ACCOUNTING DEFINITION Ledger – “book of final entry”

– is a systematic compilation of a group of

1. American Association of accounts.
Accountants (AAA) ● General ledger – contains all accounts
appearing in the financial statements.
Accounting is a process of
● Subsidiary ledger – supporting ledger for
1. identifying,
controlling accounts in the general ledger.
2. measuring, and
Example of SL: Accounts payable
3. communicating economic information
ledger, Accounts receivable ledger,
to permit informed judgments and decisions
inventory ledger
by users of the information.

2. Accounting Standard Council (ASC)

ACCOUNT
Accounting is a service activity.
Account is the basic storage of information in
Its function is to provide quantitative accounting
information primarily financial in
nature which helps users make informed TYPES:
decisions. 1. Real / 2. Nominal/
Permanent Temporary
3. American Institute of Certified accounts accounts
Balance Sheet Income Statement
Public Accountants(AICPA)
Accounts Accounts
accounts that are not accounts that are
Accounting is an art of closed at the end of closed at the end of
1. recording, the accounting period. the accounting period.
2. classifying, These are the These include all
3. summarizing, and accounts found in the income and expenses
statement of financial accounts, drawings
4. interpreting
position and dividends
financial information. accounts, clearing
accounts and suspense
accounts.
ACCOUNTING CYCLE
1. Identifying and analyzing transactions 3. Mixed accounts
2. Journalizing are accounts that have both real and
3. Posting nominal account components.
4. Preparing the unadjusted trial balance Example: Prepaid insurance, of which
5. Preparing the adjusting entries a part has expired but not yet
6. Preparing the adjusted trial balance recorded as expense
7. Preparing the financial statements
8. Closing the books 4. Contra accounts
9. Preparing the post-closing trial balance are accounts that are deducted from
10. Preparing the reversing entries a related account
Example: depreciation, allowance for
doubtful accounts
ACCOUNTING RECORDS
5. Adjunct accounts
Journal – “book of original entry” are accounts that are added to a
● General Journal –used to record related account
transactions other than those that are Example: premium on bonds payable
recorded in the special journals.
● Special Journal – used to record TRIAL BALANCE
transactions of a similar nature.
Trial Balance is a list of general ledger
Example of Special Journal: cash accounts and their balances.
receipts journal, cash disbursements
journal, payroll journal, purchases It is prepared to check the equality of total
journal and sales journal debits and total credits in the ledger.

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Intermediate Accounting 1 NOTES
By JLB
Example of Trial Balance

Simpler

Actual Trial Balance

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Intermediate Accounting 1 NOTES
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 Methods of Initial Recording of income and
ADJUSTING ENTRIES Expenses

Adjusting entries are entries made prior to INCOME

the preparation of financial statements to Liability Method Income Method
update certain accounts so that they reflect liability account is an income account
correct balances as of the designated time. credited for the is credited for the
receipt of the receipt of the
Example: To record purchase of inventory in income. income.
account EXPENSE
Asset method Expense method
Entry made the original the original
payment is debited payment is debited
to an expense to an asset
Inventory 50,000.00
account account.
A/P 50,000.00

Should be Reversing entries

Inventory 500,000.00 Reversing entries may be made on the
A/P 500,000.00 following:
(a) all accruals,
Adjusting entry/Correcting Entry (b) prepayments initially recorded
Inventory 450,000.00 using the expense method, and
A/P 450,000.00 (c) unearned income initially
recorded using the income method.
FINANCIAL STATEMENTS

Financial statements are the means by which

the information accumulated and processed
in financial accounting is periodically
communicated to the users.

A complete set of financial statements

consists of:

1. Statement of financial position;

2. Statement of profit or loss and other
comprehensive income;
3. Statement of changes in equity;
4. Statement of cash flows;
5. Notes;
(5a) Comparative information; and
6. Additional statement of financial position
(required only when certain instances occur).

Example:
https://www.sanmiguel.com.ph/storage/
images/article/file/SMC%20AR
%202020_0601Aforweb.pdf

click the link above for an actual complete

set of Audited Financial Statements of San
Miguel Corporation for the years ended
December 31, 2020, 2019 and 2018.
The Complete Set of FS can be found in page
53 to 216.

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Intermediate Accounting 1 NOTES
By JLB
 identification of events as to
Review Questions: whether they are recognized or not
in the financial statements.
A. Types of accounts. Identify the a. Identifying
accounts below b. Measuring
a. Real Account c. Communicating
b. Nominal Account d. Auditing

1. Cash 3. The following statements correctly

2. Sales refer to the accounting process.
3. Sales returns I. Measuring is the accounting
4. Accounts Receivable process of analyzing business
5. Accounts payable activities as to whether or
6. Rent expense not they will be recognized in
7. Interest expense the books.
8. Salaries and wages II. Recognition refers to the
9. Bonds payable process of including the
10. Investments effects of an event in the
totals of the statement of
B. Theory of Accounts financial position or the
statement of profit or loss
1. Accounting has been given various and other comprehensive
definitions, which of the following is income through memo
not one of those definitions entries.
III. Disclosure of events in the
A. Accounting is a service activity. notes to financial statement
Its function is to provide without including in the totals
quantitative information, of the statement of financial
primarily financial in nature, position or statement of
about economic entities that is profit or loss and other
intended to be useful in making comprehensive income is not
economic decisions. an application of the
B. Accounting is the art of recognition principle.
recording, classifying, and IV. An accountable event is an
summarizing in a significant event that has an effect on
manner and in terms of money, the assets, liabilities or
transactions and events which equity of an entity and its
are, in part of at least, of a effect can be measured
financial character and reliably.
interpreting the results thereof. V. Sociological and psychological
matters are within the scope
C. Accounting is a systematic
of accounting
process of objectively obtaining
and evaluating evidence
a. I, II, III, IV, V
regarding assertions about
b. I, II, III, IV
economic actions and events to
c. IV
ascertain the degree of
d. III, IV
correspondence between these
assertions and established criteria
4. The basic purpose of accounting is
and communicating the results to
a. to provide information useful in
interested users.
making economic decisions
D. Accounting is the process of b. to provide information useful only
identifying, measuring, and for investors
communicating economic c. to provide information regarding
information to permit informed the economic resources
judgment and decisions by users controlled by an entity
of information. d. to provide business owners,
politicians, and other government
2. It is the first process used in
accounting. It refers to the
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Intermediate Accounting 1 NOTES
By JLB
 officials an opportunity to evade An entity prepays a ₱240,000 one-year
taxes insurance on August 1, 20x1.

9. If the entity uses the asset method

of initial recording, the 20x1 year-
end adjusting journal entry includes
a. a credit to prepaid insurance
for ₱140,000
C. liability Method vs. Income Method b. a credit to insurance expense
for ₱140,000
Use the following information for the next c. a credit to prepaid insurance
four questions: for ₱100,000
An entity receives ₱360,000 advance rent d. d. a debit to prepaid
covering 3 years starting January 1, 20x1. insurance for ₱140,000

5. If the entity uses the liability method

of initial recording, the 20x1 year- 10. If the entity uses the expense
end adjusting journal entry includes method of initial recording, the 20x1
year-end adjusting journal entry
a. a debit to rent income for includes
₱120,000 a. a debit to prepaid insurance
for ₱140,000
b. a credit to unearned rent for
₱240,000 b. a credit to insurance expense
for ₱140,000
c. a debit to unearned rent for
₱120,000 c. a debit to prepaid insurance
for ₱100,000
d. a credit to rent income for
₱240,000 d. a debit to insurance expense
for ₱140,000
6. If the entity uses the income method
of initial recording, the 20x1 year-
end adjusting journal entry includes
a. a debit to rent income for
₱240,000
b. a credit to unearned rent for
₱120,000
c. a debit to unearned rent for
₱240,000
d. a credit to rent income for
₱120,000

7. If the entity uses the income method

of initial recording, how much is the
rent income for the year 20x1?
a. 240,000
b. 180,000
c. 120,000
d. 80,000

8. If the entity uses the liability

method of initial recording, how
much is the unearned rent as of
December 31, 20x1?
a. 240,000
b. 180,000
c. 120,000
d. 80,000

D. Asset method vs. Expense method

Use the following information for the next

four questions:
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Intermediate Accounting 1 NOTES
By JLB