Ae 104

LESSON 1: BASIC ACCOUNTING CONCEPTS AND should not be disclosed to third parties without
PRINCIPLES proper authorization.

Professional behavior - Professional accountants
Accounting - A service activity that provide must follow laws and regulation and avoid acts that
quantitative information, primarily financial in can discredit the profession.
nature, about economic entities to users of such TYPES OF ECONOMIC ENTITIES BASED ON
information (stakeholders), that is intended to be PURPOSE:
useful in making economic decisions. - Business organizations
BRANCHES OF ACCOUNTING: - Not-for-profit organization
- Bookkeeping - Government institution
- Financial Accounting Business organizations - Organizations created for
- Managerial Accounting purposes of generating profit in its operation
- Auditing Not-for-profit organization - Organizations created
- Taxation for purposes of specific undertaking and is not
- Government Accounting meant to generate profit in its operation.
Bookkeeping – The mechanical task involving the Government institution - Government
collection of basic financial data. instrumentalities that generates from taxes used
Financial Accounting – Involves bookkeeping for public projects and welfare.
function and periodic financial reporting TYPES OF BUSINESS ORGANIZATION BASED ON
Managerial Accounting – The utilization of NATURE OF ACTIVITY:
accounting data for specific decision-making needs - Service business
by management - Trading/Merchandising Business
Auditing- The rendering of opinion by an - Manufacturing Business
independent CPA in the fairness of an Service business – an entity engaged in providing
organization’s financial statement specific kinds of service(s) to its customer and does
Taxation – Preparation of tax return and analysis of not create any tangible product.
tax effect of certain transactions Trading/Merchandising business - an entity
Government accounting – Identification of the tax engaged in buying goods from a manufacturer or
revenue sources and usage of funds consistent with other merchandisers to be sold to its customers at
the national and local laws. a mark-up.
CODE OF ETHICS OF PROFESSIONAL Manufacturing business- An entity engaged in
ACCOUNTANTS: procuring raw materials, labor and other goods and
- Integrity services with the intention of creating a finished
- Objectivity product for sale to customers.
- Professional competence and due care TYPES OF BUSINESS ORGANIZATION BASED ON
- Confidentiality OWNERSHIP STRUCTURE:
- Professional behavior - Sole proprietorship
Integrity - Professional accountants must be - Partnership
straightforward and honest in all professional and - Corporation
business relationships. Sole Proprietorship- A business owned by a single
Objectivity - Professional accountants should not owner who generally manages the affair of the
allow bias, conflict of interest or undue influence of business.
others to override professional judgement Partnership - A business owned by two or more
Professional competence and due care- persons who bind themselves to contribute money,
Professional accountants should continuously hone property or industry in an undertaking with the
their professional knowledge and skill to ensure intention of dividing profits among themselves.
that their clientele receive competent services. Corporation - An artificial being created by
Confidentiality - Information obtained by the operation and owned by stockholders. The
professional accountant in course if their work corporation is a separate legal entity, and the
stockholders are not personally liable to the Financial institution – Provides the fund needed by
corporation’s liabilities. the entity to finance its operations and activities
TYPES OF BUSINESS ORGANIZATION BASED ON SIZE General public – Has interest in the general afffairs
OF OPERATION: of the entity
- Micro enterprises PURPOSE OF FINANCIAL INFORMATION:
- Small enterprises (EXTERNAL)
- Medium enterprises Suppliers – determine the entity’s ability to pay for
- Large enterprises the goofs and service they deliver
Micro enterprises – has a net asset value of 3 Customers – Determine the entity’s capacity to
Million and Less deliver the goods and service they order.
Small enterprises – has a net asset value of more Government- ensure the entity’s compliance with
than 3 million up to 15 million regulation and check accuracy of tax payment
Medium enterprises – has a net asset value of Financial institution – Determine the entity’s
more than 15 million up to 100 million ability to repay loans and interests as they fall due.
Large enterprises – has a net asset value of more General public – uses financial information for
than 100 million specific purposes
USERS OF FINANCIAL INFORMATION: CHARACTERISTICS OF USEFUL INFORMATION
A. Internal users Relevance and faithful representation – these are
o Owners the fundamental qualitative characteristic of useful
o Managers financial information
o Employees • Information must be BOTH relevant and
B. External users faithfully represented if it is to be useful.
o Suppliers Relevance:
o Customers • Information is relevant if it CAN INFLUENCE
o Government DECISIONS MADE BY USERS.
o Financial institution • Information is relevant when it has BOTH
o General public PREDICTIVE AND CONFIRMATORY VALUE
ROLE TO THE ORGANIZATION: (INTERNAL) Confirmatory value – Information can confirm or
Owners – Starts a business and provided its initial correct the user’s expectations
capita. Also included subsequent investors Predictive value – information can be used by the
Managers – Manages the over-all affairs of the user to make predictions
entity Faithful representation:
Employees – Render services to the entity in • Financial statement SHOULD reflect a TRUE
exchange for remuneration AND FAIR VIEW the economic substance of
PURPOSE OF FINANCIAL INFORMATION: transactions.
(INTERNAL) • Transaction and balances are
Owners – Determine if the business is stable and recorded/reported COMPLETELY,
profitable OBJECTIVELY, UNBIASED, AND FREE FROM
Managers – Determine if the business is MATERIAL ERROR
performing as intended • Does NOT necessarily mean 100% accuracy,
Employees- Determine if the business is stable as it due to use of judgment and estimates.
may affect the status of their employment Prudence and Faithful Representation:
ROLE TO THE ORGANIZATION: (EXTERNAL) • Requires the exercise of a degree of caution
Suppliers – The source of services or goods in adopting policies and estimates
procured by the entity • Financial reports SHOULD NOT present the
Customers – The buyer of the services or goods organization better than what it is and may
sold by the entity cause users to user to make decision that
Government – regulates business activities and can be disadvantageous to them.
collects taxes from the entity
IN EXERCISING PRUDENCE, the entity should make • At the minimum, the Company is expected
sure that: to continue operating within 12 months
- Asset and revenues are NOT overstated from reporting date.
- Liabilities and expenses are NOT • If there is evidence showing that the
understated Company is no longer a going concern, it
ENHANCING QUALITATIVE CHARACTERISTICS: shall disclose such fact and discontinue the
- Comparability use going concern assumption.
- Verifiability Periodicity concept:
- Timeliness • An entity’s life can be divided into
- Understandability meaningfully equal time period
Comparability - Information has more value if it (“accounting periods”) for reporting
can be compared with other entities or with other purposes.
similar information about the entity. • Sets the frequency of financial reporting to
Verifiability - Information is verifiable when users.
different knowledgeable and independent Fiscal year – 12 months on different year
observers can reach a consensus that such Calendar year – 12 months within the same year
information is faithfully represented Interim period – less 12 months (monthly,
Timeliness - Information needs to be provided to quarterly, semi-annual)
decision-makers in time to be capable of Stable monetary unit concept:
influencing their decision. • Assumes that the value of a currency
Understandability – Information needs to be (Philippine Peso) is stable over time.
clearly and concisely presented • Impact of inflation is disregarded.
FUNDAMENTAL ACCOUNTING CONCEPTS AND FUNDAMENTAL ACCOUNTING PRINCIPLES:
UNDERLYING ASSUMPTION: - Objectivity principle
- Economic entity concept - Historical cost
- Going concern assumption - Revenue recognition principle
- Periodicity Concept - Expense recognition principle
- Stable monetary unit concept - Adequate disclosure
Economic entity concept: - Materiality
• Transaction associated with an entity must - Consistency principle
be separately recorded from those its Objectivity principle:
owners or other entities. • Accounting records and statements are
• Transactions and balances of the business based on the most reliable data so that they
are recorded in the accounting records, will be as accurate and as useful as possible.
while transactions and balances of the • Reliable data is verifiable when they can be
owners are excluded. confirmed by independents observers.
• Comingled transactions (i.e., business Historical Cost:
transactions mixed with that of the owners • Transaction and balances are carried at
and vice versa) must be properly identified actual cost, unless required/ permitted by
and charged to the proper party. the standard to use a different
• Economic entity concept will not prevent measurement basis.
the owners from accessing the assets of the Revenue recognition principle:
business, however, its accounting treatment • Revenue is recognized in the period realized
will be different compared to business or earned irrespective of the timing of cash
transactions. receipt.
Going concern assumption: • Revenue is said to be earned when services
• An entity is viewed as a continuing business are rendered, or goods were delivered to
in the foreseeable future, unless there is the customer.
evidence to the contrary.
• When cash is received after the delivery of Bookkeeping - is a business activity concerned with
goods or services, the company recognizes recording and classifying financial data related to
a receivable. business operation in order of its occurrence.
• When cash is received before the delivery • A mechanical task involving the following
of goods or services, the company activities:
recognizes a liability. – Collection of basic financial
Expense recognition principle: information
• Expense is recognized in the period incurred – Identification of economic events
or used up irrespective of the timing of cash and transactions
payment. – Measurement of economic
• Expense is said to be incurred when services transactions in monetary terms
are provided by, or goods were received – Recording economic transactions
from the supplier. chronologically
• When cash is paid after the receipt of goods – Classifying effects of economic
or services, the company recognizes a transaction
liability. TYPES OF BOOKKEEPING SYSTEM:
• When cash is paid before the receipt of - Single-entry bookkeeping
goods or services, the company recognizes - Double-entry bookkeeping
an asset. Single-entry bookkeeping:
Adequate disclosure: • Uses only one entry in every transaction,
• The entity should provide footnotes, similar to a check register.
supplementary schedule and other relevant • Does not track assets and liabilities from
information that will complement the transaction.
figures in the financial statement and give • Applicable only to very small businesses
the users a better understanding of the with simple operations and low volume of
Company's financial statement. activity.
Materiality: Double-entry bookkeeping:
• Financial reporting is concerned with • Used by most businesses.
information that is significant enough to • Develop by Italian mathematician Luca
affect evaluations and decisions. Pacioli in 1494.
• Accounting information is deemed material • Based on the principle of the duality of
if its inclusion or exclusion can change business transactions and events, i.e., every
user’s decisions. transaction has a double (or dual) effect on
Consistency principle: the position of a business as recorded in the
• The firm should use the same accounting accounts.
method from period to period to achieve • Double entry bookkeeping has the following
comparability over time within a single features:
enterprise. • Transactions are recorded in specific
• Nonetheless, changes are permitted if accounts
justifiable and disclosed in the financial • Every transaction has two fold aspects (one
statements party giving the benefit and the other
LESSON 2: ACCOUNTING EQUATION AND DOUBLE- receiving the benefit).
ENTRY BOOKKEEPING • Every transaction is divided into two
Accounting equations: aspects, Debit and Credit.
• Assets = Liabilities + Equity (Balance • Every debit must have its corresponding
Sheet/Financial position) and equal credit.
• Revenues-Costs and Expenses = Net ADVANTAGES OF DOUBLE-ENTRY BOOKKEEPING:
Income/Loss (Income Statement/Financial • Completely captures the economic effect of
Performance) business transactions.
• Ensures arithmetical accuracy of the books • Also known as permanent accounts or
of accounts, since every debits must have balance sheet accounts.
an equal credit. Nominal Account:
• Balances of receivables and payable are • Accounts related to the entity’s revenues
properly tracked. and expenses.
• Most errors can be easily detected and • Balances are transferred to a real account
rectified. at the end of an accounting period.
LIMITATIONS OF DOUBLE-ENTRY BOOKKEEPING • Also known as temporary accounts or
• It does not disclose all the errors committed income statement accounts.
in the books accounts. Contra account:
• It is costly as it involves maintenance of • Accounts that reduced the value of a
numbers of books of accounts. related account.
THE ACCOUNTING PROCESS: • The normal balance of these account will be
1. Identification of transaction the opposite of the related account (i.e., if
2. Recording/Journalizing asset account have normal debit balance,
3. Summarizing/Posting in General Ledger contra-asset accounts will have a normal
4. Preparation of trial balance credit balance).
5. Posting of adjusting entries • Can either be a real account or nominal.
6. Worksheet preparation (optional) CONCEPTS OF DEBIT AND CREDIT
7. Financial statements preparation Debit (Dr)
8. Preparation of closing entries • Derived from the Latin word “debitum”,
9. Preparation of post-closing trial balance meaning “What we will receive”.
10. Reversing entries (optional) • It is the “destination” of every transaction,
CONCEPT OF ACCOUNT: or the benefit that the entity received
• An account is defined as a summarized (value received).
record of economic transactions related to Credit (Cr)
the elements of the financial statement. For • Derived from the Latin word “credere”,
example: meaning “What we will have to pay”.
• The “Cash” account is a record of all • It is the “source” of the benefits received on
money transactions of the entity every transaction(value parted with or
(receipt/payment). given up).
• The “Accounts receivable” account Additional notes:
contains information about all credit • Every transactions debit entries must equal
sales transaction. its credit entries.
• An account is usually expressed as a • The difference between the total debits and
statement in form of letter ‘T’. total credits in an account is the account’s
• The left side is called as “Debit’ and balance.
the right side is called as “Credit’. – If debits exceed credits, the account
• The debit is denoted as ‘Dr’ and the has a debit balance
credit by ‘Cr’. – If credits exceed debits, the account
TYPES OF ACCOUNT: has a credit balance.
- Real Account
- Nominal Account
- Contra Account
Real Account:
• Accounts related to the entity’s assets,
liabilities and owner’s equity
• Balances are carried-over from one
accounting period to another.
Type of Debit Credit Normal Work-in-process inventory - inventories in the
account balance manufacturing line bur not yet completed.
Finished goods inventory - inventories completed
Asset Increase Decrease Debit from the manufacturing process for sales.
Production supplies – inventory of other supplies
Liability Decrease Increase Credit
used in the production goods and services.
Equity Decrease Increase Credit Prepaid expenses - Represents cash paid by the
entity to its supplier of goods or service that is yet
Revenue Decrease Increase Credit to incurred used or consumed by the entity and ,
Expense Increase Decrease Debit hence, yet not incurred by the entity.
Property, plant and equipment - Tangible
properties that are held by an enterprise for use in
Chart of accounts - is a listing of the names of the
the production or supply of goods or services,
accounts that a company has identified and made
rental to other or use for administrative purposes
available for recording transactions in its books of
that is expected to be useful within for more than
accounts.
one year. Includes items such as land, building,
Chart of accounts - is tailored to suit the needs of
machinery and equipment, furniture and fixture
the business.
and vehicles.
TYPICAL ACCOUNTS USED BY BUSINESS
Accumulated depreciation - A contra-asset account
ORGANIZATIONS
related to an item of fixed asset and contains the
ASSET ACCOUNTS:
accumulated sum of periodic depreciation charges.
• Cash
The balance of this account is deducted from the
• Accounts receivable
cost of the related asset (e.g. building, equipment,
• Notes Receivable
vehicle) to obtain its net book value or carrying
• Allowance for Doubtful accounts (contra-
value.
asset)
LIABILITY ACCOUNTS
• Inventories
• Accounts Payable
• Prepaid expenses
• Accrued expenses payable
• Property, plant, and equipment (fixed asset)
• Unearned revenues
• Accumulated depreciation (contra-asset)
• Loans payable
Cash - Paper bill, check and any other medium that
Accounts Payable - Amount due to be paid by the
will be accepted in the exchange of goods or
entity to its supplier for services rendered or good
service.
received on credit.
Accounts receivable - Amount due to be collected
Accrued Expenses Payable - Amount owed to other
by the entity from its customer for service
for unpaid expense where the supplier’s billing or
rendered or goods sold on credit.
other supporting document are still not yet
Notes receivable - A written pledge that a debtor
received by the entity.
will be pay the entity a fixed amount on a certain
Unearned revenues - Represents cash received by
date.
the entity from its customer prior to rendering of
Allowance for Doubtful Accounts - A contra-asset
service or delivery of goods, hence, still not earned
account representing a portion of the entity’s
by the entity.
receivable that is assessed to be uncollectible.
Loans Payable - Represents cash obtained through
Inventories - Goods that are held for sale in the
debt financing from a bank or other financial
ordinary course of business or used in production
institution
of goods and services.
Short-term loan payable - if it is due to be paid
Merchandise inventory - goods bought by trading
within one year
firms for resale at a mark-up.
Long-term loan payable - if it is due to be paid for a
Raw materials inventory - goods to be used in
period exceeding one year.
making a finished goods by a manufacturing firm.
EQUITY ACCOUNTS • Insurance expense
• Owner, Capital • Depreciation expense
• Owner, Withdrawals • Bad debts expense
Owner, Capital - Pertains to the owner’s invested • Interest expense
capital and accumulated profit (loss), net of • Losses
withdrawals closed in this account. Salaries and Wages Expense - Payments made as a
Owner, Withdrawals - Contra-equity account; result of an employer-employee relationship
Temporary account used to record withdrawals of between the entity and its employees.
business asset by the owner for personal purposes. Utilities Expense - Expenses related to use of
REVENUE ACCOUNTS telecommunication facilities, consumption of
• Service Revenue electricity or water.
• Sales Rent Expense - Expense for leasing office space,
• Other Revenues/Income equipment or other assets.
• Gains Office Supplies Expense - Expense of using office
Service revenue- Revenue earned by performing supplies in the conduct of routing business
services for a customer or client; for example, activities
accounting services by a CPA firm, legal services by Insurance Expense - Payment of premium on
a law firm insurance coverage of the entity’s assets.
Sales - Revenues earned as a result of sale of Depreciation Expense - Portion of a tangible asset
goods, for example, sale of building materials by a allocated or charged as expense during an
construction supply firm accounting period.
Other revenues/income- Revenue earned that is Bad Debts Expense - Amount of receivable
incidental to the operations of the business, for estimated to be doubtful of collection and charge
example, interest income earned on cash in bank as expense during the period.
Gains - Revenue earned from activities outside of Interest Expense - Expense related to the use of
the normal course of business, for example, gain on borrowed funds.
sale of fixed assets sold for more than its carrying Losses - Outflow of economic resource that is
value. outside of the normal of course business
EFFECT OF BUSINESS TRANSACTIONS:
COST OF SALES/REVENUE ACCOUNTS Every accountable event has a dual but self-
• Direct cost balancing effect on the accounting equation. The
• Cost of sales types of effect of transactions are as follows:
• Purchases • Increase in Asset = Increase in Liability
Direct cost - Expenditure spent by the entity that is • Increase in Asset = Increase in Owner’s
directly related in earning service revenues; for Equity
example, salaries of CPAs hired by an accounting • Increase in one Asset = Decrease in
firm or the fuel consumed and salary of the drivers another Asset
of a bus company. • Decrease in Asset = Decrease in Liability
Cost of sales - Cost assigned to goods sold by a • Decrease in Asset = Decrease in Owner’s
trader or manufacturer. This account is used in the Equity
perpetual inventory system only. • Increase in Liability = Decrease in Owner’s
Purchases - Accumulated cost of goods purchased Equity
by a trading firm from suppliers. This account is • Increase in Owner’s Equity = Decrease in
used in the periodic inventory system only. Liability
EXPENSE ACCOUNTS • Increase in one Liability = Decrease in
• Salaries and wages expense another Liability
• Utilities expense • Increase in one Owner’s Equity = Decrease
• Rent expense in another Owner’s Equity
• Office supplies expense
LESSON 3: IDENTIFYING AND RECORDING BUSINESS Non-transactional events
TRANSACTIONS • Non-transactional events may or may not
Transaction have an immediate financial impact on the
• It is exchange of an asset and discharge of books of accounts.
liability between two or more parties in • Non-transactional events are be recorded in
consideration of monetary value. the books of accounts if:
• Directly impact the financial aspect of an o It has immediate financial impact,
entity. and
• Occurs on a regular basis. o The monetary value of the impact
Event can be measured reliably.
• An event is any incidence that occurs as a • Events with no measurable financial impact
result of a business activity, decision or the are not recorded in the books of accounts
entity’s circumstances. of the company. However, it is important
• May or may not affect the entity financially. for management to keep track of these as
• May occur frequently or seldomly. these may lead to future monetary impact
for the business.
NOTE: All transactions are events, but not all events • Management’s judgment is involved in
are transactions. assessing the financial impact of an event.
TYPES OF BUSINESS TRANSACTION EXAMPLES OF NON-TRANSACTIONAL EVENTS:

• Operating activities Non-transactional events with immediate
• Investing activities financial impact
• Financing activities • Vehicle destroyed due to an accident
• Bankruptcy of a debtor
Operating activities - Transactions that are related • Expiration of an advance payment
to the primary business activities on the sale of • Consumption of inventories
goods and services. Non-transactional events with no immediate
Investing activities - Transactions that are related financial impact
to acquisition of long-term assets or investments • Death of a senior officer
by the entity. • Employee strike
Financing activities - Transactions that are related • Economic recession
to the sourcing of funds to finance the entity’s • Technological advancements
activities (other than operating sources).
Source Documents
TYPICAL ACTIVITIES (OPERATING ACTIVITIES) • A source document is the original document
• Sale of goods/ Rendering of services that contains the details of a business
• Purchase of goods and services transaction.
• Payment of operating expenses (including • Source documents captures the key
taxes) information about a transaction, such as the
TYPICAL ACTIVITIES (INVESTING ACTIVITIES) names of the parties involved, transaction
• Acquisition of fixed asset amount, transaction date, and the
• Sale of fixed assets substance of the transaction.
• Investing to a different business • Source documents are frequently identified
TYPICAL ACTIVITIES (FINANCING ACTIVITIES) with a unique number, so that they can be
differentiated in the accounting system.
• Contribution by owners to the entity
• Source documents serves a “paper trail”
• Withdrawals by owners
that a transaction has transpired.
• Receipts of long-term loans
• Transactions are supported by standard
• Repayment of long-term loans
source documents.
• Events may or may not be supported by Credit Memorandum
standard source documents. - commonly known as CREDIT MEMO
- A documents issued by the entity to its
COMMONLY-USED SOURCE DOCUMENTS customers to notify them that a credit is
1. Receipts being applied to their account for reasons
2. Invoice stated in the memo.
3. Credit memorandum - A credit memo reduces the balance owed
4. Debit memorandum by the customer and is issued for various
5. Deposit Slip reasons, such as:
6. Payroll Register o Return of goods or rejection
7. Tax-related documents (registration, of service
returns) o Mistake on previous invoice
8. Bank Statement o Damaged good in transit
9. Contracts
10. Loan Agreement
11. Pertinent documents In relation to non-
transactional events
Receipts - A document showing the amount of cash

received by the payee from the payor.
Debit Memorandum
- Commonly known as debit memo.
- A documents issued by the entity to its
customers to notify them that a debit being
to their account for reason stated in the
memo.
Invoice - A debit memo increases the balance owed
- A document issued to a customer that by the customer and is issued for various
states the amount owed to the issuer for reasons, such as:
the goods sold or services rendered by the - Additional charges
latter. - Invoice correction
- For sale of goods, a sales invoice is issued by
the seller.
- For sale of services, a billing invoice/
statement is issued.
Accounting Journal Source document reference - indicates the unique
- A journal is often referred to as the book of identifying number in the document that serve as
original entry. evidence of the occurrence of a transaction.
- In this book, transactions are recorded in Posting reference- this will be used when the
their chronological order. The process of journal entries are posted, that is, until the
recording transaction in a journal is called amounts are transferred to the related ledger
journalizing. account.
- The entry made in this book is called a
journal entry. TYPES OF JOURNAL ENTRY
Function of a journal • Simple journal entry
- Maintain a chronological record of • Compound journal entry
transactions for future reference.
- Enables understanding of the impact of Simple journal entry
transactions to the business by analyzing - Accounting entries that debits one account
the corresponding debits and the credits. and credits a corresponding account.
- Involves only two accounts.
TYPES OF JOURNAL Compound journal entry
• General Journal - Accounting entries that involved more than
• Special Journal two accounts (e.g., two or more debits
and/or credits).
General Journal
- Primary journal of every business SAMPLE PROBLEM
- Can be used to record any type of • On January 15, 2021, ECQ Trading purchased
transaction cleaning supplies amounting to P2,500. ECQ
- When special journals are used, this journal paid 50% of the amount due, with the
will contain non-recurring and adjusting balance payable by the end of the month
entries [Voucher No. 2021-076].
Special Journal Simple Journal Entry
- Pertains to all accounting journal, except for
the general journal, used to record specific
types of transactions.
- Contains details of recurring transactions
with high volume of activity that will
overwhelm the general journal
Compound journal entry:
JOURNAL ENTRY FORMAT
Date Account Debit Credit
mm/dd/yyyy Account debited Pxx,xxx
(any format) Account credited Pxx,xxx
Short narration on nature of transaction
Date column - indicates the date that the

transaction occurred. RECORDING OPERATING ACTIVITIES
Accounts column - indicates the accounts to be (REVENUE AND EXPENSE TRANSACTIONS)
debited and credited, with short explanation called
narration. Accounts are based on the entity’s chart REVENUE-RELATED TRANSACTIONS
of accounts. Cash sales/revenue
Debit/credit column- indicates the financial • Cash is received as soon as revenue is
value/impact of the transaction. earned and recognized.
• Increases both cash and revenue
• Increase total assets and total equity; no Advance payment from customers (Liability
impact on total liabilities method)
Illustrative example: • The entity obtains cash from customer for
• On June 10, 2021, Detoya Company services to be rendered or goods to be
received P50,000 from Sabio Company for delivered on a future date.
cleaning services rendered from June 1 to 7, • Using the liability method, the cash received
2021. is initially recorded in a liability account,
Journal entry: which will be adjusted at period-end for any
Date Account Debit Credit earned portion.
10-Jun-21 Cash 50,000 • Increases both cash and unearned revenues
Service revenue 50,000 • Increases both total assets and total
To record payment received from Sabio Company
liabilities; No effect on total equity
Illustrative example:
Sales/Revenues on account • On January 1, 2021, Violet Holdings
• Revenue is earned and recognized, with the received P30,000 from Magenta Corp.
corresponding cash to be received on a representing rental on properties leased
later date. from January to June 2021.
• Increases accounts receivable and revenue Journal entry:
• Increase total assets and total equity; no
impact on total liabilities 01-Jan-21 Cash 30,000
Illustrative example: Unearned rent revenue 30,000
• On July 8, 2021, Susan Enterprise billed To record receipt of advance payment from Magenta Corp.
P35,000 to Patrimonio Company for various
merchandise delivered. This will be paid by Advance payment from customers (Income
the end of the month. method)
Journal entry: • The entity obtains cash from customer for
Date Account Debit Credit services to be rendered or goods to be
08-Jul-21 Accounts receivable 35,000 delivered on a future date.
Sales 35,000 • Using the income method, the cash
To record sales on credit to Patrimonio Company
received is initially recorded in a revenue
account, which will be adjusted at period-
Collection of accounts receivable end for any unearned portion.
• Customer settles the amount owed to the • Increases both cash and revenues
business from previously recorded credit • Increases both total assets and total equity;
sales. No effect on total liabilities
• Cash increases, but accounts receivable Illustrative example:
decreases • On January 1, 2021, Violet Holdings
• No effect on total asset, liabilities and received P30,000 from Magenta Corp.
equity representing rental on properties leased
from January to June 2021.
Illustrative example: Journal entry:
§ On July 31, 2021, Susan Enterprise received Date Account Debit Credit
P35,000 from Patrimonio Company in 01-Jan-21 Cash 30,000
payment for the merchandise sold on Rent revenue 30,000
account last July 8, 2021. To record receipt of advance payment from Magenta Corp.
Journal entry:
31-Jul-21 Cash 35,000
Accounts receivable 35,000
To record receipt of payment from Patrimonio Company
EXPENSE-RELATED TRANSACTIONS Illustrative example:
§ On May 13, 2021, Tan Company paid
Direct payment of expenses P16,500 to Chua Law to settle the billing
• Cash is paid at the same time expense is received last April 30, 2021 for legal services
incurred and recognized. rendered for the moth of April 2021.
• Expense increase while cash decreases Journal entry:
• Decreases both total assets and equity; no Date Account Debit Credit
impact on total liabilities 13-May-21 Accounts payable 16,500
Illustrative example: Cash 16,500
To record payment to Chua Law to settle April billing
• On March 31, 2021, Calibri Company paid
P25,000 to Garamond Holding for rental due
on leased office space for the month of Advance payment to suppliers (Asset method)
March 2021. • The entity pays cash to a supplier for services
Journal entry: to be rendered or goods to be delivered on a
future date.
31-Mar-21 Rent expense 25,000 • Using the asset method, the cash paid is
Cash 25,000 initially recorded in an asset account, which
To record payment of office rental to Garamond Holding will be adjusted at period-end for any
expired/used portion.
Receipt of supplier’s billing for expenses • Increases prepaid expenses while decreasing
• Expense is incurred and recognized, with the cash
corresponding cash to be paid on a later • No effect on total assets, liabilities and
date. equity.
• Increases both accounts payable and Illustrative example:
expense • On June 2, 2021, Russell Delivery Services
• Increase total liability while decreasing total paid P200,000 to MoonLife PH for the
equity; no impact on total assets insurance coverage of its fleet of service
Illustrative example: vehicle from June 2021 to June 2022.
• On April 30, 2021, Tan Company received a Journal entry:
billing amounting to P16,500 from Chua Law Date Account Debit Credit
for legal services rendered during the 02-Jun-21 Prepaid insurance 200,000
month, payable on May 14, 2021. Cash 200,000
To record payment of insurance due from June 2021 to 2022
Journal entry:
30-Apr-21 Professional fee expense 16,500 Advance payment to suppliers (Expense method)
Accounts payable 16,500 • The entity pays cash to a supplier for services
To record billing for legal services received from Chua Low to be rendered or goods to be delivered on a
future date.
Payment of accounts payable • Using the expense method, the cash paid is
• Supplier is paid for the amount owed by the initially recorded in an expense account,
business on previously recorded supplier’s which will be adjusted at period-end for any
billing. unexpired/unused portion.
• Decreases both cash and accounts payable. • Increases expenses while decreasing cash
• Decreases both total assets and total • Decreases both total assets and equity; no
liabilities; No effect on total equity. impact on total liabilities
Illustrative example: Sale of fixed assets at a gain
§ On June 2, 2021, Russell Delivery Services • Fixed asset is sold to a third party for a cash
paid P200,000 to MoonLife PH for the consideration that is higher than the asset’s
insurance coverage of its fleet of service carrying amount.
vehicle from June 2021 to June 2022. • The entity recognizes a “Gain on Sale of
Journal entry: Fixed Asset” for the difference in cash
Date Account Debit Credit received against the net carrying value of
02-Jun-21 Insurance expense 200,000 the fixed asset sold.
Cash 200,000 • Increases total assets and total equity; No
To record payment of insurance due from June 2021 to 2022
impact on total liabilities
RECORDING INVESTING ACTIVITIES • On May 8, 2021, Hagonoy Company sold its
old vehicle for 100,000. The vehicle has an
FIXED ASSET TRANSACTIONS acquisition cost of P800,000 and total
Cash purchase of fixed assets accumulated depreciation of 720,000.
• Cash is paid at the same time the fixed asset • Carrying value: P800,000 - P720,000 =
is received and recognized. P80,000
• Fixed asset account increases while cash • Gain on sale of fixed asset: P100,000 -
decreases P80,000 = P20,000
• No impact on total assets, total liabilities Journal entry:
and equity Date Account Debit Credit
Illustrative example: 08-May-21 Cash 100,000
• On October 13, 2021, Plato Company paid Accum. depreciation - Vehicle 720,000
Vehicle 800,000
P750,000 to buy a parcel of land from Gain of sale of fixed asset 20,000
Aristotle Property Inc. which will be used as To record sale of vehicle
a business center in the future.
Journal entry: DISPOSAL OF FIXED ASSET
Date Account Debit Credit Sale of fixed assets at a loss
13-Oct-21 Land 750,000 • Fixed asset is sold to a third party for a cash
Cash 750,000 consideration that is lower than the asset’s
To record land purchased for future business center.
carrying amount.
Purchase of fixed assets on account • The entity recognizes a “Loss on Sale of
• Fixed asset is received and recognized, Fixed Asset” for the difference in cash
which will be paid on a later date received against the net carrying value of
• Fixed asset account and accounts payable the fixed asset sold.
increases • Decreases total assets and total equity; No
• Increases both total assets, total liabilities; impact on total liabilities
no impact on equity Illustrative example:
Illustrative example: • On May 8, 2021, Hagonoy Company sold its
• On November 6, 2021, Zeus Corp. bought old vehicle for 50,000. The vehicle has an
various office furniture and fixtures totaling acquisition cost of P800,000 and total
P150,000 from Jupiter Office Solutions Inc., accumulated depreciation of 720,000.
to be paid by end of the month. • Carrying value: P800,000 - P720,000 =
Journal entry: P80,000
Date Account Debit Credit • Loss on sale of fixed asset: P50,000 -
06-Nov-21 Office furniture and fixtiures 150,000
Accounts payable 150,000
P80,000 = P (30,000)
To record office furniture and fixtures purchased on account
Journal entry: RECORDING FINANCING ACTIVITIES
08-May-21 Cash 50,000
Accum. depreciation - Vehicle 720,000
TRANSACTION WITH OWNERS
Loss of sale of fixed asset 30,000 Initial and subsequent investment by owner
Vehicle 800,000 • The owners invest his personal money to
To record sale of vehicle
start the business, or make additional
Sale of fixed assets at carrying value capital infusion
• Fixed asset is sold to a third party for a cash • Increases both cash and owner’s equity
consideration that is equal to the asset’s • Increases both total assets and total equity;
carrying amount. No effect on total liabilities
• No gain nor loss recognized on the sale of Illustrative example:
the asset. • On September 15, 2021, Dr. Calaguas
• No impact on total assets, total liabilities invested P100,000 to his business, Calaguas
and total equity. Medical Clinic, to finance the renovation
Illustrative example: activities needed in his workplace.
• On May 8, 2021, Hagonoy Company sold its
Journal entry:
old vehicle for 80,000. The vehicle has an
acquisition cost of P800,000 and total 15-Sep-21 Cash 100,000
accumulated depreciation of 720,000. Calaguas, capital 100,000
• Carrying value: P800,000 - P720,000 = To record additional cash invested by the owner
P80,000 Owner’s withdrawal
• Gain/Loss on sale of fixed asset: P80,000 - • The business owner withdraws cash from
P80,000 = P 0 the business for personal use
Journal entry: • Decreases both cash and equity (thru the
Date Account Debit Credit withdrawal account)
08-May-21 Cash 80,000 • Decreases both total assets and total
Accum. depreciation - Vehicle 720,000 equity; No effect on total liabilities
Vehicle 800,000
To record sale of vehicle
• On January 10, 2022, Dr. Calaguas withdrew
Write-off or retirement of fixed asset P50,000 from his business, Calaguas
• Fixed asset is retired/destroyed/disposed Medical Clinic, for his personal use.
off by the entity for no consideration. Journal entry:
• The entity recognizes a “Loss on disposal of Date Account Debit Credit
10-Jan-22 Calaguas, withdrawals 50,000
fixed asset” for the remaining carrying value Cash 50,000
of the fixed asset disposed. To record withdrawal of cash for personal use by the owner
• On May 23, 2021, Talampas Inc. received a LOAN TRANSACTION
report that one of its service vehicle was Receipt of loan
destroyed due to an accident. The said • The entity obtains cash from a financing
vehicle has an acquisition cost of P800,000 institution (e.g., banks) that needs to be
and total accumulated depreciation of paid on a later date.
720,000. • Increases both cash and loans payable
Journal entry: • Increases both total assets and total
Date Account Debit Credit liabilities; No effect on total equity
23-May-21 Accumulated depreciation 720,000
Loss on disposal of fixed asset 80,000
Vehicle 800,000
To record disposal of destroyed vehicle
Illustrative example: Ledger entry:
§ On January 4, 2021, Liceo Sign Company Cash
obtained a loan of P500,000 from
NorthSouth Bank. The loan will be paid in E.Dela Cruz, Capital
ten (10) equal annual installments every
January.
Journal entry:
Date Account Debit Credit RECORDING AND SUMMARIZING BUSINESS
04-Jan-21 Cash 500,000 TRANSACTIONS
Loans payable 500,000
To record 10-year loan received from NorthSouth Bank M. Arevalo Repair Shop entered into the following
Payment of loan transactions during May 2021
• The entity pays in cash the amount
obtained from a financing institution (e.g.,
banks) either partially or in full.
• Decreases both cash and loans payable
• Decreases both total assets and total
liabilities; No effect on total equity
• On January 3, 2022, Liceo Sign Company
paid P50,000 to NorthSouth Bank to settle Chart of Accounts:
the installment due from its 10-year loan Account title
obtained last January 2021. Cash
Journal entry:
Accounts receivable
03-Jan-22 Loans payable 50,000
Land
Cash 50,000 Accounts payable
To record payment of installment due on loan M. Arevalo, capital
M. Arevalo, drawings
LESSON 4: SUMMARIZING JOURNAL ENTRIES Service revenue
Utilities expense
Sample Problem Rent expense
On April 1, 2021, Ms. E. dela Cruz opened Nailflix Office supplies expense
Salon. She invested P20,000 cash as initial
investment to the business on the said date. RECORDING BUSINESS TRANSACTIONS
Required:
• Provide the journal entry to record the May 1 Organized a repair shop and invested
above transaction. P500,000 cash for use by the business.
• Post the journal entry to the ledger using
the:
• Accounts format
• Running balance format
Journal Entry: May 3 Purchased P15,000 of office supplies on
account [use expense method].
May 6 Purchase a piece of land for the future May 30 Paid the balance of P7,500 to
business site for P140,000 cash. supplier of office supplies purchased on May 3.
May 11 Paid P7,500 to supplier of office May 31 Received P16,000 from customers
supplies purchased on May 3. billed on May 25.
May 15 Withdrew P25,000 for personal use. SUMMARY OF JOURNAL ENTRIES:
May 17 Paid P20,000 for the temporary

office rent for the month.
May 20 Paid various utility bills amounting

to P9,650.
N0. Date Particu lars Debit Credit

7 20-May -21 Utilities ex pense 9,65 0
May 21 Owner invested another P100,000 of Cash 9,65 0
personal funds in the business. To record payment of utility bills
8 21 -May -21 Cash 1 00,000

M. A rev alo, capital 1 00,000
To record additional investment from ow ner
9 22-May -21 Cash 5 ,000

Serv ice income 5 ,000
May 22 Received cash amounting P5,000 for To record cash received from services provided
repair services provided. 10 25 -May -21 A ccounts receiv able 35 ,000

Serv ice income 35 ,000
To record billing to customers
11 30-May -21 A ccounts pay able 7 ,5 00

Cash 7 ,5 00
To record full payment of accounts payable
May 25 Billed P35,000 to various clients for 12 31 -May -21 Cash 1 6,000
A ccounts receiv able 1 6,000
repair services provided on account. To record collection from customers
LEDGER POSTING – JOURNAL ENTRY NO. 1
Journal entry:
N0. Date Particulars Debit Credit
1 01 -May -21 Cash 500,000
M. Arev alo, capital 500,000
To record investment from owner
Ledger Entry:
CASH
Date Particulars Debit Date Particulars Credit
01 -May -21 To record inv estment from owner 500,000 06-May -21 To record purchase of land 1 40,000
M. AREVALO, CAPIT AL
06-May -21 To record withdrawal from the owner 25,000 01 -May -21 To record inv estment from owner 500,000
Journal entry:
2 03-May -21 Office supplies ex pense 1 5,000
Accounts pay able 1 5,000
To record purchase of office supplies
Ledger Entry:
OFFICE SUPPLIES EXPENSE
03-May -21 To record purchase of office supplies 1 5,000
ACCOUNT S PAY ABLE

1 1 -May -21 To record pay ment of accounts pay able 1 8,000 03-May -21 To record purchase of office supplies 1 5,000
Journal entry:
3 06-May -21 Land 1 40,000
Cash 1 40,000
To record purchase of land
Ledger Entry:
LAND
06-May -21 To record purchase of land 1 40,000
CASH
Journal entry:
4 1 1 -May -21 Accounts pay able 7 ,500
Cash 7 ,500
To record payment of accounts payable
Ledger Entry:
ACCOUNT S PAY ABLE
1 1 -May -21 To record pay ment of accounts pay able 7 ,500 03-May -21 To record purchase of office supplies 1 5,000
CASH
25-May -21 To record additional inv estment from owner 1 00,000 1 1 -May -21 To record pay ment of accounts pay able 7 ,500
Journal entry:
5 1 5-May -21 M. Arev alo, drawings 25,000
Cash 25,000
To record withdrawal from the owner
Ledger Entry:
M. AREVALO, DRAWINGS
1 5-May -21 To record withdrawal from the owner 25,000
CASH
28-May -21 To record cash receiv ed from serv ices prov ided 5,000 1 5-May -21 To record withdrawal from the owner 25,000
Journal entry:
6 1 7 -May -21 Rent ex pense 20,000
Cash 20,000
To record payment of rent
Ledger Entry:
RENT EXPENSE
1 7 -May -21 To record pay ment of rent 20,000
CASH
Journal entry:
7 20-May -21 Utilities ex pense 9,650
Cash 9,650
To record payment of utility bills
Ledger Entry:
UT ILIT IES EXPENSE
20-May -21 To record pay ment of utility bills 9,650
CASH
21 -May -21 To record additional inv estment from owner 1 00,000 1 1 -May -21 To record pay ment of accounts pay able 7 ,500
31 -May -21 To record collection from customers 1 6,000 1 7 -May -21 To record pay ment of rent 20,000
Journal entry:
8 21 -May -21 Cash 1 00,000
M. Arev alo, capital 1 00,000
To record additional investment from owner
Ledger Entry:
CASH
01 -May -21 To record inv estment from owner 500,000
21 -May -21 To record additional inv estment from owner 1 00,000
Journal entry:
9 22-May -21 Cash 5,000
Serv ice income 5,000
To record cash received from services provided
Ledger Entry:
CASH
SERVICE INCOME
22-May -21 To record cash receiv ed from serv ices prov ided 5,000
Journal entry:
10 25-May -21 Accounts receiv able 35,000
Serv ice income 35,000
To record billing to customers
Ledger Entry:
ACCOUNT S RECEIVABLE
25-May -21 To record billing to customers 35,000
SERVICE INCOME
Journal entry:
11 30-May -21 Accounts pay able 7 ,500
Cash 7 ,500
To record full payment of accounts payable
Ledger Entry:
ACCOUNT S PAY ABLE
30-May -21 To record full pay ment of accounts pay able 7 ,500
CASH
Journal entry:
12 31 -May -21 Cash 1 6,000
Accounts receiv able 1 6,000
To record collection from customers
Ledger Entry:
CASH
25-May -21 To record billing to customers 35,000 31 -May -21 To record collection from customers 1 6,000
Ledger Balances - Assets

(Standard Format)
CASH
Total debits 621 ,000 Total credits 209,650
Ending balance 411,350
25-May -21 To record billing to customers 35,000 31 -May -21 To record collection from customers 1 6,000
LAND
06-May -21 To record purchase of land 140,000
Ledger Balances - Liabilities and Equity

(Standard Format)
ACCOUNT S PAY ABLE
1 5,000 Credit balance 1 5,000
Ending balance -
01 -May -21 To record inv estment from owner 500,000
21 -May -21 To record additional inv estment from owner 1 00,000
25,000 Ending balance 600,000
1 5-May -21 To record withdrawal from the owner 25,000
Ledger Balances - Revenues and Expenses

(Standard Format)
SERVICE INCOME
UT ILIT IES EXPENSE

RENT EXPENSE

03-May -21 To record purchase of office supplies 15,000
Ledger Balances - Assets

(Running Balance Format)
CASH
Date Particulars Debit Credit Balance
01 -May -21 To record inv estment from owner 500,000 500,000 DR
06-May -21 To record purchase of land 1 40,000 360,000 DR
1 1 -May -21 To record pay ment of accounts pay able 7 ,500 352,500 DR
1 5-May -21 To record withdrawal from the owner 25,000 327 ,500 DR
1 7 -May -21 To record pay ment of rent 20,000 307 ,500 DR
21 -May -21 To record additional inv estment from owner 1 00,000 407 ,500 DR
20-May -21 To record pay ment of utility bills 9,650 397 ,850 DR
22-May -21 To record cash receiv ed from serv ices prov ided 5,000 402,850 DR
30-May -21 To record full pay ment of accounts pay able 7 ,500 395,350 DR
31 -May -21 To record collection from customers 1 6,000 411,350 DR
25-May -21 To record billing to customers 35,000 35,000 DR
31 -May -21 To record collection from customers 1 6,000 19,000 DR
LAND
06-May -21 To record purchase of land 1 40,000 140,000 DR
Ledger Balances - Liabilities and Equity
ACCOUNT S PAY ABLE
03-May -21 To record purchase of office supplies 1 5,000 1 5,000 CR
1 1 -May -21 To record pay ment of accounts pay able 7 ,500 7 ,500 CR
30-May -21 To record full pay ment of accounts pay able 7 ,500 -
01 -May -21 To record inv estment from owner 500,000 500,000 CR
21 -May -21 To record additional inv estment from owner 1 00,000 600,000 CR
1 5-May -21 To record withdrawal from the owner 25,000 25,000 DR
Ledger Balances - Revenues and Expenses
SERVICE INCOME
22-May -21 To record cash receiv ed from serv ices prov ided 5,000 5,000 CR
25-May -21 To record billing to customers 35,000 40,000 CR
UT ILIT IES EXPENSE

20-May -21 To record purchase of office supplies 9,650 9,650 DR
RENT EXPENSE
1 7 -May -21 To record pay ment of rent 20,000 20,000 DR

03-May -21 To record purchase of office supplies 1 5,000 15,000 DR
M. Arev alo Repair Serv ices

T rial balance
As of May 31, 2021
Account title Debit Credit

Cash 41 1 ,350
Accounts receiv able 1 9,000
Land 1 40,000
Accounts pay able -
M. Arev alo, capital 600,000
M. Arev alo, drawings 25,000
Serv ice rev enue 40,000
Utilities ex pense 9,650
Rent ex pense 20,000
Office supplies ex pense 1 5,000
T otal 640,000 640,000

Ae 104

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ae 104

Uploaded by

Copyright:

Available Formats

LESSON 1: BASIC ACCOUNTING CONCEPTS AND should not be disclosed to third parties without

PRINCIPLES proper authorization.

TYPES OF BUSINESS TRANSACTION EXAMPLES OF NON-TRANSACTIONAL EVENTS:

Receipts - A document showing the amount of cash

Date column - indicates the date that the

May 15 Withdrew P25,000 for personal use. SUMMARY OF JOURNAL ENTRIES:

May 17 Paid P20,000 for the temporary

May 20 Paid various utility bills amounting

N0. Date Particu lars Debit Credit

personal funds in the business. To record payment of utility bills

8 21 -May -21 Cash 1 00,000

9 22-May -21 Cash 5 ,000

repair services provided. 10 25 -May -21 A ccounts receiv able 35 ,000

11 30-May -21 A ccounts pay able 7 ,5 00

LEDGER POSTING – JOURNAL ENTRY NO. 2

ACCOUNT S PAY ABLE

LEDGER POSTING – JOURNAL ENTRY NO. 3

LEDGER POSTING – JOURNAL ENTRY NO. 5

LEDGER POSTING – JOURNAL ENTRY NO. 6

LEDGER POSTING – JOURNAL ENTRY NO. 8

LEDGER POSTING – JOURNAL ENTRY NO. 9

LEDGER POSTING – JOURNAL ENTRY NO. 10

LEDGER POSTING – JOURNAL ENTRY NO. 11

Ledger Balances - Assets

Ledger Balances - Liabilities and Equity

Ledger Balances - Revenues and Expenses

UT ILIT IES EXPENSE

OFFICE SUPPLIES EXPENSE

Ledger Balances - Assets

UT ILIT IES EXPENSE

OFFICE SUPPLIES EXPENSE

M. Arev alo Repair Serv ices

Account title Debit Credit

You might also like