Financial Accounting and Reporting
remains liability at the end.
Adjusting Entries
Are entries made prior to the preparation of FS to update
certain accounts so that they reflect correct balances.
1. To take up unrecorded income and expense of the
period.
2. Split mixed account into their real and nominal
elements.
Accruals of Income and Expense
- Income that is already earned but not yet collected or,
- Expense that is already incurred but not yet paid.
It gives rise to income and receivable or expense and
payable.
Accrued Income
- Receivable gives rise to income.
- Income is earned due to passage of time.
Interest Income- (I = Prt)
Accrued Expense
- Payable gives rise to expense
- Expense is incurred due to passage of time.
Recognition and Depreciation of Expense
Systematic and Rational Allocation- recognizing expense
piecemeal, call depreciation.
Annual Depreciation Expense= Cost/Useful life
Carrying Amount= Cost-accum. Dept.
Recognition Of Bad Debts-
Dr. Bad Debts Expense
Cr. Allowance for Bad Debts.
Immediate Recognition- cost that produce no future
economic benefit.
Real, Nominal, and Mixed Account
Real Accounts (permanent Accounts)- accounts that are not
closed at the end of accounting period.
Nominal Accounts (Temporary Accounts)- closed account
includes income statement accounts, clearing accounts
(income summary), and suspense account (shortages and
surpluses).
Mixed Accounts- subject to adjustments.
METHODS OF INITIAL RECORDING
1. Liability Method
Initially credited to Liability Account.
The earned portion is recognized as income and unearned
2. Income Method
Initially credited to Income Account.
The unearned portion is recognized as liability and the earned
portion is income at the end of the period.
3. Asset Method
Initially debited to an asset account.
The incurred portion is expense and unused remains an asset at
the end.
4. Expense Method
Initially debited to an expense account.
The unused portion is asset and used remains expense.
Deferrals
Income that was collected in advance but not yet earned and
expenses that were paid in advance.
To defer means to delay or postpone.
- Unearned portion of an item of income that was
collected in advance is recognized as Liability.
- Unexpired portion of an expense that was paid in
advance is recognized as an asset.
ACCOUNTING CYCLE FOR A SERVICE BUSINESS
Worksheet- An analytical device to facilitate gathering of data
for adjustment, the preparation of FS and, closing entries.
Financial Statements- the product of accounting process.
Balance Sheet- ALC
Income Statement- IE
Closing Entries- are entries prepared at the end of accounting
period to zero out all nominal accounts in the ledger.
Post-Closing Trial Balance- contains only Real Accounts.
Reversing Entries- usually made on the first day of the next
accounting period to reverse certain adjusting entries in the
immediately preceding period.
Adjusting Entries that may reverse.
- Accruals for income OR expense
- Prepayments recorded using expense method.
- Prepayments recorded using income method.
ACCOUNTING CYCLE FOR A MERCHANDISING
BUSINESS
Inventories- Assets that are held for sale in the ordinary course
of the business.
2 Inventory Systems
1. Perpetual System- the inventory account is updated
every transaction; stock cards are maintained under
the system. All the purchase discounts, good sold,
and sales return are recorded through the account
INVENTORY.
2. Periodic System- Inventory account updated only
when a physical count is performed, the business
doesn’t maintain records, but physical count must be
performed consistently.
Cost Of Goods Sold
Inventory Beg. + Net Purchases= TGAS
TGAS - Ending Inventory = COGS
Net Purchases
Purchases + Freight In – Purchase Returns – Purchase
Discounts = Net Purchases
Gross Profit
Net Sales – COGS = Gross Profit
Net Profit
Gross Profit – Expense = Net Profit
Net Sales
Sales – Sales Returns – Sales Discounts = Net Sales
Statement of COGS- not a formal accounting report.
The contributions of the partner to the partnership initially
measured at FAIR VALUE
- If a partner’s capital balance is credited for an amount
greater than or less than the fair value, there is a
BONUS.
PARTNERSHIP OPERATION
Art. 1797
- Share of Profit have agreed upon, share on losses
shall be proportionate.
- In the absence of stipulation, P/L shall be in
proportion to what they have contributed, but
INDUSTRIAL PARTNER shall not be liable for
losses.
The partners share in partnership P/L based on their
agreement.
- Salaries, Bonus, and Interest on Capital are allocated.
- Any remaining amount is allocated based on their P/L
ratio.
- Bonus is allocated only if there is profit.
Proforma:
 Profit, Salaries, Bonuses, Interest on Capital.
Salaries- normally, industrial partner receives salary.
Bonuses- only if the partnership earns profit, the
managing partner is entitled to bonus.

SoCOGS Interest On Capital- The partnership agreement may

stipulate that capitalist partners are entitled to an annual
Sales- Gross Profit interest on their capital contribution.
PARTNERSHIP (Balance x months outstanding/months in year = Weighted
Average)
PARTNERSHIP FORMATION
(Weighted Capital Balance x interest % = interest on Capital)
Partnership- incorporated association of two or more
individuals to carry on, as co-owners, with the intention of PARTNERSHIP DISSOLUTION
dividing the profits among themselves.
Dissolution- the change in the relation of the partners caused
ADVANTAGES DISADVANTAGES by any partners being disassociated from the business.
Ease of Formation. Easily dissolved.
Shared Responsibility. Unlimited liability 1. Admission of a partner.
Flexibility Conflict among partners. 2. Withdrawal, retirement or death of a partner.
Greater Capital Lesser capital 3. Incorporation of a partnership.
Lack of Regulations by the It is taxed.
government. ADMISSION OF A PARTNER

Purchase Of Interest Investment in the

Major considerations in accounting for equity of partnership Partnership
The transaction is recorded The transaction is recorded
- Formation as a TRANSFER WITHIN in the REGULAR
- Operation EQUITY MANNER.
- Dissolution
- Liquidation Dr. Selling partner’s capital Dr. Asset Invested

Cr. Incoming partner’s Cr. Incoming partner’s

 capital Capital Settlement by the Partnership- is recorded in the
WITHRAWAL, RETIREMENT, OR DEATH OF A partnership book, alongside any other necessary
PARTNER adjustments.
Purchase by remaining Settlement by partnership Bonus- If partner’s interest is greater than or less than
partners
the value of his interest, BONUS METHOD is used.
The transaction is recorded The transaction is recorded
as TRANSFER WITHIN in the regular manner. Deferred Settlement- Outgoing partner’s interest is
ENTITY
transferred to a liability account, which is considered an
Dr. Outgoing Partner’s Dr. Outgoing partner’s ordinary claim, subordinate to the claim of other
Capital Capital creditors.

Cr. Purchasing Partner’s Cr. Payment made INCORPORATION OF PARTNERSHIP

Capital
ADMISSION OF A NEW PARTNER - When a partnership is converted into a
corporation, they need to ADJUST, CLOSE,
Agreed Actual Bonus/Asset AND TRANSFER Their financial statements.
Capital Contributed Reval
(AC) Capital PROFORMAS
(CC)
Old xx xx xx WITHRAWAL
New xx xx xx
TOTAL xx xx xx - Purchase of Interest by remaining partners.
BEFORE WITHRAWAL:
- If the totals do not equal to zero (there is
(unadjusted balance + Share In profit = Adjusted
negative total) bonus or asset revaluation will
Balance)
take place on either new or old partners.
- If the total of bonus has a value, there is an asset AFTER WITHRAWAL:
revaluation, if the total of AC and CC equals 0,
- The total partnership capital remains before and
bonus might take place if there is a negative
after withdrawal of the partner.
value on the row of old and new partner.
RETIREMENT
(Asset Revaluation is for the benefit of old partners.)
- Settlement of interest by partnership.
GOODWILL
BEFORE WITHRAWAL:
GAAP uses goodwill method to recognize an implied
value from a partner’s contribution but outlawed by (unadjusted balance + Share In profit = Adjusted
PFRS 3. Balance)
WITHRAWAL/ RETIREMENT OF A PARTNER AFTER WITHRAWAL:
When a partner withdraws, retires, or dies, his interest - The payment of retired partner is recorded in the
may be. books because the interest of is settled by the
partnership, rather than by the remaining
1. Purchase by one of the remaining partners.
partners.
2. Settled by the partnership.
3. In case of death, the partner’s estate is entitled to Purchase by Settlement by
the value of the partner’s interest at the date of remaining partners Partnership
death. The payment to the The payment to the
outgoing partner is outgoing partner is
The interest of the partner is adjusted by. NOT RECORDED in RECORDED in the
1. His share of any profit the partnership book. partnership books.
2. His share of any revaluation of gains and losses. Partnership capital Partnership capital is
REMAINS THE DECREASED by the
Purchase by one or all the remaining partners- not SAME before and after payment for the
recorded, the entry to be made is a transfer within equity. the withdrawal, outgoing partner’s
 retirement, or death of capital balance. owners as PARTIAL settlements of
their interests.
the outgoing partner.
STEPS
No gain or loss is No gains or loss is
recognized in the recognized in the 1. Compute the net proceeds, deduct expenses, and
partnership’s books, partnership’s books. cash retention.
RETIREMENT 2. Compute the gain or losses.
- Payment in the form of non-cash asset. 3. Allocate the gain/ loss to the partners.

(Unadjusted balance, share in profit, share in LUMP SUM LIQUIDATION

revaluation gain = Adjusted Balance) - All non-cash assets are realized, and all
DEATH liabilities are settled before a single final cash
distribution is made to the partners.
Same as retirement.
PARTNERSHIP LIQUIDATION
STEPS
- Is the winding up of its business activities
characterized by sale of all non-cash assets, 1. Realization of non-cash Asset
settlement of all liabilities, and distribution of 2. Settlement of Liabilities
remaining cash to the partners. 3. Distribution to partners

STEPS Proforma:
NAME OF
1. Realization of all non-cash assets. PARTNER
SHIP
Realization- conversion of non-cash assets into SoL
Dec xx,
cash. 20x1

2. Settlement of Liabilities Cash NCA liabilities Partners,

Capital
- Outside Creditors (liquidation, salaries, taxes,
creditors)
- Inside Creditors Bal. before xx xx xx xx
3. Distribution To Partners liquidation

METHODS OF PARTNERSHIP LIQUIDATION

Sale of NCA xx (xx) - (xx)
1. Lump-Sum Method
BALANCES XX - xx xx
2. Installment Method Payment of (xx) (xx) -
Liabilities
TRUST FUND DOCTRINE= (A=LC)
LUMP SUM INSTALLMENT
All the non-cash assets are SOME of non-cash assets are Balances xx xx xx xx
converted to cash. converted into cash. Distribution to (xx) (xx) (xx) (xx)
The total gain or loss on the sale is The carrying amount of any Partners
allocated to the partner’s capital UNSOLD non-cash asset is
balances based on their P/L ratios. considered as a loss. This is BALANCES xx xx xx xx
allocated to the partners’ capital
balances based on their P/L ratios. CAPITAL DEFICIENCY
Actual liquidation expenses are Actual and estimated future
allocated to the partner’s capital liquidation expenses are allocated In case of insolvency, the rule of Marshalling of Asset is
balances based on their P/L ratios. to the partner’s capital balances applied, only the excess of a partner’s personal asset
based on their P/L ratios.
The liabilities to outside creditors The liabilities to outside creditors over his personal liabilities can be used to settle debt.
are FULLY SETTLED. are PARTIALLY or FULLY settled.
The liabilities to the inside The liabilities to inside creditors 1. Solvent- Additional investment
creditors are FULLY SETTLED. are partially or fully settled, but
only after the full settlement of 2. Insolvent- Absorb by the partnership.
liabilities to outside creditors. 3. Write of Offset- absorption of another partner if
Any remaining cash is distributed If both the liabilities to outside and
to the owners in FULL settlement inside creditors are fully settled,
he has a receivable to a partner.
of their interest. any remaining cash less CASH
ASSET aside for future liquidation INSTALLMENT LIQUIDATION
expenses is distributed to the
 1. Realization of non-cash Asset Corporation
2. Settlement of Liabilities
- Artificial being created by law, having the right
3. Distribution to partners
of succession and the powers, attributes, and
SAFEGUARDS properties expressly authorized by law or
incident to its existence.
1. Safe Payments schedule (assumes)
- All non-cash asset will never be realized. ORGANIZATION OF A CORPORATION
- All partners are insolvent.
- Formed by any person, partnership, association,
Done on Every Distribution to partners. or corporation, singly or jointly with other but
not more than 15.
Partnership
- Article of Incorporation must be authorized by
Schedule of Safe Payment SEC.
- States the exact authorized capital stock, any
Dec xx, 20x1 surplus will be illegal.
PARTNER PARTNER - Amending article of incorporation, A majority
Balance Before xx xx vote of the board plus a vote by shareholders
Distribution. representing at least 2/3 of the outstanding share
Restricted Interest; (xx) (xx) capital.
All NCA will - A corporation has PERPETUAL EXISTENCE
never realize unless a fixed term is stated in the articles.
Payment to xx xx
Partners COMPONENT OF SHAREHOLDERS’ EQUITY
- SHARE CAPITAL
2. Cash Priority Program (preference share, ordinary share, subscribed share
– Loss Absorption Balance. capital, subscription receivable, share dividends
distributable, capital liquidated, share premium)
Partnership
- Other Components of Equity
Cash Priority Program - Treasury Shares
Dec xx, 20x1 Authorized Share Capital (capital stock)- The
Par Partn Partn Partn Partn Partn
maximum number of shares fixed in the entity’s
tne er er er er er authorized articles.
r
Capital xx xx xx Unissued Share capital- represents the portion of
balances
Add: xx xx xx share capital not yet issued and is still available for
Loan subscription and issuance.
Balance
Add: xx xx xx
partner’s
TRANSACTTION AFFECT THE
Interest ACCOUNTING
Divide XX XX% XX%
By: P/l % - Authorization, subscription, and issuance of
ratio
Absorptio xx xx xx shares.
n balance - Acquisition and reissuance of treasury shares.
Priority 1 (xx) xx
Balances xx xx xx
- Retirement of shares
Priority 2 (xx) (xx) xx xx - Donated capital
Balances xx xx xx xx xx - Distributions to owners (dividends)
ACCOUNTING FOR SHARE CAPITAL
partner partner partner
Priority 1 xx xx
Priority 2 xx xx xx
1. Memorandum- Only a memorandum entry is
Priority 3 xx xx xx made for authorized capitalization.
TOTAL xx xx xx 2. Journal Entry Method- crediting authorized
ACCOUNTING FOR CORPORATION\ share capital and debiting unissued share capital.
 - Subsequent, credited to unissued SC, and the
difference between authorized SC and Unissued
SC represent the issued Capital.
Subscription- a contract between the purchaser of
shares and the issuer, the purchaser promised to buy
shares of the issuing company at agreed price.
Subscription Receivable- represents UNPAID
PORTION of the subscription price, it is deduction from
the related subscribed SC.
Subscribed SC- represents the portion of the authorized
SC that is subscribed but not yet issued.
CLASSES OF SHARE CAPITAL
1. Ordinary Shares (common stocks)
r