01 - Financial Accounting

ACCOUNTING FOR NON-
ACCOUNTANTS
Public Management Development Program

Public Finance and Budgeting Module
The Financial Statements

At the end of the session, you shall be
able to:
 State the types of financial statements (FS);
 Describe the format and purpose of the following FS:
1.Statement of Financial Position

2.Statement of Financial Performance
3. Statement of Cash Flow
4.Statement of Changes in Net Assets/ Capital
5. Notes to FS
6. Statement of Comparison of Budget and Actual
Amount

Financial Statements
--- are the principal

means by which
important and relevant
financial information
about a business
entity/organization are communicated
to interested parties (users) for their
decision-making.

Statement of Financial Position
- is the statement which

shows the business
entity’s/organization’s
financial condition/
status as of a given
date.

Other Uses of Statement of Financial Position
1. Provides useful data/relevant information
• Evaluation of liquidity
• Evaluation of financial flexibility
2. Basis for predicting/ forecasting future

events
3. Useful means for:

•Controlling solvency
•Analyzing cost of new financing activities
•Determining the flexibility available for altering
basic capital structure

Definition
Assets
Items of value or resources owned by
the economic unit (or business entity or
organization) which are measurable in
monetary terms. These are classified into
Current and Non-Current

Assets
Cash
Accounts Notes
Receivable Receivable
Resources
owned or
Vehicles controlled Land
by an Entity
Buildings
Supplies
Equipment

Public Finance and Budgeting Module Slide 2.5
Definition
Liabilities
Debts owing to outside parties or
creditors for assets or services acquired
with the promise to pay at some future
time. These are classified into Current
and Non-Current.

Liabilities
Accounts Notes
Payable Payable
Creditors’
claims on
assets
Benefits Wages
Payable Payable

Definition
Equity/Capital
The residual interest in the assets of
a corporation after deducting all its
liabilities

Equity/Capital
Capital Drawings
Entity’s
claims
on
Revenues assets Expenses
Losses

Sample SFP C & C Company
Statement of Financial Position
December 31, 2016
Assets
Current Assets:
Cash P xxx.xx
Accounts Receivable P xxx.xx
Lees: Allowance for Bad Debts xx.xx xxx.xx
Total Current Assets P xxx.xx
Non-Current Assets:
Marketable Securities /1 P xxx.xx
Total Non-Current Assets P xxx.xx
Property, Plant & Equipment:

Building P xxx.xx
Less: Accum. Depreciation-Building xxx.xx xxx.xx
Furniture and Fixtures P xxx.xx
Less: Accum. Depreciation-F&F xxx.xx xxx.xx
Total Property, Plant & Equipment P xxx.xx
Other Assets: P -
TOTAL ASSETS P______________xxx.xx
Liabilities and Owner’s Equity

LIABILITIES
Current Liabilities:
Accounts Payable P xxx.xx
Notes Payable xxx.xx
Tax Payable xxx.xx
Total Current Liabilities P xxx.xx
Non-Current Liabilities:
Loans Payable P xxx.xx
Other Liabilities:
Other Payables P xxx.xx
TOTAL LIABILITIES P xxx.xx
EQUITY/Capital
C&C Company, Equity ( December 31, 2015) P______________ XX.XX
TOTAL LIABILITIES & EQUITY P______________XX.XX
/1 Marketable Securities that are readily marketable are shown under Current Assets.

C and C Company
Statement of Changes in Capital
For the Year ended December 31, 2016
Capital, January 1 P 385,000

Add net increase in
Capital
Net Income P 79,200
Less : C and C
drawings 5,000 74,200
Capital, December 31 P 459,200

Definition
Income
Gross increase in the owner’s equity or amounts
of assets that a business unit or economic entity
gains as a result of its operations or business
activities.

Definition
Expenses
Costs associated with earning revenue. These are
either costs of assets consumed or services
rendered/used in the process of earning revenue.

Expenses include the following:
a. Cost of Sales
b. Distribution or Selling Expenses
c. Administrative Expenses
d. Other Operating Expenses
e. Income tax Expense

Sample Statement of
Income and Expenses C & C Company
Statement of Financial Performance
For the year ended December 31, 2016
Sales Revenue/Income P xxx.xx

Less: Sales Returns & Allowances xxx.xx
P xxx.xx
Less: Cost of Sales:
Inventory, Beginning P xxx.xx
Add: Purchases P xxx.xx
Plus Freight In xx.xx
P xxx.xx
Less: Purchase Returns
& Allowances xxx.xx xxx.xx
Total goods available for sale P xxx.xx
Less: Inventory, End xxx.xx xxx.xx
Gross Income/Profit P xxx.xx
Less: Operating Expenses
Salaries and wages P xxx.xx
Rent Expense xxx.xx
Water, Light & Power xxx.xx
Insurance Expense xxx.xx
Supplies Expense xxx.xx
Depreciation Expense xxx.xx
Bad Debts Expense xxx.xx
Miscellaneous Expense xxx.xx xxx.xx
Net Income/Profit before tax xxx.xx

Less: Taxes xxx.xx
Net Income/Profit P xxx.xx
==========

Statement of Cash Flow :
--isis aa statement
statement which
which shows
shows the
the inflows
inflows and
and
outflows of cash and cash equivalents.
outflows of cash and cash equivalents.
CASH-comprises
CASH-comprises cash
cash on
on hand
hand and
and demand
demand
deposits
deposits
CASH EQUIVALENTS - - are are short-term,

CASH EQUIVALENTS short-term, highly
highly liquid investments
that are that are readily
liquid investments readily convertible
convertible to known amounts
and of cash to
and
to known amounts of cash subject an
subject to an insignificant risk of changes in
insignificant risk of changes in value.
value.

PURPOSE OF STATEMENT OF CASH FLOW
• To provide relevant information on the

inflows and outflows of cash of the agency
during the year.

Classification of Cash Flows:
1. OPERATING ACTIVITIES
Derived primarily from the

principal revenue producing
activities of the enterprise.
Generally result from
transactions that enter into the
determination of net income or
loss.

2. INVESTING ACTIVITIES
Include cash transactions covering

non-operating assets, such as:
purchase of property and
equipment; short and long term
investments; and other non-current
assets.

3. FINANCING ACTIVITIES
Activities that result in

changes in the size and
composition of the equity
capital and borrowings of the
enterprise

EFFECTS ON CASH
of the
Three Main Types of Activities
OPERATING OPERATING
(receipts from revenues) (payment for expenses )
INVESTING INVESTING
(receipts from sale of CASH (payment for acquiring
non-current assets) non-current assets)
FINANCING FINANCING
(receipts from issuing equity (payment for treasury stocks,
& debt securities) dividends, & redemption of
debt securities)

Notes to Financial Statements:
A. Acquisition of subsidiary
During the period, the company acquired Subsidiary X. The fair market value of the asset acquired and liabilities
assumed were as follows:
Cash P xx.xx
Inventories xx.xx
Accounts Receivable xx.xx
Property, Plant * Equipment xx.xx
Trade payable ( xx.xx)
Long-term debt ( xx.xx)
Total purchase price xx.xx
Less: Cash of X ( xx.xx)
Cash flow on acquisition: xx.xx
=======
B. Property, Plant & Equipment
During the period, the company acquired property, plant & equipment with an aggregate cost of P xx.xx of
which Pxx.xx was acquired by means of finance leases. Cash payments of Pxx.xx were made to purchase
property, plant & equipment.
C. Cash & Cash Equivalents
Cash and cash equivalents consist of cash on hand and balances with banks, and investments in money market
instruments. Cash & cash equivalents included in the cash flow statement comprise the following balance
sheet amounts:
Cash on hand and with banks xx.xx

Short-term investments xx.xx
Cash & cash equivalents as previously reported xx.xx
Effect of exchange rate changes ( xx.xx)
Cash & cash equivalents, as restated xx.xx
======

Learning Objectives
At the end of the session, you shall be able to:
 describe the meaning of accounting;
 state its scope, purposes and uses;
 identify the elements of accounting
 describe the relationship between

assets, liabilities, equity, revenue and
expenses through the accounting
equation; and
 analyze the effects of transactions
on the accounting equation.
Accounting defined . . .
The art of recording, classifying,
and summarizing in a significant
manner and in terms of money,
transactions and events which
are, in part at least, of a financial
character, and interpreting the
results thereof.
(Committee on Terminology, AICPA)

Concepts of Accounting
Accounting defined . . .
American Accounting Association –
- is the process of identifying, measuring
and communicating economic
information to permit informed judgment
and decision by users of the information.

Components of Accounting
1. Identifying – analytical component; event

is accountable or quantifiable when it
has an effect on assets, liabilities and
equity (economic activity or transactions )
2. Measuring - technical component;

assigning of peso amounts to the
accountable economic transactions and
events

Components of Accounting
3. Communicating - formal component;

process of preparing and distributing
accounting reports to potential users of
accounting information

Accounting Concepts
1. Entity theory – the objective is geared
toward proper income determination, and
proper matching of cost against revenue.
This is explained by the equation:
Assets = Liabilities + Capital (Equity)
Ex.: P2,000 = P1,200 + P800

Accounting Concepts (Cont.)
2. Fund theory – the objective is neither
proper income determination nor proper
valuation of assets but the custody and
administration of funds.
In Government accounting, this theory is
applicable.
The equation is:
Fund = cash inflows – cash outflows

Basic Elements of Accounting
 Assets (A)
 Liabilities (L)
 Owner’s Equity (OE)

or Equity (E)
 Income (I)
 Expense (E)

Accounting Equation
Owner’s
Assets = Liabilities + Equity

Illustration Agency A Agency B
Assets - P300,000.00 P400,000.00
Liabilities - 250,000.00 420,000.00
Equity - P 50,000.00 (P 20,000.00)
Income P180,000.00 P230,000.00

Expenses 165,000.00 250,000.00
Net Income P 15,000.00 (P20,000.00)
(Loss)

Effects of Transaction on the
Accounting Equation
A transaction may have the following effects:
1. increase an asset and decrease another

asset account;
2. increase an asset and increase a liability;
3. increase an asset and increase the equity;
4. increase a liability and decrease another
liability account;
Effects of Transaction on the
Accounting Equation
A transaction may have the following effects:
5. increase in liability and decrease in equity

6. decrease an asset and decrease a liability;
7. decrease an asset and decrease the equity;
8. decrease a liability and increase the equity.

Learning Objectives
 define what an account is;
 explain what debits and credits are;

 explain the principles of the
Double-Entry System;
 state the rules in the Double-
Entry System;

Learning Objectives
 identify the
steps in recording transactions;
 state the nature and purpose of

journals and their relationship
to the General Ledger; and
 explain the nature and purpose

of Trial Balance

7
Journalize
and Post the
The Adjusting Entries
Accounting Prepare
Worksheet for
Process Adjustments Prepare 8
and for Financial
Statements & Reports
Financial (BS/SIE/CFS)
Transactions
takes place
Prepare
Gather and Prepare
2 Trial Balance Post-Closing
Prepare
Documents Trial Balance
Analyze and Post to

3
Record in Ledgers
4
Journals

Accounting Process
Accounting Process - is the

sequence of procedures used to
record, classify and summarize
accounting information in financial
reports, on a regular basis.

Financial Transactions
A financial transaction (or business

transaction) is defined as any economic
event or condition that directly changes
the entity’s financial position or directly
affects the results of its operations.

Analysis of Transactions
Steps in analyzing transactions:

1. Determine whether an asset, a liability,
owner’s equity, revenue or expense
account is affected by the transaction;
2. For each account affected by the
transaction, determine whether the
account increases or decreases;
Steps in analyzing transactions:
3. Determine whether each increase or

decrease should be recorded as a debit
or a credit.

Important Items in the Analysis of

Transactions:
1. the date of transaction
2. the accounts or items affected
3. the type of account (Asset, Liabilities, Equity,
Revenue or Expenses)
4. the change in the account (increase or
decrease)
5. debit side or credit side (determined by the
rules on double-entry)
6. the amount
Paid salaries of P800 to employees.
The accounts involved are:

(1) Cash (asset)
(2) Salaries expense (equity)
Remember that the balance in the salaries
expense account actually increases.
But, equity actually decreases because
expenses reduce equity.
ACCOUNT
Individual record of increases and

decreases in specific asset,
liability and owner’s equity.

DOUBLE – Entry System
A system where all transactions

must be recorded twice, once on
the debit side and another on the
credit side.

It also means the total amount debited

must equal the total amount credited for
each transaction.
The sum of the debits for all entries must
equal the sum of the credits for all
entries.

Debits and Credits
Debits are those entries entered on the left

side (column) of a journal or ledger account
that increases an asset, draw or an
expense or an entry that decreases a liability,
owner's equity (capital) or revenue.
Credits are those entries entered on the right
side (column) of a journal or ledger account
that increases a liability, owner's equity
(capital) or revenue, or an entry
that decreases an asset, draw, or an expense.
Debits and Credits
A T-account represents a ledger account and
is a tool used to understand the effects of one
or more transactions.
T- Account
(Left side) (Right side)
Debit Credit
These abbreviations are remnants of the

18th-century recordkeeping practices where
the terms debitor and creditor were used
instead of debit and credit.

RULES FOR RECORDING TRANSACTIONS

UNDER DOUBLE-ENTRY SYSTEM
1. increases in assets are debited to the asset
accounts; decreases are credited.
2. increases in liabilities are credited to the liability
accounts; decreases are debited.
3. increases in owner’s equity are likewise credited to
the owner’s equity account; decreases are debited.

RULES FOR RECORDING TRANSACTIONS

UNDER DOUBLE-ENTRY SYSTEM
4. increases in expense are debited to the
expense accounts; decreases are credited.
5. increases in revenue are credited to the
revenue accounts; decreases are debited.

Analysis Chart
The “chart” is a tool which helps in the

analysis of the transactions and their
impact on the accounting elements, and
assists in identifying the accounts to be
debited and/or credited.

Analysis Chart
Date Accounts Type of Increase/ Debit/ Amount

affected account Decrease Credit

Analysis Chart
Accounts Type of Increase/ Debit/

Date affected account Decrease (Credit) Amount
1/2/12 Cash Asset Increase debit 400,000.00
Off. Eqpt. Asset Increase debit 100,000.00
Owner’s
Equity or Equity Increase credit 500,000.00
Capital

Journalizing Transactions
Transaction Titles of Affected
Date Accounts
GENERAL JOURNAL Page 1
Date Description Debit Credit
2004
Dec. 1 Cash 3,000
Revenue 3,000
Sale of obsolete school bus
Transaction
Dec. 2 Supplies
 Amount of2,500
debits
explanation
Cash and credits 2,500
Purchased store supplies Public Management Development Program
Recording in the Journals
Journal Entries are prepared to record

and summarize transactions in special
books called Journals.

Every journal entry contains:

1) the date of the transaction,
2) the title of the accounts to be
debited and credited,
3) the amount of debits and credits,
and
4) a brief explanation of the
transaction.
Significance of a Journal:
1. It discloses in one place the complete
effect of a transaction;
2. It provides a chronological record of
transactions; and
3. It helps in preventing or locating errors
because the debit and credit amounts for
each entry can be readily compared.
Main Types of Journal:

1. General Journal - the most basic form; and
2. Special Journals:
• Cash Receipts Journal
• Cash Payment Journal
• Sales Journal
• Sales Returns and Allowances Journal
• Purchase Journal
• Purchase Returns and Allowances Journal
POSTING PROCEDURE ILLUSTRATED
GENERAL JOURNAL Page 1
DATE ACCOUNTS AND F DEBIT CREDIT
PARTICULARS
2014 Cash 101 50 000 00
March 1 Cars 750 000 00
Soriano, Capital 800 000 00
(1)
(3)
(4)
GENERAL LEDGER
(2)
CASH No. 101
DATE PARTICULARS F DEBIT DATE PARTICULARS F CREDIT
2014
March 1
J1 50 000 00
(5)

GL
Cash
ACCT NO. 101
DATE PARTICULARS F DEBIT DATE PARTICULARS F CREDIT
2014 2014
March March
1 J1 50,000.00 7 J1 45,000.00
3 J1 100,000.00 18 J1 5,000.00
21 J2 15,000.00 20 J1 55,000.00
30 47,000 J2 8,000.00 22 J1 1,500.00
173,000.00 25 J2 500.00
31 J2 19,000.00
126,000.00
Footings and balance in pencil

Alternative GL Format Cash Account Code 101
Date Particulars Ref Debit Credit Balance

March 1 Soriano Investment J1 50,000 50,000
3 Loan From Banco de Oro J1 100,000 150,000

7 Payment to Blim J1 45,000 105,000
18 Soriano Drawings J2 5,000 100,000
20 Payment to Abenson J2 55,000 45,000

21 Receipt from tourist J2 15,000 60,000
22 Payment for Gas and Oil J2 1,500 58,500
and Repairs
25 Payment for Utilities J2 500 58,000
30 Collection from customer J2 8,000 66,000
31 Payment for Rentals and J2 19,000 47,000
salaries

Trial Balance
A Trial Balance is a listing of

ledger accounts showing the
equality of debit and credit
balances as of a given period.

Purposes of the Trial Balance
 Prove the mathematical equality of the

debits and credits after posting,
 Uncover errors in journalizing and posting,
 Serve as basis for the preparation of the

financial statements .

Happy Tour and Travel Corp.
Preliminary Trial Balance
As of December 31, 2016
Account
Account Title Code Debit Credit
Certified Correct:
Chief Program
Public Management Development Accountant
Steps in the Preparation of Trial Balance
Happy Tour and Travel Corporation
1. Complete the heading.
Preliminary Trial Balance
Account
Account Title Code
Debit Credit
Cash in Bank-LCCA 111 710

Due from Officers & 123 500
Employees 211 690
Office Buildings 401 270
2. List the accounts with
balances. Accounts Payable 413 80
Due to GSIS 651 2,850
Subsidy Income from NG 701 420
Salaries & Wages – Reg. 767 410
Electricity Expenses 755 470
Office Supplies Expenses
3. Show the total of Total 3,200 3,200

the debit and credit columns. (it must be equal)
Certified Correct:
4. Sign the certification.
10/25/2017 ecdp
Chief Accountant
7
Journalize
and Post the
Accounting Prepare
Worksheet for
and for Financial
Transactions
takes place
Prepare
Gather and Prepare
Prepare
Analyze and Post to

3
Record in Ledgers
4
Journals

Learning Objectives
 explain the difference between cash and

accrual bases of accounting;
 describe the matching principle;
 state the importance of adjusting the

accounts of a business at the end of
each accounting period; and
 prepare adjusting entries.

Methods of Recognizing Income and
Expenses
Cash Basis- income is recognized only when cash is

collected or expense is recognized only when
cash is paid.
Accrual Basis- income is recognized as earned at the

time service is rendered regardless of when cash
is collected and expense is recognized as
incurred at the time service is received or used up
regardless of when cash is paid

Adjusting
Journal Entries
Under the matching principle, adjustments should
be made for economic activities that have taken
place but are not yet recorded at the time the
financial statements are prepared. Adjustments are
of two main types:
accrued items
deferred items.

Illustration: Accrual of Income and
Expenses
Assume that Carla Auto Repair Shop referred a client
to Sunday Machine Shop for which it is entitled to
a commission or referral fee of P1,000 per client.
This amount was not yet collected as of December
31, the end of its accounting period.
From the viewpoint of Carla Auto Repair Shop and

Sunday Machine Shop, how should the transaction
be accounted?

Illustration: Accrual of Income and
Expenses
Carla Auto Repair Shop:
Asset increase in accrued referral or referral
receivable; Owner’s Equity increase in referral
income
Referral Receivable 1,000
Referral Income 1,000
Sunday Machines Shop:
Liability increase in accrued referral expense or
referral payable; Owner’s Equity decrease in referral
expense.
Referral Expense 1,000
Referral Payable 1,000
Illustration: Deferral of Income
The Company collected P6,000 on October 1, 2016

representing 6 months rental fee on a corner store it
leased out.
Analysis: Asset increase in the form of Cash;

Owner’s Equity increase in the form of Rent Income
Oct. 1 Cash 6,000
Rent Income 6,000
Adjusting Entry:
Dec. 31 Rent Income 3,000
Unearned Rent Income 3,000

Illustration: Prepaid Expense
The Company issued a check on Nov. 1 for P9,000 as

payment of a six-month rent for the office building.
Analysis: Asset decrease in the form of Cash;

Owner’s Equity decrease for rent expense
Nov. 1 Rent Expense 9,000
Cash 9,000
Adjusting Entry:
Dec. 31 Prepaid Rent 6,000
Rent Expense 6,000

Effects of Failure to Record Adjusting Entries
Adjusting Entries Effect on Effect on Balance
Not Recorded Net Income Sheet Items
Utilization/Consumption Overstatement of net Overstatement of

of Assets income assets;
Overstatement of
Equity
Overstatement of
Earned Understatement of liabilities;
revenues/income net income Understatement of
Equity
Understatement of
Accrual of income Understatement of
assets;
net income
Understatement of
Equity
Accrual of expenses Overstatement of net Understatement of

income liabilities;
Overstatement of
10/25/2017 ecdp Equity
7
Journalize
and Post the
Accounting Prepare
Worksheet for
and for Financial
Transactions
takes place
Prepare
Gather and Prepare
Prepare
Analyze and Post to

3
Record in Ledgers
4
Journals

¤ determine the purposes or objectives of closing

the books;
¤ identify the accounts that need to be closed at

the end of the accounting period;
¤ describe the process in closing the books; and
prepare closing entries.

1. Determine the balance of each revenue and
expense account;
2. Prepare the journal entry to close the revenue

accounts to Revenue and Expense Summary
Account;
3. Do the same for the expense accounts;
4. Post the two closing entries (Steps 2 & 3) to the

ledger accounts;
5. Determine the balance of the Revenue and

Expense Summary Account;
6. Prepare the journal entry to close the Revenue and
Expense Summary Account to the Owner’s Equity/
Capital Account;
7. Determine the balance of the Drawings/

Withdrawals Account and prepare the journal entry
to close the account to the Owners Equity / Capital
Account;
8. Post the entries (steps 6 & 7) to the appropriate

ledger accounts.

Learning Objectives
 Determine the purposes/objectives

of analysis of FS ; and
 Describe some analytical techniques

used.

Analytical Techniques
Horizontal Analysis
- involves the comparison of financial

statements of the current period with
that of the previous year, where the
previous year is used as the base year.
This type of analysis is used to
determine how each item in the
financial statements has changed and
why there has been a change.
AGENCY X
Condensed Balance Sheet
Amount (In thousand pesos)

Increase
Percent
2016 2015 (Decrease)
ASSETS
Current Assets 1,181,975,802.64 1,185,647,796.92 16,328,005.72 1.40
Cash (Note 3.2) 334,394,497,.34 305,947,519.85 28,446,977.50 9.3
Receivables 750,543,299.89 775,910,335.88 (25,367,035.99) (3.27)
Inventories 22,668,120.41 21,071,094.28 1,597,026.13 7.58
Prepayments 62,938,441.17 55,822,340.20 7,116,100.97 12.75
Other Current Assets 11,431,443.83 6,896,506.72 4,534,937.11 65.76
Investments (Note3.3) 735,407,924.85 836,988,703.31 (101,580,778.46) (12.14)

analysis
- refers to the review of the
financial information for only
one accounting period. It
involves the comparison of a
particular financial statement
item to a total including that
item.

AGENCY X
Components of Other Income
(in million pesos)
Percentage
Particulars Amount
Distribution
Interest Income 41,435.89 54.85
Dividend Income 13,815.26 18.29
Share from PAGCOR/PCSO 13,366.11 16.37
Income from Grants and Donations 5,344.69 7.07
Miscellaneous Income 1,705.86 2.26
Sale of Confiscated/Abandoned/Seized Goods
and Properties 860.93 1.14
Other Fines and Penalties 18.89 0.03
Insurance Income 1.82 0.00
Total 75,549.45 100.00
Difference between totals and sum of components is due to rounding off.

- involves the comparison of
financial statements for three
years or more where the first
year is the base year. This form
of analysis is used in the
assessment of a business’
potential for further growth.

AGENCY X
Annual Growth of Revenue/Income
(in billion pesos)
Annual Growth
Year Amount Amount Percent
2014 1,155.08 (79.52) (6.44)
2013 1,234.60 74.62 6.43
2012 1,159.98 152.18 15.1
2011 1,007.80 168.89 20.13
2010 838.91 113.38 15.63
2009 725.53 - -
Average 85.91 10.17

AGENCY X
Comparative Composition of Current Assets
(in million pesos)
2016 Percentage 2015 Increase (Decrease)

Particulars (Amount) Distribution (Amount) (Amount) Percent
Cash 334,394.50 28.29 305,947.52 28,446.98 9.30
Receivables 750,543.30 63.5 775,910.34 (25,367.04) (3.27)
Inventories 22,668.12 1.92 21,071.09 1,597.03 7.58
Prepayments 62,938.44 5.32 55,822.34 7,116.10 12.75
Other Current Assets 11,431.44 0.97 6,896.51 4,534.94 65.76
Total 1,181,975.80 100.00 1,165,647.80 16,328.01 1.40
Difference between totals and sum of components is due to rounding off.

- is used to show analysis between
two relevant items in the financial
statements. The ratios calculated
may fall into three major categories,
financial stability, profitability and
investment ratios.

Profitability Ratios
Return of Sales
Net Profit
Net Sales
Gross Margin
Gross Profit
Net Sales
Earnings per Share
Net Profit
No. of issued shares
Liquidity Ratios
Current Asset
Current Ratio =
Current Liability
This ratio is also known as working capital ratio.

This is use to measure a company’s ability to meet
its short-term debts by using the current assets.

Liquidity Ratios
Cash + C E + MS + AR
Acid-Test Ratio = _______________________
Current Liabilities
This is also known as quick ratio or the liquid ratio.
This ratio indicates a firm’s ability to meet its
immediate debts using assets which are readily
convertible to cash (within 30 days) without
affecting the business operations.

Liquidity Ratios
Debt/Equity Ratio
Total Liabilities
Total Equity
Debt/Capitalization Ratio
Total Long-term Liabilities
Total LTL + Total S.E.

Funds Management Ratios
Days’ Receivables
Accounts Receivable
Daily Sales
Days’ Payables
Accounts Payable
Daily CGS (or Daily Purchases)
Funds Management Ratios
Inventory Turnover
Cost of Goods Sold
Mdse. Inventory

Learning Objectives
 explain what the GAAP is;

 explain the effects of the accounting
principles on the measurement of
assets, revenues and expenses;

Generally Accepted Accounting Principles
(GAAP) – encompass the conventions, rules and
procedures necessary to define what is
accepted accounting practice.
GAAP are conventional, ie, they become

generally accepted by agreement often tacit
agreement rather than by formal derivation.
The principles have developed on the basis of

experience, reason, custom, usage, and
practical necessity.

Accounting Conventions
 going concern
 accounting period
 accounting entity/ business entity
 monetary unit
 historical cost

- refers to the business having
continuous existence and not
simply operating for a specific
period of time.

• matching of revenues against expenses
• preparation of periodic financial reports; and
• periodic evaluation of the operating

performance of the business

also known as the “ business entity convention”
states that economic events can be identified with
particular unit of accountability. The business entity
can be an individual, a non-profit organization, a profit
enterprise, or a government unit

states that only transaction data
capable of being expressed in terms of
money should be included in the
accounting records of the business
entity / organization

This principle, also known as the cost principle,
determines the amount to be entered into the
accounting records for purchase of goods and services.
Under this convention, business transactions are recorded
when they occur at their original exchange price/amount/
cost (historical cost), and this will be the valuation which
will be used in the future.

• Conservatism
• Materiality
• Consistency
• Disclosure
• Objectivity

Accounting Principles relate to three
principal areas:
1. Recognition – relates to the time or period

when a financial transaction is recorded
and incorporated in the FS.
2. Measurement – the monetary unit used in
recording transactions is the peso.
3. Reporting – the manner that the assets,
liabilities, equity, income and expenses are
shown on the FS, with what information is
provided, where and how such information
should be reported.

Conceptual Framework
– a summary of the terms and concepts
that underlie the preparation and
presentation of financial statements.
– provides an overall theoretical foundation
for accounting which will guide standard-
setters, preparers and users of financial
information in the preparation and
presentation of statements.
– concerned with general-purpose FS,
including consolidated FS, prepared at
least annually and are directed toward the
common needs of a wide range of users.

Qualitative Characteristics of
Financial Reporting (QCFR)
a) presented in accordance with the
substance of the transactions and
Match the QCFR
other events, and not merely their
with the
legal form
description on the
b) its omission or misstatement could
right column
influence the decisions of users or
assessments
1. Understandability
c) free from material error and bias
2. Relevance
d) can be used to assist in evaluating
3. Materiality
past, present, or future events or in
4. Reliability
confirming, or correcting, past
5. Faithful
evaluations
Representation
e) users might reasonably be expected
to comprehend its meaning
Financial Reporting (QCFR)
I) free from bias
II) represent faithfully the transactions
Match the QCFR and other events that it purports to
with the represent
description on the III) Identify similarities and differences
right column between that information and
information in other reports
1. Substance over IV) inclusion of a degree of caution in
Form the exercise of the judgment needed
2. Neutrality in making the estimates required
3. Prudence under conditions of uncertainty
4. Completeness V) All the necessary information are
5. Comparability presented within the bounds of
materiality and cost
GPFRs
Constraints on Information
included in the GPFRs
• Timeliness
• Balance between Benefit and
Cost
• Balance Between the
qualitative characteristics

01 - Financial Accounting

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ACCOUNTING FOR NON-

Public Management Development Program

Public Management Development Program

 Describe the format and purpose of the following FS:

1.Statement of Financial Position

Public Management Development Program

--- are the principal

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- is the statement which

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2. Basis for predicting/ forecasting future

3. Useful means for:

Public Management Development Program

Public Management Development Program

Public Management Development Program

Public Management Development Program

Public Management Development Program

Public Management Development Program

Public Management Development Program

Property, Plant & Equipment:

Liabilities and Owner’s Equity

TOTAL LIABILITIES & EQUITY P______________XX.XX

Public Management Development Program

Capital, January 1 P 385,000

Public Management Development Program

Public Management Development Program

Public Management Development Program

Public Management Development Program

Sales Revenue/Income P xxx.xx

Net Income/Profit before tax xxx.xx

Public Management Development Program

CASH EQUIVALENTS - - are are short-term,

Public Management Development Program

• To provide relevant information on the

Public Management Development Program

Derived primarily from the

Public Management Development Program

Include cash transactions covering

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Activities that result in

Public Management Development Program

Public Management Development Program

B. Property, Plant & Equipment

C. Cash & Cash Equivalents

Cash on hand and with banks xx.xx

Public Management Development Program

 describe the meaning of accounting;

 state its scope, purposes and uses;

 identify the elements of accounting

 describe the relationship between

Public Management Development Program

Public Management Development Program

1. Identifying – analytical component; event

2. Measuring - technical component;

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3. Communicating - formal component;

Public Management Development Program

Public Management Development Program

Public Management Development Program

 Owner’s Equity (OE)

Public Management Development Program

Public Management Development Program

Income P180,000.00 P230,000.00