FINANCIAL ACCOUNTING AND REPORTING I

CHAPTER 1: ACCOUNTING CONCEPTS AND PRINCIPLES

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

(GAAP)
- It is a set of rules and standards that guide 11. COMPARABILITY
accountants in the application of accounting and the - one accounting period (present) must be
preparation of financial statements comparable to another period (past) to
- It is also known as the characteristics of a financial draw meaningful conclusions and decisions
statement
1. RELEVANCE 12. CONSISTENCY
- users of the financial statement provide a - accounting methods must be applied
decision correctly, be it in the present or consistently
future circumstances that are based on the - in changing accounting policies, one must
past performance of the organization properly disclose it in the notes to the
2. RELIABILITY financial statements
- the user of the information can depend on it 13. UNDERSTANDABILITY
to be accurate and faithfully represented - transactions and events must be presented
3. MATCHING PRINCIPLE in the financial statements in a way that are
- revenues and expenses must be recognized easily understandable by the users
and charged to the income statement in the 14. MATERIALITY
accounting period in which these are earned - financial statements should have no
(revenues) and incurred (expenses) material omission or misstatement
4. TIMELINESS 15. GOING CONCERN
- accounting information must be presented - the assumption that a business entity will
to the users on time operate as a going concern or will continue
5. NEUTRALITY to operate in the foreseeable future
- information should reflect a view that is fair 16. ACCRUALS CONCEPT
and balanced - financial statements are prepared where
6. FAITHFUL REPRESENTATION income and expenses must be recognized in
- transactions and events should be the accounting periods in which these are
accounted for in their true economic incurred
substance rather than their legal form 17. SUBSTANCE OVER LEGAL FORM
7. PRUDENCE - transactions and events must be recorded in
- accountants should exercise a degree of the financial statements in their economic
caution in making significant estimates on substance (faithful representation)
the valuation of assets and recording of 18. REVENUE RECOGNITION PRINCIPLE
income (not overstated) and expenses (not - application of accruals concept in
understated) recognition of revenue (income)
8. COMPLETENESS - revenue is recognized when it is earned
- financial statements are reliable if they are regardless of whether payment for the sale
completely provided to the users and has been received or not by the seller
decision-makers
9. SINGLE ECONOMIC UNIT ENTITY
- companies associated with each other
should be regarded as a single economic
unit and therefore should present one
consolidated financial statement to
represent group
10. MONEY MEASUREMENT CONCEPT
- transactions and events when recorded in
the books of accounts should be measured
in monetary terms
FINANCIAL ACCOUNTING AND REPORTING I
CHAPTER 2: REVIEW OF THE ACCOUNTING PROCESS

ACCOUNTING ★ all withdrawals of assets made by the owner from the

- an accountant provides services and furnishes business decrease the capital account of the owner
quantitative information expressed in terms of money ★ all supplies taken from the inventory and used by the
that is useful to the users of the accounting business in the operation will be charged as
information. expenses, thus reducing the capital account of the
- the information is outlined in reports called financial owner
statements
BRANCHES OF ACCOUNTING
1. financial accounting — provides accounting
information for all parties external to the operating
responsibility of the company; the process of
preparing accounting reports known as financial
statements; for external users
2. managerial accounting — provides accounting
information and operational needs for use by the
internal users, and the management; involves THE ACCOUNTING CYCLE
financial analysis, budgeting and forecasting, cost - also known as the accounting process, refers to a
analysis, and evaluation of business decisions series of steps accountants perform during an
AREAS OF ACCOUNTING accounting period for the orderly accumulation,
1. Public Accounting reporting, and interpretation of data about the
2. Private Accounting financial operations of the business
3. Government Accounting - the functions of accounting can be summarized as
4. Tax Accounting the recording, classifying, summarizing, and
5. Cost Accounting interpreting of business data
6. Auditing 1. Documentation
7. Accounting Education - documents are needed to serve as a basis
8. Accounting Research for recording the transactions
2. Journalizing
THE ACCOUNTING EQUATION
- transactions are first recorded in the book of
original entries called the general journal
3. Posting
- the information from the journal is then
transferred to the book of final entries called
the general ledger
4. Preparation of the trial balance
5. Compilation of data needed for adjustments
6. Preparation of the worksheet
7. Preparation of the Financial Statements
8. Adjusting entries are journalized and posted to the
ledger
9. Preparation of the post-closing trial balance
10. Reversing entries are journalized and posted to the
ledger
- the basic tool of accounting
- the left side of the equation (assets) shows the
resources owned by the business
- the right side of the equation (liabilities and capital)
shows the resources that are applied to the business
by the outside creditors and the owners
EFFECTS OF BUSINESS TRANSACTIONS IN THE
ACCOUNTING EQUATION
★ all revenues and income increase the capital of the
owner in the accounting equation
★ all expenses incurred by a business decrease the
capital account of the owner
FINANCIAL ACCOUNTING AND REPORTING I
CHAPTER 2: REVIEW OF THE ACCOUNTING PROCESS

ADJUSTING ENTRIES 6. Uncollectible Accounts

1. Accrued Expense - estimated amounts due from customers
- expenses incurred in one period but remain that may no longer be collected and are
unrecorded and unpaid considered to be as bad debts

2. Accrued Income
- revenues earned in one period but remain
unrecorded and not received; revenue is
recognized in advance

3. Prepaid Expense
- expenses paid by the business in advance

7. Merchandise Inventory
- these represent goods on hand and
4. Unearned Revenue/Income available for sale in the ordinary course of
- revenues already collected in cash by the the business
business but the revenues are not yet ● Periodic Inventory System
earned - relies upon the physical count of
the inventory to determine the
ending inventory balance

5. Depreciation of PPE
- systematic allocation of the cost of the fixed
asset over its useful life; the account
credited is the account Accumulated
Depreciation
● Perpetual Inventory System
- purchases and sales of
merchandise are recorded in the
Merchandise Inventory account
and the Cost of the Merchandise
sold account
- the balances of the merchandise
inventory and the cost of goods
accounts are always updated

● FOB Shipping Point — the buyer pays for the
freight from point of shipment to the buyer's
warehouse
Freight Collect: from seller's warehouse to
the shipping point - the seller owns the
product and shoulders the transportation
costs
Freight Prepaid: from the shipping point up
to the buyer's warehouse, the buyer
shoulders the transportation costs
● FOB Destination Point — the seller shoulders
the freight costs up to the warehouse of the
buyer
Freight Collect: the seller did not pay the
freight cost and the buyer will pay upon the
arrival of the goods, then buyer collects the
freight costs from the seller
Freight Prepaid: the seller paid the
transportation costs already
● Freight In — transportation cost shouldered
by the buyer
● Freight Out — transportation costs
shouldered by the seller
PREPARING A WORKSHEET
- contains the data in the trial balance, the
adjustments compiled, and the developed income
statement and statement of financial position data
- it contains four columns: trial balance data,
adjustments, income statement data, and statement
of financial position data; another pair of columns for
adjusted trial balance is added following the
adjustments columns
FINANCIAL STATEMENTS
1. Statement of Financial Position
- also known as the Balance Sheet, shows the
business's financial condition as of a specific
date
2. Statement of Comprehensive Income
- also known as the Profit and Loss Statement,
presents the income, expenses, and
operating result (profit or loss)
3. Statement of Cash Flows
- shows the cash movement (input and
output) over a period and is classified as
either under operating, financing or investing
activities
4. Statement of Changes in Owner’s Equity
- shows the summary of changes (increases
or decreases) affecting the equity of the
owner/s
5. Notes
ADJUSTING AND CLOSING ENTRIES
- closing entries are prepared to reduce the nominal
account balances to zero on the general ledger
● Nominal Accounts — include revenue, expense,
owner’s drawing, and income summary accounts
● Real or Permanent Accounts — include the assets,
liability, and the owner’s equity (capital) accounts
1. revenue and expense account balances are
transferred to the Income Summary account
2. the income Summary balance is then transferred to
the owner’s equity or capital account.
3. the owner’s drawing account is also transferred to the
owner’s capital account
★ the income Summary balance is then transferred to
the owner’s equity or capital account
FINANCIAL ACCOUNTING AND REPORTING I
CHAPTER 3: MERCHANDISING BUSINESS

MERCHANDISING BUSINESS DISCOUNTS AND CREDIT TERMS

- the revenue activities of a merchandising business 1. Purchase Discount
involve the buying and selling of goods or 2. Sales Discounts
merchandise to its customers
3. Trade Discount
- except for the merchandise-related accounts, the
4. Cash Discount — given to buyers of merchandise if
accounting cycle for both types of business activities
is the same payment is made within the discount
a. 2/10, n/30 — the customer shall have a 2%
discount if the account is paid within 10 days,
if not, the account is payable in 30 days
b. n/30 — buyer should pay in 30 days
c. 10 EOM — buyer must pay within 10 days after
the end of the month of invoiced
d. 2/10, EOM, n/60 — a 2% discount is deducted
VALUE-ADDED TAX (VAT) if the account is paid 10 days after the end of
- a type of sales tax that is levied on the consumption the month, if not the account is payable in
on the sale of goods, services, or properties, as well as 60 days
goods imported into the Philippines e. 5, 2/10, n/30 — this means that a 5% trade
- a 12% value-added tax rate is levied on goods and is discount is deducted from the list price. In
recorded as a separate account in recording the sale addition, a 2% discount is deducted if the
and purchase transactions account is paid 10 days after the end of the
month, if not, the account is payable in 30
days
SPECIAL JOURNALS
- records one particular type of transaction that occurs
frequently, such as sales on account, cash receipts,
● Output VAT — the value-added tax the seller passed purchases on account, or cash disbursements
on to the buyer and is classified as a liability account 1. Sales Journal — used to record all sales of
● Input VAT — the value-added tax the buyer paid on merchandise on account (on credit)
the purchase 2. Cash Receipts Journal — used to record all inflows or
★ the excess of output tax over input tax is the Value receipts of cash into the business
added tax due and payable to the Bureau of Internal 3. Purchases Journal — used to record all purchases of
Revenue and is to be remitted by the company within merchandise and other items on account (on credit)
25 days of the following month 4. Cash Payments Journal — used to record all
payments (or outflows) of cash by the business
★ all five of these journals are books of original entry
★ if a transaction is recorded in a special journal, it
should not be recorded in the general journal