaction Debit Credit
If the problem is silent, assume that the entity
uses Accrual Method in recording. Feb. Utilities P 3,500
Expense
Example: On January 1, you have rendered a
service, a payment P100,000 will be made on Cash P 3,500
February 25.
Accrual Method:
Date Transaction Debit Credit
Jan. Accounts P
Receivable 100,000
Service P 100,000
Income

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 Financial Statements
Financial Statements are written records (formal reports) that convey the business activities and the
financial performance of a company.

Often audited by the government agencies, accountants, firms etc. to ensure accuracy for tax,
financing or investing purposes.

It is the end product of accounting.

5 Types of Financial Statements

Income Statement – formal statement of company’s income and expenses. It shows whether the
company is making profit or loss for a given period. Helps understand the financial health of the
business.
Revenue – Expenses = Net Incomes/ Net Loss
Basic Format of an Income Statement:

ABC Company
Income Statement
For the Year Ended Dec. 31, 2020

Revenue Pxxx
Less: Expenses Pxxx
Net Income (Loss) Pxxx

Name of the company

Title of the report
Period (For the year/month/quarter ended)

• If for the whole year assumption.

However it can be:
- “For the six month ended June 31, 2020” if half a year
- “For the month ended Jan. 31, 2020” if monthly
- “For the quarter ended Mar. 31, 2020” if quarterly

• Elements of Financial Statement

- Revenues/Income
- Expenses

• Under the income statements are the nominal accounts / temporary accounts.
- They are good for only 1 accounting period.
- They should be closed at the end of the accounting period.
- Should have a balance of zero every end of an accounting period.

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1. Statement of Financial Position (Balance Sheet) – represents the assets, liabilities, and
equity of a business at a period in time.

ABC Company
Statement of Financial Position
As of Dec. 31, 2020

Assets
Liabilities
Equity

Name of the company Elements of Financial

Title of the report Statement
Period (As of)

• Under the income statements are the real accounts/permanent accounts.

- They have continuous balances
- Are not closed every end of the accounting period.
- Have beginning and ending balances.

2. Statement of Changes In Owner’s Equity – explains the changes in the company’s capital,
accumulated reserves and retained earnings over the reporting period.
- It breaks down the changes in the owner’s interest in organization, and in the
application of retained profit or surplus from one accounting period to the next.

Name of the Company

ABC Company
Statement of Changes in Owner’s Equity
As of December
Title of the Report
Period (As of *month*) Beg. Balance P xxx
Add: Additional Investment P xxx
Net Income P xxx
Less: Withdrawals P xxx
Ending EQUITY
Balance P xxx
• NET LOSS • Beg. Balance
• DRAWINGS • Additional Investment
• DIVIDENDS (CORP.) • Net Income
• Retained Earnings
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 3. Statement of Cash (Cash Flow Statement) – inflows (sources generated money) and
outflows (spent money) .

Example:
Beg. Cash Balance : P20,000
End. Cash Balance : P30,000
Increase: P10,000 (analyzed in statement of cash flow).

Three activities in Statement of Cash Flow (OIF)

1. Operating Activities
2. Investing Activities
3. Financing Activities

Operating Activities:
Inflow: P 100,000
Outflow: (P 80,000)
Net Cash provided by OA; P 20,000

Investing Activities:
Inflow: P 50,000
Outflow: (P 20,000)
Net cash provided by IA: P 30,000

Financing Activities:
Inflow: P 60,000
Outflow: P 100,000
Net cash provided by FA: (P 40,000)
Increase in Cash P 10,000

4. Notes to Financial Statements – disclosures of detailed assumptions made by accountants

when preparing the company’s Income Statement, Statement of Financial Position,
Statement of Changes in Equity, and Statement of Cash Flow.
- Its intention is to fully understand the documents.
Accounting Period
• A period of time that covers certain accounting functions which can either be fiscal or
calendar year.——> for reporting and analyzing purposes.
• Usually for one year.

Basic Accounting Periods: (1 Year/ Annual Financial Statements)

- Calendar Year: January 1 – December 31
- Fiscal Year: Any month – after a year other than January 1- December 31

Interim Period (Less than 1 year periodic financial statement)

- Monthly
- Quarterly
- Semi-annually

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 Operating Cycle
• The days required for the business to receive inventories, sell inventories, and collect
inventories.
• The cash operating cycle also known as the working capital cycle or the cash
conversion cycle.
• Is the number of days between paying suppliers and receiving cash from sales. An
operating cycle refers to the time it takes a company to buy goods, sell them and
receive cash from the sales of the said goods.
• It is important in classifying current assets and current liabilities. While most
manufacturers have operating cycles of several months, few industries requires very long
processing time— this could result to an operating cycle longer than a year.
• Cash—-> Inventory——> Sales ——> Cash

Concept of Capital / Capital Maintenance

• Also known as the capital recovery.
• A company achieves capital maintenance when the amount of its capital at the end of
the period remains unchanged from the beginning of the period. The excess will be your
profit.
*kailangan munang mabawi yung capital, then yung excess beyond the capital is your
profit na.

then listed in order of, revenue

Chart of Accounts
• Considering that there are lot of
items under assets,liabilities, equity,
it is necessary that similar items
should be grouped together and
then assign name to facilitate the
recording process.
• List of all accounts used in recording.
• Listing of all account titles and their
codes.
• First in the order of assets,
liabilities, owner’s equity. Then,
income statement accounts are
and expenses.
• It is the accountant who prepares the
Chart of Accounts
Recording Business Transactions - only
accountable (transactions and events affecting
the business) transactions should be recorded.
• Economic activity that directly
changes a business enterprises
financial condition or directly affects
its results of operations.
• Takes place when there is an
exchange of things with value.

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Where are the transactions recorded?
• Books of Accounts (BOA) - are the
formal accounting books where
business transactions are recorded
.
Consist of 2 books:
• Books of Original Entry - the
accounting book where the business
transactions are recorded first (first
entry).
o The book of original entry is
called “Journal”
o The process of recording is
called “journalizing”
• Book of Final Entry - the accounting
book where the business transactions
are finally recorded (final entry).
o The book of final entry is
called “Ledger”
o The process in recording is
called “posting”
2 Kinds of Ledger
1. General Ledger
2. Subsidiary Ledger
Double Entry Method of Bookkeeping - The
recording of transactions is in terms of debit
and credit.
Rules of Debit and Credit
Debit - the values received by the
business or what the business paid for.
Credit - the value parted or given up by
the business or the source of the value
received by the business. From Latin word
“Credere” which means value parted with.
➢ Simple Entry: If a journal has only
one debit and credit
➢ Compound Entry: If there are two or
more debits or credits.
Asset VS Expense Method
Asset Method – Chart of Accounts has
“Unused Supplies” and “Prepaid Rent”
Expense Method – Chart of Accounts doesn’t
have “Unused Supplies” and “Prepaid Rent”.
If the problem is silent, expense method.
Financial Accounting
Follows the GAAP ( general record keeping
following rules)
Intented for External Users
Managerial Accounting
• For internal users (specifically
tailored)
• For managers
• Does not follow GAAP
Cost Accounting
• form of managerial accounting
that aims to capture a company's
total cost of production by
assessing the variable costs of
each step of production as well as
fixed costs, such as a lease expense.
• Pricing
• Does not follow GAAP
Government Accounting
• Government Funds and budgets
Forms of Business Organizations
Sole Proprietorship – managed by one
person (DTI)
Partnership – two or more (SEC)
• Limited life
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Corporations – two or more (minimum of
fifteen).— SEC
• Unlimited life (50years, renewable)
Types of Business Organization
Service Business – has no inventories.
Renders service for a fee.
Merchandising Business – Has inventory.
Purchase goods to sell them.
Manufacturing Business – Raw materials to
finished goods.
Types of Manufacturing Inventories:
• Raw Materials
• Working Process Inventory
• Finished Goods Inventory
Related to inventory accounts: Freight-In
and Freight-Out
• Freight – In : part of the inventory –
increase in invetory (Adjunct
Account= addition)
• Feight -Out : and expense account
(Selling Expense)
Definition of Accounting:
Accounting:
• An art (of classifying summarizing….)
• A service activity
• Is a process (of identifying, recording
and summarizing)
Purpose: To provide information (financial
information for decision making).
• Financial in Nature
Only accountable business transactions are
recorded.
Users: External ( Cosumers, creditors,
investors, government, employees.) and
Internal Users (BOD, Owners and
management).
GAAP -Generally Accepted Accounting
Principles
Set of accounting principles,
standards and procedures followed in the
preparation of accounting priciples.
Accounting Principles:
Business Entity Concept (Separate Entity
Concept) – a business has a separate
personality.
Going Concern concept – Continue
operation indefinitely.
Accrual Basis of Acounting – Revenue
should be recorded on the time it is earned
and not when collected. As well as, expense
should be recognized when incurred not
when paid.
Objectivity – Every transactions should be
recorded or amount recorded can be verified.
Cost Principle ( Historical Cost Concept) –
means that the properties or assets acquired
must be recorded at the actual acquisition
cost and not at an estimated cost.
Consistency Principle – same format of
procedures every accounting period.
Accounting Period or Time Period Principle
– life of the business is divided into reporting
periods.
Materiality Concept – all material
information that woud affect decision making
should be recorded.
Faithful Representation – if it is complete,
neutral and free from errors.
Assets and Liabilities – results of past events
• Increase to : actual amount
• Increase by : amount to add
Account: Represented by T-Accounts. It is the
basic storage of data.
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Merchandising Company —-> Purchases =
Inventory + Freight – in (if any).
Accounts Receivable – Debit when
• Sales on account
• Promise to pay
Unused Supply —> Asset Account
• There is income if revenue is
higher than expense.
• There is loss when expense
Special Journals:
Sales Books – record all sales transactions on
account.
Cash Receipts Books – Issued check or paid
check / all payment
Cash Disbursement Book – all collections are
recorded
Purchases Book – all purchases are recorded
Journal – Bookof Original Entry; all
transactions not recorded on other books is
recorded here.

Cash Account

is higher than revenue.

Computation of Book Value or Carrying
Value
Book value: Cost -Accumulated Depreciation Cash Balance Beg. Xxx
Cost: 100,000 – 20,000 = 80,000—>Book Add: Collections xxx
Total Available Cash
Less: Payments
Cash Ending balance

Current Ratio = Current Asset / Current

Value

Net Realizable Value

Gross Accounts Receivable – Allowance for Liabilitities
Doubtful Accounts = Net Realizable value
100,000 – 20,000 = 80,000

Journalizing – process of recording

accountable transactions in a chronological
manner.
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Fundamental Qualitative Characteristics of
Financial Information
Relevance: Relevant financial reporting
information means the ability of users
(shareholder) to make a difference in their
decision. Information regarding to economic
phenomenon will help the users make a
difference decision if it included predictive
value and confirmatory value.
• Predictive Value: Information
has predictive value if the value can be
useful to the shareholder in predicting
certain things that is related to future.
Information which is highly
predictable . does not necessary has
predictive value. For instance,
depreciation of plant and equipment
by using straight line method can be
highly predictable every year, but it
cannot assist in evaluating the net cash
flows.
• Confirmatory
value: Information has confirmatory
value if it confirms the validity of prior
expectation or correcting them
according to the prior evaluations. The
outcomes will be same as past
expected if the information has
confirmed past expectation while the
outcome can be changed if correcting
in past expectations occurred.
Faithful Representation: Useful financial
information needs not only be a relevant but
also be a faithful representation. Financial
reporting information included the
characteristics of complete, neutral, and free
from material error is supposed to be faithful
representation of an economic phenomenon.
A single description in financial reports may
correspond to multiple economic phenomena.
For instance, the plant and equipment presents
in the balance sheet may stand for all the plant
and equipment that owned by entity.
• Complete: Complete financial
reporting information must have all
the necessary information which is
useful for decision making and should
not be missing a material fact or
consideration that would cause the
financial reporting information
misleading.
• Neutrality: Neutrality in
financial reporting information must
be free from bias which the
information provided does not favor
to the particular group over other
interested person. In order to have
neutral information, information must
report in faithful and trustworthiness
condition without changing anything
that need to be conveyed for the
purpose of inducing someones
behavior.
• Free from error: A set of
financial reporting information is said
to be true if the information is free
from error. However, due to some
constraint and uncertainty in economy
phenomena, financial reporting
information does not provide
absolutely value which is totally free
from error. Therefore, a various type of
judgments and estimation based on
appropriate input are used by the
management in assessing the financial
reporting.
Application of the Fundamental Qualitative
Characteristics of Financial Information
Relevance is the fundamental qualitative
characteristic which connected to the
economic phenomena and must be considered
first before the other qualitative characteristics.
Once the relevance is applied to distinguish
which economic phenomena should be
presented, faithful representation is going to
determine which characteristics are best to
correspond to the relevant phenomena.
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Enhancing Qualitative Characteristics of
Financial Information
Enhancing qualitative characteristics are
additional benefit added to the fundamental to
enhance the decision usefulness of financial
information.
Comparability: Comparability refers to the
ability of the users to distinguish similarities
and differences between two economic
phenomena. Comparability between entities
and consistency in the application of methods
or procedures over time period will enhance
the informational value in relative economic
performance. In order to maximize the
fundamental qualitative characteristics, some
degree of comparability should be included in
relevant and faithful representation.
Verifiability: Verifiability refers to the
capability of the users to ensure that the
information faithfully represents what it
purports to represent and to ensure the
selected technique of measurement had been
used is without bias and error. The information
is verified when the different evaluators or
observers who are knowledgeable confirmed
and come up with the same result. Verification
can be distinguished as direct or indirect.
Direct verification can be verified through an
amount or other representation while indirect
verification refer to the amount or other
representation which is verified by examining
the inputs and recount the outputs by
adopting same accounting convention.
• Timeliness: Timeliness means
that the information must be received
by the users at the right time before it
loses its ability to affect the decision.
Information should be provided with
sufficient timeliness to give a clear and
meaningful picture for the
shareholders. Information that is not
available when it is needed by the
decision makers will be useless and the
information may lose its potential
value.
• Understandability: Understa
ndability means that the quality of
financial information that the users
could be able to identify or discover
the meaning of the message that
trying to be shown. Users of financial
statements are assumed to have
sufficient knowledge to study the
information properly. If the
information is classified, clearly
represent and concise, it will help to
enhance understandability.
Sometimes, the information is
complicated and hard to understand,
the users may seek an adviser to
explain to them.
Application of the Enhancing Qualitative
Characteristics of Financial Information
Enhancing qualitative characteristics provide
additional benefit and usefulness in the
financial reporting information. Therefore, the
four important characteristics which are
comparability, verifiability, timeliness and
understandability should be extent widely.
However, the enhancing qualitative
characteristics will be useless if the financial
information is irrelevant or not faithfully
represented in fundamental step. The
application of the enhancing qualitative
characteristics is redundant process that does
not follow priority and prescribed order.
Sometimes, one or some of the enhancing
qualitative characteristics will be given up to
maximize the usefulness of another qualitative
characteristic. If such situation happened,
appropriate information or evidence should be
disclosed.
Completing the Accounting Cycle
Accounting Cycle:
Is a series of steps used to collect and
process raw economic data into relevant
financial information before financial
statements can be prepared.
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Purpose of Trial Balance: to check the
equality of the total debit and the total credit.
• After trial balance, proceed to
worksheet.
Worksheet - Aid in the preparation of financial
statements. Makes adjustments to get the
adjusted trial balance.
Time Period Assumption: Life of the business
divided into uniform periods of time.
Accounting Period:
• Calendar Period
• Fiscal Period
Adjusting Entries
Are journal entries needed to update
accounts and ensure accuracy of information
presented in the financial statements.
Journal entries usually made at the
end of an accounting period to allocate income
and expenditure to the period in which they
actually occurred.
• Made at the end of the
accounting period after the trial
balance has been prepared.
• Enable you to adjust revenues
and expenses to accounting period
within which they occurred.
To update the transactions and the trial
balance.
• After posting, you can now make
adjusted trial balance.
• After adjusted trial balance, you can
now make financial statements:
o Income Statement
o Balance Sheet
-> closing entries.
Closing Entries
Includes all income statement account.
After Closing Entries is the Post-Closing Trial
Balance.
Post - Closing Trial Balance
No income statement accounts, only
assets, liabilities and equity accounts.
Accrual Principle
Otherwise known as the Revenue
Recognition Principle and the Expense
Recognition Principle.
Revenues should be recorded at the
time the service is rendered, not on the time
that the payment is received. Same as with
expenses, it should be recognized at the time
it is incurred and not when paid.
Needs for Adjustment (Reasons):
Timing Issues:
• Payments to Expense
• Receivables to Income
Some adjustments transactions are:
• Supplies purchased and recorded as
ASSET must be EXPENSED for the used up
portion.
• Unpaid utility bills (LIABILITY) from
Meralco and PLDT must be EXPENSED as
incurred.
• Cash received in advance from
costumers recorded as LIABILITY must be
recorded as INCOME the moment the service
has been rendered.
• Tangible ASSETS used in the
operations but which will become obsolete or
worn out must de depreciated. (EXPENSE)
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Adjusting entries are prepared at the end of
the accounting period before the preparation
of Financial Statements.
Real, Nominal and Mixed Accounts.
Real Accounts (Permanent Accounts)
• The assets, liabilities, and equity
accounts or the balance sheet accounts
(except “drawings”).
• They are NOT closed or zeroed out at the
end of each accounting period.
• Balances to be transferred on next
accounting period.
Nominal Accounts (Temporary Accounts)
• Accounts CLOSED or zeroed out at the
end of the accounting period.
o All income statement accounts,
drawing accounts, clearing
accounts and suspense
accounts.
o
• Mixed Accounts
o Accounts that have both real
and nominal accounts.
Real —> Adjusting Entries —> Real Accounts and
Nominal Accounts
Example:
• Deferrals (Liability): advance collections
of future revenues has an earned and
unearned portions at the end of the
accounting period.
•
Accounts Usually Adjusted at the End of
the Accounting Period.
1. Accrued Income: income already earned
(service has been rendered) but not yet
collected. (Asset)
2. Accrued Expense: expenses already used
up but not yet paid. (Liability; Accrued
Expense)
3. Prepaid Expenses: advance payment for
an expense. (Asset; Prepaid Expense)
4. Deferred Revenues: advance collection
for an income. (Liability; Deferred
Revenues)
5. Bad Debts: account of costumers that
cannot be collected anymore or are
doubtful of collection.
6. Depreciation: decrease in value of assets
subject to wear and tear, obsolescence
or inadequacy.
7. Inventory
Unearned Income; Two Methods of Recording
Advance Collection
• Liability Method (Unearned remains)
Initially CREDITED TO LIABILITY
(Unearned Income) upon the receipt of cash.
At the end of the accounting period, the
EARNED portion is RECOGNIZED AS INCOME
and the UNEARNED PORTION RECOGNIZED
AS STILL A LIABILITY.
• Income Method (Earned remains)
Initially CREDITED TO AN INCOME
ACCOUNT. At the end of the accounting
period, the UNEARNED PORTION IS
RECOGNIZED AS A LIABILITY while the
EARNED PORTION REMAINS INCOME.
Accounting from Prepaid Expenses
Asset Method
Advance payment is initially debited as an
asset. Once expense is used up, an adjustment is
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made to record the expense by decreasing the 2 - Posting
prepaid asset that was initially recorded. • Transfer the information from the
journal to the ledger.
Expense Method • Ledger - book of final entry
The advance payment is initially debited
as expense even if its not yet used up. If at the 3 - Unadjusted Trial Balance
end of the accounting period, there is an unused • Worksheet
or unexpired portion, an adjustment is made to • Check the equality of total debit and
record the asset. credit.
Depreciation Expense
Pxxx
Bad Debts; Two Methods of Recognizing Bad Accumulated Depreciation
Debts 4 - Adjustments Pxxx

Bad Debts are accounts that cannot be collected • Update the accounts:
anymore. ➢ Depreciation
1. Direct Write Off Method ➢ Bad Debts (doubtful of
collection)
Bad Debts Expense
Accounts Receivable Methods:
1. Based on % of Sales
2. Based on % of A/R
3. Based on aging
2. Allowance Method

Doubtful Accounts Expense • Direct Write Off

Bad Debts Expense Pxxx
Allowance for Doubtful Accounts Accounts Receivable Pxxx Method
• Allowance for Bad
Debts
Doubtful Accounts Expense Pxxx
Depreciation Allowance for Bad Debts Pxxx

• Part of the asset as expense.

• When a tangible asset becomes obsolete.
• Advance Payments
➢ Expense
Pro forma;
• Asset Method
• Expense Method
Cost of Assets
Less: Salvage Value
➢ Revenue or Income
_________________________
• Liability Method
Depreciation Cost
• Income Method
Divided by: Useful Life
_________________________
5 - Adjusted Trial Balance
Annual Depreciation
6 - Financial Statements
——> Depreciation Expense
• Income Statement (Worksheet only)
Accumulated Depreciation
• Balance Sheet (Statement of Financial
Position) – (Worksheet only)
• Statement of Changes in Owner’s Equity
The Accounting Cycle
• Cash Flow Statement
1 - Journalizing
7 - Closing Entries (As of Dec. 31)
• Recording only accountable business
• All debit are credited, all credit are
transactions in chronological order.
debited but only income statement
• Double entry bookkeeping (debit and
accounts or nominal accounts or
credit)
temporary accounts
• Book of original entries—> Journal

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 • Revenue and Income Account (Credit)
Income and Expense Account

Income Statement Pxxx

Income/Expense Summary Pxxx

• Expense Account (Debit)

Income & Expense Summary Pxxx

Expenses Pxxx

8 - Post Closing Trial Balance

• All real accounts, permanent accounts
and balance sheet accounts.

9 - Jan . 1

Assets Pxxx
Liabilities Pxxx
Capital Pxxx

10 - Reversing Entries
• All adjustments on advance payments.
• Adjusting entries made in preparation for
the next accounting period.

Prepaid Expense Pxxx

Expense Pxxx

Expenses Pxxx
Prepaid Expenses Pxxx

Accrued Interest Income Pxxx

Accrued Interest Pxxx

Interest Income Pxxx

Accrued Interest Income Pxxx

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Partnership Formation

Partnership - a partnership is an unincorporated

association of two or more individuals to carry on,
as co-owners, a business, with the intention of
dividing the profits among themselves.

Characteristics of Partnership
1. Ease of formation
2. Separate legal personality
3. Mutual agency
4. Co-ownership of property
5. Co-ownership of profits
6. Limited life
7. Transfer of ownership
8. Unlimited liability (this is applicable to a
general partnership)

Accounting for Partnership ➢ Due to – Liability

The following are the major considerations in the
accounting for the equity of a partnership:
1. Formation - accounting for initial
investment to the partnership.
2. Operation - division of profits or losses.
3. Dissolution - admission of a new partner
and withdrawal, retirement pr death of a
partner.
4. Liquidation - winding-up of affairs.
Valuation of contribution of Partners
All assets contributed to (and related liabilities
assumed by) the partnership hall be measured at
fair value.
Partners’ Ledger Account
1. Capital Account
2. Drawing Accounts
Illustrations:
Partnership
Initial investment 9II); Additional Investment (AI)
Bonus on Initial Investments
A bonus exists when the capital account is
credited for and amount greater than or less than
the fair value of his contribution.
The bonus is treated as adjustments to the capital
accounts of the partners.
Pro Forma Entries
Partner A ——> Contributed Cash (P100,000)
Partner B ——> Contributed Equipment (Cost:
P75,000; Fair Value: P50,000)
Partner C ——> Contributed Inventory (P120,000)
To record the initial investment

Dr. Asset P xxx

Cr. Capital P xxx

Journal Entries
Cash P100,000
Partner A
(Advances to) (Advances from) A, Capital P100,000
3. Receivable from/payable to a partner.
(Asset) (Liability) Partner B Equipment P50,000
B, Capital P50,000
➢ Advances to – Asset
➢ Advances from – Liability Partner C
➢ Due form – Asset Inventory P120,000
C, Capital P120,000
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 Accumulated Depreciation - depreciation
expense yearly. It is closed at the end of the
accounting period.

Example:
Year 1
Depreciation Expense P10,000
Accumulated Depreciation P10,000
Non-Cash Asset
Depreciable: Year 2
Building, Machinery, Equipment Depreciation Expense P10,000
(depreciate) Accumulated Depreciation P10,000

Non-Depreciable: Year 3
Land (appreciate) Depreciation Expense P10,000
Accumulated Depreciation P10,000

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Merchandising Business
Purchases
• Service Type - no inventories; in
exchange for a fee. Inventory intended Gross Purchases Pxxx
for use. Add: Freight-in Pxxx
• Merchandising Type – buys finished Total Pxxx
products intended for sale.
➢ 1 Form of Inventory: Less: Purchase Discount Pxxx
Merchandise Inventory Purchase Ret./Allow. Pxxx
(Current Asset – Balance Sheet). Net Purchases Pxxx
• Manufacturing Type – buy raw materials
for further processing.
Freight – In : adjunct account.
Purchase Discount / Purchase Returns and
Merchandising Business: buy finished goods and
Allowances: contra accounts.
resell the product.
Journal Entries
Cost of the product:
purchase price Pxxx
Add: Mark up Pxxx
Selling price Pxxx

Income Statement of Merchandising Business

ABC Company
Income Statement
For the Year Ended Dec. 31, 2021

Sales Pxxx
Less: Cost of Goods Sold Pxxx
Sales
Gross Profit Pxxx Gross Sales Pxxx
Less: Expenses Pxxx Less: Sales Discount Pxxx
Net Income Pxxx Sales Returns &Allow. Pxxx
Net Sales Pxxx
Two Inventory System - system used in
accounting or recording inventory.
1. Periodic Inventory System
2. Perpetual Inventory System Gross Sales

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Accounting for Discount
• Trade Discount Gross Purchase (net of trade discount)
• Cash Discount
List Price 300
Trade Discount – given for buying in large
quantities. Less: Trade Discount 50
• NO entry / accounting recognition. Invoice Price 250 Gross Purchases
• Deducted in list price. Less: Cash Discount 50 Purchase Disc.

Cash Discount – given for early payment. Amount Payable 200 Net Purchases
• Deducted in the invoice price.

Dec. 1 Purchased merchandise for P300,000 on

account. Compute the invoice price and the amount
Terms: list price = P300,000 payable.

Trade discount = 20%, 10%, 15%

List Price 300,000
Cash Discount = 2/10; n/30
Less: Trade Discount 20% 60,000
➔ Credit terms
240,000
List Price P 300,000 10% 24,000
Terms: 20%, 10%, 15% 216,000
2/10; n/30 15% 32,400
Gross
Invoice Price 183,600 Purchases
Purchase
Less: Cash Discount 3,672 Disc.
Net
Amount Payable 179,928 Purchases

2 Methods of
Recording Purchases
• Gross
Method
• Net Method

Gross Profit Compute Cost of Goods Sold

Net Sales Pxxx 500,000 Beg. Inventory Pxxx 30,000
Less: Cost of Goods Sold Pxxx 400,000 Add: Net Purchases Pxxx 185,000
Gross Profit Pxxx 100,000 Goods Available for Sales Pxxx 215,000
Less: Ending Inventory Pxxx 15,000
Cost of Goods Sold Pxxx 200,000

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Value Added Tax
VAT = 12%
VAT Payable :
Output Tax 12,000
Less: Input Tax 9,600
VAT Payable 2,400
Example:
Sales of P112,000 inclusive of VAT
Purchases of P89,600, inclusive of VAT

Compute the VAT Payable

Sales Inclusive:
112,000 / 1.12 = Sales exclusive
100,000
Output tax: 12,000

Purchases inclusive:
89,600 / 1.12 = P80,000
Input tax: 9,600

Journal Entry to record Sales with VAT

Accounts Receivable 112,000
Sales 100,000
Output Tax 12,000
To record purchases (inclusive)
Purchases 80,000
Input Tax 9,600
Accounts Payable 89,600

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