FUNDAMENTALS OF

ACCOUNTANCY,
BUSINESS AND
MANAGEMENT 2

ANALYSIS AND INTERPRETATION OF - is also known as trend analysis. It is a

FINANCIAL STATEMENT
Financial Statement (FS) analysis - is the process
evaluating risks,
performance, financial health, and prospects of a
business by subjecting financial statement data to
computational and analytical techniques with the
objective of making economic decisions.
There are three kinds of FS analysis techniques:
- Horizontal analysis
- Vertical analysis
- Financial ratios
technique that involves the comparison of a
line item (account) over several periods.
- Horizontal Analysis uses financial statements
of two or more periods.
- Horizontal analysis may be performed on all
financial statements, specifically for both the
SFP and SCI.
Formula:
- Peso change = Balance of Current Year –
Balance of Prior Year
- Percentage change = Peso Change / Balance of
1

HORIZONTAL ANALYSIS Prior Year

 VERTICAL ANALYSIS E. Accounts Receivable Turnover - It measures
- It is the preparation of common-size financial the number of times the company can convert
statements. It is a technique that expresses account receivable to cash during the year.
each financial statement line item as a FINANCIAL HEALTH RATIOS - investigate
percentage of a base amount. the company’s solvency and liquidity ratios.
- SFP: the base amount used is total assets. Solvency - refers to the company’s capacity to pay
Common size: SFP shows each line accounts as their long-term liabilities.
a percentage of total assets. From the asset side, Liquidity - intends to measure the company’s ability
we can infer the composition of assets. On the to pay debts that are coming due (short term debt).
other side, we can a. Debt ratio - indicates the percentage of the
determine the company’s financing mix – the company’s assets that are financed by debt.
percentage of asset financed by liability and b. Equity ratio - indicates the percentage of the
equity.
company’s assets that are financed by capital.
- SCI: sales or net sales is used as base amount.
c. Debt to equity ratio - indicates the company’s
Common size: expresses each line as a
reliance to debt or liability as a source of
percentage of sales. net income is the portion of
sales not eaten up by expenses. financing relative to equity.
FINANCIAL RATIOS d. Interest coverage ratio - measures the
Profitability Ratios - measure the ability of the company’s ability to cover the interest
company to generate income from the use of its assets expense on its liability with its operating
and invested capital as well as control its cost. income.
A. Gross profit ratio - reports the peso value of e. Current ratio - ratio is used to evaluate the
the gross profit earned for every peso of sales. company’s liquidity.
B. Operating income ratio - It f. Quick ratio - It does not consider all the
C. measures the percentage of profit earned from current assets, only those that are easier to
each peso of sales in the company’s core liquidate such as cash and accounts receivable
business operations. that are referred to as quick assets.
D. Net profit ratio - This shows how much profit BASIC DOCUMENTS AND TRANSACTIONS
will go to the owner for every peso of sales RELATED TO BANK DEPOSITS
made. KINDS OF BANK ACCOUNTS
E. Return on Asset (ROA) - It is viewed as an SAVINGS ACCOUNT CHECKING
interest rate or a form of yield on asset ACCOUNT
investment. It earns minimal interest is like savings account that
and may have minimum allows withdrawals
F. Return on Equity (ROE) - measures the return
balance requirement. through issuance.
(net income) generated by the owner’s capital Some savings account of bank checks.
invested in the business. come with passbooks,
OPERATIONAL EFFICIENCY - ratio ATM, or debit cards.
measures the ability of the company to utilize its These are intended to Money held under a
assets. provide an incentive for checking account can be
A. Asset turnover - is an indicator of the the depositor to save withdrawn through
efficiency with which the company is utilizing money. issuance of a check
all its assets. The depositor can make Banks usually allows
B. Fixed assets turnover - except that it is focused deposits and withdrawals numerous withdrawals and
on fixed assets only. using the form provided by unlimited deposit under
C. Inventory Turnover - is measured based on the bank. this type of
account.
cost of goods sold and not sales.
Banks usually pay an The interest rate for
D. Days in Inventory - This ratio computes the
interest rate that is higher checking account is
average number of days that inventories are than a checking account or usually lower as compared
held until sold. a current to a savings account.
2

account.
Some savings accounts The account holder or
 have a passbook, in which depositor of a checking  Drawee, the bank, or other financial institution
transactions are logged in account is normally where the cheque can be presented for
a small provided at the end of the payment.
booklet that the depositor month a bank statement BANK STATEMENT
keeps. showing all the deposits
SAMPLE OF BANK STATEMENT
made, checks paid by the
bank, and the
- The date column indicates the date the
balance of the account. transaction was made. The check number
Some savings accounts The depositor is given indicates the details of the check paid by the
charge a fee if the balance easy access to the funds as bank.
falls below a specified compared to a savings - The transaction code is normally a bank code
minimum. account. for the transactions.
- The Debit column represents all charges or
TIME DEPOSIT ACCOUNTS - are investment deduction made by the bank to your account.
placement wherein the depositor agrees not to - The Credit column represents the deposits or
withdraw the funds over the contracted period in additions to your account that was made by
exchange for fixed interest rates which are higher than the bank.
deposit rates. - The Balance column is the running balance
after considering the effect of the transaction
UNIT INVESTMENT TRUST FUNDS (UITF) - to your account.
allows investors to indirectly invest in stocks and NATURE OF BANK RECONCILIATION
bonds. - Is a report which compares the bank balance
as per the company’s accounting records with
KINDS OF BANK FORMS the balance stated in the bank statement.
WITHDRAWAL SLIP- documents the withdrawal - Preparation of bank reconciliation helps in the
from a passbook account. identification of errors in the accounting
 Account Name records of the company or the bank.
 Account Number - Bank reconciliation provides the necessary
 Date of the withdrawal control mechanism to help protect the valuable
 Currency resource through uncovering irregularities
 Amount to be withdrawn. such as unauthorized in bank withdrawals.
- It provides added comfort that the bank
 Signature of the Depositor
transactions have been recorded correctly in
 DEPOSIT SLIP - is a bank form filled up by the
the company’s records.
depositor to document a deposit transaction.
- Assists in regular monitoring cash flow of the
 Account Name – business.
 Account Number –. BANK RECONCILITATION
 Date of Deposit - is the procedure to reconcile the unadjusted
 Type of Account bank and book balances to the correct cash
 Currency balance.
 Amount in words and in figures A. Reconciliating items - that result from timing
CHECK - is a document that orders a bank to pay a differences occurs when transactions are
specific amount of money from a recorded on the banks and the company’s
person's account to the person in whose name the accounting books at different dates.
cheque has been issued. i. Outstanding checks refer to the checks
The parties involved in a transaction that uses check issued and delivered to the designated
as medium of payee but has not yet cleared the bank.
exchange: ii. Deposit in transit refers to the deposits
 Drawer, the person, or entity who makes the that did not meet the bank’s cut-off time
check. and is not recorded in the bank statement
3

 Payee, the recipient of the money. until the following period.

 iii. Collections received directly by the bank
are added to the unadjusted book balance.
iv. Debit and credit memo refers to additions
and deductions from the account that were
not instructed by the depositor. Examples
are interest income, interest expense and
bank service charge.
v. NSF checks are checks dishonored by the
bank because the balance of the issuer’s
checking account is not enough to cover
the amount of the check.
B. Errors - are unintentional mistakes. It should
be carefully analyzed to determine the proper
adjustment to the bank reconciliation.
PRINCIPLES OF TAXATION
TAXATION
- is the process by which the government
collects revenue to pay for its expenses.
INCOME TAX
- is defined as the tax on the net income or the
entire income realized in one taxable year.
National Internal Revenue Code of 1997.
- Governing the tax law in the Philippines.
- The Bureau of Internal Revenue (BIR) is
the primary implementing agency of this law.
Who are required to pay income tax in the
Philippines? (Section 23 of the National Internal
Revenue Code [NIRC] of 1997)
- A citizen of the Philippines, living in the
Philippines, is taxable on all income earned
inside and outside the Philippines.
- A non-resident citizen is taxable only on
income earned in the Philippines.
- An OFW is taxable only on income earned in
the Philippines.
- A foreigner living in the Philippines is taxable
only on income earned in the Philippines.
- A domestic corporation is taxable on all
income derived from sources inside and
outside the Philippines.
- A foreign corporation is taxable only on the
income derived inside the Philippines.
List of sources of gross income: (NIRC 1997
Chapter 6 Section 32 A)
- Compensation for services in whatever form
paid, including, but not limited to fees,
salaries, wages, commissions, and similar
items.
- Gross income derived from the conduct of
trade or business or the exercise of a
profession.
- Gains derived from dealings in property;
(Note: subject to 6% capital gains tax for
individuals and for corporation if land and
building is not used in business)
- Interests; (Note: generally subject to 20% final
withholding tax)
- Rents
- Royalties; (Note: generally subject to 20%
final withholding tax,10% if from books and
literary works)
- Dividends; (Note: generally subject to 10%
final withholding tax for individuals, tax
exempt for corporation)
- Annuities
- Prizes and winnings; (Note: generally subject
to 20% final withholding tax, except those that
are tax exempt based on specific criteria in the
law)
- Pensions.
- Partner's distributive share from the net
income of the general professional
partnership.
Compensation Income
 Employed individuals that earn
compensation income pay their income taxes
monthly. Employers withhold the income tax
of their employees from their monthly gross
income and remit these sums to the BIR.
 Philippine individual income tax is
progressive. The tax rate increases as the tax
base increases which means that tax payers
with more capacity to pay will pay more taxes.
 All individual taxpayers are granted a
personal exemption of P 50,000. Additional
exemptions of ₱ 25,000 are given for each
qualified dependent but only up to four
dependents. For husband and wives with
children, only one spouse can claim the
additional exemption. The husband is deemed
head of the family and will claim the
deduction unless he explicitly waves his right
in favor of his wife.
Withholding income tax for employees:
 Employers are required by law to withhold
income tax dues from their employees ‘salary.
 It is implemented because employees might
not have sufficient cash to pay for their
income tax dues if aggregated to a one-time
annual payment.
4
 The withholding tax deduction is computed
based on the employee’s gross compensation
(net of mandatory contributions to SSS or
GSIS, Philhealth and Pag-ibig Fund), tax
status, timing of compensation payments and
using the published BIR withholding tax table.
 Income tax is computed at the end of the year
based on all compensation income derived
during the year.
 Taxable income is computed after deducting
personal and additional exemptions.
 Applicable tax rate is applied on the taxable
income to get the tax due.
 The total income tax withheld by the employer
is deducted from the tax due to get remaining
tax liability by the employee.
 Taxpayers who derive their income solely
from compensation are required to file BIR
Form 1700 as their income tax returns.
However, to give relief to these taxpayers, the
employee may present BIR Form 2316 as their
income tax return.
 BIR Form 2316 is a statement issued by the
employer and signed by the employee but not
filed with the BIR. This is referred to as
substituted filing.
Business Income
 The tax payments of a business organized as a
sole proprietorship are made in the name of its
owner. The owner is considered an individual
taxpayer who derivedincome from business.
He is required to file BIR Form 1701.
 Businesses may settle their income tax
liabilities and submit their income tax returns
(tax form) to the government three months and
fifteen days from the close of the year.
 Some businesses pay income tax on a
quarterly basis based on their quarter-end
income. Quarterly payments are due sixty days
following the close of the first three quarters
of the year.
 When the tax due is more than ₱ 2,000, the
individual taxpayer may elect to pay the tax in
two equal installments. The first installment
shall be paid at the time the return is filed and
the second installment is paid on or before
July 15 following the close of the calendar
year.
5