Reviewer for Fundamentals of Introduction to Accounting

Accountancy, Business, and  Accounting is the systematic process of measuring and reporting
Management relevant financial information about the activities of an economic
organization.
List of Contents  Defined by the American Institute of Certified Public
Accountants (AICPA) as the art of recording, classifying, and
summarizing in a significant manner the money, transactions, and
I. Introduction to Accounting 1 events which are part of a financial character.
a. Nature of Accounting
b. Four Aspects of Accounting NATURE OF ACCOUNTING
c. History of Accounting
d. Business Organizations  Accounting is a systematic process
e. Business Activities/ Operations Accounting is a process because recording, classifying,
II. Branches of Accounting 4 summarizing, and interpreting all leads to communicating to financial
III. Users of Accounting Information 5 users.
IV. Accounting Concepts and Principles 6
 Accounting is an art
a. Fundamental Concepts
An art is a skill honed by experience, study, and observation.
b. Basic Priciples
The four aspects of accounting requires both knowledge and skill to
V. Accounting Equation 7
produce the key end product, financial reports.
VI. Types of Major Accounts 7
VII. Books of Accounts 9  Accounting is a service activity
VIII. Accounting for Service and Bus. Org. 10 Service = the occupation or function of serving
a. Accounting Cycle Activity = something done for a purpose
b. Double-entry System & T-Accounts Accounting is a work or occupation for serving a particular
c. Adjusting Entries purpose, which is to provide financial information.
d. Closing Entries
 Accounting is an information system
e. Reversing Entries
It is the storehouse of information as it collects, processes,
IX. Accounting for Merchandising Operations 14
and communicates financial data.
a. Inventory Systems
b. Freight Charges
c. Worksheet FOUR ASPECTS OF ACCOUNTING
d. Value Added Tax  Recording
e. Subsidiary Ledgers and Special Journals Accounting is to write down business transactions chronologically
X. General Purpose of Financial Statements 15 in the books of account

Reviewer for Fundamentals of Accountancy, Business, and Management 1

 Classifying
Business transactions are sorted into three categories of assets,
liabilities, and owner’s equity
 Summarizing
Financial statements are prepared to suit the users’ needs, based on
the transactions recorded in the book of account
 Classifying
Representing the information both quantitatively and qualitatively
which is comprehensible by its users
BASIC FUNCTION OF ACCOUNTING
 All the aspects can be summed up to one basic function which is the
generation of relative & timely financial information. It is why
accounting is considered as the language of business.
HISTORY OF ACCOUNTING
 Early calculators
o Abacus of Sumerians as calculator (5000 BCE)
o Papyrus of Egyptians (4000 BCE)
 Early record-keeping
o Clay tablets in Egypt as written tax records containing marks
representing accounts of oil and linens as taxes to the king.
o Clay tokens and tablets in Mesopotamia to record loans,
herds, crops, and trade system. Scribes were equivalent to
modern accountants.
o Money was introduced by Greeks in 600 BCE in the form of
coins. Phoenician writing system and Greek alphabet were
used to keep records. Greeks also had banks to offer credit as
evidenced by banker’s books of account.
o Annual budget were used by Romans to estimate the nation’s
expenditures in accordance to its revenue and people’s taxes.
o Doomsday book contains all the real estate surveyed by
William the Conqueror in England. The Pipe Roll or Great Roll
of the Exchequer is the most ancient surviving record of
English Language.
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 Double-Entry Bookkeeping
o Luca Pacioli of Italy (Friar Luca dal Borgo)
 A mathematician, and friend of Leonardo da Vinci
 The “Father of Accounting”
 One who wrote Summa de Arithmetica, Geometria,
Proportioni et Proportionalita (Everything about
Arithmetic, Geometry and Proportion)
o Summa de Arithmetica, Geometria, Proportioni et
Proportionalita
 De Computis et Scripturis (Of Reckonings and Writings)
consisted of the accounting cycle, balance sheet,
memorandums, journals and ledgers, the primary and
nominal accounts, closing entries and trial balance.
 Made from the idea of Benedetto Cotrugli in his
manuscript Della Mercatura et del Mercante Perfetto (Of
Trading and The Perfect Trader) and the Venetians.
 Modern Accounting in England and America
o Industrial Revolution
 The larger scale of factories and businesses transformed
accounting into an actual profession as they needed.
o Chartered Accountants
 Queen Victoria of Scotland granted a royal charter to the
Institute of Accountants in Glasgow in 1854, making
accountants a formal profession.
o American Association of Public Accountants
 Created a formal certification process for accountants as
the US accounting society flourished in 1887.
 Evolution of Modern Accounting Standards (20th Century)
o American Institute of Certified Public Accountants
 Formed by the nation of United States
o Securities and Exchange Commmission
 Made during the economic depression
o AICPA was tasked to create the Financial Accounting
Standards Board (FASB) in 1973 due to the demand for reliable
financial reporting by the Congress and SEC.
o GAAP was established in accordance to the FASB and GASB
(Governmental Accounting Standards Board).
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 A business owned and managed by two or more people who
 Information Age contribute toward a common end.
o The Internet and software applications paved the way for o Advantages
faster and more accurate methods, such that transactions can  Minimal Cost
be accomodated online.  More funds/capital
 Division of labor and infusion of knowledge
 Accounting In Modern Times (21st Century)
o Disadvantages
o International Accounting Standards Board (IASB)
 Sharing of liability
 Replaced the International Accounting Standards
 Disagreements is common
Committee (IASC) in 2001.
 The death or incapacity of one partner result to dissolution
o Enron Scandal (2002)
 Admission of new partner needs approval from existing one
 The greatest corporate fraud case in American History o Requirements
 Made Arthur Andersen to close business
 Proposed Article of Partnership
 Paved the way to the Sarbanes-Oxley Act that restricted
 Name Verification Slip
accountants conducting consultancy services.
 Bank Certificate Deposit
o Economic Recession (2008)
 Proof of visa (if foreign)
 Dodd-Frank Act was signed in July 2010 which contained  Proof of Inward Remittance (if non-resident aliens)
sixteen major areas to reform
o Philippine Accounting  Corporation
 Adopts International Accounting Standards (IAS) and A business managed by an elected board of directors. Investors are
International Financial Reporting Standards (IFRS) called stockholders and ownership is share of stock.
o Advantages
BUSINESS ORGANIZATIONS (TYPES & REQUIREMENTS)  Limited liability (debt can only extend to the capital amount)
 Continuous lifespan
 Sole Proprietorship  More infusion of funds
A business managed by only one (1) person  Management is vested on board of directors
o Advantages o Disadvantages
 Minimal cost of formation  Costly and requires many requirements
 Personal discretion of assets  Restricted and controlled by the government
 Sole decision process  Distribution of income depends on declaration of dividends
 Life of business is dependent to the owner o Requirements
o Disadvantages  Articles of Incorporation
 Limited resources  By-laws
 Unlimited liability and sole management of business  Treasurer’s Affidavit
o Requirements  Bank Certificate
 Registration to Department of Trade and Industry under the
Bureau of Trade Regulation and Consumer Protection  Cooperative

 Partnership

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 An association of small producers and consumers who come o Examples
together voluntarily to form a business which they own and manage.  Grocery
(Section 3 of RA 6938)  Sari-sari store
o Advantages  Hardware
 Price of products is lower due to direct purchases  School supply store
 Lower to none management cost as the members
themselves are managing the business  Manufacturing
o Disadvantages A type of business operation engaged in production of items.
 Limited capital due to underprivileged members o Aspects
 Strictly for members only  Purchase and convertion of raw materials to finished goods
 Lack of efficient management  Incurs overhead costs, wages and purchases cost
o Requirements  May incur non-manufacturing costs such as rent, insurance,
 Economic Survey worker benefits and depreciation
 Notarized Articles of Cooperation and By-laws  Involves careful planning
 Bonds of accountable officer/s o Examples
 Notarized sworn statement of treasurer  Shoe Factory
 Food Processing
BUSINESS ACTIVITIES/ OPERATIONS
 Service
A type of business operation engaged in redering services. Branches of Accounting
o Aspects
 Earns based on skill and quantity of services
 Training of employees is a must  Financial Accounting
 Constant monitoring, evaluating and updating of staff Deals with the theoretical framework covering accounting
knowledge is necessary principles and concepts relative to measurements and valuation
 Continuous maintenance and improvement of service applied to accounts in relation to the preparation and presentation of
o Examples financial statements. The financial information provided is used for
decision making by both internal and external users.
 Dental clinic
o More on the recording of finances and numbers to make
 Barber shop
 Laundry service financial statements

 Trading/ Merchandising  Management Accounting

A type of business operation engaged in buying and selling goods. A profession that involves partnering in management decision
o Aspects making, devising a planning and performance management systems,
and providing expertise in financial reporting and to control the
 Sales are optimized
formulation and implementation of an organization’s strategy.
 Demands have to be satisfied
o Focuses on how the organization uses the money and helping
 Includes the processes of forecasting, purchasing, pricing,
and marketing of product to generate sales the management.

Reviewer for Fundamentals of Accountancy, Business, and Management 4

 Government Accounting
It encompasses analyzing, classifying, summarizing and
communicating all transactions involving the receipt and disposition
of government funds and property (Sec. 109 of Presidential Decree
1445). The agencies responsible in performing government
accounting functions are Commission of Audit (COA), Department of
Budget and Management (DBM), and Bureau of Treasury (BTr).
o Focuses on the movement of money through various agencies
such that the budget are met. Such accountants work in state
and federal programs like healthcare, housing and education.
 Auditing
It examines and monitor a business for accurate reporting and
compliance with tax laws, regulations and financial integrity. It also
ascertain fairness, prospriety and reliability.
o Focuses on the business records such that it fairly complies
with the Generally Accepted Accounting Principles (GAAP)
 Tax Accounting
It include the preparation of monthly value added tax,
percentage tax, expanded withholding tax returns, quarterly and
annual tax returns, and other tax applicable to business. Accountants
work closely with their clients to avoid problems with Bureau of
Internal Revenue (BIR).
o Focuses on the taxes related to an entity such that they may
avoid problems regarding to taxes.
 Cost Accounting
Includes the collection, determination, allocation, assessment,
interpretation, and control of cost data. It analyzes costs to prepare
and present reports that inform decision-makers on how to reduce
costs, or when to spend more.
o Focuses on the costs of a project or venture to offer informed
decisions
 Accounting Education
Involves planned grading and formal teaching in an educational
institution.
o Focuses on imparting knowledge to students enrolld in an
accounting subject matter.
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 Accounting Research
Involves careful study aimed at discovering facts, revising
accepted theories, and generation of new knowledge.
o Focuses on implementing new standards of accounting.
Users of Accounting Information
 Internal Users
Are primary users of financial information who are directly
involved in managing the company’s daily operations.
o Investors/ Owners/ Stockholders
They provide resources for the business to keep going. They
invest depending on the reliability of the company reflected by
its financial statements.
o Management
Financial information are used to set goals, evaluate their
progress and plan for future actions.
o Employees
Financial information are used by employees to determine
the viability of becoming a staff in a certain company.
 External Users
Are secondary users of financial information who are parties
outside the company. They are not directly involved to business
operations but have significant effects to it.
o Financial Institutions / Creditors
They use financial information to determine the credit
worthiness of an organization such that they may be able to
meet their agreements.
o Government
Financial information are used for tax purposes and to
determine a company’s compliance with regulatory authorities.
o Potential Investors
Financial information are used by these individuals to
determine whether their shares would have significant return
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 from the company. The financial information may also show the
 Going Concern
company’s history that may show assurance for them to invest.
A concept which assumes that the business will continue
o Customers
indefinitely such that there is a need to compensate for depreciation
Financial information are used by customers to identify if the
of assets.
company may become a stable source of supply in the long run.
o An example is when a business assumes that it will continue for
the next years.

Accounting Concepts & Principles BASIC ACCOUNTING PRINCIPLES

 Monetary Unit Principle
It states that amounts are stated into a single monetary unit
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
regardless of the business’ location.
 These are broad, general statements or rules and procedures that o An example is a Jollibee’s branch abroad having the monetary
serve as guide in the practice of accounting. unit peso in their financial statements.

 Accounting system are the methods used by a business to record
its financial activities and to summarize these accounts in periodic
accounting reports.
 Trancsaction is a completed action expressed in monetary terms.
FUNDAMENTAL CONCEPTS
 Entity Concept
It regards the business as separate and distinct from its owners
and other business enterprises.
o An example is when personal purchases of the owner is
deducted to his salary rather than the business revenue.
 Periodicity/ Time Period
The concept of providing financial information for specified time
periods. One year is usually considered as one accounting period.
o Activities are to be reported over periods.
o Calendar Year – a twelve-month period that starts on January
1 and ends on December 31
o Fiscal Year – a twelve-month period that starts on any month of
the year other than January and ends twelve months after
starting period. (ex. starts on May 1 and ends on April 30)
o An example is when separate businesses prepare financial
reports yearly to measure its annual income.
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 Objectivity Principle
The concept stating that all business transactions to be
recorded have supporting verifiable evidence to avoid getting
subjected to fraud.
o A business have “safekeeping” of documents that provides
evidence for a certain transaction.
 Historical Cost Principle
A concept suggesting that properties and services acquired
must be recorded in their original acquisition cost.
o An property such as land may have increased its market value
(appreciation) but in the records will still be the same as when it
was acquired.
 Accrual Accounting Principle
Income should be recognized when earned regardless of
collection and expenses should be recognizzed when incurred
regardless of payment
o When a product is used, it is already an expense despite not
having to pay for it yet.
o Likewise, when a product or service is sold, it is already a
revenue despite not being paid yet.
 Adequate Disclosure Principle
The concept of recording relevant or important information.
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 o When a land have increased in market value, it may be  NOTE: No matter what, the assets of a company will always be
indicated in financial statements in the form of footnotes or equal to the sum of its liabilities and equity, such that the formula can
parenthetical notes. be arranged accordingly to find the other.
o Examples:
 Conservatism Principle/ Prudence
A concept of understating income and assets, and overstating
ASSETS LIABILITIES EQUITY
liabilities and expenses, such that the company may take conflicts.
o Being prudent in their estimates may help prevent conflicts. 650,000 340,000 310,000
 Materiality Principle 600,000 295,000 305,000
It means that financial reporting is only concerned with
967,000 307,000 660,000
information significant enough to affect decision. In case of assets
being immaterial to make significant results, it is considered as an
expense.
Types of Major Accounts
o Paper clips being less significant is outright an expense.
BALANCE SHEET ACCOUNTS (REAL/ PERMANENT)
 Matching Principle
The concept of matching the revenue generated and expense  Assets
incurred of the same accounting period, allowing real time analysis. Are economic resources of the company expected for future
o A fixed asset is not related to an accounting period for its gain. These are property or rights of value by the business.
benefit will spread over a number of years. Only the Current Assets
depreciation from its use is related to the accounting period. These are assets that are liquid or can easily be converted
 Consistency Principle or realized to cash within the accounting period.
A concept suggesting uniform employment of approaches from o Cash
period to period to allow comparison of results. Includes coins, currencies, checks, bank deposits and other
o If account form is used in the preparation of balance sheet, cash items readily available for operation use.
account form must be used for the other periods. o Cash Equivalents
Are short-term investments that are readily available to be
converted to cash
Accounting Equation o Marketable Securities
Are stocks and bonds purchased usually when a business
has excess cash.
FUNDAMENTAL CONCEPTS
o Receivables
 The accounting equation is an expression of the relationship  Accounts Receivable – amount collectible from customers
among assets, liabilities and owner’s equity in a business. It is as whom sales have been made on account or credit.
follows:  Notes Receivable – promissorry note issued by the client
 ASSETS = LIABILITIES + OWNER’S EQUITY in exchange for goods or services
 Interest Receivable – amount of interest collectible on
promissorry notes received
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  Advances to Employees – amount of money loaned to
Current Liabilities
employees payable in cash or salary deductions
These are obligations settled within the accounting period.
 Accrued Income – income earned but not yet received
o Accounts Payable
o Inventories
Debts arising from purchase of an asset or acquisition of
Are unsold goods at the end of the accounting period,
services on account
applicable only for merchandising business.
o Notes Payable
o Prepaid Expenses
Debts arising from purchase of an asset or acquisition of
May include rent, utilities, supplies and other expenses that
services on account evidenced by a note
are paid in advance by the company. Since it isn’t used yet, it is
considered an asset. o Loan Payable
o Contra-Asset Accounts An obligation to pay the bank or other for financial institution
Are accounts deducted from related asset accounts. arising from funds borrowed by the company. (Non-current if
 Allowance for Bad Debts – are losses to uncollectible more than 1 year or silent)
accounts, deducted to accounts receivable to get the net o Utilities Payable
realizable value Are obligation to pay utility companies for services such as
 Accumulated Depreciation – the expired cost of fixed water, electricity and telephone services.
assets as a result of usage and passage of time
o Unearned Revenues
Are advance payments of customers to services. This is a
Non-Current Assets
liability for the company unless it was settled.
o Long-term Investments
These are assets held by the enterprise for accretion of o Accrued Liabilities
wealth. (Non-current if more than 1 year or silent) Are expenses already incurred but are not yet paid by the
company.
o Property, plant and equipment
 Salaries Payable
Are tangible assets held by the company for the production
 Interest Payable
or supply of goods or services for more than 1 period.
 Taxes Payable
 Land – a piece of lot or real state which a building can be
 Utilities Payable
constructed for business purposes
 Building – edifice or structure used to accommodate
Non-Current Liabilities
operations
These are long-term obligations payable for a period longer
 Equipment – includes gadgets used for operations and
than the accounting cycle.
may be titled specific accounts
 Furniture and Fixtures – are necessities for employees o Mortgage Payable
 Intangible Assets – are non-monetary assets with no Long-term debt by the company with security or collateral
physical substance that include patents, copyrights,licences o Bonds Payable
Certificate of indebtness under the seal of a corporation,
 Liabilities specifying the terms of repayment and interest rate charged.
Are debts, obligations to pay, and claims of creditors on the
asset of the business.
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 Owner’s Equity or Capital
Books of Accounts
o Capital
Account bearing the name of the owner representing the
original and additional investment of the business along with the BASIC CONCEPTS
results of the operations.  Account
o Drawing These are forms of record that summarizes the increases or
Are cash or asset withdrawals of the owner for personal use decreases of any accounting value.
 Chart of Accounts
o Income Summary
It is a list of all account title used by the company with their
Temporary account used at the end of accounting period to
corresponding account numbers. A footnote is a memorandum of
close income and expense accounts.
total of column of numbers.
INCOME STATEMENT ACCOUNTS (NOMINAL)

 Income  Trial Balance

Are revenues earned by the business performing services for List of all accounts with their corresponding ending balances
customers or clients. It may vary according to the business operation that proves the equality of debit and credit columns in the ledger.
and may also include other income gained from activities not related  Worksheet
to its operations. Are
o Sales o Consultancy Fees
o Service Revenue o Rent Income
o Laundry Income o Interest Income
o Medical Fees o Audit Fees
o Legal Fees

 Expenses
Are payments made or to be made by the company from
other enterprises in exchage for their services or goods. BOOKS USED AND THEIR TYPES
o Salaries or Wages Expense
o Utilities Expense  Journal
It is known as the book of original entry; is a chronological
o Supplies Expense
record of events or transactions showing the effects of each
o Insurance Expense
transaction in terms of debit or credit.
o Depreciation Expense
o The simplest kind of journal is called the general journal where
o Uncollectible Accounts Expense
all transactions are put according to date.
o Interest Expense o There are also special journals as follows:
 Purchases journal (buying merchandise on credit)
 Sales journal (selling merchandise on credit)
 Cash Receipts journal (cash collections)

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  Cash Disbursement journal (cash payments)
 Ledger
It is a group of the accounts used by the company and is
referred to as the book of final entry.
o It also have a general ledger that contains all the accounts with
their corresponding credit and debit balances and their normal
balance.
o It as well have subsidiary ledgers for both accounts receivable
and payable. The only difference is that subsidiary ledgers
organizes the two accounts according to the name of their
supplier or customer.
Accounting for Service Business
ACCOUNTING CYCLE
 Identifying events and transactions to be recorded
It is the process of identifying and analyzing transactions to
be recorded through business documents (forms that support the
existence of a transaction).
Recalling the adequate disclosure principle, not all
transactions that are related to the business are recorded, thus the
need for critical analyzation of data.
 Recording transactions in the journal
It is known as journalizing which is the process of recording
in the first book of account known as journal.
 Posting journal entries to the ledger
It is the process of posting where information from the
journal is transferred to the ledger or the book of final entry. A
ledger is a compilation of individual accounts with its corresponding
increases and decreases in value.
 Preparing the trial balance
Reviewer for Fundamentals of Accountancy, Business, and Management
A trial balance shows a list of all accounts with its ending
balances based on the ledger, providing proof that the ledger is
balance.
 Preparing the worksheet and adjusting entries
The worksheet is a common tool for accountants to
assemble all the information needed for financial statements.
 Preparing the financial statements
The four major statements are prepared after making the
working as guide.
 Journalizing and posting adjusting journal entries
This is the process of adjusting some accounts that affects
more than one accounting period. These accounts include accruals,
defferals, and prepayments.
 Journalizing and posting closing journal entries
This is the process of closing nominal accounts (revenue,
expenses, and drawings) and updating the capital account according
to the results of the business, whether a loss or an income. The
temporary account Income Summary is used in the preparation of
closing entries.
 Preparing the post-closing trial balance
Similar to the previous trial balance, it ensures that the
posting was correctly done by showing the equality of credit and
debit balances.
 Journalizing and posting reversing entries
Reversing entries are done to simplify the accounting
process by simply reversing the adjusting entries of accruals and
deferrals that use nominal accounts.
DOUBLE ENTRY SYSTEM & T-ACCOUNTS
 The double-entry system
This concept on recording transactions suggests a dual
effect which means that every transaction affects at least two
accounts such that there is a debit in every credit. This concept
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 applies to journal almost every book of accounts, such as the jounal, When journalizing adjusting entries ALWAYS CONSIDER THE
t-account, ledger, and even the trial balance. DATE.

 T-account
 Prepayments
This is an informal device used to record and analyze the
effect of a transaction in the different accounts. These are advance payments to expenses that may cover
more than one accounting period.
 Normal Balance
Every account classification have its normal balance whether Example 1: On April 30, 2016, X Co. paid P36,000 worth of
on the debit or credit side. Note: Debit accounts usually are insurance for two years. Give entry for June 30, 2016
transactions that benefit the entity. The expanded interpretation ff:
Asset Method (Focuses on how much was used)
ASSETS LIABILITIES
Increase Decrease Decrease Increase o The journal entry upon payment would be:
Debit Credit Debit Credit
Prepaid Insurance P36,000
Normal Normal Cash P36,000
Balance Balance
OWNER’S EQUITY OWNER’S DRAWINGS o Take note that only two month of insurance have been used,
Decrease Increase Increase Decrease which is why there is a need for computation.
Debit Credit Debit Credit o The adjusting journal entry:

Normal Normal Insurance Expense P3,000

Balance Balance Prepaid Insurance P3,000

Expense Method (Focuses on how much is still left)

REVENUE EXPENSES
o The journal entry upon payment would be:
Decrease Increase Increase Decrease
Debit Credit Debit Credit Insurance Expense P36,000
Cash P36,000
Normal Normal
Balance Balance o The adjusting journal entry:
Prepaid Insurance P33,000
Insurance Expense P33,000
ADJUSTING ENTRIES
Example 2: On September 1, 2016, X Co. paid P30,000 worth of
 These are entries used to update the accounts prior to the
insurance for one year. Give entry for December 31, 2016
preparation of Financial Statements. It is because the accounts that
are to be adjusted may affect more than one accounting period. Asset Method
 Following the accrual principle, it is only when earned that an
income is recognized and when incurred an expense is recognized. o The journal entry upon payment would be:

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 Prepaid Rent P30,000 o The adjusting journal entry:
Cash P30,000
Dental Fees P60,000
o The adjusting journal entry: Unearned Dental Fees P60,000
Rent Expense P10,000
Prepaid Rent P10,000 Example 2: On December 1, 2016, X Co. received P48,000 worth of
rentals for six months. Give entry for December 31, 2016
Expense Method
Liability Method
o The journal entry upon payment would be:
o The journal entry upon payment would be:
Rent Expense P30,000
Cash P30,000 Cash P48,000
Unearned Rent Income P48,000
o The adjusting journal entry:
o The adjusting journal entry:
Prepaid Rent P20,000
Rent Expense P20,000 Unearned Rent Income P8,000
Rent Income P8,000
 Deferrals Income Method
These are income already received but not yey earned.
o The journal entry upon payment would be:
Example 1: On August 1, 2016, X Co. received P90,000 worth of 6 Cash P48,000
months. Give entry for the end of September. Rental Income P48,000
Liability Method (Focuses on how much was already earned) o The adjusting journal entry:

o The journal entry upon payment would be: Rental Income P40,000
Unearned Rental Income P40,000
Cash P90,000
Unearned Dental Fees P90,000
 Accrued Expenses
o The adjusting journal entry:
These are expenses already used, but not yet paid.
Unearned Dental Fees P30,000
Dental Fees P30,000 Example 1: On November 15, Mory issued a 90-day P120,000, 10%
note. Record interest due at the end of December 31.
Income Method (Focuses on how much is still to earn)
o Interest = Principal × time × rate
o The journal entry upon payment would be: = (P120,000) (90/360) (10%)
= P3,000
Cash P90,000
Dental Fees P90,000 o The adjusting journal entry upon payment would be:

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 Interest Expense P3,000 o The adjusting journal entry upon payment would be:
Interest Payable P3,000
Interest Receivable P6,000
Interest Income P6,000
Example 2: The company received a bill in the amount of P9800 on
Dec. 26, 2016. The company intends to pay on January 8, 2017.  Bad Debts/ Doubtful Accounts/ Uncollectible Accounts

o The adjusting journal entry upon payment would be: These are losses due to uncollectible accounts.

Interest Expense P3,000 Example 1: Accounts receivable has a balance of P78,000, 3% of

Interest Payable P3,000 which are estimated to be uncollectible.

Example 3: Unpaid salaries at the end of December 31, 2016 o Bad Debts = (P78,000) (3%)
amounted to P18,800. = P2,340
o The adjusting journal entry upon payment would be:
o The adjusting journal entry upon payment would be:
Bad Debts Expense P2,340
Salaries Expense P18,800
Allowance for Bad Debts P2,340
Salaries Payable P18,800

 Accrued Income Example 2: Accounts Receivable is P229,000 and Allowance is

P5,000. 7.5% will be uncollectible.
These are income already earned, but not yet received.

Example 1: Dugas Realty have a 2% commission from selling a o Bad Debts = (P229,000) (7.5%)
house worth P25,000,000. He hasn’t yet received his payment. = P17,175
Record the accrual. o The allowance is too low and in short of P12,175.
o The adjusting journal entry upon payment would be:
o Commission = (P25,000,000) (2%)
= P500,000 Bad Debts Expense P12,175
Allowance for Bad Debts P12,175
o The adjusting journal entry upon payment would be:
 Depreciation Expense
Commision Receivable P500,000
Commission Income P500,000 These are allotted for the wear and tear of fixed assets due
to passage of time. Straight line formula of depreciation is as follows:
Example 2: A one-year, 6% note receivable in the amount of Initial Cost−Salvage Value
P200,000 was received in January 1. Give entry for June 30, 2016. Annual Depreciation =
Estimated Life

o Commission = (P200,000) (6%) (6/12) Example 1: Given the following cases, prepare the adjusting entries
= P6,000 on December 31, 2021.

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 Acquisition Income Summary XX
Property Cost Salvage Value Estimated Life
Date Owner’s Capital XX
Oct. 31, 2016 Building 20,000,000 1,500,000 20 years
For Net Loss:
June 15, 2015 Furnitures 51,000 3,000 12 years Owner’s Capital XX
Sep. 1, 2020 Machinery 108,000 8,000 20 years Income Summary XX

 Close the Drawing Account

o Applying the formula, we have the following values:
 Building - P 925,000 Owner’s Capital XX
 Furnitures - P 4,000 Owner’s Drawings XX
 Machinery - P 5,000
o The adjusting journal entry upon payment would be:  A post-closing trial balance is prepared to ensure the equality of
debit and credit balances, allowing for more accurate posting.
Depreciation Expense - Building P925,000
Depreciation Expense - Furnitures P4,000
Depreciation Expense – Machinery P5,000
REVERSING ENTRIES
Accumulated Depreciation - Building P925,000  These entries are done to simplify the accounting process. These
Accumulated Depreciation - Furnitures P4,000
are made on the first day of the next accounting period. Although
Accumulated Depreciation – Machinery P5,000
these are optional and are just the opposite of adjusting entries, only
those entries that increased an asset or a liability can be reversed.
These accounts are as follow:
CLOSING ENTRIES o Prepayments (Expense Method)
o Undearned/Deferred Revenue (Income Method)
 These are entries used to prepare nominal accounts for the next
o Accrued Expenses
accounting period, and to transfer the results of business to the
o Accrued Income
capital account, along with the owner’s withdrawals. The steps taken
in closing entries are as follows.

 Close the Income Accounts

Accounting for Merchandising
Revenue & accounts with Business
normal credit balances XX
Income Summary XX INVENTORY SYSTEM
 Close the Expense Accounts  Merchandising businesses are mainly involved in two activies,
Income Summary XX buying and selling. Inventory is an important factor for these kind of
Income Summary XX businesses, which is why there is two alternative systems in
recording transactions of such businesses; periodic and perpetual
 Close Income Summary to Capital systems. The common account titles used are as follows:
For Net Income: o Buyer’s Perspective

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  Purchases o 2/10 EOM, n/60 – 2% discount if paid 10 days after the end of
 Purchase Returns & Allowances month, payable within 60 days
 Purchase Discounts o 1/EOM – 1% discount if paid until the end of month
 Freight-in o EOM – there is no dicount, payable until the end of month
o Seller’s Perspective
 Sales PERPETUAL SYSTEM
 Sales Returns & Allowances
This system is appropriate for businesses selling high-priced
 Sales Discounts
items for these typically make small number of sales daily. Since the
 Freight-out
amount of sales are only few, recording cost of sales per transaction
 There are also business documents used to back up the following is feasible such that when the accounting period ends, the ending
transactions: inventory must tally with the physical count unless there is case of
o Buyer’s Perspective theft, obsolescence or spoilage.
 Purchase Order  This system being strict with its inventory, replaces the accounts
 Receiving Report purchases, purchase returns and allowances, purchase discount,
 Debit Memorandum (for purchase returns) and freight-in with merchandise inventory. There is also a need to
o Seller’s Perspective evaluate the cost of goods sold when an inventory is sold.
 Sales Invoice
 Official Receipt
 Credit Memorandum (for sales returns)

PERIODIC SYSTEM
FREIGHT CHARGES
 This system is appropriate for businesses selling low-priced items for
these typically are voluminous. It isn’t feasible to be tracing from the
records the costs of each items sold. Terms of Freight Who should pay? Who paid?
 Kinds of Discount FOB shipping point, freight collect BUYER BUYER
o Trade Discount- a deduction from the list price or catalogue
FOB shipping point, freight prepaid BUYER SELLER
price to encourage purchases in big quantities or volume.
o Cash Discount- a deduction from the selling price to prompt FOB destination, freight collect SELLER BUYER
payments of accounts (partial payments are excluded if FOB destination, freight prepaid SELLER SELLER
discounted)
 Terms of Discount
o 20-10, 1/10, n/30 – means that the list price will go through
series of 0.2 and 0.1 discounts to get the purchase price. The
date of payment will then be the basis for additional
deductions when the terms are met. General Purpose of Financial
o 3/15, 2/20, n/30 – 3% discount if paid within 15 days, 2% in
20 days and must be paid within 30 days.
Statements
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  Financial Statements are the key or end product of the accounting Accounts Payable P XX
process, used to communicate the current standing of an enterprise. Salaries Payable P XX
Utilities Payable XX ss P XX
Non-Current Liabilities
Loans Payable P XX
Mortgage Payable XX P XX
Total Liabilities P XX
Owner’s Capital XX
Total Liabilities and Owner’s Equity P XX
STATEMENT OF FINANCIAL POSITION
 Also known as Balance Sheet, shows the financial condition of the
business as of a given period. It consists of the real accounts, STATEMENT OF COMPREHENSIVE INCOME
namely the assets, liabilities, and owner’s equity.
 Also known as Income Statement, shows the results of operations
for a given period. It consists the nominal account, income and
expense.

Sample Format:

Company Name Sample Format:

Statement of Financial Position
Company Name
As of xx xx, xx
Statement of Comprehensive Income
ASSETS For the Year Ended xx xx, xx

Current Assets Sales P XX

Cash P XX Less: Sales Returns and Allowances P XX
Sales Discount XX XX
Accounts Receivable P XX
Net Sales P XX
Prepaid Rent XX ss P XX Less: Cost of Sales
Non-Current Assets Merchandise Inventory, beg. P XX
Office Equipment XX Add: Net Cost of Purchases
Building P XX Purchases P XX
Vehicle P XX P XX Less: Purch. Ret. & Allow. P XX
Total Assets P XX Purchase Discount XX XX
Net Purchases P XX
LIABILITIES & OWNER’S EQUITY Add: Freight-in XX XX
Goods Available for Sale P XX
Current Liabilities Less: Merchandise Inventory, end XX XX

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Gross Profit P XX Net Income (if any) XX XX
Add: Other Income Total P XX
Dividends Income P XX Less: Drawings P XX
Rent Income XX XX
Net Loss (if any) XX XX
Total Income P XX
Less: Operating Expenses Owner’s Capital, end P XX
Distribution and Selling Expenses
Freight-out P XX
Advertising expense XX STATEMENT OF CHANGES IN CASH FLOW
Sales/store-related expense XX P XX
General and Administrative Expenses  Summarizes all the CASH FLOW during the period, cash inflow as
Bad debt expense P XX receipts and cash outflow as the disbursements. It is all classified
Office-related expenses XX under three major categories; operating, investing, and financing.
Quiet (no sign) expenses XX XX
Other Expenses
Discount Lost XX
Finance Cost
Interest expense XX XX
Net Income P XX

STATEMENT OF CHANGES IN OWNER’S EQUITY Sample Format:

 Shows the changes in the capital or owner’s equity as a result of
Company Name
additional investment or withdrawals of the owner, along with the net
Cash Flow STATEMENT
income or loss for the year.
For the Year Ended Dec. 3, 2020

Cash Flows from Operating Activities

Receipts
Collection of accounts P XX
Received Income XX
Payments
Sample Format: Operating expenses (XX)
Interest Expense (XX)
Company Name Net Cash from Operating Activities P XX
Statement of Changes in Equity Cash Flows from Investing Activities
For the Year Ended xx xx, xx Receipts
Proceeds from sale of equipment P XX
Owner’s Capital, beg. P XX
Payments
Add: Additional Investment P XX
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 For purchase of land (XX)
Net Cash from Investing Activities (XX)
Cash Flows from Financing Activities
Receipts
Additional Investment of owner P XX
Proceeds of bank loan XX
Payments
Partial payment of bank loan (XX)
Net Cash from Financing Activities XX
Net Increase/(Decrease) in Cash P XX
Beginning Cash Balance XX
Ending Cash Balance P XX

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