Fundamentals - of - ACCOUNTING Module

FUNDAMENTALSOFACCOUNTI
NG
MODULE
Wr
it
tenby
:
Dr.Quenni
eA.Cunanan,MBA
Chr
ist
ianJamesFernandez,
CPA,MBA
PREFACE
Fundament
alsofAccount
ingi
samodul
ewhi
chwi
l
lser
veasani
ntr
oduct
ory
cour
set
opr
ogr
am i
nBusi
nessAdmi
nist
rat
ionandot
herr
elat
edpr
ogr
am aswel
l
asaf
oundat
iont
othosest
udent
swhoseobj
ect
ivei
stoengagei
nbusi
nessaf
ter
f
ini
shi
ng t
hei
rrespect
ive busi
ness pr
ogr
ams.The st
ep-
by-
step pr
ocedur
es
i
ntr
oducedi
nthi
smodul
ewi
l
lsomehowgi
vet
her
eader
sthebasi
cknowl
edgei
n
t
hel
anguageofbusi
ness.
TABLEOFCONTENTS
MODULE1: Account
ingConcept
sandI
tsConsi
der
ati
on 1
MODULE2: Basi
cConsi
der
ati
ononFi
nanci
alSt
atement
s 13
MODULE3: Pr
epar
ati
onofFi
nanci
alSt
atement
s 44
MODULE4: Adj
ust
ingt
heAccount
s 63
MODULE5: Compl
eti
ngt
heAccount
ingCy
cle 73
Modul
e I
ntendedLear
ning Lessons Wr
it
er
Outcomes
 Under
1
stand and expl
ain t
he Lesson1 DR.QUENNI
EA.
definiti
on, pur pose, nat ure, ACCOUNTING CUNANAN
funct i
ons and obj ecti
v es of CONCEPTS
account ing.
 Distinguish t he br anches of Lesson2
account ing,user s of account i
ng BASICPRINCIPLES
i
nfor mat i
on. OFACCOUNTI NG
 Under stand t he doubl e ent ry
bookkeepi ng conceptand how i t
dif
fer s f rom si
ngle ent ry
bookkeepi ng.
 Appr eciate t he hi story of
account ing,account i
ng v ari
ati
ons
amongcount ri
es
 Adopt t he basi c pr ofessional
valuesandet hi
cs

 Under
2
stand and expl
ain t
he Lesson1 DR.QUENNI
EA.
objective and qualit
ati
v e FINANCIAL CUNANAN
charact eri
sti
cs of fi
nancial STATEMENTS
statement s.
 Distinguish t he el ement s of Lesson2
fi
nanci al stat
ement s, its ACCOUNTING
recogni ti
onandmeasur ement s. EVENTSAND
 Learn and appl yt he principle of TRANSACTIONS
Account i
ng Equation,the r ule of
debitsandcr edits.
 Under standAccount i
ngev entsand
transact i
ons,typesandef f
ectsof
transact i
ons

 Under
3
stand t
he di
ff
erent sour
ce Lesson1 CHRI
STIANJAMES
document s evidenci
ng a BUSINESS FERNANDEZ,CPA,
tr
ansaction. TRANSACTION MBA
 Understand and appl y t he
accounting cy cl
e i n day-t
o-day
businesstransacti
ons. Lesson2
 Fami l
iar
ize with GeneralJournal
, PREPARATI ONOF
LedgerandTr ialBal
ance. FINANCIAL
 Deeperunder stand thedebitand STATEMENTS
credit
 Under
4
st
andtheAccounti
ngper
iod. CHRI
STIANJAMES
 Di
ffer
enti
ate Accrual to Lesson1 FERNANDEZ,CPA,
CashAccount
ing. ADJUSTI
NGENTRI
ES MBA
 Appr
eci
atet
hei
mpor
tanceof
Adjusti
ngent riesinthepreparat
ion
offinancialstatements.
 I
temst hatneededAdj ust
ment s.
 TheEf fectsofnotmaki ngthe
necessar yadjusti
ngentri
est o
fi
nancial st
atement s.
5
 Under
stand and appl y t he Lesson1 CHRI
STIANJAMES
remaining steps i n compl eti
ng THEACCOUNTING FERNANDEZ,CPA,
cycle;closi
ngent ri
es,post-cl
osing CYCLE MBA
entri
esandr eversi
ngent r
ies.
 Deeperunder standingther easons
and impor t
anceoft her emai ni
ng
steps.
MODULE1
LESSON1ACCOUNTI
NGCONCEPTS
Desi
redLear
ningOut
comes
 Under
stand and expl
aint
he def
ini
ti
on,pur
pose,nat
ure,f
unct
ions and obj
ect
ives of
account
ing.
 Di
sti
ngui
sht
hebr
anchesofaccount
ing,
user
sofaccount
ingi
nfor
mat
ion.
LESSON2BASI
CPRI
NCI
PLESOFACCOUNTI
NG
Desi
redLear
ningOut
comes
 Under
standt
hedoubl
eent
rybookkeepi
ngconceptandhow i
tdi
ff
ersf
rom si
ngl
eent
ry
bookkeepi
ng.
 Appr
eci
atet
hehi
stor
yofaccount
ing,
account
ingv
ari
ati
onsamongcount
ri
es
 Adoptt
hebasi
cpr
ofessi
onal
val
uesandet
hics
Why
Do
We
Need
Accounti
ng?
Sowhydoweneedaccount ing? Askingthat

questi
onofanaccount anti
sl i
keaskingaf ar
merwhywe
needrain.Weneedaccount ingbecausei t
’st
heonl yway
forbusinessto grow and f l
ourish.Account i
ng isthe
backbone ofthe busi nessf inancialwor l
d.Af t
erall
,
accounti
ngwascr eatedinresponset othedevelopment
oftr
adeandcommer ceduringthemedi evalt
imes.
Accountingi st heconsci ousofthebusi ness

world.When handl ed wi t
h car eand wit
hr espect,it
perf
orms asexpect ed.Whenabuseoccur s,andt he
syst
em i s ci
rcumv ented or ov erri
dden because of
di
shonest y and gr eed, i t doesn’t work correctly
.
Accounting i
smuchl i
keal lothersyst
emsinplace,t hey
areonlyasgoodast hepeopl eusingthem.
NG| 1
ACCOUNTI
NGi
saser
viceact
ivi
ty.I
t’
sfunct
ioni
stopr
ovi
dequant
it
ati
vei
nfor
mat
ion,
pri
mar
il
y
f
inanci
ali
nnat
ure,
abouteconomi
cent
it
iest
hati
sint
endedt
obeusef
uli
nmaki
ngeconomi
cdeci
sions.
“
Languageofbusi
ness”
Account
ingasscienceandar t Fi
x ed,inf
lexi
ble,
 Account i
ngisasoci alsciencewi t
habodyofknowl edgewhichhasbeen
organized
and
syst
ematical
lygathered,classi
fied,andorgani
zed.Itisinfl
uencedby
,and systemat i
c
i
nter
actswith,economic,social
andpol i
ti
calenv
ironments.
 Account i
ngisapr act
icalartwhichrequi
restheuseofcreati
veskil
l
andjudgment. Opinionated, f
lexi
bleand
subjecti
ve
Account
ingasaninformat
ionsystem
 Accountingident
if
iesandmeasur eseconomicacti
vi
ti
es,processesi
nfor
mat
ioni
ntof
inanci
al
repor
tsandcommunicatestheser
epor
tstodeci
sionmakers.
Economi
cActivi
tiesandt
hei
rclassi
fi
cat
ion
 Production – theprocessofconv ert
ing economicresour
ces
i
ntoou tputsofgoodsa nds er
v i
cesthata reintendedt o
havegr e at
erut
il
it
yth antherequir
edinpu t
s.
 Ex
change–t hepr
ocessoftradi
ngr
esour
cesorobl
i
gat
ionsf
or
otherr
esour
cesorobli
gat
ion.
 I
ncome di
str
ibut
ion -the process of al
l
ocat
ing ri
ghtst o
t
h euseofoutputamongindi
vidual
sandgroupsinsociet
y.
 Consumpti
on–t heprocessofusi
ngt
hef
inalout
putoft
he
pr
oduct
ionprocess.
 I
n v
e st
ment– t he pr
ocess ofusingc ur
rentinputs t
o
i
ncreasethe st
ockofr esourcesavai
labl
ef oroutputas
opposedt
oimmediatel
yconsumableoutput.
 Savi
ngs–theprocessbywhi
chindi
vi
dual
sandgroupssetasi
de
ri
ghtst
opresentc onsumpt
ioninexchangef
orr i
ght
st o
fut
ureconsumption.
BASIC PURPOSE OF ACCOUNTI NG: To pr ov

ide quanti
tat
ive i
nfor
mat
ion about
economi
cent
it
iesi
ntendedt
obeusef
uli
nmakingeconomicdeci
sions.
TYPESOFINFORMATI ONPROVIDEDBYACCOUNTI NG
1. Quant
it
ati
v einfor
mati
on–expressedinnumbers,quant
it
iesoruni
ts.
2. Qual
it
ati
veinformati
on–expressedinwordsordescri
pti
vefor
m
3. Fi
nanci
alinformati
on–expr
essedintermsofmoney
NG| 2
ECONOMI
CENTI
TYVSBUSI
NESSENTI
TY
 Economi cent i
ty–isasepar atelyidenti
fi
ablecombinati
onofper sonsandpr opert
ythatusesor
contr
olseconomi corscarceresour cestoachievecert
aingoalsorobject
ives.Scarceresources
havenosi gnifi
cantcharact
eri
stics.
o Not -for-
prof
itornon-pr
of itenti
tyi
sonet hatcar
riesoutsomesoci al
lydesir
ableneedsof
thecommuni t
yoritsmember swhoseact i
vi
ti
esar enotdir
ectedt
owar dsmakingprofit.
o Busi nessentit
yi sanent i
tythatproducesanddistri
butesgoodsorser vcespr
i i
mar i
lyfor
profi
t.
FUNCTI
ONSOFACCOUNTI
NG
 Ident
if
icati
on.Theaccount
ingprocessofrecognit
ionornon-r
ecogni
ti
onofbusi
nessact
ivi
ti
esas
accountabl
eev ent
sorwhetherhasaccounti
ngr el
evance.
Oneth ati
squanti
fi
abl
eandhasane ff
ectonasset s,l
iabi
l
iti
esand
equi
ty.Thi
salsoknownas economi
c act
ivi
ty,whi
ch isthe subj
ect
matt
erofaccounti
ng.
Cr
it
eri
aforacc ountabl
eevent
1. Itmus taffectafi
nan ci
alel
eme ntofaccount
ing
(incr
eas i
ng orde cr
e asi
nga sset
,li
abi
l
ityorequi
ty)
2. Itisare sul
tofapa stacti
vi
ty
3. Itscostcanbeme as ur
edreli
ably
.
 Measurement.The account
ing pr
ocess ofassi
gni
ng ofpeso amount
s ornumberstot he
economict
ransact
ionsandev s.Theuni
ent tofmeasur
eofaccounti
ngismoney,expr
essedin
pri
ces.
 Communi cat
ion.Theaccount
ingprocessofpr
epari
nganddist
ri
but
ingaccount
ingreport
st o
potent
ialusersofaccounti
ngi nf
ormati
onandint
erpr
eti
ngt
hesigni
ficanceoft
hisprocessed
i
nformation.
o Recording.theprocessofsyst
emati
cal
lycommitt
ingtowrit
ingbusi
nesst
ransact
ions
andev entsaftertheyhavebeenident
if
iedandmeasured,i
nbooksofaccounti na
syst
emat icandchronol
ogi
cal
manneraccordi
ngt
oaccounti
ngrul
es.
o Cl
assi
fyi
ng.Thegr
oupi
ngofsi
mil
arandi
nter
rel
atedi
temsi
ntot
hei
rrespect
ivecl
asses.
o Summarizi
ng.Putti
ngtoget
herorexpressingi
ncondensedorbr
ieff
ormt
her
ecor
ded
andcl
assif
iedst
atementsi
nfinanci
alst
atement
s.
NG| 3
BRANCHESOFACCOUNTI
NG/
AREAOFSPECI
ALI
ZATI
ON
1. Financi
alAccount
ing.Therecordi
ngoft
ransacti
ons,pr
eparat
ionoff i
nanci
alst
atementsand
communi cat
ionoffi
nanci
alinf
ormati
ont
oext er
nalusergroups.Focusesongeneralpur
pose
report
s.
2. Audit
ing.Theexaminat
ionoff
inanci
alst
atementsbyindependentcer
ti
fi
edpubli
caccount
antf
or
thepurposeofexpr
essi
nganopiniononthefai
rnessofpresent
ati
onoffi
nanci
alstat
ement
s.
3. ManagementAccounti
ng.Incorporat
escostaccounti
ngdataandadapts them forspecif
ic
deci
sionswhi
chmanagementmaybecal l
eduponto make.Amanagementaccounti
ngsystem
i
ncorporat
esal
lty
pesoffi
nancialandnon-
fi
nanci
ali
nformat
ionf
rom awi
derangeofsour
ces.
4. Financi
alManagement .Relati
velynewbranchofaccounti
ngthathasbeengrownrapi
dlyoverthe
l
ast35y ears.Financi
almanager sareresponsibl
eforsett
ingfi
nanci
alobj
ecti
ves,makingplans
basedont hoseobjecti
ves,obtaini
ngthef i
nanceneededt oachi
evetheplans,andgener all
y
safeguar
dingallthefi
nancial
resourcesoftheenti
ty.
5. Taxat
ion/Taxaccount
ing.I
nvolvestheprepar
ati
onoftaxretur
nsandrenderi
ngoftaxadv
ice,
suchasdet
ermi
nati
onoftaxconsequencesofcert
ainpr
oposedbusi
nessendeavor
s.
6. Gov er
nmentAccount i
ng.Account
ing f
ort he nat
ionalgover
nmentand itsinst
rument
ali
ti
es,
focusi
ngattent
ionont hecust
odyofpubli
cf unds andthepurposeorpur
posestowhichsuch
fundsarecommi t
ted.
7. Fi
duci
aryAccount
ing.Handli
ngofaccount
smanagedbyaper
son ent
rust
edwi
tht
hecust
ody
andmanagementofproper
tyfort
hebenef
itofanot
her
.
8. Soci
alResponsi
bil
it
y.Repor
ti
ngofpr
ogramsandproj
ectsthathav
etodowi
tht
heupl
i
ftmentof
thewel
far
eofthepeopleofacommunit
yorofthenat
ion.
9. Envi
ronmentalAccount
ing.Theareaofaccount
ingt
hatf
ocusesonpr
ogr
ams,act
ivi
ti
esand
proj
ectst
hataref
ocusedcareforMot
herEar
th.
Oneexampl eofthi
si s carbonaccount
ingsuchas “Capand
Scheme”, whi
chisa process ofencour
agi
ngr educt
i
ons in
greenhousegasemi
ssions.
10.Pri
ce-
lev
elAccounti
ng.Ot herwi
se known asAccount
ing forHyperi
nfl
ati
onaryEconomi es–
si
mplydefi
ned,is accounti
ng thatrecogni
zes i
nthe f
inanci
alstatements changes i
nt he
pur
chasi
ngpowerofmoney .
NG| 4
USERSOFACCOUNTI
NGI
NFORMATI
ON
 Int
ernalUsersarethosewhomakedeci si
onsdirect
lyaff
ecti
ngtheinter
naloper
ati
onsoft he
business.
o Manager saredi
rect
lyinv
olvedi
noperati
onoft hebusi
ness.Theyneedaccount
ingdata
toimpr
ovetheef
fici
encyandeff
ecti
veoftheorgani
zati
on.
o Employees use fi
nanci
aldat at o assess whet
her t
hey ar
er ecei
v i
ng the ri
ght
compensati
onandt ocheckiftheybargai
nforhi
gherr
emunerat
ion,reti
rementbenefi
ts
andemploymentopport
unit
ies.
o Officers,al
socalledast hecompanyexecut iveswhoar e i
nter
estedt oknow ift
he
companyi sdoingwel linitsoperati
onso t heycanpl anforpossibl
eexpansionor
branchingouttowidenitsgeographi
calanddemogr aphicmar
ket
.
thea ctofma kingmon ey
o InternalAudit
ors,ther
er ol
ei stopr ot
ectandsaf eguar
dthe bymak ingpeopl
ebeli
eve
resourcesofthecompanyagai nstfr
audorir
regular
iti
es. some thingwhichisnot
tr
ue.
 Exter
nalusersar
eindi
vidual
sorent
erpri
sesthathavefinanci
ali
nter
esti
nthebusi
nessbutt
hey
arenoti
nvolv
edinthedayacti
vi
ti
esoftheorgani
zat
ion.Theseare:
o I
nvestors(Thepr ovi
der
sofr i
skcapital
)ar eint
erest
edininformat
ionwhichenabl
es
t
hem toassesst heabil
i
tyoftheent
erprisetopaydivi
dends.Theyneedi
nformat
ionon
whethertheyshouldbuy,
hol
dorsell
theirsharesi
n.
o Lendersareinterest
edini
nfor
mationt
hatenabl
esthem t
odet
ermi
newhet
hert
hei
rloans,
andtheiri
nterestatt
achi
ngtothem wi
l
lbepaidwhendue.
o Suppl
iersandothert
radecr
editor
sar ei
nterest
edini
nfor
mati
ont
hatenabl
est
hem t
o
det
erminewhet
heramountowingtothem wil
lbepai
dwhendue.
o Customersar
eint
erest
edi
nthequal
i
tyofgoodsandser
vicest
hatt
heyar
eget
ti
ngf
rom
theent
it
y.
o Governmentandthei
ragenciesrequi
reinfor
mati
oni
nordertoregulatetheact
ivi
ti
esof
theenter
pri
se,
det
erminetaxati
onpoli
ciesandasabasi
sfornat
ionalincomeandsimil
ar
acti
vi
ti
es,
NG| 5
o Publicareassi
stedbyi
nfor
mat i
ont hr
oughFinancialst
atementsaboutthetrendand
recentdev
elopment
sint
heprosperi
tyoftheent
erpr
iseandt her
angeofit
sacti
vi
ties.
FUNDAMENTALCONCEPTS
Entit
yConcept
The mostbasic conceptin accounti
ng isthe ent
it
yconcept .An accounti
ng ent
it
yi s an
organizati
onorasecti
onofanor ganizati
onthatst
andsapartf
rom otherorgani
zat
ionsandi
ndiv
idual
sas
asepar ateeconomicuni
t.Simplyput,thetr
ansacti
onsofdiff
erententi
ti
esshouldnotbeaccountedfor
together.Eachent
it
yshouldbeev al
uatedseparat
ely
.
Peri
odicit
yConcept
Anentit
y’sl
if
ecanbemeani ngf
ull
ysubdiv
idedintoequalti
meperiodsforrepor
ti
ngpur poses.
Forthepurposeofr epor
ti
ngt ooutsi
der
s,oney earistheusualaccounti
ngperiod.LucaPacioli
,
thefi
rstauthorofanaccount i
ngtext,wrotein1494:“Booksshouldbecl osedeachyear,especial
lyi
na
part
nership,
becausefrequentaccounti
ngmakesf orl
ongf r
iendshi
p.”
Cal
endarYear–star
tsi
nJanuaryandendsin
December.Fi
scal
Year–st
art
sinanymonthandends
af
ter12months.
St
abl
eMonet
aryUnitConcept
The Phi
li
ppine Peso i
s a r
easonabl
e uni
t of
agre at
erincr
easei nthe
measureandthatit
spurchasi
ngpowerisrel
ati
velystabl
e.Thi
sist
he supplyofmoneyorc redi
t
basi
sfori
gnor
ingtheef
fect
sofinf
lat
ioni
ntheaccounti
ngrecor
ds. thanintheproduc t
ionof
goodsands ervi
ces,resul
ti
ng
i
nhi gher
BASI
CPRI
NCI
PLES pri
cesandaf al
li
nt he
purchasingpowe rofmoney .
Account i
ngpr act
icesfoll
ow certai
ngui del
ines.Thesetofgui
del
inesandpr oceduresthatconsti
tute
acceptableaccountingpracti
ceatagivent i
mei sGAAP,whi
chst
andsforgeneral
lyacceptedaccounting
pri
nciples.In ordert o generat
ei nf
ormat i
on thati
s usef
ultot he user
s off i
nanci
alstatement s,
accountantsrelyuponthef ol
l
owingprincipl
es.
Objecti
vityPri
ncipl
e.Accountingrecordsandst atement sarebasedont he mostreli
abledataav ai
labl
e
sothatt heywil
lbeasaccur ateandasusef ulaspossi bl
e.Reli
abledataarever
if
iabl
ewhent heycanbe
confir
medbyi ndependentobservers.
thet otalcostof
Histori
calCost.Thispri
nciplestat
est hatacquiredassetshoul dberecordedat produc ingorbuy ing
thei
ractualcostandnotatwhatmanagementt hi
nkst heyar ewort
has a nitem, which ma y
atreportingdat
e. include, e.
g.,
itsprice
plust hec ostof
de l
ive r
yor
s t
or age.
NG| 6
RevenueRecognit
ionPri
nci
ple.Revenueistober
ecogni
zedi
ntheaccount
ingper
iodwhengoodsar
e
del
i
v er
edorserv
icesar
erenderedorperf
ormed.
ExpenseRecognit
ionPr
inci
ple.Expensesshoul
dberecogni
zedintheaccounti
ngperiodi
nwhichgoods
andservi
cesareuseduptoproducerevenueandnotwhentheent
it
ypaysforthosegoodsandser
vices.
AdequateDiscl
osur
e.Requi
resthatal
lrel
evantinf
ormat
ionthatwoul
daffecttheuser
’sunder
standi
ng
andassessmentoft
heaccounti
ngenti
tybediscl
osedint
hefi
nanci
alst
atements.
Materi
ali
ty.Fi
nanci
alrepor
ti
ngisonlyconcer
nedwit
hinfor
mati
onthati
ssi
gnifi
cantenoughtoaffect
ev
aluati
onsanddecisi
ons.Mater
ial
i
tydependsont
hesizeandnat
ureoft
hei
tem j
udgedinthepar
ti
cular
ci
rcumstancesofit
somissi
on.
Consi
stencyPri
ncipl
e.Thef i
rmsshoulduset hesameaccount
ingmet hodfr
om per
iodtoperiodto
achi
evecomparabil
it
yoverti
mewi thi
nasingl
eenter
pri
se.Howev
er,changesar
epermi
ttedi
fjust
ifi
abl
e
anddiscl
osedi
nt hefi
nanci
alstat
ements.
UNDERLYI
NGASSUMPTI
ONS
AccrualBasis
Fi
nancialStat
ementsareprepar
edontheaccrualont
heaccrualbasi
s ofaccounti
ngandnotas
cashori t
sequi v
alentisr
eceiv
edorpaid.Underthi
sassumpti
on,theeffect
soft r
ansact
ionsandother
eventsarerecognizedwhentheyoccurandtheyarerecor
dedint
heaccount i
ngrecor
dsandr epor
tedin
thefi
nancialst
atementsoftheper
iodstowhytheyrel
ate.
I
nshor
t,t
ransact
ionsar
erecogni
zedwhe Re
n“ venueast
heyear
ned,ev
ennoty
etr
ecei
vedand;
Expensesast
heyi
ncur
red,
evennoty
etpai
d.
I
ncashbasi
saccount
ing,howev
er,doesnotr
ecor
dat
ransact
ionunt
ilcashi
srecei
vedorpai
d.
Gener
all
y,cashr
ecei
ptsar
etr
eat
edasr
evenuesandcashpay
ment
sasexpenses.
GoingConcern
Fi
nanci
alst
atementsarenormallyprepar
edont heassumpt i
onthatanent
erpr
iseisagoi
ng
concernandwi l
lcontinueinoperat
ionfor af oreseeabl
ef ut
ure.Itisassumedther
efor
ethatt
he
enter
pri
sehasneit
hertheint
ent
ionnortheneedtoli
quidatei
tsoperat
ions.
NG| 7
BUSI
NESSORGANI
ZATI
ON
FORMSOFBUSI
NESSORGANI
ZATI
ONS
 SolePropriet orshi
p.Thisbusi nessor ganizat
ionhasasi ngl
eownercal l
edt hepr opri
etorwho
general
lyis al so manager .Itt ends to be smallservi
ce-t
ype (
e.g.physici
ans,l awyers and
accountants)busi nessandr etailestabl
ishments.Theownerr eceiv
esallpr ofi
ts,absorbsall
l
ossesandi ssol el
yresponsibl
ef oralldebtsofthebusi
ness.From theaccountingviewpoint
,the
solepropri
et orshipisdist
inctf r
om i t
spr opri
etor
.Thus,theaccounti
ngrecordsdonoti nclude
propr
ietor
’sper sonalfi
nancialrecords.
 Partnershi
p.Abusinessownedandoperat
edbytwoormorepersonswhobi ndthemselv
est o
contri
butemoney,proper
tyori
ndust
ryt
oacommonfund,wi
tht
heintent
ionofdiv
idi
ngtheprofi
ts
amongt hemsel
ves.Eachpart
nerisper
sonal
l
yli
abl
eforanydebtincurr
edbyt hepart
nershi
p,
exceptlimit
edpart
ner.
 Cor
porati
on.Abusinessownedbyitsstockholder
s.I
tisanarti
fi
cialbei
ngcreatedbyoperat
ionof
l
aw,hav i
ng the r
ight
s ofsuccession and the powers,att
ri
butes and proper
ti
es expressl
y
aut
hor
izedbyl aworinci
dentt
oitsexistence.Thestockhol
dersarenotpersonall
yli
ableforthe
cor
por
ation’
sdebt.
PURPOSEOFBUSI
NESSORGANI
ZATI
ONS
 Servi
cecompani
esperf
orm servi
cesforafee(e.g.l
aw f
ir
ms,account
ingandl
aw f
ir
ms,st
ock
broker
age,
beaut
ysal
onsandr ecr
uit
mentagencies)
 Merchandi
sing companiespurchase goodsthatarer
eadyf orsal
e and t
hen sel
lthese t
o
cust
omers(e.g.cardeal
ers,
clot
hingst
oresandsuper
mar
kets)
 Manufact
uringcompaniesbuyraw materi
als,conv
ertt
hem i
ntoproduct
sandt hensel
lthe
pr
oductst o othercompani
es ortof inalconsumers(e.
g.papermi l
ls,st
eelmill
s,car
manufact
urersanddr
ugmanufact
urer
s)
MI
CRO,
SMALLANDMEDI
UM ENTERPRI
SES(
MSME)
 Mi
croEnter
pri
sesarethosewi
thasset
s,bef
oref
i ngofP3 mi
nanci l
li
onorl oynot
essandempl
mor
ethannine(9)wor
kers.
 Smal
lEnt
erpr
isesar
ethosewi
thasset
s,bef
oref
i ngofabov
nanci eP3mi
l
li
ont
oP15mi
l
li
onand
oy10t
empl o99worker
s.
NG| 8
 Medium Ent
erpr
isesar
ethosewi
thasset
s,bef
oref
i ngofabov
nanci eP15mi
l
li
ont
oP100mi
l
li
on
andemploy100to199worker
s.
ACTI
VITI
ESI
NBUSI
NESSORGANI
ZATI
ONS
 Operat
ingActivi
ti
esar ethepri
ncipalacti
vi
ti
esoft heent erpri
se.Theyar
ethetransact
ionsand
event
sthatenteri
ntothedetermi
nationofprofi
tandl oss.E.g.
:
o Sal eofservi
ces
o Pur chaseofsupplies
o Pay mentofv ari
ousexpensesl i
kesal ar
iesandot herbenefi
tstoemployees,uti
li
ti
es,
t
axesandrepairsandmaintenance,i
nsurance,transport
ati
onandgasol
i
neexpense.
 Invest
ing Act
iviti
es ar
e t he acqui sit
ion and di
sposal of l
ong-
ter
m
assetsandotheri
nv estments.E.g.:
o Purchaseofequi pment,
furnit
ure,aut
omobileandland
o Costofdev elopingandconst r
uctingoff
iceorbui
ldi
ng
o Saleofusedf ixedassets
o Loansandadv ancest ootherpart
ies
o Invest
mentsi nequi t
yordebti nst
ruments
 Financi
ngActi
vit
iesareactivit
iesthatr esul
ti nchargesinthesi zeandcomposi t
ionoft
he
contri
but
edequi
tyandborrowingsoftheent er
prise.E.
g.:
o Cashproceedsfr
om issuingsharesofst ocksbyacorporati
on
o Cashproceedsandrepay mentofbankl oansandotherlong-t
erm bar
rowi
ngs.
Ref
erences:
Ball
ada,WinandSusanBal lada.(2009).BasicAccount
ingMadeEasy14thEditi
on.Manil
a:Domdane
Publi
shersandMadeEasyBooks.
Ledesma,EsterL.(
2014).Fi
nancialAccountingTheoryRevi
ewBooklets.Manil
a:CRC-AceTheProfessi
onal
CPA Rev i
ewSchool .
Rante,Gl
ori
aAr adani
el.
(2013).AccountingforServi
ceEnti
ti
es.MandaluyongCit
y:Mil
leni
um
Books,I
nc.
NG| 9
MODULE2
SESSI
ON2
LESSON1FI
NANCI
ALSTATEMENT
Desir
edLear
ningOut
comes
 Understandandexpl
aintheobj
ecti
veandqual
itat
ivechar
acter
isticsoffi
nanci
al
st
atement s.
 Di
stinguish the el
ements of fi
nanci
al st
atements, i
ts r ecogni
ti
on and
measurement s.
LESSON2ACCOUNTI
NGEVENTSANDTRANSACTI
ONS
Desi
redLear
ningOut
comes
 Lear
nandapplythepri
nci
pleofAccounti
ngEquat i
on,t
herul
eofdebi
ts
andcredi
ts.
 Underst
andAccount
ingevent
sandt ransact
ions,ty
pesandeff
ectsof
tr
ansacti
ons
NG| 10
FI
NANCI
ALSTATEMENTS
OBJECTIVES
Provideinf ormat i
onaboutt hef inancialposi
ti
on,performanceandchangesi
nfi
nanci
al posi
ti
onof
anent
it
yt hatisusef ultoawi der angeofuser sinmaki ngeconomi cdeci
sions.
Financial statement spr epar edf orthispurpose:
 Meett hecommonneedsofmostuser s
 Al so show t he r esul t
s oft he stewardship* ofmanagement,oraccount abi
li
ty of
managementf ort her esourcesent r
ustedtoit.
 Donot ,howev er ,
pr ovideal ltheinf
ormationthatusersmayneedtomakedecisionssince
theyl argelypor trayt hef inancialeffect
sofpastev ent
sanddonotnecessaril
yprovide
non-f inancialinfor mat i
on.
*e.
g.i
nprev.t
imes,ti
i stheoneempl oy
edbyalar
gehouseholdorest
atetomanagedomest
icconcer
ns
suchassuper
visi
onofservant
s,col
l
ecti
onofr
entsandkeepi
ngofaccount
s.
QUALI
TATI
VECHARACTERI
STI
CSOFFI
NANCI
ALSTATEMENTS
A. Fundament
alquali
tati
vecharact
eri
sti
cs
a. Rel
evance
b. Fai
thf
ulRepresent
ati
on
B. Enhanci
ngQualit
ativ
echar act
eri
sti
cs
a. Comparabil
ity
b. Veri
fi
abil
it
y
c. Timel
iness
d. Underst
andabili
ty
RELEVANCE
Rel
evantf
inanci
alinf
ormationiscapabl
eofmakingadi
ff
erenceint
hedecisi
onmadebyuser
s,
i
nfl
uencest
heeconomi cdeci
sionsofusersbyhelpi
ngt
hem t
oev
aluate,
past
,pr
esent,
orf
utur
eev
entsor
conf
ir
ming,orcor
recti
ng,t
heirpasteval
uati
ons.
a. Predi
cti
vevalue.Financiali
nfor
mationhaspredi
cti
vev
alueifitcanbeusedasinputt
oprocesses
employedbyuser stopr edi
ctfutur
eoutcomes.Fore.
g.inf
ormat i
onaboutf
inanci
alposi
ti
onand
pastperf
ormancei sfrequentl
yusedinpredi
cti
ngwagespay ments,andt
heabil
it
yoftheenti
tyto
meetmat ur
ingobli
gations.
b. Confirmator
yvalue( orfeedback)
.Financialinfor
mati
on hasconfi
rmator
yvalueifitpr
ovi
des
feedbackabout( confi
rmsorchanges)pr eviouseval
uat
ion.I
nfor
mationwit
hf eedbackval
ue
enablesuserst
oconf i
rm orcorr
ectexpectati
ons.
NG| 14
FAITHFULREPRESENTATI ON
Tobeusef ul
,fi
nanci
ali
nfor
mat i
onmustnotonl
yrepresentr
elev
antphenomena,
buti
tmustal
so
fai
thf
ull
yrepr
esentthephenomenathati
tpur
port
storepr
esent.
a. Complet
eness.Acompl
etedepi
cti
oni
ncl
udesal
linf
ormat i
onnecessar
yforausertounder
stand
theev
entori
nfor
mati
onbeingpr
esent
ed,
incl
udi
ngallnecessar
ydescri
pti
onsandexpl
anati
ons.
b. Neut
ral
it
y.Aneut
ral
present
ati
oni
sonewi
thoutbi
as.
c. Freedom fr
om error.Means t her
e are no er
ror
s oromissi
ons i
nthe descr
ipt
ion ofthe
phenomenon,andtheprocessusedt oproducet
herepor
tedi
nfor
mati
onhasbeensel ect
edand
appli
edwit
hnoerrorsi
nt heprocess.
ENHANCI
NGQUALI
TATI
VECHARACTERI
STI
CS
a. Comparabi
li
ty.I
tenablestheuserst
oi dent
if
yandunderst
andsimil
ari
ti
esin,anddi
ff
erences
among,
items.Consi
stency
,al
thoughr
elat
edtocompar
abil
i
ty,i
snotthesame.
“
Compar
abi
l
ityi
sthegoal
;consi
stencyhel
pst
oachi
evet
hatgoal
.”
b. Veri
fi
abil
ity.Means thatdiffer
entknowl
edgeable and i
ndependentobservers coul
dr each
consensus,alt
houghnotnecessari
l
ycompl
eteagreement,t
hataparticul
ardepi
cti
onisaf ai
thful
repr
esentati
on.
c. Ti
meliness.Meanshav i
nginf
ormati
onav ai
labl
etodeci
sion-maker
sinti
met
obecapableof
i
nfl
uencingthei
rdeci
sions.
d. Under
standabil
it
y. Means cl assi
fyi
ng, charact
eri
zi
ng, and present
ing
i
nfor
mat i
onclearl
yandconcisel
y.
THEELEMENTSOFFI
NANCI
ALSTATEMENTS
Thefinancialstat
ementspor t
rayt he f
inancialeff
ectsoftransacti
onsand ot herevent
s by
gr
oupi
ng them into broad cl
asses accordi
ng tot heireconomi
c character
isti
cs.These ter
med the
el
ementsoffi
nancialst
atements.El
ement sdir
ectl
yrelatedt
omeasurementoff inanci
alposi
ti
onare:
El
ement
sdirectl
yrel
atedt
omeasur
ementoffi
nanci
alposi
ti
onare:
 Assets
 Liabi
li
ti
es
 Equity
El
ement
sdirectl
yrel
atedt
omeasur
ementofperf
ormanceare:
 Income
 Expense
NG| 15
RECOGNI
TIONOFTHEELEMENTSOFFI
NANCI
ALSTATEMENTS
Recogni
ti
onist hepr
ocessofincorpor
ati
nginthebal
ancesheetorincomestat
ementanitem
thatmeetsthedefini
ti
onofanelementandsat i
sfi
est
hecri
ter
iaforr
ecogni
ti
on.Anit
em thatmeet
st he
defi
nit
ionofanelementshoul
dberecognizedif
:
 Iti
sprobablet
hatanyfutureeconomicbenef
itassoci
atedwit
htheit
em wi
l
lfl
owt
oorf
rom t
he
enter
pri
se;and
 Theitem hasacostorvaluethatcanbemeasuredwithrel
i
abil
it
y.
MEASUREMENTOFTHEELEMENTSOFFI
NANCI
ALSTATEMENTS
Measurementistheprocessofdet erminingthemonetaryamountsatwhi chtheel

ementsof
fi
nancialst
atementsaretoberecognizedandcar riedi
nthebalancesheetandincomestat
ement
.This
i
nvolvestheselecti
onofapar t
icul
arbasi sofmeasur ement.Anumberoft heseareusedtodif
fer
ent
degreesandinv ar
yingcombi
nat
ionsinfinanci
alstatement
s.Theyincl
udethefol
l
owing:
HISTORICALCOST.Asset
sarerecordedattheamountofcashorcashequi
val
ent
spai
dort
hef
airv
alue
oftheconsi
der
ati
ongi
ventoacquir
et hem att
het
imethei
racqui
sit
ion.
CURRENTCOST.Assetsarecarri
edattheamountofcashorcashequi
val
ent
sthatwoul
dhav
etobepai
d
i
fthesameoranequi
valentassetwasacqui
redcur
rent
ly.
“Li
abil
i
tiesar
ecar r
iedatthediscount
edamountofcashandcash equi
val
ent
sthatwoul
dber
equi
redt
o
set
tletheobl
igat
ioncurr
ently
.”
RELI
AZABLE(
SETTLEMENT)VALUE
Rel
iazabl
evalue.Asset
sarecarr
iedatt heamountofcashorcashequi
val
ent
sthatcoul
d
cur
rentl
ybeobtai
nedbysel
l
inganasseti
nanorder
lydi
sposal
.
Sett
lementv
alue.Li
abi
li
ti
esarecar
ri
edattheundi
scount
edamountsofcashorcashequi
val
ent
s
expect
edtobepaidtosati
sfyt
heli
abi
li
ti
esint
henormalcour
seofbusi
ness.
Pr
esentVal
ue.Asset
s/l
i
abil
i
ties ar
e car
ri
ed atpresentdiscount
ed v
alue ofthe f
utur
e netcash
i
nfl
ows/
out
fl
owsthatt
heit
em i
sexpectedt
ogenerat
e/sett
lei
nthenormalcour
seofbusi
ness.
GUI
DELI
NESI
NTHEPRESENTATI
ONOFFI
NANCI
ALSTATEMENTS
Phi
li
ppineAccount
ingSt
andar
d1(
PAS)gi
vesust
he f
oll
owi
nggui
del
i
nesi
nthepr
esent
ati
onof
f
inanci
alst
atement
s.
NG| 16
(
1) Eachcomponentoft hefinancialst
atementsshallbecl earl
yident
ifi
edandthef ol
lowing
i
nfor
mationshal
lbeemphasi z
edf oraproperunder
standi
ngoft heinf
ormat
ionpresent
ed:
i. Thenameoft hereporti
ngentit
y;
ii
. Whet hert
hef i
nancialst
atementscovertheindivi
dualent
it
yoragroupofentit
ies.
(
2) Theper
iodcover
edbyt hefi
nancialstat
ementshallbespecif
ied.
Note:ForBal
anceSheet
,useAsof(dat
e).ForIncomeStat
ement
,St
atementof
ChangesinOwner’
sEqui
tyandSt
atementofCashf l
ows,
useFort
hemonth/
year
ended(dat
e).
FI
NANCI
ALPOSI
TION
Thef i
nancialposi t
ionofanent er
pri
seisaffectedbyt heeconomi cresour
cesi tcontr
ols,i
ts
f
inanci
alstructure,i
tliquidi
tyandsol v
ency,anditscapacitytoadaptt ochangesintheenv i
ronmentin
whichi
toper at
es.Thisi sprimari
lyprovi
dedintheSt
atementofFi nancialPosi
ti
onorBalanceSheet.
Itanswer sthef ol
lowingquesti
ons:
 Whatasset sdoesent it
yown?
 Whatdoesi towe?
 Whatar etheresidualequit
yinter
estsi
ntheentit
y’snetassets?
Other i mport
ant i
nfor
mat
ion pr
ovi
ded by t
he st
atement of f
inanci
al
posit
ioni
sasfol
lows:
 Fi
nancialst
ructur
e–i sthesour ceoff i
nancingf ortheassetsoftheenterpri
se.Itindi
cates
whatamountofasset shasbeenf inancedbycr edi
tors,whi
chisborrowedcapi t
al,andwhat
amountofassetshasbeenf i
nancedbyowner s,whichi si
nvest
edcapital
.
Signi
fi
cance:
(
1) Usefuli
npr edicti
ngfuturebor rowingneedsandhow f utureprofit
sand
cash fl
owswi llbe dist
ributed among those with an i
nterestint he
enter
pri
se.
(
2) Usefuli
npr edi
ct i
nghowsuccessf ultheenter
pri
seisl i
kel
yt ober ai
sing
fur
therfi
nance.
 Li
qui
dit
y–r
efer
stot
heavail
abil
i
tyofcashi nt
henearfut ur
e
aft
ertaki
ngaccountoff i
nanci
alcommi t
ment soverthi
sper
iod.
Si
gni
fi
cance:
1)Usef
( ulin predi
cti
ng the abil
i
tyoft he enter
pri
se t
o meeti
tsshor
t-
ter
m
financi
alcommi t
mentsast heyfalldue.
 Sol
vency–r
efer
stotheavail
abil
it
yofcashovert
helongert
erm
t
omeetf i
nanci
alcommit
mentsastheyfal
ldue.
Si
gnif
icance:
NG| 17
1)Usef
( uli
npr
edi
cti
ngtheabil
i
tyoftheent
erpr
iset
omeeti
tsl
ong-
ter
mfi
nanci
al
commi
tmentsastheyf
alldue.
 Capacit
yforadapt
ion–t heabil
it
yoft heenterpr
isetouseitsavailabl
ecashf orunexpected
requi
rement
sandinv estmentopportuni
ti
es.Thisisalsoknownasf inanci
alfl
exibil
it
y .
(1)Inf
or mationabouttheeconomi cresourcescontr
olled bytheent erpri
seand
i
ts capacit
yf oradaptation is usef
ulin predict
ing t
he abili
tyoft he
enterpr
iset
ogener at
ecashandcashequi val
entsinthefuture.
COMPOSI
TIONOFASTATEMENTI
NFI
NANCI
ALPOSI
TION
Asset
s
Theseareresourcescontrol
l
edbytheent
erpr
ise* asaresul
tofpastev s** andf
ent rom whi
ch
f
utur
eeconomi
cbenefis***ar
t eexpectedt
ofl
owt
otheenterpri
se.
Forexample,anassetmaybe:
 Usedsi ngl
yorincombi nati
onwithotherasset
sint
hepr
oduct
ionofgoodsorser
vicest
o
besol dbytheent er
pri
se;
 Exchangedf orotherasset
s;
 Usedt osettl
ealiabil
it
y;
 Di str
ibutedtotheowner softheent
erpri
se.
Assetsar
eshouldbecl assi
fi
edonlyint
wo:currentassetsandnon-cur r s.Oper
entasset ati
ng
Cycl
eist hetimebetweentheacquisi
ti
onofassetsforprocessi
ngandt hei
rreal
izati
onincashorcash
equi
valents.Whentheent
it
y’snormaloper
ati
ngcycl
eisnotclearl
yident
if
iabl
e,i
tisassumedt obetwel
ve
months.
*
Contr
ol l
edbyt heenterpri
se–cont rolist heabi l
i
tyt oobt aint
heeconomi cbenefit
sand
tor estr
icttheaccessofot hers( e.g.anent it
ybei ngt hesoleuserofi t
splantsand
equi pmentorbyselli
ngi dl
easset s)
*
*Pastev ents–Theev entmustbepastbef or eanassetcanr i
se.( E.
g.equipmentwi l
l
onlybecomeanassetwhent her ei sther i
ghtt odemanddel iveryoraccesst othe
asset ’
s potenti
al.Dependenton t he t erms oft he contract,thi
s may be on
accept anceoftheorderorondel ivery.
*
**Fut
ureeconomi cbenefi
ts–Thesear eev i
dencedbyt heprospect i
verecei
ptofcash.
Thiscoul dbecashi tsel
f,anaccountr eceivableoranyi tem whi chmaybesol d.
Although,forexampl e,af actorymaynotbesol df orithousest hemanuf actur
ing
facili
tyforthegoods.Whent hesegoodsar esol d,theeconomi cbenefi
tresult
ing
from theuseoft hefactoryi srealizedascash.
NG| 18
Cur
rentAsset
s
Anent
it
yshal
lcl
assifyassetsascurrentwhen:
a. Itexpectstor eal
izetheasset,ori nt
endstosellorconsumei t,i
ni t
snor maloperati
ng
cycle;
b. Itholdstheassetprimari
lyfort
hepur poseoftr
ading;
c. Itexpectstoreali
zetheassetwithintwelv
emont hsaft
erthereport
ingperiod;
d. Theasseti scashorcashequi valentunl
esstheassetisrest
ri
ctedfrom beingexchanged
orusedt osettl
eal i
abil
i
tyforatleastmonthsaft
erthereport
ingperiod.
1. Cashanymedi um ofexchangethatabankwillacceptf
ordeposi
tatf
acev
alue.I
tincl
udescoi
ns,
cur
rency
, checks,moneyorder
s,bankdeposi
tsanddr af
ts.
*Moneyor dersi
sadocumentwhi chcanbeboughtasawayofsendingmoneyt hr
ough
thepost .
2. CashEqui
val
entst
heseareshort
-t
erm,highl
yliqui
dinvest
ment sthatar
er eadi
l
yconvert
ibl
eto
knownamount
sofcashandwhicharesubj
ecttoaninsi
gnif
icantr
iskofchangesinv
alue.
3. Account
sReceivableTheseareclai
msagainstcust
omersar
isi
ngfr
om sal
eofser
vicesorgoods
oncredi
ts.Thi
stypeofrecei
vabl
eoffer
slesssecuri
tyt
hanapromi
ssor
ynot
e.
4. NotesRecei
vabl
eAnoterecei
vabl
eisawri
tt
enpl
edget
hatt
hecust
omerwi
l
lpayt
hebusi
nessa
f
ixedamountofmoneyonacertai
ndat
e.
5. Invent
oryorMer chandi
seInv ent
orytheseareasset
swhichar
e(a)hel
df orsal
ebythecompany,
(b)intheprocessofpr oductionforsuch sal
e,(c)int
hefor
m ofmat eri
als(r
aw mat
eri
als)or
suppli
estobeconsumedi nt heproducti
on.
6. Suppl
iesthi
smaybeof f
icesuppli
esli
kebondpaper
s,papercli
psandtheli
keorcanbeal
so
st
oresuppli
esl
i
keboxes,
bags,packagi
ngt
apesandotherr
elat
edmater
ial
s.
7. Prepai
dExpensesTheseareexpensespai
dforbythebusi
nessin adv
ance.I
tisanasset
becausethebusi
nessavoi
ds,havi
ngtopaycashinthefut
ureforaspeci
fi
cexpense.Thi
s
i
ncludesi
nsur
anceandrent
.
Non-
cur
rentAsset
s
All
otherassetsnotcl
assi
fi
edordoesnotf
all
undert
hecr
it
eri
aofcur
rentasset
sar
ecal
l
ednon-
curr
entassets.
NG| 19
1. Proper
ty,PlantandEquipment(
PPE)thesear
etangibl
easset
st hatareheldbyanenter
pri
sefor
useinthepr oduct
ionorsuppl
yofgoodsori nrender
ingser
vices,orf orrent
alt
oother
,orfor
admini
strat
ivepurposesandwhichar
eexpect
edtobeuseddur ingmor ethanoneperi
od.These
are:
a. Land Del i
veryEquipment
b. Building f. St or
eEqui pment
c. Of f
iceEquipment g. Ser vi
ceVehi cl
e
d. Furnitur
eandFixtur
es
e.
2. AccumulatedDepr
eciat
ionappli
est opropert
y,plantandequipment exceptlandasacont r
a
accountthatcont
ains t
he sum ofper iodi
c depreci
ati
on char
ges.The ref
lected amounti
s
deductedf
rom t
hecostoftherel
atedassettoobtai
nbookv al
ue.
Toil
lust
rat
e:
TheCompanyhasanof fi
ceequipmentwor
thP500,
000wi
thausefull
i
feof10
year
sacquir
edlastJune1,2013.
Offi
ceEquipment P500,000
AccumulatedDepr
eciat
ion–O/E (100,
000)
Netbookv al
ue P400,000
For
mula:
Annual
Depr
eci
ati
on=Costoft
hePPE–salv
agev
alue*(
ifany
)
Li
fe(n)
AccumulatedDepr
eci
ati
on=Annualdepr
eci
ati
onxageofthePPE
*Salv
agevaluei
stheval
ueofanasseti
fsol
dforscr
apandalsocal
l
edasResi
dual
or
scrapval
ue.
Tocomput
e:
=500,000 =50, 000annualdepr
eci
ati
on
10
=50,000x2y ear
s=100,000Accu.Dep.
(fr
om june12013toj
une12015)
3. I
ntangi
ble
Thesear eidenti
fi
abl
e,nonmonetar
yassetswit
houtphysicalsubst
anceheldforusein
thepr
oductionorsupplyofgoodsorserv
ices,
forr
ent
alstoother
sorf oradmini
str
ati
vepur
poses.
Theseare:
a. Goodwi l
l Franchi
ses
b. Patents f. Trademarks
c. Copy r
ight
s g. Brandnames
d. Licenses
e.
NG| 20
LI
ABI
LITI
ES
A pr
esentobl
igat
ionoftheent
erpri
seari
singfrom pastev
ents,t
heset
tl
ementofwhichis
expect
edt
oresulti
nanoutfl
owf
rom t
heenter
pri
seofresour
cesembodyi
ngcanbemeasur
edbenef
it
s.
*Obl
igat
ion–Thesemay belegalornot.Adutyt
odosomet hingoradebt
.
*Transf
ereconomi cbenefi
ts-Thiscouldbeat r
ansferofcash,oranot
herproper
ty,t
he
provi
sionofaser vi
ceort heref
rai
ningfrom acti
vit
ieswhi
chwouldotherwi
se
beprofitabl
e.
Theset
tl
ementofapr esentobl
igati
oninv
olvi
ngoutf
lowofresour
cesmayt
aket
hef
orm of
:
a. Paymentofcash
b. Transferofot
herassets
c. Provisi
onforservi
ces
d. Replacementofthepresentobl
igat
ionwi
thanot
herobli
gat
ion
e. Conv er
sionoftheobl
igat
iontoequity
Cur
rentLi
abi
l
iti
es
Anenti
tyshallcl
assif
yaliabil
i
tyascur r
entwhen:
a. Itexpectstoset
tl
et heli
abili
tyi
nitsnormal oper
ati
ngcycl
e
b. Itholdstheli
abi
li
typrimari
lyforthepurposeoftradi
ng
c. Thel i
abi
lit
yisduetobeset tl
edwi t
hintwelvemonthsaft
ertherepor
ti
ngperi
od;or
d. Theent i
tydoesnothav eanuncondi t
ionalri
ghttodef
ersettl
ementoftheli
abil
i
tyf
orat
leasttwelvemonthsafterthereport
ingperiod.
1. Account
spayabl
eThisaccountrepresentsthereverser
elat
ionshi
poft
heaccount
srecei
vabl
e.
Duetosuppl
i
ersofgoodsandotherassetspurchasedoncredit
.
2. NotesPay
abl
eAnot epayabl
eisli
keanoterecei
vabl
ebuti
nar ever
sesense.Thebusi
nessent
it
y
i
sthemakerofthenot
e;t
hatis,
theenti
tyisthepart
ywhopromisestopayinaspeci
fi
edamount
ofmoneyonspeci
fi
edfut
uredate.
3. AccruedLi
abil
it
iesAmount
sowedt
oot
her
sforunpai
dexpenses.Thisaccounti
ncl
udes:
a. Sal
ariespayabl
e Int
erestpayabl
e
b. Uti
li
ti
espayable d. Taxespay abl
e
c.
4. Unear nedRevenuesWhent hebusinessenti
tyrecei
vespay mentbef
oreprovi
dingitscust
omer s
withgoodsorser v
ices,t
heamount srecei
ved arer ecor
dedintheunearnedr evenueaccount
(l
iabil
i
t ymethod).Whent hegoodsorser vicesarepr ovi
dedt othecustomer ,theunearned
revenueisreducedandincomei
sr ecogni
zed.
NG| 21
5. Curr
entpor
ti
onofLong-
ter
m debtThesearepor
ti
onsofl
ong-
ter
mli
abi
l
iti
eswhi
char
etobepai
d
wit
hinoney
earf
rom t
hebalancesheetdat
e.
Non-
cur
rentl
iabi
li
ti
es
All
ot herli
abi
li
ti
esnotclassi
fi
edordoesnotf
all
undert
hecr
it
eri
aofcur
rentl
i
abi
l
iti
esar
ecal
l
ed
non-currentl
i
abil
it
ies.
1. Mortgagepayabl
eThisaccountr
ecordsl
ong-
term debtoft
hebusi
nessent
it
yforwhi
cht
heent
it
y
haspledgedcer
tai
nassetsassecur
it
ytothecredi
tor.
2. Bondspayableisanobl
i
gati
oni
nconnect
ionwit
ht hebond,acont
ractbetweent
hei
ssuerand
thel
enderspeci
fyi
ngt
heter
msofrepay
mentandtheint
erestt
obecharged.
OWNER’
SEQUI
TY
Equi
tyisdef
inedast
her
esi
dual
int
eresti
ntheassetofanent
it
ythatr
emai
nsaf
terdeduct
ingal
li
ts
l
iabi
l
iti
es.
1. Capi
talthi
saccountisusedt orecor
dorigi
nalandaddi
ti
onali
nvestmentoftheownerofthe
busi
nessenti
ty.I
npartner
shi
p,Part
ner
s’Capi
tali
suseasit
scapi
talaccountwhi
lei
ncorpor
ati
on
i
sSharehol
ders’Equi
ty.
2. Wi t
hdrawalsWhentheownerofabusinessenti
tywit
hdrawscashorot herasset
s,suchare
recordedinthedr
awingorwi
thdr
awalaccountr
athert
handir
ect
lyreduci
ngt heowner
’sequi
ty
account.
3. IncomeSummar yI
tisatemporaryaccountusedatt
heendoftheaccounti
ngper
iodtocl
oset
he
i
ncomeandexpenses.Thisaccountshowst hepr
ofi
torl
ossfortheperi
odbefor
eclosi
ngtot
he
capit
alaccount
.
FI ALPERFORMANCEr
NANCI efl
ect
edbyaccr
ualaccount
ing*
Perf
ormanceofanenterpr
ise–compriseit
sr ev
enue,expenses,neti
ncomeorl ossforaperi
odoftime.
I
tisthelevelofi
ncomeear nedbytheenterpri
sethr
oughef fi
cientandeffect
iveuseofitsresources.
I
nformat
ionaboutperf
ormanceispr
imari
lyprovidedi
nanI ncomeSt atementorStatementofFinancial
Perf
ormanceorStat
ementofComprehensiveIncomeorSt at
ementofI ncomeandExpenses.
*
AccrualAccount
ingrecogni
zestransact
ionsandot
herevent
sofarepor
ti
ngent
it
yintheper
iodsi
nwhi
ch
t
hoseeffect
soccur,evenift
heresult
ingcashrecei
ptsandpayment
soccuri
nadif
fer
entper
iod.
NG| 22
COMPOSI
TIONOFSTATEMENTOFFI
NANCI
ALPERFORMANCE
REVENUEORI
NCOME
Theseareincr
easesineconomi cbenefi
tsdur i
ngtheaccounti
ngperiodinthefor
m ofinf
lowsor
enhancement
sofassetsordecr easeofliabi
li
ti
esf rom del
i
ver
yorpr oduct
ionofgoods,r
enderi
ngof
serv
ices,
orot
heracti
vi
ti
esthatconsti
tut
etheenterpri
se’
smajoroper
ati
ons.
1. Servi
ceI ncomeRev enuesear
ned byperf
orming ser
vicesforacustomerorcl
i
ent
,fore.
g.
account
ingserv
icesbyaCPAf i
rm,
laundr
yservi
cesbyal aundr
yshop.
2. Sal
esRevenuesear nedasar
esul
tofsal
eofmer
chandi
se;f
ore.
g.sal
eofmer
chandi
seby
Gener
alMerchandi
seStor
e.
EXPENSES
Thesearedecr
easeineconomi
cbenefi
tsdur
ingtheper
iodinthef
orm ofoutf
lowsorusingupof
assetsorincurr
enceofli
abi
l
iti
esthatr
esul
tindecr
easesinequit
y,ot
herthanr
elat
ingtodi
str
ibuti
onsto
equit
yparti
cipant
s.
1. CostofSalesThecosti
ncurr
edtopurchaseort
opr
oducet
hepr
oduct
ssol
dtocust
omer
sdur
ing
theper
iod;
alsocal
ledascostofgoodssold.
2. Salar
ies and Wages Expense i
ncl
udes al
lpay ment
s as a r
esul
tofan employ
er-empl
oyee
rel
ati
onshipsuchassalaresandwages,13th mont
i hpay,costi
fli
vi
ngal
l
owances,otherr
elat
ed
benefi
ts.
3. Ut
il
it
iesExpenseexpensesr
elat
edt
ouseoft
elecommuni
cat
ionsf
aci
l
iti
es,consumpt
ionsof
el
ect
rici
ty,
fuel
andwater
.
4. RentExpenseexpensef
orspace,
equi
pmentorot
herassetr
ent
als.
5. Suppl
iesExpenseexpenseofusi
ngsuppl
i
esi
ntheconductofdai
l
ybusi
ness.
6. I
nsur
anceExpensepor
ti
onofpr
emi
umspai
doni
nsur
ancecov
eragewhi
chhasexpi
red.
7. Depreci
ati
onExpenseporti
onoft
hecostofat
angi
bleassetal
l
ocat
edorchar
gedasexpense
dur
inganaccount
ingper
iod.
8. Uncoll
ecti
ble Account
s Expense t
he amountofr ecei
vabl
es est
imat
ed t
o be doubt
fulof
col
lect
ionandchargedasexpenseduri
nganaccount
ingperi
od.
NG| 23
9. I
nter
estExpenseAnexpenser
elat
edt
ouseofbor
rowedf
unds.
CHANGESI
NFI
NANCI
ALPOSI
TION
Itr
eferst
othechangesint
heeconomicresour
cesandobl
igat
ionofanent
erpr
ise.I
nconst
ruct
ing
astat
ementofchangesi nOwner’sEqui
ty,f
undscanbedef i
nedinv ar
iousway
s,suchasallfi
nancial
r
evenues,worki
ngcapi
tal
,l
iqui
dasset
sorcash.
THEACCOUNT
Thebasicsummar ydev
iceofaccountingist heaccount .Aseparateaccountismaint
ainedf or
eachel ementthatappearsinthebalancesheet( asset
s,liabili
ti
es,and equi
ty)and intheincome
stat
ement( i
ncomeandexpense).Thus,anaccountmaybedef inedasadet ai
ledrecordoft
heincreases,
decreaseandbalanceofeachel
ementthatappearsinanent i
ty’
sf i
nancial
statements.
Thesimplestfor
m oftheaccounti
sknownast he“T”accountbecauseofi
tssi
mil
ari
tyt
othe
l
ett
erT.theaccounthasthr
eepar
tsasshownonthenextpage.
AccountTi
tl
e
Lef
tsi
deorDebi
t Ri
ghtsi
deor
si
de cr edi
tsi
de
THEACCOUNTI
NGEQUATI
ONandDEBI
TSANDCREDI
TS-
THEDOUBLEENTRYSYSTEM
Asset
s = Li
abi
li
ti
es + Equi
ty
Bal
ance
Thebasictoolofaccounti
ngistheaccounti
ngequati
on.Thelef
tsi
deoftheequati
onshows
how muchthebusinessowns,andt heri
ghtsi
deoft heequat
ionshowshow muchresour
cesdothe
out
sidecr
edi
torandownersuppli
edtothebusi
ness.
Thel ogi
cofdebit
ingandcr editi
ngisr
elat
edt
otheaccount
ingequat
ion.Tr
ansact
ionsmay
r
equi
readdi
ti
ontobot
hsides(l
eftorsides),
NG| 24
subt
ract
ionsfrom bothsi
des(l
eftandri
ghtsi
des)
,oranaddit
ionandsubt
ract
ionont
hesamesi
de(
lef
tor
ri
ghtsi
des).Buti
nal l
casestheequal
it
ymustbemai nt
ainedasshownabove.
Account
ingisbasedonadouble-ent
rysystem whi
chmeansthatthedualef
fect
sofbusinessar
e
recor
ded.Adebi tsi
deent r
ymusthav ea correspondi
ngcredi
tsi
deent r
y.Foreveryt
ransact
ion,t
her
e
mustbeoneormor eaccountsdebit
edandoneormor eaccount
scr
editedandmustbeequalbot hsi
des.
Eachtransact
ionaff
ectsatleastt
woaccounts.
Ther
ulesofdebi
tandcr
edi
tinaccount
s.
ACCOUN DEBI
T CREDI
T
T
Assets + -
Li
abil
it
ies - +
Capit
alorEquity - +
RevenueorIncome - +
Expenses + -
(+)incr
ease; (
-)decr
ease
ACCOUNTI
NGEVENTSANDTRANSACTI
ONS
Anaccountingeventisaneconomi
coccurrencethatcauseschangesi
nanenter
pri
se’
sassets,
l
iabi
li
ti
es,
and/orequit
y.Atransact
ioni
sapart
icul
arkindofeventthati
nvol
vest
het
ransf
erofsomet
hing
ofval
uebetweentwoentit
ies.
Accountant
sobservemanyevent
sthatt
heyidenti
fyandmeasurei
nfinancialt
erms.Abusi
ness
t
ransacti
onistheoccur
renceofanev
entoracondi
ti
ont hataf
fect
sfi
nanci
alposit
ionandcanberel
iabl
y
r
ecorded.
Fi
nanci
alt
ransact
ionwor
ksheet
Everyfi
nanci
altransact
ioncanbeanal y
zedorexpr essedi
ntermsofi t
sef fect
sontheaccounti
ng
equati
on.Thefi
nancialt
ransactionswil
lbeanal
yzedbymeansofaf i
nanci
altr
ansacti
onwor
ksheetwhi
ch
i
saf or
m used t oanalyzei ncreasesanddecreasesintheasset
s,li
abil
i
tiesorowner’
sequityofa
busi
nessenti
ty.
Whenaspecifi
casset,
li
abil
ityorowner’
sequi
tyi
tem iscr
eatedbyaf
inanci
alt
ransact
ion,
iti
sli
stedi
nthe
f
inanci
alt
ransact
ionworksheetusi
ngtheappr
opriat
eaccounts.
NG| 25
Toi
ll
ust
rat
e:
Mr.Wagmali
toKayay
anwant
stoopenanaccount
ingf
ir
mthi
syear
.Thef
oll
owi
ngt
ransact
ions
ar
emadeduri
ngthemonth.
May1.Mr
.W.Kay
ayani
nvest
edP100,
000t
ost
artanaccount
ingof
fi
ce.
W.Kayay
anAccountingFi
rm Fi
nanci
al
Tr
ansact
ionWorksheet
Mont
hofMay2015
ASSET = LIABI
LITI
ES + OWNER’SEQUITY
May Cash Account
s Offi
ce Of
fi
ce = Accounts Notes + W.Kayay
an
2015 Recei
vabl
e Suppli
es Equi
pment Payable Payabl
e Capi
tal
1 100,000 100,
000
Thef
inancial
transact i
oni sanal yzedasfoll
ows:
 Anent i
tysepar ateanddi sti
nctfr
om Kayayan’
sper sonal f
inanci
al
aff
airsiscr eat
ed.
 Aneconomi cresour ce–cashofP100, 000isinvest edint hebusinessent
ity
.Thesourceoft hi
s
assetist hecont r
ibut i
onmadebyt heowner,whichr epresentsowner ’
sequit
y.Theowner’sequit
y
accounti sW.Kay ayan, Capit
al.
 Thedual natur
eoft hetransacti
onisthatcashisinvestedandowner ’sequi
tycreat
ed.Theeff
ects
ofthi
st ransact i
onont heaccount i
ngequati
onareasf oll
ows:increaseinasset–cashf r
om zero
toP 250, 000andi ncreaseinowner ’
sequit
yfrom zerot oP250, 000.
May3.Pur
chasedof
fi
cesuppl
i
eswor
thP20,
000onaccount
.
ASSET = LI
ABI
LITI
ES + OWNER’
SEQUI
TY
Ma
Cash Accounts Off
ice Of
fi
ce = Account
s Notes + W.Kay
ayan
y
2015 Recei
vabl
e Suppli
es Equi
e Capi
tal
Bal. 100,
000 100,
000
3 20,
000 20,
000
Bal
. 100,
000 0 20,
000 0 = 20,
000 0 + 100,
000
120,
000 = 120,
000
Theef
fectoft
ransact
ioni
sincr
easeinassetandi
ncr
easei
nli
abi
l
iti
es.Takenot
ethatt
heequal
i
tyoft
he
twosi
desoftheequati
oni
smai nt
ained.
May5.Purchasedaddit
ional off
ice suppl i
esf
or cash,P10,
000.
May ASSET = LI
ABILITI
Cash Accounts Office Of
fi
ce = Accounts Not es + W.Kayayan
2015
Recei
vabl
e Supplies Equi
pment Payable Payable Capi
tal
Bal
. 100, 000 0 20,000 0 = 20, 000 0 + 100,
000
NG| 26
5 (
10,
000) 10,
000
Bal
. 90,
000 0 30,
000 0 = 20,
000 0 + 100,
000
120,
000 = 120,
000
Theeffectoftr
ansacti
onisincr
easeinassetanddecr
easeinanotherassetfor
m ofasset
.Afterposti
ng
thet
ransacti
on,tot
alassetamountst
oP120,000andtotal
li
abi
l
iti
esandcapitalamounttoP120,000.
May6.Pai
dtheaccount
spayabl
einf
ull
.
ASSET = LI
ABI
LITI
ES + OWNER’
SEQUI
TY
Ma
Cash Accounts Off
ice Of
fi
ce = Accounts Notes + W.Kayayan
y
2015 Recei
vabl
e Suppli
es Equi
e Capit
al
Bal
. 90,
000 0 30,
000 0 = 20,000 0 + 100,
000
6 (
20,
000) (
20,000)
Bal
. 70,
000 0 30,
000 0 = 0 0 + 100,
000
100,
000 = 100,
000
Transact
ionr
educesbot
hsi
desoft
heequat
ionbyP20,
000r
esul
ti
ngt
otheequal
i
tyoft
heequat
ionaf
ter
posti
ng.
May8.Pur
chased2uni
tsofcomput
erwi
thpr
int
erf
orP50,
000,
30days.
ASSET = LIABI
LITI
ES + OWNER’
SEQUI
TY
Ma
Cash Accounts Off
ice Of
fi
ce = Account
s Notes + W.Kayayan
y
2015 Recei
vabl
e Suppli
es Equi
e Capit
al
Bal. 100,
000 100,
000
8 50,
000 50,
000
Bal
. 70,000 0 30,
000 50,
000 = 50,
000 0 + 100,
000
150,
000 = 150,
000
May10.Render
edaccount
ingser
vicesf
orcash,
P25,
000.
ASSET = LI
ABI
LITI
ES + OWNER’
SEQUI
TY
Ma
y
Cash Account
s Offi
ce Offi
2015
Recei
vabl
e Suppli
es Equipment Payabl
e Pay
able Capit
al
Bal
. 70,
000 0 30,
000 50,000 = 50, 000 0 + 100,
000
10 25,
000 25,
000Prof.f
ee
Bal
. 95,
000 0 30,
000 50,
000 = 50,
000 0 + 125,
000
175,
000 = 175,
000
May
2015
NG| 27
account
ingser
vicesonaccount,P30,000.
May ASSET = LIABI
LITI
15 Cash Account
s Offi
ce Of
fi
ce = Accounts Notes + W.Kayay
an
Render Receiv
abl
e Suppli
es Equi
e Capi
tal
ed
Bal. 95,
000 0 30,
000 50,
000 = 50,
000 0 + 125,
000
NG| 28
15 30,
000 30,
000Prof.
fee
Bal
. 95,
000 30,
000 30,
000 50,
000 = 50,
000 0 + 155,
000
205,
000 = 205,
000
May15Pai
dMer
alcobi
l
ls,
P3,500.
Ma ASSET = LI
ABI
LITI
ES + OWNER’
SEQUI
TY
y
Cash Accounts Offi
ce Offi
2015
Recei
v abl
e Suppli
es Equipment Payabl
e Pay
able Capital
Bal
. 95,000 30,000 30,
000 50,000 = 50, 000 0 + 155,
000
15 (
3,500) (3,
500)Uti
li
ty
Exp.
Bal
. 91,
500 30,
000 30,
000 50,
000 = 50,
000 0 + 151,
500
201,
500 = 201,
500
May15Pai
dsalar
iesfortheperi
od, P15,
000.
Ma ASSET = LIABI
LITI
ES + OWNER’SEQUI TY
y
Cash RAc
ecci
eou
vn
at
bs
l
e Ou
S f
f
pi
c
p e
l
ies E O
quf
fi
c
i
p e nt = Ac
me Pc
ao
yu
an
bt
ls
e N
Po
at
ye
as
be +
l W.Kay
Ca
ay
pa
i
tn
al
2015
Bal
. 91,500 30,000 30,000 50,000 = 50,000 0 + 151,
500
15 ( 15,
00) (
15,
000)
Salari
es
Exp.
Bal
. 76,500 30,000 30,000 50,000 = 50,000 0 + 136,
500
186,
500 = 186,
500
May20Col l
ect
edP10,000f r
om customer
.
ASSET = LIABI
LITI
Ma
Cash Accounts Off
ice Of
fi
y
2015 Receivabl
e Suppli
es Equi
e Capit
al
Bal. 76,500 30,
000 30,
000 50,
000 = 50,000 0 + 136,
500
20 10,000 (10,
000)
Bal
. 86,
500 20,
000 30,
000 50,
000 = 50,
000 0 + 136,
500
186,
500 = 186,
500
May22AShortter
mloanfrom al
ocalbankwasgrantedintheamountofP50,
000,
lessP5,
000f
inanci
ng
char
ges.Mr.W.Kayay
anissued1yearpromissorynot
e.
ASSET = LIABI
LITI
ES + OWNER’ SEQUI
TY
Ma
y
Cash Accounts Offi
ce Offi
ce = Accounts Notes + W.Kayay an
2015 Recei
v abl
e Suppli
es Equipment Payabl
e Payabl
e Capi t
al
Bal
. 86,
500 20,000 30,
000 50,000 = 50, 000 0 + 136,500
22 45,
000 50,000 (5,
000)
Int
erest
Expense
Bal
. 131,
500 20,
000 30,
000 50,
000 = 50,
000 50,
000 + 131,500
NG| 29
231,
500 = 231,
500
NG| 30
May25Paidt
elephonebil
lamounti
ngtoP 6,
000.
ASSET = LIABI
LITI
ES + OWNER’SEQUI TY
May
Cash Accounts Of
fi
ce Office = Accounts Notes + W.Kayayan
2015
Receivabl
e Suppli
es Equipment Pay
able Pay abl
e Capit
al
Bal
. 131,500 20,000 30,
000 50,000 = 50,000 50,000 + 131,
500
25 (6, 000) (6,
000)Comm.
Expense
Bal
. 125,
500 20,
000 30,
000 50,
000 = 50,
000 50,
000 + 125,
500
225,
500 = 225,
500
May27Mr
.Kay
ayanwi
thdrewP20,
000f
orper
sonal
use.
ASSET = LI
ABI
LITI
ES + OWNER’
SEQUI
TY
Ma
y
Cash Accounts Offi
ce Offi
ce = Accounts Notes + W.Kay ayan
2015
Recei
v abl
e Suppli
es Equipment Payabl
e Payabl
e Capit
al
Bal
. 125,500 20,000 30,
000 50,000 = 50,
000 50,000 + 125,500
27 (20,000) (
20,
000)Kayayan,
Wit
hdrawals
Bal
. 105,
500 20,
000 30,
000 50,
000 = 50,
000 50,
000 + 105,500
205,
500 = 205,
500
May 30 At t he end of t he month, phy si

cal count of t he off
ice suppli
es
r
evealedt hatP5,000hadbeenconsumed.
Ma ASSET = LIABILI
TIES + OWNER’ SEQUI TY
y
Cash Account s Office Offi
ce = Accounts Not es + W.Kay ay an
2015
Recei
v able Supplies Equipment Payabl
e Pay abl
e Capi t
al
Bal
. 105,500 20,000 30,000 50,000 = 50, 000 50,000 + 105,500
30 (5,000) (
5,000)Suppl i
es
Expense
Bal
. 105,500 20,000 25,000 50,000 = 50, 000 50,000 + 100,500
200,
500 = 200,
500
NG| 31
Summar
yofW.Kay
ayani
ntabul
arFor
m
W.Kayay
anAccountingFi
rm Fi
nanci
al
Tr
ansact
ionWorksheet
Mont
hofMay2015
ASSET = LI
ABI
LITI
ES + OWNER’
SEQUI
TY
May
Cash Account
s Off
ice Off
ice = Accounts Notes + W.Kayayan
2015
Recei
vabl
e Suppl
ies Equi
pment Payabl
e Payabl
e Capit
al
1 100,
000 100,
000
3 20,
000 20,
000
5 (
10,
000) 10,
000
6 (
20,
000) (
20,000)
8 50,
000 50,
000
10 25,
000 25,000Prof .
fee
15 30,
000 30,000Prof .
fee
15 (
3,500) (
3,500)
Util
i
tyExp.
(
15,000)Salari
es
15 (
15,
00)
Exp.
20 10,000 (
10,
000)
22 45,000 50,
000 (5,000)Interest
Expense
25 (6,
000) (
6,000)Comm.
Expense
27 (
20,
000) (
20,000)Kay ayan,
Withdrawals
30 (5,
000) (5,
000) Supplies
Expense
Bal
. 105,
500 20,
000 25,
000 50,
000 = 50,
000 50,
000 + 100,500
200,
500 = 200,
500
USEOFT-
ACCOUNTS
Analy
zingandr ecor
dingtransacti
onsusingtheaccounti
ngequati
onisusef
uli nconveyi
nga
basi
cunderstandi
ngofhow t r
ansacti
onsaf f
ectthebusi
ness.However,i
tisnotaneff
ici
entapproach
oncethenumberof account sinvolvedincr
eases.Doubl
e-ent
rysyst
em provi
desaformalsystem of
cl
assi
fi
cati
onandr ecor
dingbusi
nesstransact
ions.
May1.Mr
.W.Kayay
aninvest
edP100,
000t
ost
artanaccount
ingof
fi
ce.Cash W.Kayay
an,
Capi
tal
5/
1100,
000 100,
000 5/1
May3.Pur
chasedoffi
cesuppl
i
eswor
thP20,
000onaccount
.
Off
iceSuppl
i
es Account
sPayabl
e
5/
3 20,000 20,
000 5/
3
NG| 32
May5.Pur
chasedaddi
ti
onalof
fi
cesuppl
i
esf
orcash,
P10,
000.
Off
iceSuppl
i
es Cash
5/
3 20, 000 5/
1 100,
000 10,
000 5/
5
5/
5 10, 000
May6.Pai
dtheaccountspayabl
einf
ull
,P20,
000
Account
sPayable Cash
5/
6 20, 000 20,
000 5/ 3 5/
1 100,
000 10,
000 5/
5
20,
000 5/
6
May8.Pur chased2unit
sofcomput
erwi
thpr
interforP50,
000,30days.
AccountsPay abl
e Off
iceEqui
pment
5/
6 20,
000 20,000 5/ 3 5/8 50,
000
50,000 5/ 8
May10.Render
edaccounti
ngser
vicesforcash,
P25,
000.
Cash Pr
ofessi
onal
Fees
5/
6 20, 000 20,
000 5/ 3 25,
000 5/
10
5/
10 25,000 50,
000 5/ 8
May15.Render
edaccount
ingserv
icesonaccount
,P30,
000.
Account
sReceivabl
e Pr
ofessi
onal
Fees25,
000
5/
1530,000 5/10
30,000 5/15
May15.Pai
dMeralcobil
ls,
P3,500.
Cash Ut
il
it
iesExpense
5/
6 20, 000 20,
000 5/3 5/
15 3,
500
5/
10 25,000 50,
000 5/8
3,
500 5/
15
May15.Pai
dsalar
yofof
fi
cestaf
fs,
P15,
000
Cash Salar
iesExpense
5/
6 20, 000 20,
000 5/ 3 5/
15 15,000
5/
10 25,000 50,
000 5/ 8
3,
500 5/15
15,
000 5/15
May20.Col
l
ectedP10,
000from cust
omer.
Cash Account
sRecei
vabl
e
5/
6 20, 000 20,000 5/ 3 5/
15 30,
000 10,
000 5/
20
5/
10 25,000 50,000 5/ 8
5/
20 10,000 3,500 5/15
15,000 5/15
May22.Ashorttermloanf
rom alocalbankwasgrant
edintheamountofP50,
000,l
essP5,
000f
inance
charges.W.Kay
ayanissued1y earpr
omi
ssorynot
e.
NG| 33
Cash Not
esPay
abl
e
5/
6 20,
000 20,
000 5/3 50,
000 5/
22
5/
10 25,
000 50,
000 5/8
5/
20 10,
000 3,
500 5/15
5/
22 45,
000 15,
000 5/15
I
nter
estExpense
5,000 5/
22
May25.Pai
dtelephonebil
lamount
ingtoP6,
000.
Cash Tel
ephoneExpense
5/
6 20, 000 20,
000 5/ 3 5/
25 6,
000
5/
10 25,000 50,
000 5/ 8
5/
20 10,000 3,
500 5/15
5/
22 45,000 15,
000 5/15
6,
000 5/25
May27.W.Kayayanwit
hdrewcashP20,
000f
orherper
sonal
use.
Cash W.Kay
ayandr
awi
ng
5/
6 20, 000 20,
000 5/ 3 5/27 20,
000
5/
10 25,000 50,
000 5/ 8
5/
20 10,000 3,
500 5/15
5/
22 45,000 15,
000 5/15
6,
000 5/25
20,
000 5/27
May30.Att
heendofthemont h,
physi
cal
countoft
heof
fi
cesuppl
i
esr eveal
edthatP5,
000hadbeen
consumed.
Off
iceSuppl
i
es Suppli
esExpense
5/
3 20, 000 5,
0005/30 5/
30 5,000
5/
5 10, 000
Ref
erences:
Ball
on.Manil
a:Domdane
Publi
Ledesma,EsterL.(
2014).Fi
ewBooklets.Manil
onal
CPA Rev i
ewSchool .
Rante,Gl
ori
aAr adani
el.
ceEnti
ti
es.MandaluyongCit
y:Mil
leni
um
Books,I
nc.
NG| 34
MODULE3
LESSON1BUSI
NESSTRANSACTI
ON
Desir
edLearningOutcomes
 Underst
andthediff
erentsourcedocumentsevidencingat r
ansact
ion.
 Underst
and and applytheaccount i
ng cycl
ei n day-t
o-daybusiness
tr
ansacti
ons.
LESSON2PREPARATI
ONSOFFI
NANCI
ALSTATEMENTS
Desi
redLear
ningOut
comes
 Famil
iar
izewi
thGeneral
Jour
nal
,LedgerandTr
ial
Bal
ance.
 Deeperunder
standt
hedebi
tandcredi
t.
NG| 35
BUSI
NESSTRANSACTI
ONS
Abusi
nesstr
ansacti
onisanyeventt
hataffect
sthefi
nancialposi
ti
onoft hebusi
nessandcanbe
recordedreli
abl
y.Itinv
olvesexchangeofvalues.Therearetransacti
onswi t
hintheorgani
zati
onli
ke
recognizi
ngtheusedporti
onofsuppliesasexpense,orwi
thoutsideentit
iesorpersonsli
kepur
chasi
ng
suppliesei
therf
orcashoronaccount.
SOURCEDOCUMENTS
Transacti
onsandev ent
sar ethestart
ingpoi ntsi
ntheaccount i
ng cy cle.Byrel
yingonsource
document s,tr
ansact ionsandev entscanbe anal yzedast ohow theywi l
laf f
ectperfor
manceand
fi
nancialpositi
on. Sour ce documentsi denti
fyand descri
be transacti
ons and ev ent
s enter
ing t
he
accountingprocess.Theseor i
ginalwri
tt
enev idences contai
ninformationaboutt henat ur
eandt he
amount softhet r
ansact ions.Someoft hemor esourcedocumentsare:
 Sal esi nvoice Checks
 Cashr egi stertapes  Pur chaseor ders
 Of f
ici
al receipts  Ti mecar ds
 Bankdeposi tsli
ps  St atementofaccount s
 Bankst atement s

TRANSACTI ONANALYSI S
Theanal
ysisoftransactionsshouldfoll
owt hesef ourbasicsteps:
1. I
dentifythetransactionfr
om sourcedocument s
2. I
ndicatetheaccount s–assets,l
iabi
lit
ies,equi
ty,incomeorexpenses
–af f
ectedbyt het r
ansacti
on.
3. Ascertai
n whet her each account i s i ncreased or decr eased by the
tr
ansaction.
4. Usingther ul
esofdebi torcredi
t,determinewhet hertodebitorcr
edi
ttheaccounttorecor
dit
s
i
ncreaseordecr ease.
ACCOUNTI
NGCYCLE
St
ep1 Document ati
on.Anal yzi
ngbusi nessdocument swhi ch ser veasa basisofr ecording
transact ions.
St
ep2 Journali
zing.Recor di
ngbusi nesst ransactionsint hejour nalto hav echronologi
calrecordsof
economi cacti
v i
ti
es.
St
ep3 Posti
ng.Thei nformationint hegener aljournalistransferredtot heGener alLedgertocr eatea
recor dofcl assifi
edaccount s.
St
ep4 Preparat i
onofTr i
alBal ance.At ri
albal anceispr eparedt o pr ovet heequalit
yofdebi tsand
credi tsinthegener alledger.
St
ep5Adj
ustingent ries.Maki ngend ofper i
od adj ustments bef orefinancialstat
ement sarepr epared
sot hatt heincomeandexpensei nt heincomest atementar ereportedattheircorrect
amount s.
St
ep6 Worksheet .Wor ksheetisprepar edtof acil
i
tatethepr eparation offinancialst
atements.
NG| 36
St
ep7 FinancialStatement.Thebasi cfi
nancialst
atementsareprepar
edaft
ermaki
ngthe
necessaryadj ustments.
a. IncomeSt at
ement
b. BalanceSheet
c. StatementofCashFl ows
d. StatementofChangesi nEquity
e. Notest ofi
nancialst
at ement
St
ep8Journali
zingand post ing cl
osi ng entries.The obj ect
ive ofclosi
ngent
ryistotr
ansf
ert
he
revenue,expenseanddr awingaccount stothecapital
account.
St
ep9Prepar
ati
onofaPost -closi
ngt r
ialbalance
St
ep10Rever
singjournalentries(madeatt hest artofthenextperi
od)
CHARTOFACCOUNTS
Itisal i
stofAssets,Liabi
li
ti
es,Revenue,ExpenseandCapi t
alAccountsappli
cabl
et othebusi
ness
enter
pri
se.Itnormal
lyincl
udesbriefdescri
pti
onoft henatur
eoftransacti
on,i
denti
fi
cat
ionnumberor
accountnumber.Pr
esentedbelowisthechartofaccount
sfort
heil
l
ustrat
ion.
W.KAYAYANACCOUNTI
NGFIRM
CHARTOFACCOUNTS
BalanceSheetAccounts I
ncomeSt at
ementAccount
s
ASSETS REVENUE
110 Cash 410 Ser
viceRevenue
120 AccountsReceivabl
e
130 NotesReceivable EXPENSES
140 Offi
ceSupplies 510 Offi
ceSuppliesExpense
150 Land 520 Uti
lit
iesExpense
160 Offi
ceEquipment 530 Salari
esExpense
165 Accumul at
edDep.O/ E 540 TelephoneExpense
170 Furnit
ure&Fixtur
es 550 Int
erestExpense
175 Accumul at
edDep.F/F 560 RentExpense
570 Depreciat
ionExpense–O/E
LI
ABI LI
TIES 580 Depreciat
ionExpense–F/F
210 AccountsPay abl
e 590 Miscell
aneousExpense
220 NotesPay able
230 Uti
li
ti
esPay able
240 Sal
ariesPay abl
e
250 I
nterestPayable
260 UnearnedRev enue
EQUI
TY
310 W.Kayay
an,
Capi
tal
320 W.Kayay
an,
Wit
hdrawal
s
330 I
ncomeSummary
NG| 37
JOURNALI
ZING
THEJOURNAL
Thejour
nalisachr onologicalrecor
doft heent
ity’
str
ansactions.I
tiscal
ledt
hebookofori
ginalentr
y.A
j
ournalentryshowsal lt heef fect
sofabusi nesstransacti
onint er
msofdebitsandcr edit
s.Each
tr
ansact
ionisini
tial
lyrecor dedinaj our
nalrat
herthandirectl
yintheledger
.Thegener
alj
our nali
sthe
si
mplestjour
nal.
SimpleandCompoundEnt ry
Inasi mpleentry,onlytwoaccountsareaffected–oneaccounti
sdebit
ed andtheotheraccounti
s
credi
ted.Howev er,sometransact
ionsrequi
retheuseofmor et
hantwoaccount
s.Whenthreeormore
accountsarerequiredi
najournalentr
y,t
heentryisr
efer
redt
oasacompoundentr
y.
For
mat
Date: They earandmont har enotwr i

tt
enf orev erywritt
enent r
yunl esstheyearormont hchangesora
newpagei sneeded.
AccountTit
lesandExpl anat i
on:Thef i
rstli
neofanent r
yshowst heaccountdebi t
edandt hesecondli
ne
i
st heaccountcr edi
ted.Theaccountcr edi
tedi si ndentedtother i
ght.Foreachentr
y,a
bri
efexplanati
onisrequiredenought ounder standt henatureofthetransact
ion.
Posti
ngRef erence:Thiscol umni sf i
ll
eduponl ywhent heent ryi st r
ansfer
redt othenextbookof
accounts,theledger.Postingr eferencecolumni swher etheaccountnumberofeach
accountiswrit
ten.
Debit
:Thedebi tamountf oreachaccounti senteredi nthiscolumn.
Credi
t:Thecreditamountf oreachaccounti sent eredinthiscol umn.
I
LLUSTRATI
ON
Onceagai
n,l
etusr
evi
ewt
het
ransact
ionsoft
henewl
yor
gani
zedaccount
ingf
ir
m ofMr
.Kay
ayan.
May1.Mr .W.Kay ayani nvestedP100, 000tost artanaccountingoff

ice.
May3.Pur chasedof f
icesuppl i
eswor thP20, 000onaccount .May5.Pur chased
addit
ionaloff
icesuppl iesforcash,P10, 000.May6.Pai dtheaccountspayablei
n
ful
l.
May8.Pur chased2uni t
sofcomput erwi t
hpr i
nterforP50,000,30days.
May10.Render edaccount ingservicesf orcash,P25,000.May15Render ed
accounti
ngser vicesonaccount ,P30,000.May15Pai dMer al
cobil
ls,P3,500.
May15Pai dsalariesfortheper i
od, P15,000.
May20Col l
ectedP10, 000f rom customer .
NG| 38
May22AShorttermloanfrom al
ocalbankwasgr antedintheamountofP50,
000,l
essP5,
000fi
nanci
ng
charges.Mr.W.Kayayanissued1y earpromissorynot
e.
May25Pai
dtelephonebil
lamountingtoP6,000.
May27Mr.Kayayanwit
hdrewP20,000f orpersonaluse.
May30Attheendoft hemont h,phy si
calcountoft heoffi
cesuppl
iesrev
eal
edthatP5,000hadbeen
consumed.
GENERALJOURNAL PAGENo.1
Dat
e AccountTit
lesandExpl
anat
ion PR Debi
t Cr
edi
t
2014
May 1 Cash 110 1 0 0 0 0 0
W.Kayayan,Capi
tal 310 1 0 0 0 0 0
I
nit
ial
inv
est
mentoft
heowner
3 Of
fi
ceSuppl
i
es 140 2 0 0 0 0
Account
sPay
abl
e 210 2 0 0 0 0
Of
fi
cesuppl
i
espur
chasedon
account
.
5 Of
fi
ceSuppl
i
es 140 1 0 0 0 0
Cash 110 1 0 0 0 0
Of
fi
ceSuppl
i
espur
chased.
6 Account
sPay
abl
e 210 2 0 0 0 0
Cash 110 2 0 0 0 0
Ful
lpay
mentofaccount
.
8 Of
fi
ceEqui
pment 160 5 0 0 0 0
Account
sPay
abl
e 210 5 0 0 0 0
Comput
eruni
tspur
chased
10 Cash 110 2 5 0 0 0
Ser
viceRev
enue 410 2 5 0 0 0
Ser
vicer
evenuer
ender
ed.
15 Account
sRecei
vabl
e 220 3 0 0 0 0
Ser
vicer
evenue 410 3 0 0 0 0
Ser
vicer
evenuer
ender
edonaccount
.
15 Ut
il
it
iesExpense 520 3 5 0 0
Cash 110 3 5 0 0
Pai
dmer
alcobi
l
l.
NG| 39
2014
15 Sal
ari
esExpense 530 1 5 0 0 0
May
Cash 110 1 5 0 0 0
Pai
dSal
aryofof
fi
cest
aff
s
20 Cash 110 1 0 0 0 0
Account
sRecei
vabl
e 120 1 0 0 0 0
Col
l
ect
ionofaccount
22 Cash 110 4 5 0 0 0
I
nter
estExpense 550 5 0 0 0
Not
esPay
abl
e 220 5 0 0 0 0
Pr
oceedsofl
oan.
25 Tel
ephoneExpense 540 6 0 0 0
Cash 110 6 0 0 0
Pai
dtel
ephonebi
l
l.
27 W.Kay
ayan,
Wit
hdr
awal
s 320 2 0 0 0 0
Cash 110 2 0 0 0 0
Wi
thdr
awal
byt
heowner
.
30 Of
fi
ceSuppl
i
esExpense 510 5 0 0 0
Of
fi
ceSuppl
i
es 140 5 0 0 0
Of
fi
ceSuppl
i
esconsumed.
Takenotethatthepostr
efer
enceofthegener
alj
our
nali
snotf
il
ledupy
eti
nthepr
ocessofr
ecor
ding.
Thi
swillf
il
ledinthepost
ingprocess.
POSTI
NG
THELEDGER
Agr oupingoftheenti
ty’
saccount
sisrefer
redt
oasal edger
.Althoughsomefir
msmayusev ari
ousledger
toaccumul atecertai
ndet ai
l
edinformati
on,al
lfi
rmshav eagener all
edger
.A generalledgerist he
referencebookoft heaccounti
ngsystem andisusedt oclassi
fyandsummar i
zetransacti
ons,andt o
preparedataforbasicfi
nanci
alst
atements.
Theaccount
sinthegeneral
ledgerar
eclassif
iedi
ntotwogeneralgr
oups:
 Per manent/
Realaccounts–bal
ancesheetaccounts
 Tempor ary
/Nominalaccounts–incomestatementaccount
s
NG| 40
Post
ingmeanst r
ansferr
ingtheamount sfrom t
hejournaltotheappr opri
ateaccountsintheledger.The
st
epsareill
ust
ratedasfoll
ows:
1. Transf
erthedateoft hetr
ansact i
onfrom thejournaltotheledger.
2. Transf
erthepagenumberf rom thejournalt
ot hejournalr
eference.
3. Postthedebitfi
gurefrom t
hej ournalasadebitfigureintheledgerandthecr edi
tfi
gurefrom the
l
edgerasacr editf
igurei
nt heledger.
4. Entert
heaccountnumberi nt hepost i
ngrefer
encecol umnoft hejournaloncethefigurehasbeen
postedtotheledger.
I
ll
ust
rat
ion:
Account
:Cash AccountNo.
:110
Date Expl
anat
ion J.
R. Debi
t Cr
edi
t Bal
ance
2009
May1 I
nit
ialI
nvestment J-
1 100,
000.
00 100,
000.
00
3 Off
iceSuppli
espurchased J-
1 10,
000.
00 90,
000.
00
Account
:W.Kayayan,
Capi
tal AccountNo.
:310
Date Expl
anat
ion J.
R. Debi
t Cr
edi
t Bal
ance
2009
May1 I
nit
ial
Inv
estment J-
1 100,
000.
00 100,
000.
00
Account
:Of
fi
ceSuppl
ies AccountNo.
:140
Date Expl
anat
ion J.
R. Debi
t Cr
edi
t Bal
ance
2009
May3 Of
fi
ceSuppl
i
espurchased J-
1 10,
000.
00 10,
000.
00
LEDGERACCOUNTSPOSTI NG
Attheendoft
heaccounti
ngper i
od,thedebitandcredi
tbalanceofeachaccountmustbedet er
mined
toenabl
eustocomeupwi thatri
albalance.
 Eachaccountbalanceisdeterminebyfooting(addi
ng)allt
hedebit
sandcr edi
ts.
 I ft
hesum ofanaccount’
sdebitisgreatert
hant hesum ofit
scredi
ts,
thataccounthasadebi
t
bal
ance.
 I ft
hesum ofi
tscredi
tsisgreater,
thataccounthasacreditbal
ance.
I
nthedi
scussionofbasi
caccounti
ng,T-account
sisof
tenuser
athert
hant
heact
uall
edgert
ofaci
l
itat
e
t
hepost
ingstepintheaccount
ingcycl
e.
NG| 41
TRI
ALBALANCE
I
ti sali
stofal
laccountswit
ht hei
rrespecti
vedebitorcr
edi
tbal
ances.Iti
sprepar
edtov
eri
f heequal
yt i
ty
ofdebitsandcredi
tsintheledgerattheendofeachaccount i
ngperiodoratanyti
methepost
ingsare
updated.
Il
lust
rati
on:
W.Kay ayanAccounti
ngFi
rm Tr
ial
Balance
May31, 2015
Cash 105,
500
AccountsRecei vabl
e 20,
000
Off
iceSuppl i
es 25,
000
Off
iceEqui pment 50,
000
AccountsPay able 50,
000
NotesPay able 50,
000
W.Kay ayan,Capital 100,
000
W.Kay ayan,Withdrawal
s 20,
000
Servi
ceRev enue 55,
000
Off
iceSuppl i
esExpense 5,
000
Uti
li
ti
esExpense 3,
500
Sal
ariesExpense 15,
000
Tel
ephoneExpense 6,
000
I
nterestExpense 5,
000
Total P255,
000 P255,
000
Thetr
ialbal
anceisacont r
oldev i
cet hathel
psmi ni
mizeaccounti
ngerror
s.Whent ot
alsareequal
,thetr
ial
bal
anceisinbal
ance.Itonlyprovest heequali
tyofdebi
tandcreditt
otal
sbutnotthefoll
owingerr
ors:
1. Fail
uret
or ecordorpostat ransacti
on.
2. Recordi
ngt hesamet ransactionmorethanonce.
3. Recordi
nganent rybutwi t
ht hesameer r
oneousdebitandcredi
tamounts.
4. Posti
ngapar tofat r
ansactioncorrect
lyasadebitorcredi
tbuttothewr
ongaccount .
I
NEQUALI TYOFTOTALSDUETOERRORS
Thesemightar i
sefrom thefoll
owi ngcircumst ances:
1. Fail
ingt opostpartofaj ournalentry
2. Postingadebi tasacr edit
, orvi
cev er
sa.
3. Incorrectl
ydeterminingthebalanceofanaccount .
4. Recor dingthebalanceofanaccounti ncorrectl
yinthetr
ial
bal
ance.
5. Omi tt
inganaccountf r
om t hetr
ialbalance.
6. Incorrectl
ydeterminingthet ot
alsofthet wocol umnsofthetr
ial
bal
ance.
7. Listi
ngadebi tbalanceofanaccounti nt hecreditcol
umn.
NG| 42
PREPARATI
ONOFFI
NANCI
ALSTATEMENTS
All
accounti
ngrepor
tsr
equi
reaheadi
ngwhi
chi
swr
it
tenont
hef
ir
stt
hreel
i
nesatt
hecent
eroft
her
epor
t
bei
ngprepared.
1stl
i
ne–nameoft heCompany
2ndl
ine–tit
leoft
her epor
torst
atement3rdl
i
ne–Dat
eof
therepor
t
Forincomest at
ementandStat
ementofChangesi
nEqui
ty,t
hedat
eiswr
it
tenas:Fort
hemont
hended
fort
hey earendedu orf orthesi
xmonthsended.
Fort
hebal
ancesheet
,thedat
eiswr
it
t Asof
enas: orj
ustt
hedat
eit
sel
f.
W.KayayanAccounti
ngFir
m
I
ncomeSt at
ement
Fort
hemonthendedMay ,31,
2014
Servi
ceRev enue P55,
000
Less:Expenses
Off
iceSuppliesExpense P 5,
000
Sal
ariesExpense 15,
000
Uti
li
ti
esExpense 3,
500
Tel
ephoneExpense 6,
000
I
nterestExpenseNet 5,
000 34,
500
Profi
t P20,500
W.KayayanAccounti
ngFi
rm
St
atementofChangesinCapi
tal
Fort
he
monthendedMay31, 2014
W.Kay ay
an,Capi
tal
Beg. P100,000
Add:Netprof
it 20,500
Total 120,500
Less:W.Kayayanwit
hdr
awal
s 20,000
W.Kay ay
an,Capi
tal
End. P100,500
NG| 43
REPORTFORM
W.Kay
ayanAccount
ingFi
rm
Bal
anceSheet
May31,2014
Asset
s
Cur
rentAssets
Cash P100,500
AccountsReceivabl
e 20,000
Of f
iceSuppli
es 25,000
TotalCurrentAsset
s P150,
000
Non-
currentAssets
Offi
ceEquipment P 50,
000
TotalAssets P200,
500
Li
abi
li
ti
esandOwner
’sEqui
ty
CurrentLiabili
ties
Account sPay abl
e P50,
000
NotesPay able 50,
000
TotalLiabili
ti
es P100,
000
Capi
tal
W.Kay ayan,Capi
tal 100,
500
TotalLiabil
it
iesandOwner ’
sEqui
ty P200,
500
ACCOUNT
FORM W.Kay
ayanAccounti
ngFi
rm
Bal
anceSheet
May31,2014
NG| 44
Asset
s Li
abi
li
ti
esandOwner
’sEqui
ty
Curr
entAssets Cur
rentLiabil
it
ies
Cash P100,
500 AccountsPay abl
e P50,000
AccountsReceiv
able 20,
000 NotesPay abl
e 50,
000
Offi
ceSuppli
es 25,
000 Tot
alLiabil
i
ties P100,
000
Tot
alCurrentAssets P150,
000
Capit
al
Non-
currentAsset
s W.Kayayan,
Capi
tal 100,
500
Off
iceEquipment P 50,
000 TotalLi
abil
it
ies
Tot
alAssets P200,
500 andOwner ’
sEquity P200,
500
References:
Bal
lada,Winand SusanBal l
ada.(2009). Basic Accounti
ng Made Easy 14th
Edit
ion.Mani
la:DomdanePublisher
sandMadeEasyBooks.
Rante,Glor
iaAradani
el.
(2013)
.AccountingforSer
viceEnt
it
ies.Mandal
uyongCi
ty:
Mil
l
eni
um Books,
Inc.
NG|
MODULE4 63
MODULE4
LESSON1ADJUSTI
NGTHEACCOUNTS
DesiredLearni
ngOut comes
 UnderstandtheAccountingper i
od.Dif
ferenti
ate Accrual
toCash
Account i
ng.
 Appreciatet
heimportanceof
 Adjust
ingentri
esinthepr eparat
ionoffinancialst
atements.
 I
temst hatneededAdjustment s.
 TheEffectsofnotmakingt henecessaryadj usti
ngentr
iestofi
nanci
alst
atement
s.
NG|
MODULE4 64
THEACCOUNTI
NGPERI
OD
Theacti
vit
iesofanenterpr
isecanbedivi
dedi
ntospeci
fi
cperi
odssuchasamont h,aquart
er,asemester
,
orayear.Theaccounti
ngper iodi
susual
lysspanof12months.Itmaybeacal endaryearorfi
scaly
ear.
Cal
endaryearisthenormaly earwhi
chendsDecember31ofeachyear.Fi
scalyeari
sanaccountingyear
of12consecuti
vemont hsthatmayormaynotcoinci
dewit
ht hecal
endaryaer
.
ACCRUALVERSUSCASHACCOUNTI
NG
AccrualAccountingr
equiresthatal
lrevenueear
nedwhet herpay
menti srecei
vedornotshouldbe
recognizedintheper
iodthegoodsorser vi
cesar
edeli
veredrerenderedandthatal
lrel
atedcoststo
deli
vert hegoodsort
or enderthewhet
herpaidornotshouldberecogni
zedasexpensetomat chthe
revenue.
Cash-
basisAccounti
ngr
equir
esthatal
lrev
enuei
srecogni
zedonl
ywhencashi
srecei
vedwhi
l
eexpenses
ar
erecognizedonl
ywhencashispai
d.
I
MPORTANCEOFADJUSTI
NGENTRI
ES
Adj
ust
ingEntr
iesar
eentri
esmadeattheendoftheperi
odt oassi
gnr
evenuest
otheper
iodi
nwhi
cht
hey
ar
eearnedandexpensest
otheper
iodinwhi
chtheyareincurr
ed.
Manyaccountsneedadj
ustmentstorefl
ectthecur
rentcondit
ionsasoft i
meofr eport
inginorderforthe
statementstobemeaningf
ul.Theremaybef i
nanci
aldat anotpr ev
iouslyrecogni
zedt hatneedt obe
recordedtomakethebooksofaccountsupt odateli
ket heexpensesalreadyincurr
edbutno pay ment
unti
l somet
imeint
hesubsequentper
iod,andrev
enuesalreadyearnedbutnocashi scollect
edy et
.
I
TEMSTHATNEEDADJUSTMENTS
PREPAI
DEXPENSES
Prepai
dExpensesar
eexpendi
tur
espai
dforgoodst
hatar
enoty
etconsumedl
i
kesuppl
i
es,
insur
anceand
rent
.
METHODSOFRECORDI
NGPREPAYMENTS
AssetMet
hod
1. Exampl
eforSuppli
es
a. Pur
chaseofsuppl
ieswort
hP5,
000i
srecor
dedas
Suppl
i
es 5,
000
Cash 5,
000
NG|
MODULE4 65
b. Attheendofaper iod,physi
calcountofunusedsuppli
esshowedat ot
alofP3,500.Thi
s
showsthati
fP3,500isunused,t
henP1,500worthofsuppli
esisusedorconsumed.
Suppl
iesExpense 1,
500
Suppli
es 1,
500
2. Exampl
ef orI
nsurance
a. OnOctober1, 2013,acompanypai
dP12,
000asinsur
ancepr
emium
foroneyear.Theentry t
o recor
dthepaymentundert
heasset
methodis:
PrepaidInsurance 12,
000
Cash 12,
000
b. Wit
hthepassageoft i
me,theprepai
dinsur
ancegr adual
lyexpi
res,
that’
swhyonDec.31,
anadjusti
ngentryisrequi
redtorecogni
zetheexpiredporti
onoftheinsur
ancepr
emium
asexpense.
I
nsur
anceExpense 3,000
PrepaidI
nsurance 3,000
3. Exampl
ef orRent
a. OnDec.1,thecompanypaidP18,
000asr
entf
oroneyear
.Theent
ryt
orecor
dthe
paymentundertheassetmet
hodis:
Pr
epai
dRent 18,
000
Cash 18,
000
b. OnDec.31,theentr
ywil
lbe(18,
000/
12mons.
)x1mons.=1,
500.
00
RentExpense 1,
500
Prepai
dRent 1,
500
EXPENSEMETHOD
Thi
smethodofr
ecor
dingpr
epay
ment
srequi
resanent
rydebi
ti
nganexpenseaccountuponpay
ment
.
1. Exampl
ef orsuppli
es
a. I
nt heprevi
ousexample,i
fthesuppl
iespurchasedwererecorded,
theent
rywoul
dbe:
Suppl
i
esExpense 5,
000
Cash 5,000
b. Theadjusti
ngentr
yrequir
edtorefl
ecttheunusedport
ionwoul dbe
Suppl
i
es 3,
500
Suppl
iesExpense 3,500
2. Exampl
eforInsurance
a. I
ftheExpenseMet hodi
susedt
orecor
dthepr
epayment
,theent
rymadeuponpay
menti
s:
Insuranceexpense 12,
000
Cash 12,
000
b. Theadjusti
ngent
ryonDec.31,
woul
dbe:
Prepai
dInsurance 9,
000
Insur
anceExpense 9,
000
3. Exampl
eforRent
NG|
MODULE4 66
a. I
ftheExpenseMet hodisusedtorecor
dthepr
epayment
,theent
rymadeuponpay
menti
s:
Rentexpense 18,
000
Cash 18,
000
b. Theadj
ustingentr
yonDec.31, wouldbe:
Prepai
dRent 16,
500
RentExpense 16,
500
ACCRUEDEXPENSES
Theseareit
emsal readyrecor
dedasexpensesbutnotyetpaid,t
huscreati
nganobli
gati
onst omake
paymentsi
nthefuture.Themostcommonexamplesaresal
ari
esofemployeesandut
il
it
iesexpensesl
i
ke
bi
ll
sfrom Mer
alcoandMani laWat
ers.
OnJune15,
whenthecompanypayst
hesal
ari
esofempl
oyees,
thepay
mentwill
ber
ecor
dedas:
Sal
ari
esExpense Pxxx
Cash Pxxx
Noaccr ualforsal
arypay mentonJune15becauset hi
sdatei
sar egul
arworki
ngday .Thesalaryf
orthe
2ndhal
foft hemonthwhi chisdueJune30wi l
lnotbepai
donthatdaybecausei
tisanon- worki
ngday.So
thesalaryoft heemployeeswillbepai
dthefoll
owingMonday
,July2.Thebookkeeperwillr
ecogni
zethe
expenseonJune30wi ththefol
lowingent
ry:
Sal
ari
esExpense Px
xx
Accr
uedSal
ari
esor
Sal
ari
esPay
able Pxxx
ACCRUEDI
NTERESTONNOTESRECEI
VABLE
Acompanyi ssueda90- day10%not eonDec.1forP100,000.Thenot espayableisdue90day

sfrom dat
e
ofi
ssueincludi
nginterestearnedfor90days.I
ffi
nancialstat
ement sarepr epar
edonDec.31,whi
chare
nor
mall
yt hecase,thenthecompanymustr ecor
dt hei
nterestfor30day sas:
Int
erestExpense 833.33
AccruedInter
est 833.33
ACCRUEDREVENUE
Thesear
erev
enuesal
readyear
nedbutnopay
menti
srecei
vedy
et.
I
nter
estRecei
vabl
e Pxxx
I
nter
estRev
enue Pxxx
NG|
MODULE4 67
DEFERREDREVENUEORUNEARNEDREVENUES
Thi
sistheexactoppositeofaccruedrev
enues.I nthi
scase,paymentisrecei
vedi
nadv ancepri
orto
del
iv
eryofservi
ces,ordel
iv
eryofgoods,thus,creat
ingali
abil
it
yfortheamountcol
lectedinadvanced;
however
,asthecompanyrender
stheservi
ce,theunearnedr
evenuebecomesearnedr
ev enue.
Revenuemethod
Forexampl
e,onAug.1,atenantpai
dit
srentf
oroney
eari
nadv
ancei
ntheamountofP24,
000.Att
he
ti
mecashisrecei
ved,
theent
ryis:
Cash 24,
000
RentRev
enue 24,
000
Whenfi
nanci
alstat
ementispreparedonDec.31,anadjust
menti
snecessarytorefl
ecttheunear
ned
por
ti
onoftherentt
hatcor
respondstotheper
iodJan.12013–Jul
y31,2014.Theadj
usti
ngentr
ywould
be:
RentRev
enue(7/
12x24,000) 14,
000
Unear
nedRent 14,
000
Li
abil
it
yMethod
I
ftheli
abi
l
itymet
hodi
susedt
orecor
dther
ecei
ptofP24,
000,
theent
ryuponr
ecei
ptwoul
dbe:
Cash 24,
000
Unear
nedRent 24,
000
OnDec.31,
theamountear
nedmustber
ecogni
zedasr
evenuet
hroughanadj
ust
ingent
ry.
Unear
nedrent 10,
000
RentRev
enue 10,
000
UNCOLLECTI
BLEACCOUNTEXPENSEORDOUBTFULACCOUNTS
Inanyenter
pri
seselli
ngonaccountt oitscustomers,experienceshowthatsomecustomerswillnotbe
ableto paytheiraccountsast heyf ldue.Uncol
al l
ecti
bleaccounts orbad debtsareaccount sof
customerswhodonotpaywhatt heyhavepromi sedtopay .Theenter
pri
seshouldprov
ideal
lowancefor
uncoll
ect
ibl
e accounts and r
ecognize an expense orloss f rom t
hese account
s.Otherterms for
uncoll
ect
ibl
eaccountsareBadDebt sandDoubt f
ulaccounts.
a. BasedonPercent
ageofSal
esonAccountorser
vicer
evenueonaccountForexample,
the
companyest
imatest
hat2%ofsal
esonaccountar
eproventobeuncol
lect
ibl
e.Theentr
ywoul
d
be:
NG|
MODULE4 68
Uncol
l
ecti
bleaccountexpense xxx
Al
lowanceforuncoll
ecti
bleaccount
s xxx
Theal l
owance f
ordoubtfulaccount
sisacont ra accountwhich i
sdeduct
ed f
rom t
heaccount
s
recei
vabl
einthebal
ancesheett
oarri
veati
tsnetr
eal
izableval
ue.
b. BasedonAccount
sRecei
vabl
eBal
ance
Exampl
e1:Thef ol
l
owi
ngbal
ancesar
eav
ail
abl
efr
om t
her
ecor
dsofMani
l
aPr
emi
erHot
elat
December31,
2013:
Account
sReceivabl
e,12/31 P800,000
All
owanceforuncol
lect
ibl
eaccount
s,1/
1 12,000Cr
.
Servi
ceRev
enueonaccount 2,
500,000
Thecompany
’sest
imat
eforuncol
l
ect
ibl
eaccount
sis2%ofaccount
srecei
vabl
e.
Theadj
ust
ingent
ryr
equi
redt
oref
lectt
heexpensef
ort
hey
eari
s:
Uncol
l
ecti
bleaccountexpense 4,
000
Al
lowanceforuncoll
ecti
bleaccount
s 4,
000
Exampl
e2:Assumet hefoll
owingbalances:
Account
sReceivabl
e,12/31 800,000
All
owanceforuncol
lect
ibl
eaccounts 22,000Cr
.
Servi
cerev
enueonaccount 2,
500,000
Sincether equi
redall
owanceisonl
yP16,000,andthebal
anceoftheal
lowanceaccountis
P22,000,t
heal l
owanceforuncol
l
ect
ibl
eaccount
sshoul
dbereducedbyP6,000.Theadj
ust
ing
entrywoul
dbe:
Al
l
owanceforuncoll
ecti
bleaccounts 6,
000
Uncoll
ecti
bleaccountsexpense 6,
000
DEPRECI
ATI
ON
Depreci
ati
onisthesy stemati
cmeansofal l
ocati
ngthecostoflongli
vedassetoverit
sesti
mated
economicli
fe.Depr
eci ati
ondoesnotnecessari
l
ymeasur ethedecl
ineintheval
ueofanassetbut
i
tshowsonl ytheportionofthecostoftheassetthathasexpi
redduet ousi
ngupt heasset
.The
assetst
hataresubjecttodepreci
ati
onarecaleddepr
l eciabl
easset
s.Thef or
mula:
Depr
eci
ati
onExpense=CostofAsset–Scr
apv
alue/
resi
dualv
alue/
sal
vageval
ue
Estimatedeconomi cli
fe
NG|
MODULE4 69
Costofasseti stheamountofcompanypai dtopurchasetheasset.I
tincludestheinv
oicepri
ce
plustr
ansportati
onchargesandinstall
ati
onf ees.
Scrapvalueistheamountexpectedt ober ecoveredattheendofanasset’susefull
if
e.Iti
salso
call
edresidualval
ueorsalvagev ue.Est
al i
mat edeconomiclif
eisthesameast heest
imated
usefull
if
eofanasset .
Depreci
ationcostorval
ueist hedi
ff
er encebet weenthecostofanassetandi t
sscrapvalue.
Example:Adeli
ver
yequipmentwaspur
chasedonJan.3,2013f
orP600,
000.I
tisest
imat
edt
hat
thevehi
cle’
ssal
vagev
alueattheendof10yrs.I
sP50,
000.
Dep.Expense=600,
000–50,
000 =55,
000/
yr.
10yr
s.
Theadj
ust
ingent
ryonDec.31,
2013wi
l
lbe:
Depr
eci
ati
onExpense 55,
000
AccumulatedDepr
eci
ati
on-
D/E 55,
000
AccumulatedDepr
eci
ati
oni
sacont
raaccount
,whi
chi
srepor
tedasadeduct
ionf
rom t
her
elat
ed
assetaccount
.
Thepr
esent
ati
onoft
heassetandi
tsr
elat
edaccumul
ateddepr
eci
ati
oni
nthebal
ancef
oll
ows:
Deli
veryEqui
pment P 600,
000
Less:Accumulat
edDepr
eci
ati
on 55,
000
Bookv al
ue P 545,
000
Bookv
aluei
sthepar
toft
hecostoft
heassett
hati
snoty
etal
l
ocat
edt
oanexpenseaccount
.
Ref
erences:
Ball
on.Manil
a:Domdane
Publi
Ledesma,EsterL.(
2014).Fi
ewBooklets.Manil
onal
CPA Rev i
ewSchool .
Rante,Gl
ori
aAr adani
el.
ceEnti
ti
es.MandaluyongCit
y:Mil
leni
um
Books,I
nc.
NG| 73
MODULE5
LESSON1THEACCOUNTI
NGCYCLE
Desi
redLear
ningOut
comes
 Under
stand and appl
ythe r
emai
ning st
eps i
n compl
eti
ng cy
cle;
cl
osingent
ries,
post
-cl
osi
ngentri
esandr
ever
singentr
ies.
 Deeperunderst
andi
ngthereasonsandi
mportanceoftheremai
ning
st
eps.
NG| 74
CLOSI
NGENTRI
ES
Closingentr
iesareusuallypreparedattheendofanaccount i
ngper i
odlikeadjusti
ngentr
ies.Notall
accountsarecl osed.Onlythenomi nalaccounts,oft
encalledtempor ar
yaccount sandthedr awi
ng
accountareclosedattheendoft heaccount
ingperi
od.Nominalaccountsaretheaccount
sthatappeari
n
theincomest at
ementlikerev
enueandexpenseaccount s.
At emporar
yaccountissai dtobeclosedwhenanent ryi
smadesucht hatitsbalancebecomeszero.
Closi
ngsimplytr
ansfersthebalanceofoneaccountt
oanot heraccount.I
nthiscase,thebal
ancesoft
he
temporar
yaccountsar etransf
err
edtothecapit
alaccount
.Asummar yaccount–I ncomeandExpense
Summar yisusedtocloset hei
ncomeandexpenseaccounts.
1. Closetheincomeaccounts
Incomeaccountshavecredi
tbalancesbef
oret
heclosi
ngentr
iesareposted.Forthi
sreason,an
entrydebi
ti
ngeachrevenueaccounti
ntheamountofi
tsbal
anceisneededtoclosetheaccount.
Dec31 Rev
enues 67,
700.
00
I
ncome&ExpenseSummar
y 67,
700.
00
2. Closetheexpenseaccount
s
Expenseaccountshavedebitbal
ancesbefor
ethecl
osi
ngent r
iesar
epost
ed.Fort
hisr
eason,a
compoundent ryisneededcredit
ingeachexpenseaccountforit
sbal
anceanddebit
ingthe
i
ncomeandexpensesummar yforthet
otal
.
Dec31 I
ncome&ExpenseSummar y 36,
700.
00
Sal
ariesExpense 15,
600.
00
Suppli
esExpense 3,
000.
00
RentExpense 4,
000.
00
I
nsuranceExpense 1,
200.
00
Uti
li
ti
esExpense 4,
400.
00
Depreciat
ionExpense-
S.V. 4,
000.
00
Depreciat
ionExpense-
Off.
Equp. 1,
000.
00
I
nterestExpense 3,
500.
00
3. Closingtheincomeandexpensesummar y
Afterclosingentri
esinvol
vi
ngthei ncomeandexpenseaccounts,t
hebalanceofthei
ncome
summar yaccountwil
lbeequalt
othepr of
itorl
ossf
ortheper
iod.Aprof
iti
sindi
cat
edbyacredi
t
balanceandal ossbyadebitbal
ance.
Dec31 I
ncome&ExpenseSummar
y 35,
000.
00
XYZ,Capi
tal 35,
000.
00
NG| 75
4. Closethewithdr
awalaccount
Thewi thdr
awalaccountshowst heamountbywhichcapi
tali
sr educedduringt
heper
iodby
withdr
awalsofcashorotherasset
soft
hebusinessbyt
heownerforpersonal
use.
Dec.31 XYZ,
Capi
tal 14,
000.
00
XYZ,
wit
hdr
awal
s 14,
000.
00
POST-
CLOSI
NGTRI
ALBALANCE
Afterpost
ingtheclosingentri
estot hegeneralledgeranothertr
ialbal
ancei sprepared.Thi
sti
me,the
accountsl
eftwit
hbal ancesareallbalancesheetaccountsorpermanentaccount sbecauseal
lnominal
accountsi
ncludi
ngthedr awingaccountshav ezerobalances.Thi
spost-closi
ngtrialbal
ancei
sprepar
ed
tochecktheequali
tyoft heaccounti
ngequat i
onbeforethebalancesoft heassets;li
abi
li
ti
esandcapi
tal
areforwar
dedtothenextaccountingper i
od.Thi
sistheendoft heaccountingperi
od.
XYZCompany
Post
-cl
osi
ngTri
alBal
anceDec.
31,
2014
Cash 22,
200
AccountsRecei vable 17,
300
Suppli
es 15,
000
PrepaidRent 4,
000
PrepaidI
nsur ance 13,
200
Servi
ceVehi cle 420,
000
AccumulatedDepr eci
ati
on-
S.V.Of
fi
ce 4,
000
Equipment 60,
000
AccumulatedDepr eci
ati
on-
O.E. 1,
000
NotesPay able 210,
000
AccountsPay able 53,
000
Salari
esPay able
Ref
erences:
Ball
on.Manil
a:Domdane
Publi
Ledesma,EsterL.(
2014).Fi
ewBooklets.Manil
onal
CPA Rev i
ewSchool .
Rante,Gl
ori
aAr adani
el.
ceEnti
ti
es.MandaluyongCit
y:Mil
leni
um
Books,I
nc.
NG| 76

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