ACCOUNTING REPORTING AND ANALYSIS

MIDTERM REVIEWER

Financial
MODULE I: FUNDAMENTALS OF  Receiving deposits, lending and
ACCOUNTING
investing money
Insurance
WHAT IS ACCOUNTING?  Pooling premiums of many to meet
 Is a service activity. claims of a few
 an information system that measures,
processes and communicates financial Form of Business Organization
information about an economic entity.
 a process of identifying, measuring and
communicating economic information to
permit informed judgments and decisions by
users of the information.
 an art of recording, classifying and
summarizing in a significant manner and in
terms of money, transactions and events
which are of a financial character and
interpreting the results thereof. Activities in a Business Organization
Financing Activity
THE FUNDAMENTAL OF BUSINESS MODEL  Obtaining financial and other resources
to be used.

Investing Activity
 Acquisition of other resources to be
used in the transformation process or to
deliver products/services.

Operating Activity
 Use of resources in the transformation
process or to deliver product/services.

Types of Business
Fundamental Concepts
Services
Entity Concept
 Selling people’s time
 Transactions of the business are
Trader
separately accounted for to that of the
 Buying and selling products owner’s.
Manufacturing
 Designing products, aggregate Periodicity Concept
components and assembling finished  An entity’s life divided into equal time
products periods for the purpose of reporting.
Raw materials
 Growing or extracting
Infrastructure
 Selling the utilization of infrastructure
 ACCOUNTING REPORTING AND ANALYSIS
MIDTERM REVIEWER
Stable Monetary Unit Concept
 The purchasing power of the unit of
measure (Philippine peso) is assumed
to be relative stable.
Going Concern
 Financial Statements are normally
prepared on the assumption that the
entity is a going concern and will
continue in operation for the foreseeable
future.
Basic Principles
 Objectivity Principle
 Historical Cost
 Revenue Recognition Principle
 Expense Recognition Principle
 Adequate Disclosure
 Materiality
 Consistency Principle
Purpose and Phases of Accounting
 Measure
o Recognition issue (when)
o Valuation issue (what)
o Classification issue (how)
 Record
 Summarize
Generally Accepted Accounting Principles
(GAAP)
Encompasses the conventions, rules and
procedures necessary to define accepted
accounting practice.
3 criteria:
 Relevance
o Meaningful and useful to the users.
 Objectivity
o Not influenced by personal judgment
of those who furnished it.
 Feasibility
o Can be implemented without
complexity and undue cost.
Objective of General Purpose Financial
Statement
 Provide financial information about the
entity that is useful to its users.
Users of the Financial Statement
Primary Users
 Need information about the resources and
claims against the resources for the entity
not only to assess an entity’s prospectus for
future net cash inflows but also how
effectively and efficiently management has
discharged their responsibilities to use the
entity’s existing resources.
External vs. Internal Users
 External Users
o Individuals and others that have
current or potential financial interest
in the reporting entity but are not
involved in the daily operations of
the entity.
 Internal Users
o Users having specific goals
designed to help the entity primarily
for planning and control decisions to
achieve strategic goals.
MODULE II: THE ACCOUNTING EQUATION
AND DOUBLE-ENTRY SYSTEM
The Accounting Equation
Assets = Liabilities + Owner’s Equity
Assets
 Resource controlled by the enterprise as a
result of past events and from which future
economic benefits are expected to flow to
the enterprise.
Liabilities
 ACCOUNTING REPORTING AND ANALYSIS
MIDTERM REVIEWER

 Is a present obligation of the enterprise  The liability is due to be settled within twelve
arising from past events, the settlement of months after the reporting period;
which is expected to result in an outflow  The entity does not have an unconditional
from the enterprise of resources embodying right to defer settlement of the liability for at
economic benefit. least 12 months after the reporting period.
LIABILITIES
Owner’s Equity Current Liabilities Non-Current
 Residual interest in the assets of the Accounts Payable Mortgage Payable
enterprise after deducting all its liabilities. Notes Payable Bonds Payable
Accrued Liabilities
Current Assets Accounts Receivable
An entity shall classify assets as current when: Unearned Revenues
Current Portion of a
 It expects to realize the asset, or intends to
Long –
sell or consume it, in its normal operating term debt
cycle;
 It holds the asset primarily for the purpose Owner’s Equity
of trading; Capital
 It expects to realize the asset within twelve  This account is used to record the original
months after the reporting period. and additional investments of the owner of
 The asset is cash or cash equivalents (PAS the business.
No. 7) unless asset is restricted from being Withdrawal
exchange or used to settle a liability for at  When the owner of a business entity
least 12 months after the reporting period. withdraws cash or other assets.
Income Summary
ASSETS  temporary account used at the end of the
Current Assets Non-Current Assets accounting period to close income summary
Cash Property, Plant and and expenses
Equipment
Cash Equivalents Accumulated
Chart of Accounts
Depreciation
 A listing of all the accounts and their
Notes Receivable Intangible Assets account numbers in the ledger.
Accounts Receivable  It is arranged in financial statement order.
Allowance for  The account should be numbered in a
Uncollectible Accounts flexible manner.
Inventories  If an account title is not listed in the chart,
Prepaid Expense an additional account may be added.

Current Liabilities
An entity shall classify liabilities as current when:
 It expects to settle the liability in its normal
operating cycle;
 It holds the liability primarily for the purpose
of trading;
 ACCOUNTING REPORTING AND ANALYSIS
MIDTERM REVIEWER

Types of Transactions
Source of Assets:
 An asset account increases and a
corresponding claims (liabilities or owner’s
equity) increases.
Exchange of Assets:
 One asset account increases and another
asset account decreases.
Use of Assets:
 An asset account decreases and a
corresponding claims (liabilities or equity)
account decreases.
Exchange of Claims:
 One claims (liabilities or equity) account
Rule on Debit and Credit increases and another claims (liabilities or
 An account is debited (Dr) when an amount equity) account decreases.
is entered on the left side of the account
and credited when an amount is entered on
the right side.
 Normal Balance of any account refers to the
side of the account, whether debit or credit,
where increases are recorded.

Normal Balance of an Account

Account Category Normal Balance
Debit Credit
Assets 
Liabilities 
Owner’s Equity
Owner’s Capital 
Withdrawals 
Income 
Expenses  MODULE III: Journalize Transaction, Posting and
Preparation of the Trial Balance
Effects of Business Transaction in Accounting
Equation
ACCOUNTS The Journal
Debit Credit  A chronological record of the entity’s
Increases in Assets: Increases in Liabilities;
transactions.
Expenses Owner's Capital; Income
Decreases in Liabilities; Decreases in Assets;  Shows all the effects of a business transaction in
Owner's Capital; Income Expenses terms of debits and credits.
 “book of original entry”
 ACCOUNTING REPORTING AND ANALYSIS
MIDTERM REVIEWER

Format: Trial Balance

 A list of all accounts with their respective
debit or credit balances.
 Verify the equality of debits and credits
Single Entry vs. Compound Entry
Procedure:
 List the account titles in numerical order.
 Transfer the balances of each account from
the general ledger to the trial balance
accordingly.
 Add amounts on each column.
 Totals must be balance.
The Ledger
 A grouping of the entity’s account.
 Classify and summarize transactions and to
prepare data for basic financial statements
 “reference book”
 Posting: transferring the amounts from the
journal to the appropriate accounts in the
ledger.

Format:

Other format:
T-Accounts MODULE IV: PREPARATION OF THE
WORKSHEETS AND ADJUSTING ENTRIES

Accrual Basis
 The effects of transactions and other events
General Ledger are recognized when they occur and not as
received or paid.
 Revenue is recognized as they are
earned and expenses as they are
incurred.
 The financial statements except for cash
flow statement are prepared on the
accrual basis of accounting in order to
meet their objective.
 ACCOUNTING REPORTING AND ANALYSIS
MIDTERM REVIEWER

Cash Basis
 Does not record a transaction until cash is
received or paid.
 Cash receipts are treated as revenues and
cash payments as expenses.

Periodicity Concept
 To provide timely information, accountants Unearned Revenues
have divided the economic life of business On July 1, 2018, Gutierrez Company received a
into artificial time periods. P48, 000, check for 2 years rent paid in advance.
 Calendar year: annual period ending On this date, Gutierrez may record the transaction
December 31. as follows
 Fiscal year: is a period of any 12
consecutive months.
 Natural business year: 12 month period that
ends when business activities are at their
lowest level of the annual cycle.
 Interim Period: less than 12 months

Deferrals and Accruals The Worksheet

 Deferral: postponement of the recognition of
an expense already paid but not yet
incurred or of revenue already collected but
not yet earned.
 Accrual: is the recognition of an expense
already incurred but unpaid or revenue
earned but uncollected
Alternative Methods of Recording Deferrals
Prepaid Expenses
 Asset Method
 Expense Method
Unearned Revenues
 Liability Method
 Income Method
Prepaid Expenses
On October 1, 2018, Gutierrez acquired a 3 year
insurance policy for P36, 000 paid in advance.
Gutierrez may record this transaction depending on
which of the two accounting policies it follows.
 Help transfer data from the unadjusted trial
balance to the financial statements.
 Simplifies the adjusting and closing process;
it can reveal errors.
 Not part of ledger or journal nor is it a
financial statement.
 It is a summary device for convenience
Preparing the Worksheet
Step 1: Enter the account balances in the
unadjusted trial balance columns and the total
amounts.
Step 2: Enter the adjusting entries in the
adjustments columns and total the amount.
Step 3: Compute each account’s adjusted balance
by combining the unadjusted trial balance and
adjustment figures. Enter the adjusted amounts in
the adjusted trial balance columns.
Step 4: Extend the asset, liability and owner’s
equity amounts from the adjusted trial balance
sheet columns. Extend the income and expense
amounts to the income statement columns. Total
the statements columns
Step 5: Preparation of the worksheet including
adjusting entries