SHS - Fundamentals of Accounting 2

FUNDAMENTALS OF ACCOUNTING 2
FOR ACCOUNTANCY, BUSINESS AND MANAGEMENT – SENIOR

HIGH SCHOOL (ABM – SHS)
JEFFREY TILLO, CPA

JULIETA DILLENA, CPA,
MBA BENJIE SIA, CPA
TABLE OF CONTENTS
Unit 1: The Statement of Financial Position …………………………………………………………… 1
Elements of the Statement of Financial Position ………………………………….……………………… 3
Assets ……………………………………………………………………….………………………………… 3
Current Assets ……………………………………………………………………………...………………… 4
Receivables …………………………………………………………………………………………………… 5
Inventories ………………………………………………………………………….……………….………… 6
Prepaid Expenses ……………………………………………………………………………………….…… 6
Noncurrent Assets ………………………………………………………………………….………………… 7
Property, Plant, and Equipment …………………………………………………………………………….. 7
Intangible Assets ………………………………………………………………………….…………..……… 7
Liabilities ……………………………………………………………………………………………….……… 8
Current Liabilities ………………………………………………………………………….………………..… 8
Payables ………………………………………………………………………………………………………. 8
Accrued Expenses ……………………………………………………………………………………….…… 8
Unearned Income …………………………………………………………………….……………………….. 9
Noncurrent Liabilities ……………………………………………………………………………….…….…… 9
Equity …………………………………………………………………………………………...……………… 9
Exercises ……………………………………………………………………………………………………… 15
Unit 2: Statement of Comprehensive Income …………………………………………..………………. 19

Element of Statement of Comprehensive Income ………………………………………………………… 21
Revenue …………………………………………………………………………………………………….… 21
Cost and Expenses ………………………………………………………………………….……………… 22
Exercises ……………………………………………………………………………………………...……… 25
Unit 3: Statement of Changes in Equity ………………………………………………………………… 29

Structure of Statement of Changes in Equity …………………………………………………………….. 29
Sole Proprietorship ……………………………………………………………………………….………….. 29
Partnership ……………………………………………………………………………………………..…….. 30
Corporation …………………………………………………………………………………….……………… 31
Relationship of SFP, SCI and SCE ………………………………………………………………...………. 32
Exercises ………………………………………………………………………...…………………………… 33
Unit 4: Cash Flow Statement …………………………………………………………………………..… 36

Introduction to Cash Flow Statement ………………………………………………………………...…… 36
Definition of Cash ………………………………………………………………………………..………….. 36
Sections of Cash Flow Statement …………………………………………………………………………. 36
Operating Activities ………………………………………………………………………….……………… 37
Investing Activities ……………………………………………………………………….…………………… 37
Financing Activities ……………………………………………………………………..…….……………… 37
Direct Method Format ……………………………………………………………………………….………. 38
Indirect Method Format …………………………………………………………………………….……….. 39
Exercises ………………………………………………………………………………………….……………. 47
Problems ………………………………………………………………………………………….…...……… 48
TABLE OF CONTENTS
Unit 5: Financial Statements Analysis …………………………………………………………………………
50 Objectives of Financial Statements Analysis ……………………………………………………………………
51 Tools and Techniques of Financial Statements Analysis ……………………………………………………
51 Horizontal and Vertical Analysis ……………………………………………………………………………… 51
Ratio Analysis …………………………………………………………………………….…………………………
55 Long Term and Leverage Ratios
…………………………………………………………………………………. 60 Limitations of Financial
Statement Analysis ………………………………………………………………… 61 Advantages of Financial
Statement Analysis …………………………………………………………………… 61 Exercises
………………………………………………...……………………….………………………………… 64
Unit 6: Accounting Books - Journal and Ledger …………………………………………………………… 66

Normal Balance of an Account …………………………………………………………………………………….
67 Recording to the General Journal
………………………………………………………………………………… 67 Posting to General Ledger
……………………………………………………………………………….……… 67 T-Account Analysis
……………………………………………………………………………….………………… 68 Footing the
Account ……………………………………………………………………………….……………… 71 Exercises
………………………………………………………………………....………………………………… 74
Unit 7: Accounting Practice Set ……………………………………………………………………………… 86

Review of Merchandising Business ……………………………………………………………………….… 86
Mini-Practice Set ……………………………………………………………………...……….……………………
87
Unit 8: Bank Accounts and Bank Reconciliation ………………………………………………………… 93

What is a Bank? …………………………………………………………………………….……………………… 93
Type of Bank Accounts …………………………………………………………………………….…………… 93
Savings Account ………………………………………………………………………….……………………… 93
Current Account ………………………………………………………………………………………………… 94
Checking Account …………………………………………………………………………….…………………… 94
Other Investment Account in Bank …………………………………………………………………………… 95
Examples of Bank Forms ………………………………………………………………………………………… 95
Bank Reconciliation ……………………………………………………………………………………………… 100
Bank Reconciliation Format – Adjusted Balance …………………………………………………………… 102
Exercises ………………………………………………………………………..…………………………………
107
Unit 9: Income and Business tax ………………………………………………………………………… 110

What is Taxation? ………………………………………………………………………………………………… 110
Income Taxation ……………………………………………………………………………………………………
110 Gross Revenue
…………………………………………………………………………………………………… 110 Deductions
………………………………………………………………………………………………………… 111 Personal
and Additional Exemptions …………………………………………………………………………… 112
Individual Tax Rate ………………………………………………………………………………………….…… 113
Corporate Tax Rate ……………………………………………………………………………………………… 113
PREFACE
This manual is a product of the authors’ substantial experience in teaching basic

accounting particularly the service and merchandising business and a fruit of their
practical exposure as CPA practitioner.
This manual aims to help senior high school students to understand the
fundamentals of financial statements analysis and financial ratios of a service and
merchandising business in simple and less complex manner. This may also help the
users, with the acquired knowledge and skills on financial analysis, in making sound
economic decisions in their future entrepreneurial careers.
The authors included cases and examples simulating actual problems being
encountered in business that require considerations of the particular accounting
principles and are worth discussing inside the classroom. The authors have classroom
tested all the end of unit materials and have proven that they are both teacher and
student friendly.
It is hope that this manual will meet the needs of the senior high school students
for concise, simplified but comprehensive instructional materials that can help them
understand easily fundamentals of accounting 2.
Constructive criticisms, no matter how minute, are most-welcomed from our

colleagues in the profession as well as from other users.
Unit 1: The Statement of Financial Position
Learning Objectives:
By the end of the Unit, the student should be able to:
1. identify the elements of the Statement of Financial Position (also referred herein
as SFP or Balance Sheet) and describe each of them;

2. classify the elements of the SFP into current and noncurrent items;
3. prepare the SFP of a single proprietorship; and
4. prepare an SFP using the report form and the account form with proper classification of
items as current and noncurrent
What is the Statement of Financial Position

Statement of Financial Position was previously referred to as Balance Sheet. The SFP
shows the company’s assets, liabilities and equity. It is divided into two parts (see Figure 1.1).
The assets are on one side and liabilities and equity (also referred as capital) are on the other
side. Liabilities are claim of creditors while equity are claims of owners. The SFP also shows
us the very basic formula in accounting: Assets = Liabilities plus Equity (ALE). Thus, assets
should always equal to the sum of liabilities and capital. SFP is called Balance Sheet as
it shows sheet where two sides are always equal or balance.
Figure 1.1
DEBIT CREDIT
ASSETS LIABILITIES
(Cash, Trade and Other Receivables, (Trade and Other Payables, Accrued
Inventories, Property, Plant and Equipment, Expenses, Loans Payable, etc.)
etc.)
EQUITY
∙ Owner’s Capital/Drawings
for Single proprietor
∙ Partners’ Capital/Drawings
for Partnership
∙ Stockholders’ Equity
for Corporation
1 Fundamentals of
Accounting 2
Figure 1.1illustratess the basic accounting equation ALE. It also shows that the
Debit balance of assets must be equal to the Credit balances of liabilities and equity. The
equation wants you to realize that assets came from two difference sources; It may originate
though borrowings or owner’s contributed capital.
SFP starts with a title (e.g., Name of the Company, the type of Financial
Statements and the accounting period), then followed by the balances of Current and
Noncurrent Assets, Current and Noncurrent Liabilities and the Equity. Figure 1.2 illustrates
an example of a Balance Sheet of Single Proprietor business:
Figure 1.2 (all amounts are assumed)
TILLO ENTERPRISES
Statement of Financial Position
As at December 31, 2016
2016
Current Assets
Cash (Note 3) P 228,104
Trade receivables (Note 4) 400,124
Total current assets 628,227
Noncurrent asset
Property and equipment - net (Note 6) 120,436
Total non current asset 120,436
TOTAL ASSETS P 748,663
Current liabilities
Trade and other payables 98,026
Noncurrent liabilities
Notes payable 102,644
Total liabilities 102,644
Equity
Owner's equity 247,495
Net income 300,499
Total equity 547,994
TOTAL LIABILITIES AND EQUITY P 748,663
See notes to the Financial Statements.
2 Fundamentals of
Accounting 2
The above SFP is in Report Form format. Another way to present using Account Form
format where all Assets are listed in the right side and Liabilities and Equity in the left side. Is it
okay to use the “Balance Sheet” title instead of “Statement of Financial Position”? The answer
is Yes. The Philippine Accounting Standards (PAS) only encourage the use of SFP but the use
of such title is not mandated.
The third line “As at December 31, 2016” tells the accounting period. It states that the
figures included in the balances of assets, liabilities and equity from the start of the operations up
to December 31, 2016 only. Transactions after the said date are not included. However, the SFP
doesn’t necessarily end every December 31. It depends on the reporting period of the company.
Elements of the Statement of Financial Position
SFP is composed of the following elements: Assets, Liabilities and Equity. In other words,
SFP the accounting equation ALE shows the basic elements of the SFP. The accounts in the
balance sheet is called real accounts. Real accounts are accounts where their balances are
carried forward into the next accounting period. Hence, these accounts always have a closing
balance.
Assets– debit is the normal balance
SFP balances start with Assets. Assets are company resources that are expected to have
future economic benefits. All assets should be owned and within the control of the company. The
asset should be useful to the company in the future. Control means that the company can
prevent others from benefiting from the asset; control also tells that the company has the right to
dispose the assets. Resources are classified into asset account based on its future use to the
company. There are many kinds of assets and they classified as Current and Noncurrent. Below
are the assets that will be discussed in this context:

Current Assets
1.Cash and Cash Equivalents
2.Receivables
3.Inventories
4.Prepaid Expenses
Noncurrent Assets
5. Property, Plant and Equipment
6. Intangible Assets
3 Fundamentals of
Accounting 2
Current Assets
Current Assets are assets that are expected to be converted to cash within one year.
Examples of current assets below are the normal assets in a balance sheet.
Cash and Cash Equivalents
The first line item in the balance sheet is the Cash. Cash means money. A currency in its
physical form. Cash must be owned and controlled by the company. It is categorized as Cash
on hand and Cash in bank. Cash on Hand is cash in the form of bills, coins or checks inside
the Company’s premises. It usually under the vault and kept by the company’s employee
known as cash custodian. Bills and coins are the normal currency used in the business that are
readily available for use. Bank checks, or checks, are bank documents used by the issuer to
instruct the bank to pay the assigned payee from funds in the issuer's bank account. Checks
maybe reported as part of cash because these documents are accepted as payments and
deposits. A check is classified as cash if the date of the check is on or before the SFP date. A
check dated after the SFP date is a post-dated check and is classified as receivables rather
than cash. On the other hand, Cash in bank is money in the bank which could be in the form of
savings or checking account. Cash in Bank earns interest at its respective bank interest rates.
Thus, cash deposited in bank increases due to the interest earned from the bank. Interest
varies for every bank. Cash refers only to currency readily available to be used for the
company's operations. It be used to buy inventories, machines, furniture, and other assets; pay
suppliers, rent, utilities, employee salaries and other operating expenses. Cash initially
comesowners’ contribution. Cash also comes from collections from the sale of inventories or
rendering services, proceeds from sale of other assets, and proceeds from borrowings. Not all
bank deposits are classified as cash. Some accounts are not readily available for use such as
a time deposit account. A time deposit account is a deposit in the bank that earns higher
interest because the depositor commits not to withdraw the funds over the agreed upon time.
Penalties are imposed if the depositor withdraws before the maturity of the deposit. Given the
withdrawal restriction, time deposits are not classified as cash. Those with a term of up to 90
days are reported as cash equivalents while those that will mature longer than 90 days are
reported as investments. Cash Equivalents are short-term highly liquid investments that are
readily convertible into cash. Cash equivalents are technically not cash because it is not
immediately available for use. It is almost cash in the sense that it will become cash within the
next 90 days. Thus, only highly liquid investments that are acquired three months before
maturity can qualify as cash equivalents. Time deposits with term maturities of ninety days or
less are example of cash equivalents. It is generally reported on the SFP
4 Fundamentals of
Accounting 2
together with cash. The line account is cash and cash equivalents. However, the components of
cash and cash equivalents (cash on hand, cash in bank, cash equivalents) are required to be
disclosed in the accompanying notes to financial statements.
Receivables
Receivables is a general term that refers to the company's right to collect payment
from third parties, such as customers and employees.Hence, receivables arise from
contractual rights to receive cash or other assets from third parties.
Trade Receivables are claims from suppliers from unpaid sales or services rendered in
advance to customers.Trade Receivables came from the normal operating activities of the
company. This is usually the largest receivables of an entity. Trade Receivables arise when a
company sold inventoriesor rendered services to its customers. It is evidenced by sales
invoice or statement of account and other documents such as delivery receipt. Trade
Receivables are subject to terms such as discount rate within the discount period. Discount is
amount to be deducted in a customer payment. Discount period is a period where the
customer could avail a discount. Hence, if a company sold goods to customer on January 1
and the discount period is within 10 days, the customer could avail a discount up to January 11
only. To fasten the company’s collections, the company could impose a “pay early, pay less”
policy. It means the earlier the payment, the higher the discount. A company may also enforce
a credit limit where its customers could borrow up to a certain amount.
As a rule,the collections of the company’s receivables must be in cash. However, some
company’s exchange other assets or services other than cash to settle its receivables. For
example, a company may accept land to settle the receivables from a client or customer.
Notes Receivable is a receivable evidenced by a note. It is a piece of paper signed
by the borrower where it promises to pay a certain amount at a certain time. This is called
promissory note (PN). Promissory notes usual bear interest.
Other receivables came from other sources. Examples are:
1. Advances to Officers and Employees
2. Advances to Customers
3. Advances to Affiliated Companies
4. Deposits for Future Contingencies
5. Dividend Receivables
6. Interest Receivables
7. Claims from Third Parties (such as insurance)
5 Fundamentals of
Accounting 2
8. Miscellaneous receivables from sale of other assets other than inventories
Receivables that should be presented must be at its net realizable value. This means
the total amount where the collection is probable and certain. Not all receivables are
collectible. There are some receivables where collection is uncertain due to some reasons
such as customer’s bankruptcy. In some cases, receivables became worthless. Thus, in order
to arrive at receivables’ net realizable value, an Allowance for Bad Debts account must be set-
up. This account is a deduction from the gross amount of the receivables and known as a
contra-asset account.
Inventories
This balance sheet account represents cost of unsold merchandise. Inventoriesare
company’s assets that are sold in the normal course of its business. For example, a trading
business that buys andsells cellphones, categorizes cellphones and cellphone accessories
as inventories. A business that manufactures clothing classifies its clothing as inventories.
Service company usually doesn’t have inventories as they sell services, not merchandise.
However, not all inventories of a company in its premises are owned by the company.
A
company (the consignor) may consign its inventories to another company (consignee). This
means that the inventories of the consignor are placed at the consignee’s premises (usually in
the consignee’s store or sales outlet). The consignee did not buy the consignors inventories.
Instead, the former needs to sell the inventories of the latter. In return, the consignor will pay
commission to the consignee based on the sold merchandise.
Inventories are held primarily for sale. Those that are to be used in the day-to-day
operations of the business such asOffice supplies are not Inventories. It is classified as an
asset called Supplies or Office supplies.
Prepaid Expenses
Prepaid Expenses areexpenses not yet incurred but paid in advance. One of the best
examples of a prepaid expense is the mobile prepaid load. If you pay P100 load for your
mobile, such load is prepaid expense. It will be expensed once you have used it to text or call
someone. Another example is the prepaid rent. A lessee generally pays advance rent to its
landlord, usually a two-month advance.
Prepaid rent represents rent paid in advance but not yet consumed. Thus, this expense is an
asset until such expense is consumed.
6 Fundamentals of
Accounting 2
Noncurrent Assets
Noncurrent Assets are assets that are expected to be used for more than one
year. Typical examples are as follows:
Property, Plant, and Equipment
A typical example of noncurrent asset is the Property, plant, and equipment (PPE).The
old term is Fixed assets. These assets are long-term assets that are used in the operations of
the company.PPE should be owned and controlled by the company. Leased properties are
excluded from PPE. The purchased of PPE is recorded as assets and will not automatically
recorded as expense as these assets will be used for more than one year. Expenses for these
assets will be recorded through depreciation. This depreciation will accumulate and will be
charged to Accumulated Depreciation account, which is also a contra-asset account. Costs of
buying a fixed asset should be allocated during the lifetime of the asset benefited by their use.
This is the theory of matching costs with the revenue. Examples of PPEare:
1. Land – real property used in operations or for rent. This is a fixed asset not subject
to
deprecation.
2. Building – real property used in operations such as warehouse and office buildings.
3. Equipment – this includes office computers, automobiles, delivery
vehicle, and manufacturing equipment.
4. Land and Building Improvements – these are enhancements to land or building.
Land improvements includes landscaping, parking lots and driveways. Building
improvements includes floor and roof renovation.
5. Leasehold Improvements – it’s like building improvements, except that the premise
is just rented by the company. Property, Plant and Equipment must be presented at
their respective carrying amounts. Carrying amounts simply means cost less
accumulated depreciation.
Intangible Assets
Intangible assets are also long-term assets like PPE. The only distinguishing feature
of these assets is that they are untouchable or cannot be seen by the naked eyes. These
assets don’t have physical substance. Intangible assets will be used in the business
operations for more than one year. Their costs are allocated similar to PPE. Its cost
allocation is called amortization. Typical examples are:
1. Trademarks – this is a distinguishing mark such as brand names, logo and
symbols. A lot of companies are using their trademarks such as Jollibee,
McDonalds and Coca-cola.
7 Fundamentals of
Accounting 2
Liabilities– credit is the normal balance
These are obligations of the company. The company is expected to pay cash or
exchange other assets to settle the obligations. Below are the assets that will be discussed in
this context:
Current Liabilities
1.Trade and Other Payables
2.Accrued Expenses
3.Unearned Income
4.Loans Payable
5.Noncurrent portion of Notes Payable
Current Liabilities
Liabilities are obligations of the company that are expected to be paid within one
year. As discussed before, assets could also originate from liabilities.
Payables
Trade Payables are payables arise from purchased of merchandise from suppliers.
Thus, trade payables are company obligations due to purchase of inventories. Trade
Payables are similar to trade receivables in the sense that they are also subject to discounts
and credit limit. Trade Payables is actually the opposite of Trade Receivables. Trade
Payables is a requirement to pay the supplier while Trade receivables is a requirement to pay
the customer.
On the other hand, a company may also write a promissory note to the supplier. This is
called the Notes Payable. This is the opposite of the Notes Receivable. Other receivable
represents miscellaneous payables such as advances from officers and employees. Notes
Payable could be current or noncurrent.
Accrued Expenses
The opposite of prepaid expense. This account represents expenses already incurred
but not yet paid. For example, the company’s electricity bill for the month of January is received
in the early weeks of February. We will assume that payment will be made within February.
Utilities expense must be recorded in January because the company already used the
electricity in January though payment will be made the next month.
8 Fundamentals of
Accounting 2
Accrued Expenses are presented as current liabilities as these should be paid
as soon as possible. Examples of accrued expenses are:
1. Accrued Utilities – includes water and electricity and internet connections.
2. Accrued Salaries – amount of labor already rendered by the employees but not yet
paid.
3. Accrued Interest – is interest already incurred but is not yet paid.
Unearned Income
This represents income received in advance but not yet earned. In short, collection are
already made but services are not yet rendered. Example is advance rent received by the
landlord from the lessee.
Noncurrent Liabilities
Noncurrent Liabilities are long-term obligations payable for more than one year.
Examples are:
4. Loans Payable – this usually originate from borrowing from the banks.
5. Long-term portion of Notes Payable.
Equity– credit is the normal balance
Equity is the excess of assets over liabilities. Hence, equity is the net assets of the
business. This represents capital contributed by the owners. It will increase due to
accumulated income and additional investments; It will decrease because of accumulated loss
and owner’s withdrawals. This will be

discussed in Unit 3.
Preparation of Statement of Financial Position
SFP is prepared from the Trial balance. In the Trial balance, Assets are usually at the
top, followed by Liabilities, Equity, Revenue and Expenses. Take note that balance sheet
consists of Assets, Liabilities and Equity only. Revenue and Expenses will be presented in
detail in the Statement of Comprehensive Income. The difference of Revenue over Expenses
will be presented in the Statement of Financial Position under Equity account.The easiest
way to prepare a balance sheet is to identify the account if it an asset, liability or equity.
Before you prepare the Balance Sheet, ask yourself a question: “Is this account an Asset? A
Liability? Or is it an Equity?
9 Fundamentals of
Accounting 2
Illustrative problem
The following is an adjusted trial balance of Jipoy Store as of December 31, 2016:
Cash on hand 100,000
Cash in bank 250,000
Trade receivables 244,000
Allowance for bad debts 75,000
Advances to officers and employees 12,000
Advances to suppliers 18,000
Interest receivable 1,200
Supplies inventory 6,700
Merchandise inventory - beginning 25,000
Prepaid interest 4,200
Prepaid insurance 6,240
Land 550,000
Land improvements 8,000
Accumulated deprecition - Land improvements 2,400
Building 320,000
Accumulated deprecition - Building 32,000
Building improvements 10,260
Accumulated deprecition - Building 1,026
improvements
Furniture and equipment 55,000
Accumulated depreciation - Furniture and 5,000
equipment
Delivery equipment 120,000
Accumulated depreciation - Delivery 12,000
equipment
Trade payables 165,000
Accrued utilities 3,000
Accrued salaries 6,600
Unearned rent 22,000
Unearned income 52,000
Notes payable - short-term portion 50,000
Notes payable - long-term portion 250,000
Loans payable 300,000
Jipoy, capital 360,609
Jipoy, drawing 49,000
Sales 1,800,000
Sales discount 12,000
Rent income 57,000
Purchases 1,220,000
Freight in 32,250
Utilities expense 89,000
Rent expense 28,500
Bad debts 2,200
Depreciation - building 8,700
Depreciation - land improvements 1,560
Depreciation - building improvements 2,620
Depreciation - furniture and equipment 3,450
Depreciation - delivery equipment 7,800
Supplies expense 3,500
Required: Prepare a Statement of Financial Position
Insurance expense 2,455
Merchandise inventory - ending 50,000
Income and expense summary 50,000
10 3,243,635.00 3,243,635.00
Fundamentals of
Accounting 2
To prepare the SFP simply:
1st list the assets, the liabilities and equity.
2nd identify the revenue and expenses; any excess over revenue and expenses will be
included as part of the equity.
3rd take note that beginning inventories will expensed as its assumed that such is
sold in the current year. Ending inventories will be part of the Current Assets.
4th all accounts with the same nature could be combined in just one account.
Figure 1.3 in the next page shows the 1st to 4th steps.
Solution:
Figure 1.3
FS Account Class Acct Debit Credit

Cash Assets Cash on hand 100,000
Cash Assets Cash in bank 250,000
Trade and other receivables Assets Trade receivables 244,000
Trade and other receivables Assets Allowance for bad debts 75,000
Trade and other receivables Assets Advances to officers and employees 12,000
Trade and other receivables Assets Advances to suppliers 18,000
Trade and other receivables Assets Interest receivable 1,200
Trade and other receivables Assets Supplies inventory 6,700
Prepayments Assets Prepaid interest 4,200
Prepayments Assets Prepaid insurance 6,240
Property, plant and equipment Assets Land 550,000
Property, plant and equipment Assets Land improvements 8,000
Property, plant and equipment Assets Accumulated deprecition - Land improvements 2,400
Property, plant and equipment Assets Building 320,000
Property, plant and equipment Assets Accumulated deprecition - Building 32,000
Property, plant and equipment Assets Building improvements 10,260
Property, plant and equipment Assets Accumulated deprecition - Building improvements 1,026
Property, plant and equipment Assets Furniture and equipment 55,000
Property, plant and equipment Assets Accumulated depreciation - Furniture and equipment 5,000
Property, plant and equipment Assets Delivery equipment 120,000
Property, plant and equipment Assets Accumulated depreciation - Delivery equipment 12,000
FS Account
Inventories Class
Assets Merchandise inventory - Acct
ending Debit
50,000 Credit
Trade and other payables Liabilities Trade payables 165,000
Trade and other payables Liabilities Accrued utilities 3,000
Trade and other payables Liabilities Accrued salaries 6,600
Unearned revenue Liabilities Unearned rent 22,000
Unearned revenue Liabilities Unearned income 52,000
Notes payable Liabilities Notes payable - short-term portion 50,000
Notes payable Liabilities Notes payable - long-term portion 250,000
Loans payable Liabilities Loans payable 300,000
FS Account Class Acct Debit Credit
Equity Equity Jipoy, capital 360,609
Equity Equity Jipoy, drawing 49,000
11 Fundamentals of
Accounting 2
JIPOY STORE
Statement of Financial Position
As at December 31, 2016
2016
Current assets
Cash P 350,000
Trade receivables and other receivables 206,900
Inventories 50,000
Prepayments 10,440
Total current assets 617,340
Non current Asset

Property, plant and equipment - net 1,010,834
Total noncurrent assets 1,010,834
TOTAL ASSETS P 1,628,174
Current liabilities
Trade and other payables P 174,600
Unearned revenue 74,000
Notes payable - current portion 50,000
Total current liabilities 298,600
Notes payable - noncurrent portion 250,000
Loans payable 300,000
Total noncurrent liabilities 550,000
Equity
Owner's equity 311,609
Net income* 467,965
Total equity 779,574
TOTAL LIABILITIES AND EQUITY P 1,628,174
Cash account above is the sum (100,000+250,000) of “Cash” under the FS Account
column in Figure 3. Same computation in all balance sheet accounts.
Again, the above is presented under the Report Form format. The Account Form format
is to simply list the Assets in the left side and all Liabilities and Equity in the right side
presented in figure 1.4 below.
12 Fundamentals of
Accounting 2
Figure 1.4
*Net income is computed simply by deducting Expenses from Revenue account

or simply prepare Statement of Comprehensive (see Figure 1.5)
Figure 1.5
13 Fundamentals of
Accounting 2
Take note that you can still compute the net income without preparing the Statement of
Comprehensive Income above using the basic accounting equation ALE. Assets must equal
the Liabilities and Equity.
Assets = Liabiliti + Equity Differenc

es e
1,628,174 848,600 + 311,60 ?
9
1,628,174 = 1,160,209 ?
By simply deducting the total, Assets from the total Liabilities and Equity above, it will
result to P467,965 which also the Net Income. That is the relation of Statement of
Comprehensive Income with Statement of Financial Position. Again, Net Income will become
part of the Equity.
14 Fundamentals of
Accounting 2
15 Fundamentals of
Accounting 2
16 Fundamentals of
Accounting 2
17 Fundamentals of
Accounting 2
18 Fundamentals of
Accounting 2
Unit 2: The Statement of Comprehensive Income
Learning Objectives
1. Identify the elements of the Statement of Comprehensive Income (also referred herein
as SCI or Income Statement);

2. describe each of the elements of SCI for a service business and a merchandising
business;
3. prepare an SCI for a service business using the single-step approach; and
4. prepare an SCI for a merchandising business using the multistep approach.
What is the Statement of Comprehensive Income?

Statement of Comprehensive Income was previously referred to as Income Statement.
Generally speaking, the main reason why people put up a business is to generate an income.
From the title itself, SCI is the statement that gives you the information regarding the income
and expenses of the company. The SCI answers various questions such as:
1. How much is the gross revenue of the company?
2. How much is the expenses of the company?
3. How much merchandise were purchased during the year?
4. What is the highest expenses we incur during the year?
5. Did the company earn?
6. How much earnings did we generate during the year?
These questions are answered by reading and analyzing the Income Statement. Hence,
SCI shows the company’s result of operations. The figures in the SCI is the result of how the
management of the company uses and administrates its resources. The SCI is composed of
two elements: Revenue, Cost and Expenses. In general, income is just computed by simply by
deducting the Cost and Expenses from the Revenue as presented in figure 2.1. If the Revenue
is higher than the Cost and Expenses, it will result to a Net Income. However, if the Cost and
Expenses is bigger than the Revenue, it will result to a Net Loss.
Figure 2.1
Revenue xxx
Less: Cost and Expenses xxx
Net Income or Net Loss xxx
If Revenue > Cost and Expenses = Net

Income
If Revenue < Cost and Expenses = Net
Loss
19 Fundamentals of
Accounting 2
Recall in Unit 1 that a Statement of Comprehensive Income is already presented
under Figure 1.5. It shows the details of the details of the three elements of SCI. Income
Statement starts with a title (e.g., Name of the Company, the type of Financial Statements and
the accounting period), then followed by the balances of Revenue, Cost and Expenses. Figure
1.5 in Unit 1 is presented again to illustrate an example of an Income Statement of a trading
business, while figure 2.2 is for service type business.
Figure 1.5
JIPOY STORE
Statement of Comprehensive Income
For the year ended December 31, 2016
2016
Net sales
Sales 1,800,000
Sales discount (12,000) 1,788,000
Less: Cost of sales

Inventories - beginning 25,000
Purchases 1,220,000
Freight-in 32,250
Total goods available for sale 1,277,250
Inventories - ending (50,000) 1,227,250
Gross profit 560,750
Less: General and operating expenses
Rent expense 28,500
Bad debts 2,200
Depreciation - land improvements 1,560
Insurance expense 2,455 149,785
Net operating income 410,965
Add: Rent income 57,000
Net income P 467,965
20 Fundamentals of
Accounting 2
Figure 2.2 (all amounts are assumed)
DRE SALON BUSINESS
Statement of Comprehensive Income
2016
Service revenue 1,600,000

Less: Direct cost of services
Direct materials 440,000
Direct labor 22,000 462,000
Gross profit 1,138,000
Less: General and operating expenses
Salaries and allowances 55,690
Rent expense 34,125
Bad debts 7,825
Depreciation - land improvements 7,185 211,282
Net operating income 926,718
Add: Other income 33,000
Take note that Cost of Sales is used in trading business and Direct Cost of Services is
used in a service type business. This is their main difference. Again, either service type or a
trading have the same computation of net income–Revenue less Cost and Expenses.
The 3rd line in the SCI states “For the Year Ended December 31, 2016”. It means that the
amounts in the SCI came from transactions from January 1, 2016 up to December 31, 2016
only. Needless to say, the Income statement only shows the result of a specific period.
Elements of Statement of Comprehensive Income

As discussed above, the Income Statement has two basic elements: 1st is the Revenue
and 2nd is the Cost and Expenses. Accounts in the Statement of Comprehensive Income are
called nominal accounts. At the end of the year, nominal accounts are closed to Income and
Expenses Summary account. The Income and Expense Summary account is then closed to
Equity. At the end of the year, the balances of the nominal accounts are nil or zero.
Revenue – credit is the normal balance
Revenue from sale of goods is recognized when the goods are delivered and title has
passed while revenue from sale of services is recognized when service has been rendered.
The collection of cash doesn’t matter in recognizing revenue. It is the very nature of income in
accrual accounting where revenue is recognized when earned, regardless of when received.
However, for tax purposes, revenue
21 Fundamentals of
Accounting 2
from sale of services is recognized when collected regardless of when rendered. Hence, our
Bureau of Internal Revenue doesn’t apply accrual accounting in the revenue of a service
company. Typical type of revenue as follows:
1. Sales
2. Service Income
3. Rent Income
4. Interest Income
5. Royalty Income
6. Gain from sale of other assets
In a trading business, what is the difference between Gross Sales and Net Sales? The
term “net” means something has been deducted. Sales are deducted by discount and returns.
A discount is given to boost sales there the company debit Sales Discount account. A return is
a deduction from sales due to damages or defects where the company debit Sales Return.
Sales Return and Discount accounts are contra-revenue account.
Some business uses other assets and resources to generate extra income other than
the main source of their revenue. For example, an RTW (Ready-to-Wear) business may use
portion of its building or an idle land for lease. Thus, it will generate additional income for the
company.
Cost and Expenses – debit is the normal balance
Cost and expenses are synonymous. Cost in this context means direct cost in selling the
merchandise or rendering the services. Again, the term used in trading is Cost of Sales and
Direct Cost of Services for service business.
Refer to Figure 1.5 (Jipoy Store) where Cost of Sales is computed using the formula below:
Less: Cost of sales
Inventories - beginning 25,000
Purchases 1,220,000
Freight-in 32,250
Total goods available for sale 1,277,250
Inventories - ending (50,000) 1,227,250
The Cost of Sales means the cost of the merchandise sold. It costs Jipoy store
P1,222,250 to sell P1,788,000, which is the net sales. Beginning inventories will form part of
the Cost of Sales as they are assumed sold during the year. Ending inventories are deduction
from the Cost of Sales since the amount is still unsold. Accordingly, no cost is incurred in
ending inventories. Purchases account is presented as its gross amount because there is no
Purchase Discount or Purchase Return in the example given. Purchase Discount is the
opposite of Sales Discount where the company avails discount upon buying
22 Fundamentals of
Accounting 2
bulk amount of goods or by paying within the discount period. Purchase Return account is used
when the merchandise purchase is returned due to defects and damages. Purchase Discount
and Return accounts are contra-purchase account.
Refer to Figure 2.2 (Dre Massage Parlor) where Direct Cost of Services is computed as follows:
Less: Direct cost of services
Direct materials 440,000
Direct labor 22,000 462,00
0
Direct Materials (DM) means the materials used in order to render the service. In parlor
or salon type of business, DM includes cost of scissors purchased, hair coloring materials,
shampoos, manicure and pedicure materials. Direct Labor (DL) means salaries of employees
who are directly rendering the services. DL in a salon business includes salaries of the
hairstylists, pedicurist and manicurist. The salary of the salon’s office staff is included in
General and Operating Expenses as they are not directly rendering the service.
General and operating expenses are those ordinary and necessary in the conduct of
business. The business will not operate without incurring and paying these expenses. Losses
from sale of other assets other than inventories form part of the General and Operating
expenses account.
Refer to Figure 2.2 the following are example of expenses of Dre Salon Business:
Less: General and operating
expenses
Salaries and allowances 55,690
Rent expense 34,125
Depreciation - furniture and 9,075
equipment
improvements
Bad debts 7,825
Depreciation - land improvements 7,185 211,28
2
23 Fundamentals of
Accounting 2
To illustrate, we will use the same data of Jipoy Store in Unit 1, except that only nominal
accounts will be presented.
FS account Accounts Debit Credit
Cost of sales Merchandise inventory - beginning 25,000
Revenue Sales 1,800,000
Revenue Sales discount 12,000
Other income Rent income 57,000
Cost of sales Purchases 1,220,000
Cost of sales Freight in 32,250
Operating expenses Utilities expense 89,000
Operating expenses Rent expense 28,500
Operating expenses Bad debts 2,200
Operating expenses Depreciation - building 8,700
Operating expenses Depreciation - land improvements 1,560
Operating expenses Depreciation - building improvements 2,620
Operating expenses Depreciation - furniture and equipment 3,450
Operating expenses Depreciation - delivery equipment 7,800
Operating expenses Supplies expense 3,500
Operating expenses Insurance expense 2,455
Cost of sales Income and expense summary 50,000
Income Statement is again presented in figure 1.5 above. Accounts are classified to
Revenue, Other Income, Cost of Sales and Operating Expenses. Take note that the 50,000
Income and Expense Summary account is the Ending inventories.
24 Fundamentals of
Accounting 2
25 Fundamentals of
Accounting 2
26 Fundamentals of
Accounting 2
27 Fundamentals of
Accounting 2
28 Fundamentals of
Accounting 2
Unit 3: The Statement of Changes in Equity
Learning Objectives
1. Describe the purpose of Statement of Changes on Equity (also referred herein as SCE
or Capital Statement);
2. discuss the different forms of business organization;
3. prepare an SCE for a single proprietorship, partnership and a corporation.
What is the Statement of Changes in Equity?
Statement of Changes in Equity is also known as the Capital Statement. SCE is the
details of Equity account in the Balance Sheet. Accordingly, the balance of the Equity portion
of the Statement of Financial Position must have the same balance with the Statement of
Changes in Equity. SCE shows the movements of the capital account of the owners.
Generally, SCE is composed of capital invested by the owners and net income or net loss of
the company.
Structure of Statement of Changes in Equity
The structure of the Capital Statement varies depending on forms of business
organization.
There are three basic forms of organization namely: 1st Sole Proprietorship, 2nd
Partnership, 3rd Corporation. Sole Proprietorship means the business is owned and
operated by one person, the owner.m Normally, the owner manages and hand-on in
the company’s operation. The structure of the Capital. Statement of a Sole
Proprietorship is presented in Figure 3.1 Figure 3.1 (amounts are assumed)
SINGLE ME PROPRIETOR
Statement of Changes in Equity
2016
Beginning balance P 100,000
Additional investments 400,000

Total 500,000
Owner's drawings (120,000)
Net income 150,000

Balance at December 31, 2016 P 530,000
29 Fundamentals of
Accounting 2
The structure of the Capital Statement of a Single Proprietorship is simple. It only
shows the following:
1. Beginning investment – the balance of capital balance carried forward from the
previous year.
2. Additional investment – some owners invest additional cash or other assets to
finance the operation of their business.

3. Owner’s drawings – are capital withdrawal usually in cash. The owner may withdraw
money
or other assets from its business. These drawings are generally for personal
use of the owner.
4. Net income or Net loss – as discussed in previous Units, net income or net loss is
closed to the equity account. Income earned will form part of the capital of the
owner that could be personally withdrawn or as an additional fund to the business
operation. If it is a net loss, the equity will suffer for the loss.
Partnership is a form of business organization where two or more persons combine
their capital resources, skills and knowledge to operate a business with a view of earning
profit. Examples of partnership are accounting firms, law firms and engineering firms. The
structure of a Partnership Capital Statement is illustrated in Figure 2.2.
Figure 2.2
PARTNER US BUSINESS
Statement of Changes in Equity
Parnter 1 Parnter 2 Parnter 3 Total
Beginning balance P 100,000 200,000 300,000 600,000
Partners' drawings (120,000) (100,000) (170,000) (390,000)
Additional investments 250,000 120,000 350,000 720,000

Total 230,000 220,000 480,000 930,000
Share in net income 123,656 118,280 258,065 500,000

Balance at December 31, 2016 P 353,656 338,280 738,065 1,430,000
Actually, a Partnership Capital Statement has the same structure of a Sole

Proprietorship. However, capital movements are breakdown per partner. Share in the net
income is based on the partnership agreement. If there is no agreement, distribution of net
income is based on capital balances.
30 Fundamentals of
Accounting 2
The most complex capital structure is the Corporation’s Capital Statement. The Owners
of the Corporation are called stockholders. Stockholders own stocks of a corporation. This
ownership serves as the basis for the dividend. Dividend is the return on the investment of the
stockholders. Stockholders are given certificate of stocks as proof of ownership. Generally, big
companies in the Philippines are composed of corporations. Stocks are usually sold at par
value. Par value is the minimum basis of
stockholder’ contribution. Other topics about corporation will be discussed in higher accounting.
Figure 2.3 illustrates the common structure of Capital Statement of a corporation.
Figure 2.3
This statement is also known as the Stockholders’ Equity. A corporation has the
following capital structure:
1. Common Stock – also called as ordinary share. Ownership of common stock entitles
the stockholder a voting right in the stockholders’ meeting.
2. Preferred stock – also known as the preference share. Preferred
stockholders have preferential dividend rates and claims over the Common
stockholders.
3. Share premium – this account is the excess of payment over the par value of the
stocks, either common or preferred. From the above example, if a stockholder
purchased 1,000 common stock of JTEM Corporation for 150, the share
premium is computed as follows:
The P100,000 par value of stock will go to the Common Stock account and the
P50,000 represents additional paid-in capital and will be added to the Share
Premium account.
31 Fundamentals of
Accounting 2
4. Retained earnings – this account consists of accumulated income or loss of the
company. In other words, this is the part of the equity where net income or net loss
is closed.
Relationship of SFP, SCI and SCE
The Statement of Financial Position cannot be completed without the balance of the
total balance equity. The total balance of equity account cannot be completed without the
balance of the Net income. Figure 2.4 illustrates the relationship of the three statements.
Figure 2.4
ILOVEYOU COMPANY
Statement of
Comprehensive Income
For the year ended
December 31, 2016
2016
Net sales 1,000,0
00
Less: Cost of sales 500,00 ILOVEYOU COMPANY
0 Statement of Changes in
Gross profit 500,00 Equity
0
For the year ended
Less: General and 200,00 December 31, 2016
operating expenses 0
201
6
Beginning balance P 100,
000
Additional investments 400,
000
Total 500,
000
ILOVEYOU COMPANY Drawings (120,
Statement of Financial 000)
Position Net income 300,
As at December 31, 2016 000
Balance at December 31, P 680,0
2016 2016 00
TOTAL ASSETS P 1,000,0
00
0
Equity 680,00
0
TOTAL LIABILITIES AND P 1,000,0
EQUITY 00
32 Fundamentals of
Accounting 2
33 Fundamentals of
Accounting 2
34 Fundamentals of
Accounting 2
35 Fundamentals of
Accounting 2
UNIT 4
CASH FLOW STATEMENT
Learning objectives
1. Understand the components and structures of a statement of cash flows.
2. Classify each sections of statement of cash flows.
3. Prepare statement of cash flows using direct and indirect method.
INTRODUCTION TO CASH FLOW STATEMENT:
The three major financial statements that are ordinarily required for external reporting are
income statement, balance sheet (statement of financial position), and a statement of cash
flows. The main purpose of the preparation of statement of cash flows is to highlight all the
major activities that directly and indirectly impact cash flows and hence affect the overall cash
balance. A very good cash management with sufficient cash balance at the right time, a
company may acquire golden opportunities. The cash flow statement answers questions that
cannot be answered by the income statement and a balance sheet. For example, where
did the owner get the cash for withdrawal of P500,000 in a year in which, according to
income statement, it lost more than P1,000,000? To answer such questions, familiarity with
the statement of cash flows is required.

DEFINITION OF CASH:
In preparing a statement of cash flows, the term cash is broadly defined to include both cash
and cash equivalents. Cash equivalents consist of short term, highly liquid investments such as
treasury bills, commercial paper, and money market funds that are made solely for the purpose
of generating a return on temporary idle funds. Instead of simply holding cash, most companies
invest their excess cash reserves in these types of interest bearing assets that can be easily
converted into cash. These short term liquid investments are usually included in marketable
securities on the balance sheet. Since such assets are equivalent to cash, they are included
with cash in preparing a statement of cash flows
SECTIONS OF CASH FLOW STATEMENT:
The cash flow statement is usually divided into three sections: Operating, investing and
financing activities.
36 Fundamentals of
Accounting 2
OPERATING ACTIVITIES:
Operating activities involve the cash effects of transactions that enter into the determination of
net income, such as cash receipts from sales of goods and services and cash payments to
suppliers and employees for acquisition of inventory and expenses
INVESTING ACTIVITIES:
Investing activities generally involve long term assets and include (a) making and collecting
loans (b) acquiring and disposing of investments and productive long lived assets.
FINANCING ACTIVITIES:
Financing activities involve liability and stock holder’s equity items and include obtaining cash
from creditors and repaying the amounts borrowed and obtaining capital from owners and
providing them with a return on, and a return of, their investment. Below is the typical
classification of cash receipts and payments according to operating, investing and financing
activities.
EXAMPLES OF EACH SECTIONS:
Operating Activities:
Cash inflows:
From sales of goods or services.
From collection of accounts receivable
Income Statement Items (Generally
Cash outflows: Current Assets and Current
Liabilities)
To suppliers for
inventories. To
employees for services.
To government for taxes.
To lenders for
interest. To others
for expenses.
Investing Activities:
Cash inflow:
From sale of property, plant and
equipment. From sale of long term
investments. Generally Non-current Assets
37 Fundamentals of
Accounting 2
Cash Outflows:
To purchase property, plant and
equipment. To purchase long term
investments.
To make loans to other entities.
Financing Activities:
Cash inflows:
From borrowing of long term loans.
From issuance of debt (bonds and notes). Generally Non-current Liabilities
and
Equity Items
Cash outflows:
To owner as withdrawals
To lenders for payment of long term debt
CASH FLOW STATEMENT EXAMPLE – DIRECT AND INDIRECT METHOD:
1. DIRECT METHOD:
(also called the income statement method) reports cash receipts and cash disbursements from
operating activities. The difference between these two amounts in the net cash flow from
operating activates. In other words, the direct method deducts from operating cash receipts the
operating cash disbursements. The direct method results in the presentation of a condensed
cash receipts and cash disbursements statement.
FORMAT OF THE CASH FLOW STATEMENT (DIRECT METHOD):
Company Name
Cash Flow
Statement Period
Covered
Cash Flows From Operating Activities:

List of individual actual cash inflows (e.g. Collection from
customers) List of individual actual cash outflows (e.g. P XX
Payment to suppliers) (XX)
Net cash provided by (used in) from investing activities PXX/(XX)
38 Fundamentals of
Accounting 2
Cash Flows From Investing Activities:
List of individual actual cash inflows (e.g. Proceeds from sale of equipment) P
XX List of individual actual cash outflows (e.g. Payment for acquisition of building)
(XX) XX/(XX)
Net cash provided by (used in) from investing activities
Cash Flows from Financing Activities:
List of individual actual cash inflows (e.g. Proceeds from long term
borrowings, P XX investments by the owner, etc.)
List of individual actual cash outflows (e.g. Cash withdrawal by
the owner, payment of long term liabilities, etc.) (XX)
Net cash provided by (used in) from financing XX/(XX)

PXX/(XX)
activities Net increase (decrease) in cash
XX
Cash at beginning of period
P XX
Cash at the end of period
2. INDIRECT METHOD:
(or reconciliation method) starts with net income and converts it to net cash flow from operating
activities. In other words, the Indirect method adjusts net income for items that affected reported
net income but didn’t affected cash. To compute net cash flows from operating activities,
noncash changes in the income statement are added back to net income, and net cash credits
are deducted.
FORMAT OF THE CASH FLOW STATEMENT (INDIRECT METHOD):

Company Name
Cash Flow
Statement Period
Cash Flows From Operating Activities: Covered
Profit before interest and income tax (interest and taxes are added back to PXX
net income)
Adjustments for:
PXX
ADD: Non-cash expenses deducted from profit (e.g. Depreciation
expense, amortization expense, etc.)

DEDUCT: Non-cash income/gains added to profit (e.g. Gain on sale of
39 Fundamentals of
Accounting 2
equipment, etc.) (XX)
XX
Operating income before working capital changes
P XX
DEDUCT: Increase in current assets (e.g. Accounts receivable, P(XX)
prepaid expenses, etc.)
ADD: Decrease in current assets (e.g. Accounts receivable,
prepaid expenses, etc.) XX
ADD: Increase in current liabilities (e.g. Accounts payable, salaries payable, etc) XX
DEDUCT: Decrease in current liabilities(e.g. Accounts payable, salaries payable, (XX) XX/(XX)
etc)
PXX
Cash generated from operating activities
(XX)
Interest paid
(XX) (XX)
Income taxes paid
PXX/(XX)
Net cash provided by (used in) from operating activities.
Cash Flows From Investing Activities:

List of individual actual cash inflows (e.g. Proceeds from sale of
equipment)
P
List of individual actual cash outflows (e.g. Payment for acquisition of
XX
(XX
building) Net cash provided by (used in) from investing activities
)
XX/
Cash Flows from Financing Activities: (XX)
List of individual actual cash inflows (e.g. Proceeds from long term P XX
borrowings, investments by the owner, etc.)
List of individual actual cash outflows (e.g. Cash withdrawal by the
owner,
payment of long term liabilities, etc.) (XX)
Net cash provided by (used in) from financing activities XX/(XX)
Net increase (decrease) in cash PXX/(XX)
Cash at beginning of period XX
Cash at the end of period P XX
*Note that net cash provided by operating activities is the same whether the direct or
indirect method is used.
40 Fundamentals of
Accounting 2
ILLUSTRATIVE EXAMPLE 1:
The following are items taken from the records of Intelligent Company for 2017:
a. Profit after income tax expense, P1,820,000.
b. Payment for purchase of land, P400,000.
c. Payment of long-term loans, P600,000.
d. Depreciation expense, P750,000.
e. Additional investments by the owner, P700,000.
f. Patent amortization expense, P270,000.
g. Income tax expense, P780,000.
h. Interest expense, P100,000.
i. Increase in accounts receivable, P340,000.
j. Cash withdrawals of the owner, P500,000.
k. Decrease in accounts payable, P26,000.
l. Increase in interest payable, P18,000.
m. Increase in income tax payable, P60,000.
Additional information: The company’s statement of financial position reported the cash balance of
P800,000 as of January 1, 2017 and P3,152,000 as of December 31, 2017.
Required: Prepare the Intelligent Company’s 2017 Statement of Cash Flows using the
indirect method. SOLUTION:

Intelligent Company
Statement of Cash Flows As of
December 31, 2017
Cash flows from operating activities
Profit before interest and income tax P2,700,00
0
Adjustments for
Depreciation P750,000
expense
Patent amortization expense 270,000 1,020,000
Operating income before working capital P3,720,00
changes 0
Increase in accounts receivable P(340,000)
Decrease in accounts payable ( 26,000) ( 366,000)
41 Fundamentals of
Accounting 2
Cash generated from operations P3,354,00
0
Interest paid (100,000 – 18,000) P(82,000)
Income tax paid (780,000 – 60,000) (720,000) (802,000)
Net cash provided by operating activities P2,552,00

0
Cash flows from investing
activities Acquisition of land P(400,00
0)
Net cash used in investing (400,000
activities )
Cash flows from financing
activities
P700,000
Additional cash investments
Cash withdrawals (500,000)
Net cash provided by financing activities 200,000
Increase in cash P2,352,00
0
Cash, January 1, 2017 800,000
Cash, December 31, 2017 P3,152,00
0
NOTE: Depreciation and amortization expense is added back to the profit because there’s
no actual cash outflow. Cash balance of P3,152,000 as of December 31, 2017 should be the
same as the amount of cash reported on statement of financial position.
COMPUTATIONS:
Profit before interest and
income tax: Profit before P2,700,000 SQUEEZE
interest and income tax Interest (100,000)
expense
(780,000)
Income tax
P1,820,000
Profit after interest and income tax
NOTE: INCREASE means the ending balance is GREATER than the beginning balance. While
DECREASE means ending balance is LESS than the beginning balance.
If the problem only states the changes of accounts, here’s the assumption for
computation purposes:
42 Fundamentals of
Accounting 2
∙ If there is an INCREASE of an account (That is the ending balance is GREATER than the
beginning balance), let us assume that the difference is equal to the ending balance
while the beginning balance assumed to be ZERO.
∙ If there is a DECREASE of an account (That is the ending balance is LESS than the
beginning balance), let us assume that the difference is equal to the beginning
balance while the ending balance assumed to be ZERO.
Interest paid:
Interest payable, beginning P0 100,000
balance Interest incurred (82,000) SQUEEZE
(expense) Interest paid P18,000
Interest payable, ending balance
Since there is an INCREASE in interest payable, the difference of P18,000 is assumed to

be the ending balance while the beginning balance is assumed to be ZERO
Income taxes paid: (INCREASE in income tax payable)

Income tax payable, beginning P0 780,000
balance Income tax incurred (720,000)
(expense) Income taxes paid P60,000 SQUEEZE
Income tax payable, ending
balance
Since there is an INCREASE in income tax payable, the difference of P60,000 is assumed to
be the ending balance while the beginning balance is assumed to be ZERO
ILLUSTRATIVE EXAMPLE 2:
The Wisdom Company reported the following condensed profit or loss for 2017:
Sales P 1,000,000
Cost of goods sold
580,000
Gross profit P 420, 000
Operating Expenses
Depreciation Expense P 80,000
Salaries Expense 120,000 200,000
43 Fundamentals of
Accounting 2
Profit before income taxes P220,000
Income tax expense 66,000 P154,000
Profit
The following information is also

available:
2016 2017
Accounts P140,000 P90,000
receivable
Inventory 43,000 132,000
Accounts payable 154,000 108,000
Salaries payable 12,000 36,000
Income tax 8,000 20,000
payable
Required: Prepare the operating activities section of the Wisdom Company’s Statement of
Cash Flows
for December 31, 2017 using (a) Direct Method (b) Indirect Method
SOLUTION:
(A) DIRECT METHOD
Wisdom Company
Cash Flow
Statement
As of December 31, 2017
Collections from customers P
1,050,000
Payments to trade creditors P
(715,000)
Payments for salaries (96,000) (811,000)
Cash generated from operations P 239,000
Income taxes paid 54,000
Net cash provided by operating P185,000
activities
COMPUTATIONS:
Collections from customers:
P140,000 1,000,000
AR, beginning balance Sales on
account
44 Fundamentals of
Accounting 2
Collections from (1,050,000) SQUEEZE
customers
P90,000
AR, ending balance
Payments to trade
creditors: AP, beginning P154,000
balance Purchases on 669,000*
account Payments to (715,000) SQUEEZE
trade creditors AP, P108,000
ending balance
*Purchases on account:
Inventories, beginning P43,000
balance Purchases on 669,000 SQUEEZE
account P712,000
Total goods available for (132,000)
sale AP, ending balance P580,000
Cost of goods sold
Payments for salaries:
P12,000
Salaries payable, beginning
120,000
balance Salaries incurred
(96,000) SQUEEZE
(expense) Payments for
P36,000
salaries Salaries payable,
ending
Incomebalance
taxes paid:
P8,000
Income tax payable, beginning
66,000
balance Income tax incurred (54,000) SQUEEZE
(expense) Income taxes paid P20,000
Income tax payable, ending
balance
(B) INDIRECT METHOD

Wisdom Company Cash Flow
Statement
As of December 31, 2017
45 Fundamentals of
Accounting 2
Profit before income tax P 220,000
Adjustments for
Depreciation expense 80,000
Operating income before working capital P300,000
changes
Decrease in accounts receivable P 50,000
Increase in inventories (89,000)
Decrease in accounts payable (46,000)
Increase in salaries payable 24,000 (61,000)
Cash generated from operations P 239,000
Income tax paid (54,000)
Net cash provided by operating activities P 185,000
COMPUTATIONS:
NOTE: INCREASE means ending balance is GREATER than the beginning balance. While
DECREASE means ending balance is LESS than the beginning balance.
Decrease in accounts receivable (P90,000-P140,000) P50,000

Increase in inventory (P132,000-P43,000) 89,000
Decrease in accounts payable (P108,000-P154,000) 46,000
Increase in salaries payable (P36,000-P12,000) 24,000
Increase in income tax payable (P20,000-P8,000) 12,000
Income taxes paid:

Income tax payable, beginning P8,000
balance Income tax incurred 66,000
(expense) Income taxes paid (54,000) SQUEEZE
Income tax payable, ending P20,000
balance
*As stated earlier, net cash provided by operating activities of P185,000 is the same whether
the direct or indirect method is used.
46 Fundamentals of
Accounting 2
47 Fundamentals of
Accounting 2
48 Fundamentals of
Accounting 2
49 Fundamentals of
Accounting 2
UNIT 5
FINANCIAL STATEMENTS ANALYSIS
Learning Objectives
At the end of the Unit, students should be able to:
1. Prepare and interpret financial statements in comparative and common-size form.
2. Define the measurement levels, namely, liquidity, solvency, stability, and profitability
3. Perform vertical and horizontal analyses of financial statements of a single
proprietorship
4. compute and interpret financial ratios such as current ratio, working capital, gross profit
ratio, net profit ratio, receivable turnover, inventory turnover, debt-to-equity ratio, and
the like
FINANCIAL STATEMENT ANALYSIS

Financial statement analysis is defined as the process of identifying financial strengths and
weaknesses of the firm by properly establishing relationship between the items of the balance
sheet and the profit and loss account. (analyze finance data)
There are various methods or techniques that are used in analyzing financial statements, such
as comparative statements, schedule of changes in working capital, common size percentages,
funds analysis, trend analysis, and ratios analysis.
Financial statements are prepared to meet external reporting obligations and also for decision
making purposes. They play a dominant role in setting the framework of managerial decisions.
But the information provided in the financial statements is not an end in itself as no meaningful
conclusions can be drawn from these statements alone. However, the information provided in
the financial statements is of immense use in making decisions through analysis and
interpretation of financial statements.
Financial statement analysis involves careful selection of data from financial statements in order
to assess and evaluate the firm's past performance, its present condition, and future business
potentials.
50 Fundamentals of
Accounting 2
OBJECTIVES OF FINANCIAL STATEMENT ANALYSIS
The primary purpose of FS analysis is to evaluate and forecast the company's financial health.
Interested parties, such as the managers, investors, and creditors, can identify the company's
financial strengths and weaknesses and know about the:
1. Profitability of the business firm;
2. Firm's ability to meet its obligations;
3. Safety of the investment in the business; and
4. Effectiveness of management in running the firm.
TOOLS AND TECHNIQUES OF FINANCIAL STATEMENT ANALYSIS:

Following are the most important tools and techniques of financial statement analysis:
1. Horizontal and Vertical

2. Analysis Ratios Analysis
1. HORIZONTAL AND VERTICAL ANALYSIS:
Horizontal Analysis or Trend Analysis:
Comparison of two or more year’s financial data is known as horizontal analysis, or trend
analysis. Horizontal analysis is facilitated by showing changes between years in both dollar and
percentage form.
Trend Percentage:
Horizontal analysis of financial statements can also be carried out by computing trend
percentages. Trend percentage states several years’ financial data in terms of a base year. The
base year equals 100%, with all other years stated in some percentage of this base.
Formula: Most Recent Value - Base Period

Percentage Change =
Value Base Period Value
Example:
Increase (Decrease)
2017 2016 Pesos Percent
Sales P10,000 P8,000 P2,000 25% *
51 Fundamentals of
Accounting 2
P10,000- P8,000
*Percentage Change= = 25%
P8,000
Vertical Analysis:
Vertical analysis is the procedure of preparing and presenting common size statements.
Common size statement is one that shows the items appearing on it in percentage form as well
as in peso form. Each item is stated as a percentage of some total of which that item is a part.
Key financial changes and trends can be highlighted by the use of common size statements.
Example:
EXCELLENT CORPORATION
Income Statement
For the year Ended December 31, 2017
2017 Percent
Sales P10,000 100%
Less Cost of Sales 6,000 60%
Gross Income P4,000 40%
Less operating Selling 510 5.1%
expenses:
Administrative 210 2.1%
Total operating 720 7.2%
expenses
Income from 3,280 32.8%
Operations
Less interest expense 28 0.28%
Income before tax 3,252 32.52%
Less income tax 975 9.75%
Net Income P2,277 22.77%
52 Fundamentals of
Accounting 2
ILLUSTRATIVE PROBLEM 1
The financial position of Generous Company at the end of 2016 and 2017 is as
follows:
2016 2017
ASSETS
Cash P 3,000 P 5,000
Accounts receivable 40,000 25,000
Inventory 27,000 30,000
Long-term investments 15,000 0
Land, Building and equipment (net) 100,000 75,000
Intangible assets 10,000 10,000
Other assets 5,000 20,000
Total assets P 200,000 P 165,000
LIABILITIES
Current liabilities P 30,000 P 47,000
Long-term liabilities 88,000 74,000
Total liabilities 118,000 121,000
OWNER’S EQUITY
Jenny Rose Mapagbigay, Equity 12/31 82,000 44,000
Total liabilities and shareholder’s equityP P
200,000 165,000
Sales and cost of goods sold insignificantly change in 2017 in relation with 2016.
Required:
1. Prepare a comparative balance sheet showing peso and percentage changes for 2017
as compared with 2016.
2. Prepare a common-size balance sheet as of December 31, 2016 and 2017.
53 Fundamentals of
Accounting 2
SOLUTION:
1. HORIZONTAL ANALYSIS
Generous Company
Comparative Balance
Sheet December 31, 2016
and 2017
Increase (Decrease)
ASSETS 2017 2016 Amount Percentage
Cash P 3,000 P 5,000 P (2,000) (40.0)
Accounts Receivable 40,000 25,000 15,000 60.0
Inventory 27,000 30,000 (3,000 ) (10.0)
Long-term investments 15,000 0 15,000 0.0
Land, building
and
equipment (net) 100,000 75,000 25,000 33.3
Intangibles 10,000 10,000 0 0.0
Other assets 5,000 20,000 (15,000) (75.0)
Total P 200,000 P 165,000 P 35,000 21.2
LIABILITIES & OWNERS’

EQUITY
Current liabilities P 30,000 P 47,000 P (17,000) (36.2)

Long-term liabilities 88,000 74,000 14,000 18.9
Total liabilities 118,000 121,000 (3,000 ) (2.5)
Total owners’ equity 82,000 44,000 38,000 86.4
Total liabilities and owners’
equity P 200,000 P 165,000 P 35,000 21.2
54 Fundamentals of
Accounting 2
2. VERTICAL ANALYSIS
Generous Company
Common-size Balance
Sheet December 31, 2016
ASSETS and 2017
Cash 1.50% 3.03%

Accounts Receivable 20.00 15.15
Inventory 13.50 18.18
Long-term investments 35.00 36.36
Land, building and 7.50 0.00
equipment (net) 50.00 45.46
Intangibles 5.00 6.06
2.50 12.12
Other assets Total
100.00% 100.00%
LIABILITIES and OWNERS’

EQUITY
Current liabilities 15.00% 28.48%

Long-term liabilities 44.00 44.85
Total liabilities 59.00% 73.33%
Total owner's equity 41.00 26.67
Total liabilities and owners’
equity 100.00% 100.00%
2. RATIO ANALYSIS:
The ratios analysis is the most powerful tool of financial statement analysis. Ratios simply
means one number expressed in terms of another. A ratio is a statistical yardstick by means of
which relationship between two or various figures can be compared or measured. Ratios can
be found out by dividing one number by another number. Ratios show how one number is
related to another.
PROFITABILITY RATIOS:
55 Fundamentals of
Accounting 2
Profitability ratios measure the results of business operations or overall performance
and effectiveness of the firm.
RATIO FORMULA SIGNIFICANCE

Net Income
1. Profit Margin on Sales Measures the percentage of
Net Sales
or Net Profit percentage net income to sales.
EBIT*
Net Sales
2. Net Operating Income Measures the percentage
to Sales of operating income to
*Earnings
sales.
before interest
and taxes
3. Return on Investment Net Income

Indicates whether
or Return on Total Average
management is using funds
Assets or Return on Total Assets
wisely.
Invested Capital
EBIT A variation of the Return on Total

4. Net Operating Income
Equity + Assets that excludes non-
to Total Capital
Interest-
interest- bearing debt from
bearing Debt
total assets.
Change in EBIT
5. Marginal A variation of the Net
Change in Capital
Profitability Rate Operating Income to Total
Capital Ratio.
Net Income Measures the return on

6. Return on Equity
Average Total the carrying amount of
Equity equity.
56 Fundamentals of
Accounting 2
LIQUIDITY RATIOS:
Liquidity ratios measure the short term solvency of financial position of a firm. These
ratios are calculated to comment upon the short term paying capacity of a concern or
the firm’s ability to meet its current obligations. Following are the most important
liquidity ratios.
1. Current Ratio or
Current Assets
Working Capital Test of short-term debt paying ability
Current
Ratio or Banker's
Liabilities
Ratio
Quick Assets*
Current Liabilities
Measures the firm's ability to pay its

2. Acid Test or
*Quick Assets = Cash + Cash short-term debts from its most liquid
Quick Ratio
Equivalents + Net assets without having to rely on
Receivables + Marketable inventory
Securities
WORKING CAPITAL ACTIVITY RATIOS (EFFICIENCY

RATIOS)
Turnove Income statement account Average No. of days in a
r age
Average balance sheet year
account Turnover
NOTE: Working capital = Current assets – Current liabilities
The following are taken from the balance sheet of Star Company as of December
31, 200B: Current assets:
Cash on hand and in P220,000 300,000
banks Accounts
receivable
57 Fundamentals of
Accounting 2
Merchandise inventory 330,000 P850,000
Liabilities:
Accounts payable P400,200
Notes payable 662,300 P1,062,500
Long term liabilities 2,500,000
What are the company’s current ratio and quick (acid test) ratio?
SOLUTION:
Current Assets Current Ratio =
Current Liabilities
P850,000
Current Ratio = = 0.8
P1,062,500
Quick Assets Quick Ratio =
Current Liabilities
P341,600 + P200,000
Quick Ratio = = 0.51
P 1,062,500
ASSET MANAGEMENT RATIOS:
Measure how the firm uses its assets to generate revenue and income.

Indicates if a firm
holds
Cost of Sales excessive stocks of
1. Finished Goods or
Average Inventory inventories that are
Merchandise
unproductive and
Inventory Turnover
that lessen the
company's
profitability.
Number of Days in a
Measures the
2. Average Age of Year Inventory
average number of
Inventories or Number Turnover Ratio
days that inventory is
of Days of Inventory
held before sale.
or Average
Inventory
Average Daily Cost of Sales
58 Fundamentals of
Accounting 2
Net Credit Sales Measures the average
3. Receivables
Average Accounts Receivable number of days to
Turnover Ratio
collect a receivable
Number of Days in a Year

4. Average Age of
Receivables Turnover Ratio
Receivables or Number Measures the
of Days of Receivable average number of
or
or Average Collection days to collect a
Period receivable.
Average Accounts Receivable
Average Daily Sales
Average Age of Inventories + Average Age of Measure the average

5. Operating Cycle or Receivables number of days to
Conversion Period convert inventories to
cash.
Determines whether
6. Average Age of Average Accounts Payable the firm is paying its
Accounts Payable Average Daily Purchases invoices on a timely
basis.
Net Sales Measures the level of

7. Fixed Assets
Average Net Fixed Assets use of property, plant,
Turnover Ratio
and equipment.
Net Sales Measures the level of

8. Total Assets Turnover Average Total Assets capital investment
Ratio relative to sales
volume.
Net Sales
Measures the level of
Total Capital *
9. Total Capital Turnover total assets having
Ratio explicit costs relative to
*Total Capital = total assets having sales volume.
explicit costs (equity + interest-bearing
debt)
59 Fundamentals of
Accounting 2
Measures the
Total Capital, 200B - Total Capital,
10. Investment Rate percentage change
200A Total Capital, 200A
in total capital.
LONG TERM SOLVENCY OR LEVERAGE RATIOS:

Long term solvency or leverage ratios convey a firm’s ability to meet the interest costs and
payment schedules of its long-term obligations. Following are some of the most important long
term solvency or leverage ratios.
Interest Bearing Measures the extent to which the

1. Interest-bearing Debt Ratio Debt Equity + assets having explicit cost (total
Interest - Bearing capital) are financed by interest
Debt bearing debt.
Total Liabilities
Measures the percentage of
2. Total Debt Ratio Total Assets (Capital)
funds provided by creditors.
Total Compares the resources

3. Debt to Equity Ratio Liabilities provided by creditors with
Equity resources provided by
shareholders.
Total Liabilities A more conservative measure of a

4. Debt to Tangible Net
Equity - long- term debt-payment ability than
Worth Ratio
Intangible the debt ratio or debt to equity ratio.
Assets
60 Fundamentals of
Accounting 2
The data were taken from the financial records of Left Company and Right Company on
December 31, 2017 (in thousands):
Left Company Right Company
Debt P 200,000 P 300,000
Owners’ equity 300,000 200,000
Total liabilities and equity P 500,000 P 500,000
Required: Calculate the following ratios for East Company and West Company
for 2017:
1. Debt ratio.
2. Equity ratio.
3. Debt equity ratio.
SOLUTION:
Left Company Right Company
1. Debt ratio = P 200,000 = 40% P 300,000 = 60%
P 500,000 P 500,000
2. Equity ratio = P 300,000 = 60% P 200,000 = 40%

P 500,000 P 500,000
3. Debt-equity ratio = P 200,000 = 66.67% P 300,000 = 133.33%

P 300,000 P 200,000
Limitations of Financial Statement Analysis:
Although financial statement analysis is highly useful tool, it has two limitations. These two
limitations involve the comparability of financial data between companies and the need to look
beyond ratios.
ADVANTAGES OF FINANCIAL STATEMENT ANALYSIS:
There are various advantages of financial statements analysis. The major benefit is that the
investors get enough idea to decide about the investments of their funds in the specific
company. Secondly, regulatory authorities like International Accounting Standards Board can
ensure whether the company is following accounting standards or not. Thirdly, financial
statements analysis can help the government
61 Fundamentals of
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UNIT 6: ACCOUNTING BOOKS – JOURNAL AND LEDGER
Learning Objectives
1. Differentiate the journal from the general ledger;
2. Determine the normal balance of an account
3. Prepare journal entries to record basic business transaction
4. Determine balances of accounts using the t-account
Review of the past lesson on General Journal and General Ledger

The general journal is a chronological record of the entity’s transactions. It shows all the
effects of a business transaction in terms of debits and credits. Each transaction is initially
recorded in a journal rather than directly in a ledger. It is called the book of original entry. The
standard contents of the general journal are as follows:
5. Date. The year and month are not rewritten for every entry unless the year or month
changes or a new page is needed.
6. Account titles and explanation. The account to be debited is entered at the extreme left
of the first line while the account to be credited is entered slightly indented on the next
line. A brief description of the transaction is usually made on the line below the credit.
Generally, skip a line after each entry.
7. P.R. or Posting Reference. This used when the entries are posted, that is until the
amount is transferred to the related ledger accounts.

8. Debit. The debit amount for each account is entered on the left column.
9. Credit. The credit amount for each column is entered on the right column.
The general ledger on the other hand is used to classify and summarize transactions.
Basically the final footing of the general ledger is used in the preparation of the trial balance.
The general ledger serves as the reference book of the accounting system. the accounts in
the general ledger are classified into two groups:
10. Balance sheet or permanent accounts (assets, liabilities and owner’s equity)
11. Income statement accounts or temporary accounts (income and expenses).
66 Fundamentals of
Accounting 2
In order to facilitate finding general ledger accounts during journalizing, posting and
preparing financial statements, a business firm normally creates a chart of accounts.
This consists of
sequentially listing all the firm’s account names and assigning them appropriate code based
on each account’s correct position in the financial statements.
NORMAL BALANCE OF AN ACCOUNT
The normal balance of any account refers to the side of the account – debit or credit
- where increases are recorded. Asset, owner’s withdrawals, and expense accounts,
normally have debit balances; liability, owner’s equity and income accounts normally
have credit balances. This result occurs because increases in an account are usually
greater than or equal to decreases.
RECORDING THE BUSINESS TRANSACTION FROM THE GENERAL JOURNAL

TO THE GENERAL LEDGER
When an amount is to be recorded on the left side, it is simply called debit the
account, and when it is to be recorded on the right side, it is called credit the account.
Assets increase on the debit side while liabilities and owner’s equity increase on the
credit side based on their position in the accounting equations:
Assets = Liabilities + Owner’s Equity

Observe the following rules:
1. Increases in assets are to be recorded on the debit side of the account, while decreases
in assets are to be recorded on the credit side of the account.
2. Increases in liabilities are to be recorded on the credit side of the account, while
decreases in liabilities are to be recorded on the debit side of the account.

3. Increases in owner’s equity are to be recorded on the credit side of the account, while
decreases
in owner’s equity are to be recorded on the debit side.
67 Fundamentals of
Accounting 2
DEMONSTRATION PROBLEM USING T-ACCOUNT
ANALYSIS
March 1 April Go opened a tour and travel agency business by investing cash of
400,000 and two automobile worth P500,000
Cash Go, Capital March 1
P400,000 P900,000 March 1
Transportation Equipment
March 1 P500,000
March 3 Borrowed P100,000 from BDO for business purpose

Cash Bank Loan Payable
March 1 P400,000 P100,000
3
100,000
March 8 Bought tables and chairs amounting to P50,000.

Cash Furniture and Fixtures March 1 P400,000
P50,000 March 8 March 8 P50,000
3 100,000
March 15 Purchased electric fan and computer unit worth P60,000 on account.
Equipment Accounts Payable March 15 P60,000
P60,000 March 15
March 17 Go made a cash withdrawal of P10,000 for personal use.

Cash Go, Drawing March 1
P400,000 P50,000 March 8 March 17 P10,000
3 100,000 10,000 17
68 Fundamentals of
Accounting 2
March 20 Paid the account due from the purchased of electric fan and computer unit.
Cash Accounts Payable
March 1 P400,000 P50,000 March 8 March 20 P60,000 P60,000 March 15
3 100,000 10,000 1
60,000 20
March 21 Received P25,000 from a tourist from a tour in Quezon

Cash Service Income March 1 P400,000
P50,000 March 8 P25,000 March 21
3 100,000 10,000 1
21 25,000 60,000 20
March Paid for gas and oil P1,500 and repair of car P3,000
23
Cash Gas and Oil Expense
March 1 P400,000 P50,000 March 8 March 23
P1,500
3 100,000 10,000 1
21 25,000 60,000 20
4,500 23 Repair Expense
March 23 P3,000
March 24 Mr. Perez hired the services of the travel agency and promised to pay
P30,000 on March 30.
Accounts Receivable Service Income
March 24 P30,000 P25,000 March 21
30,000 24
March 25 Paid telephone bill, P1,000

Cash Utilities Expense
March 1 P400,000 P50,000 March 8 March 25 P1,000
3 100,000 10,000 1
21 25,000 60,000 20
4,500 23
1,000 25
69 Fundamentals of
Accounting 2
March 29 Billed ABC Company P40,000 for a tour of Metro Manila
Accounts Receivable Service Income
March 24 P30,000 P25,000 March 21
29 30,000 24
40,000
40,000 29
March Collected from Mr. Perez in
30
full Cash Accounts
Marc 1 P400,000 P50,000 March Receivable March 24 March
h 8 30
3 100,000 10,000 1 P30,000 P30,000
2 25,000 60,000 20 29 40,000
1
3 30,000 4,500 23
0
1,000 25
March 31 Paid for office rent P10,000 and salaries of employees

P15,000
Cash Rent Expense

March 1 P50,000 March 8 March 31 P10,000
P400,000
3 100,000 10,000 1
21 25,000 60,000 20
30 30,000 4,500 23 Salaries Expense
1,00 2 March 31
0 5 P15,000
25,00 31
0
70 Fundamentals of
Accounting 2
FOOTING THE ACCOUNT
Cash March 1 P400,000 P50,000 March 8
3 100,000 10,000 1
21 25,000 60,000 20
30 30,000 4,500 23
1,000 25
25,000 31
P555,00 P150,50
0 0
Footing
s
Service Income
P25,000 March
21
30,000 24
40,000 29
P95,000
Footing
The footings of cash give a debit total of P555,000 and a credit total of P150,500. The
difference is a debit balance of P404,500. Some accounts may have footings only on one
side like the service income
71 Fundamentals of
Accounting 2
THE
JOURNAL
DATE ACCOUNT TITLE / PR DEBIT CREDIT

EXPLANATION
2017
MARCH 1 CASH P400,000
TRANSPORTATION 500,000
EQUIPMENT GO, CAPITAL P900,000
INITIAL INVESTMENT
3 CASH 100,000
BANK LOAN PAYABLE 100,000
BORROWED MONEY FROM
BDO
8 FURNITURES AND 50,000

FIXTURES CASH 50,000
ACQUIRED CHAIRS AND
TABLES FOR
CAS
H
15 EQUIPMENT ACCOUNTS 60,000

PAYABLE 60,0000
ACQUIRED ELECTRIC FAN AND
COMPUTER UNIT ON ACCOUNT
17 GO, DRAWINGS 10,000

CASH 10,000
GO MADE A CASH WITHDRAWAL
FOR PERSONAL USE
20 ACCOUNTS PAYABLE 60,000

CASH 60,000
PAID THE ACCOUNTS DUE
21 CASH 25,000
72 Fundamentals of
Accounting 2
SERVICE INCOME 25,000
PERFORM SERVICES TO
CLIENT
23 GAS AND OIL EXPENSE 1,500

REPAIR EXPENSE 3,000
CASH 4,500
PAID FOR THE MAINTENANCE OF
CAR
24 ACCOUNTS RECEIVABLE 30,000

SERVICE INCOME 30,000
PERFORMED SERVICES TO
CLIENTS
25 UTILITIES 1,000
EXPENSE CASH 1,000
PAID TELEPHONE
BILLS
29 ACCOUNTS 40,000
RECEIVABLE 40,000
SERVICE INCOME
PERFORMED SERVICES TO
CLIENT
30 CASH 30,000
ACCOUNTS RECEIVABLE 30,000
COLLECTED FROM CUSTOMER
BILLED
31 RENT EXPENSE 10,000

SALARIES 15,000
EXPENSE 25,000
CASH
PAID THE RENT FOR THE MONTH
AND THE SALARIES OF EMPLOYEES
FOR THE PERIOD
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UNIT 7: ACCOUNTING PRACTICE SET
Learning Objectives:
Perform the steps in the accounting cycle from preparation of documents to, to the
preparation, analysis and interpretation of financial statements.
Review of the source documents in a merchandising business

1. Sales invoice is prepared by the seller of goods and sent to the buyer. This document
contains the name and address of the buyer, the date of sale and information –
quantity, description and price – about the goods sold. It also specifies the amount of
sales, and the transportation and payment terms.
2. The bill of lading is a document issued by the carrier – a trucking, shipping or airline –
that specified contractual conditions and terms of delivery such as freight terms, time,
place, and the person named to receive the goods
3. The statement of account is a formal notice to the debtor detailing the accounts already
due
4. The official receipt evidences the receipt of cash by the seller or the authorized
representative. It notes the invoices paid and other details of payment
5. Deposit slips are printed forms with depositor’s name, account number and space
details of the deposit. A validated deposit slip indicates that cash and checks with the
supplied details were actually deposited or credited to the account holder
6. A check is written in order to a bank by a depositor to pay the amount specified in the
check from his checking account to the person named therein. The entity issuing the
check is called the payor while the receiver is the payee
7. The purchase requisition is a written request to the purchaser of an entity from an
employee or user department of the same entity that goods be purchased
8. The purchase order is an authorization made by the buyer to the seller to
deliver the merchandise as detailed in the form

9. Receiving report is a document containing information about goods received from a
vendor. It
formally records the quantities and description of the goods delivered
10. A credit memorandum is a form used by the seller to notify the buyer that his account
is being decreased due to errors or other factors requiring adjustments.
86 Fundamentals of
Accounting 2
MINI-PRACTICE SET
Merchandising Business Accounting
Cycle The Basic 101 Designs
The Basic 101 Designs is a retail merchandising business that sells brand-name clothing at
discount prices. The firm is owned and managed by Luz Bas, who started the business on
April 1, 2017. This project will give you an opportunity to put your knowledge of accounting
into practice as you handle the accounting work of The Basic 101 Designs during the
month of October 2017.

INTRODUCTION
The Basic 101 Designs has a monthly accounting period. The firm’s chart of accounts is
shown below. the journals used to record transactions are the sales journal, purchases
journal, cash receipts journal, cash payment journal, and the general journal. Postings
are made from the journals to the accounts receivable ledger, accounts payable ledger,
and the general ledger. The employees are paid at the end of the month. A
computerized payroll service prepares all payroll records and checks.

INSTRUCTIONS
1. Open the general ledger accounts and enter the balances for October 1, 2017.
Obtain the necessary figures from the post closing trial balance prepared
September 30, 2017 which is shown as Exhibit 1.
2. Open the subsidiary ledger accounts and enter the balances for October 1, 2017.
Obtain the necessary figures from the schedule of accounts payable and schedule of
accounts receivable prepared September 30, 2017, which appear as Exhibit 2.
3. Analyze the transactions for March and record each transaction in the proper journal.
(use 10 as the number for the first page of each special journal and 15 as the number
for the first page of the general journal).
4. Post the individual entries that involve customer and creditor accounts from the journals
to the subsidiary ledgers on a daily basis. Post the individual entries that appear in the
general journal and in the Other Accounts sections of the cash receipts and cash
payments journals to the general ledger on a daily basis.
5. Total, prove, and rule the special journals as of October 31, 2017
6. Post the column totals from the special journals to the general ledger accounts.
87 Fundamentals of
Accounting 2
The Basic 101 Designs
Chart of Accounts
Assets Liabilities
101 Cash 203 Accounts Payable
111 Accounts Receivable 221 SSS Payable
112 Allowance for Doubtful Accounts 222 Philhealth Payable
121 Merchandise Inventory 223 Pagibig Payable
133 Prepaid Insurance 225 Witholding Tax Payable
135 Prepaid Advertising 229 Salaries Payable
141 Equipment 231 Sales Tax Payable
142 Accumulated Depreciation-
Equipment
Owner’s Equity Expenses

301 Luz Bas, Capital 611 Advertising Expense
302 Luz Bas, Drawings 614 Depreciation Expense-
Equipment
399 Income Summary 617 Insurance Expense
620 Doubtful Account Expense

Revenues 623 Janitorial Services Expense
401 Sales 626 Witholding Taxes Expense
402 Sales Returns and Allowances 629 Rent Expense
Cost of goods sold 632 Salaries Expense

501 Purchases 635 Supplies Expense
502 Freight In 644 Utilities Expense
503 Purchase Returns and Allowances
504 Purchase Discounts
7. Check the accuracy of the subsidiary ledgers by preparing a schedule of accounts

receivable and a schedule of accounts payable as of October 31, 2017. Compare the
totals with the balances of the Accounts Receivable account and the Accounts Payable
account in the general ledger.
8. Check the accuracy of the general ledger by preparing a trial balance in the first two
columns of a 10-column worksheet. Make sure that the total debits and the total
credits are equal.
88 Fundamentals of
Accounting 2
9. Complete the Adjustments section of the worksheet. Use the following data. Identify
each adjustment with the appropriate letter.
a. During October, the firm had net credit sales of P98,100. From experience with similar
businesses, the previous accountant had estimated that 1.0 percent of the firm’s net
credit sales would result in uncollectible accounts. Record an adjustment for the
expected loss from uncollectible accounts for the month of October.
b. On October 31, an inventory of the supplies showed that items costing P32,400 were
on hand. Record an adjustment for the supplies used in October.
c. On September 30, 2017, the firm purchased a six-month insurance policy for
P60,000. Record an adjustment for the expired insurance for the month of
October.
d. On October 1, the firm signed a three-month advertising contract for P48,000 with a
local cable television station and paid the full amount in advance. Record an
adjustment for the expired advertising for October.

e. On April 1, 2017, the firm purchased equipment for P83,000. The equipment was
estimated
to have a useful life of five years with salvage value of P12,500. Record an adjustment
for the depreciation on the equipment for October.
f. Based on physical count, ending merchandise inventory was determined to be P81,260
10. Complete the Adjusted Trial Balance section of the worksheet
11. Determine the net income or net loss for October and complete the worksheet
12. Prepare a classified income statement for the month ended October 31, 2017. (the firm
does not divided the operating expense into selling and administrative expense)
13. Prepare statement of owner’s equity for the month of October 31, 2017
14. Prepare a classified balance sheet as of October 31, 2017
15. Journalize and post the adjusting entries using the general journal page 17
16. Prepare and post the closing entries using general journal page 18
17. Prepare a post closing trial balance
DATE TRANSACTIONS
October Issued Check 601 for P4,200 to pay Town Hall Properties the monthly rent
1
1 Signed a three-month radio advertising contract with Cable Station GBC for P48,000;
issued check 602 to pay the full amount in advance
2 Received P520 from Megan Co. a credit customer, in payment of her account
89 Fundamentals of
Accounting 2
2 Issued check 603 for P17,820 to remit the sales tax owed for July through
September to the BIR
2 Issued check 604 for P7,673.40 to a Fashion Designer, a creditor, in payment of
Invoice #9387 (P7,830), less a cash discount (P156.60)
3 Sold merchandise on credit for P2,480 plus sales tax of P124 to Dawn Don, Sales Slip
4
241. Issued check 605 for P1,050 to XWZ Supply Co. for supplies
4
Issued check 606 for P8,594.60 for Women’s Today, a creditor, in payment of Invoice #
5671 (P8,770), less a cash discount (P175.40)
5
Collected P1,700 on account from Evita Peron, a credit customer
5
Accepted a return of merchandise from Dawn Don. The merchandise was originally
sold on Sales Slip 241, dated October 3; issued Credit Memorandum 18 for P630,
which includes sales tax of P30
5
Issued check 607 for P1,666 to Classic Linen, a creditor, in payment of Invoice #
3292 (P1,700), less a cash discount (P34)
6
Had cash sales of P18,600 plus sales tax of P930 during October 1-6
8
Received a check from John Jones, a credit customer, for P832 to pay the balance he
owes.
8
Issued check 608 for P1,884 to deposit to SSS (P702), Philhealth (P162), and
withholding tax to BIR (P1,020) from the September payroll. Record this check
in the cash payment journal.

9
Sold merchandise on credit for P2,050 plus sales tax of P102.50 to Emma
Georgia, Sales
10 Slip 242
Issued check 609 for P1,445 to pay Inquirer for a newspaper advertisement that
11 appeared in October
Purchased merchandise for P4,820 from X Fashion Statement, Invoice
9422, dated October 8;the terms are 2/10, n/30
12 Issued check 610 for P375 to pay freight charges to Axe Freight Company, the
trucking company that delivered merchandise from X Fashion Statement on
September 27 and October 11
13 Had cash sales of P12,300 plus sales tax of P615 during October 8-13
15 Sold merchandise on credit for P1,940 plus sales tax of P97 to James Hermet,
Sales Slip 243
90 Fundamentals of
Accounting 2
16
Purchased discontinued merchandise from Joy Jobbers; paid for it immediately with check
611 for P6,420
16
Received P510 on account from Dawn Don, a credit customer
16
Issued check 612 for P4,723.60 to X Fashion Statement, a creditor, in payment of Invoice
9422 (P4,820), less cash discount (P96.40)
18 Issued check 613 for P7,200 to Luz Bas as a withdrawal for personal use
20 Had cash sales of P13,500 plus sales tax of P675 during October 15-20
22 Issued check 614 to Meralco for P1,112 to pay monthly electric bill
24 Sold merchandise on credit for P820 plus sales tax of P41 to Megan Co., Sales Slip 244
25 Purchased merchandise for P3,380 from Classic Linen, Invoice 3418, dated October 23;
the terms are 2/10, n/30

26 Issued check 615 to PLDT for P780 to pay the monthly telephone bill Had
27 cash sales of P14,240 plus sales tax of P712 during October 22-27
29 Received Credit Memorandum 175 for P430 from Classic Linen for defective merchandise
that was returned. The original purchase was recorded October 25

29 Sold merchandise on credit for P3,120 plus sales tax of P156 to Evita Peron, Sales Slip 245
29
Recorded the October payroll. The records prepared by the payroll service show the following totals:
earnings, P10,800; SSS, P702; Philhealth, P162; withholding tax, P1,020; and net pay, P8,916. The
excess withholding corrected an error made in withholdings in September.
EXHIBIT 1
Post-closing Trial
Balance September
30, 2017
ACCOUNT NAME DEBIT CREDIT
Cash P59,800.00
Accounts Receivable 6,210.00
Allowance for Doubtful Account P420.00
Merchandise Inventory 88,996.00
Supplies 4,100.00
Prepaid Insurance 8,400.00
Equipment 83,000.00
Accumulated Depreciation-Equipment 7,050.00
91 Fundamentals of
Accounting 2
Accounts Payable 18,300.00
SSS Payable 702.00
Philhealth Payable 162.00
Withholding Tax Payable 1,020.00
Tax Payable 1,780.00
Sales Tax Payable 17,820.00
Luz Bas, Capital 203,252.00
Totals P250,506.00 P250,506
EXHIBIT 2

Schedule of Accounts
Payable September 30,
2017
X Fashion Statement P7,830.00
Classic Linen 1,700.00
Women’s Today 8,770.00
Total P18,300.0
0

Statement of Account
Receivables September 30,
2017
Jennifer Brown P795.00
Megan Co. 520.00
James Hermet 832.00
Emma Georgia 232.00
Jim Price 1,621.00
Dawn Don 510.00
Evita Peron 1,700.00
Totals 6,210.00
92 Fundamentals of
Accounting 2
Unit 8: Bank Accounts and Bank Reconciliation
Learning Objectives
1. Identify the types of bank accounts normally maintained by a business;
2. differentiate a savings account from a current or checking account;
3. prepare bank deposit and withdrawal slips;
4. identify and prepare checks;
5. identify and understand the contents of a bank statement;
6. describe the nature of a bank reconciliation statement;
7. identify common reconciling;
8. items and describe each of them; and
9. analyze the effects of the identified reconciling items.
What is a Bank?
A bank is an institution that accepts cash deposits from the public. They are involved in
financial services such as lending activities to for personal and business needs. Banks have
their main offices where some could be found in areas like Makati and Ortigas. Due to their
diverse operations, banks provide branches to have a faster and easier transactions.
Individuals and businesses deposit their cash in banks mainly for safekeeping. Some invest
their money to the bank to earn additional money though interest. Technically speaking, once
a depositor deposits money in the bank, the depositor lends money to the bank and thus, bank
owes money to the depositor.
Type of Bank Accounts
This book will focus on financial services for business needs. Recall that in Unit 1, we
discussed about the 1st line item in the Balance Sheet, the “Cash” account. Remember that
Cash includes Cash on Hand and Cash in Bank. Those deposits in banks are called recorded
in the Cash in Bank account.
Deposits in banks generally are classified in savings account, checking account and other
accounts such as time deposits. The one who deposits money in bank is called depositor.
Savings Account (SA)
Savings account is the most common type of bank account. This account is used
mainly for safekeeping. This account is the easiest account to open in a bank. Individuals
and business could avail
93 Fundamentals of
Accounting 2
this type of bank account. Bank issues an Automated Teller Machine (ATM) Card as
evidenced of deposit. An ATM card (see figure 8.1) is a small ID-type card use by a depositor
to withdraw cash from the SA. A computer driven machine is provided by banks called ATM to
process the depositor’s transactions. Hence, using and ATM and an ATM card, a depositor
could withdraw or transfer money without going to bank premises. ATM card is provided by a
Username and a Password.ATM card could also use to pay purchases through a machine
linked with VISA or Mastercard networks. It is usually experienced when paying in a
Department or Grocery Store. Depositors could also request a passbook as evidenced of
their SA. A passbook is a small book-like document where transactions are recorded by the
bank. The bank requires the depositor a maintaining balance in an SA. The maintaining
balance is a
minimum amount that the depositor should leave to its SA. It can be withdrawn but once
removed, the SA could be subjected to a penalty. Though Savings Account earns interest, it is
minimal in amount. SA could also be enrolled in online banking where a depositor could
access, view and process bank transactions through online connection.
Current Account (CA)

Current Account is also a common type of bank account. CA is also provided by an ATM
card. It has the same feature of a Savings Account. CA doesn’t have a maintaining balance. If
any, it is minimal in amount. This account is usually used in payroll account of employees.
Bank does not issue passbook for this kind of account and it doesn’t even earn an interest
Checking Account
Checking account is another type of account where the depositor could withdraw
through issuance of check. A check (see figure 8.2) is a small piece of paper, usually in
rectangular shape. Bank allows the use of check as form of payment instead of using coins or
bills. Checking Account is suitable for business use for control purposes. Bank issues
passbook as evidenced for the account. Weeks after the end of a month, bank sends a Bank
Statement. It is a document where all transactions, in details, of the deposited are listed for a
particular month. This statement is also used in preparation of bank reconciliation which will be
discussed in the later part of this Unit. Due to technology, some depositors use online banking
to generate its Bank Statement. Hence, the statement is already in a softcopy document.
However, some depositors still use hardcopy for record keeping purposes. Checking account
also has a maintaining minimum balance and earns interest but just like Savings Account, it is
minimal in amount.
94 Fundamentals of
Accounting 2
Other Investment Account in Bank
Some depositors open account where the purpose is not for safekeeping, but to bigger
amount of interest. Depositor is now considered as investor. Demand deposits and Time
deposits are included in this kind of bank account. Bank issues Certificate of Deposits to
depositors as evidenced. Due to the nature of the account, depositors are prohibited to
withdraw money for a certain period of time.
Figure 8.1 ATM Card
-POY BANK-
000 0615 1988 VALID THRU

000 06/15/2018
JTT COMPANY
Figure 8.2 Check.

(Blank Check)
Ac c t n ame: JTT Co mp Check N o.: 0 0 1 0 0 BRST

an y 015 N
Ac c t No .: 0 6 1 5 1 7654
988 Date: 5420
PAY TO THE Php:

ORDER OF
PESOS
-POY BANK-
Valenzuel Branch
McArthur Highway, Marulas, Valenzuela
City
95 Fundamentals of
Accounting 2
(Filled-up Check)
Ac c t n ame: JTT Co mp Check N o.: 0 0 1 0 0 BRST

an y 015 N
Ac c t No .: 0 6 1 5 1 7654
988 February 28, 2017
Date:________________ 5420
PAY TO THE Php:___ 30,000.00

_______________
ORDER OF JELOIZA M. TILLO _ ___
_
PESOS Thirty Thousand Only.
-POY BANK-
Valenzuel Branch
McArthur Highway, Marulas, Valenzuela City
Figure 8.2 shows an example of a blank and filled-up check. A valid signatory must sign
the check for such to be accepted by the bank. Erasures are not allowed unless it is
countersigned by the signatory on top of the erasure.
Figure 8.3 Bank Statement
-POY BANK- Account No: 06151988
Valenzuela Account Name: JTT Company
Branch
Date Code Description Reference Withrawals Deposits Running

Balance
2/28/2016 BEGINNING BAL 100,000.00
3/1/2016 17790 CHECK WITHDRAWAL 00100001 5,500.00 94,500.00
3/3/2016 17881 CHECK DEPOSIT 55,000.00 149,500.00
3/7/2016 17824 CHECK DEPOSIT 6,700.00 149,978.82
3/15/2016 17723 CHECK DEPOSIT 125,000.00 257,294.26
3/21/2016 17591 CASH DEPOSIT 1,200.00 258,494.26
3/25/2016 17765 CHECK DEPOSIT 8,670.00 181,439.36
3/27/2016 17650 CASH DEPOSIT 567.52 182,006.88
3/31/2016 317-061588i INTEREST INCOME 454.57 127,901.35
3/31/2016 317-061588sc BANK SERVICE 234.56 127,666.79
CHARGE
3/31/2016 EN DIN G BAL 127,666.79
Bank Statement comes from the bank in printed copy. Recall that this document could be
downloaded in an online banking at bank’s website. Below explain the contents of the Bank Statement.
1. Date – represents the date when the transaction occurred.
2. Code – this is a reference that bank uses for to record the depositor’s transactions.
3. Description – column that describes the kind of transaction
4. Reference – means number for depositor use. For check withdrawal, it is the check number.
96 Fundamentals of
Accounting 2
5. Withdrawals – are amounts that are deductions from the depositor’s balance. This is usually
consists of:
1. Check payments made by the depositor. These checks are presented by the check
payees to the bank for encashment or for deposit to the payees’ bank account.
2. Bank Debits – it includes Bank Service Charge, a service fee charged by the bank from
depositor’s account.
3. Bank error is a transaction error made by the bank that decreased the depositor’s
account.
6. Deposits – this column represents addition to depositor’s account. This is usually consists of:
1. Cash and Check Deposits
2. Bank Credits – it includes Interest Income. As discussed before, savings and checking
accounts earn interest but minimal in amount.

3. Bank error is a transaction error made by the bank that increased the depositor’s
account.
Figure 8.4 Certificate of Deposit
-POY BANK-
CERTIFICATE OF DEPOSIT
N AME OF DEP OSITOR: JTT COMP AN Y
DATE: 1 5 JU N E 2 0 1 6 DESCRIP TION :
TIME DEP OSIT REFEREN CE N U MBER: 228201 7
AMOU N T: P HP 1 0 0 , 0 0 0 . 0 0
TRAN SACTION CODE: COD- 0 6 1 5 8 8 - 1 6
Deposit Slip (see Figure 8.5 and 8.6)

A deposit slip is used by depositor as evidenced of deposit. This is filled-up by the depositor
and
submitted to the bank’s teller for validation. Once validated, a copy is given by the bank teller to the
97 Fundamentals of
Accounting 2
depositor. Again, the copy should be validated. A not validated deposit slip cannot be
presented as
proof of deposit. The depositor’s account is automatically increased as a result of deposit.
Deposit may
be in the form of check deposit or cash deposit. Anyone can deposit from anyone’s account.
Withdrawal Slip (see Figure 8.5.1)

On the other hand, withdrawal slip is used to withdraw money from a passbook
account. Only the depositor or account holder can only withdraw from the bank account.
Figure 8.5 (Blank Cash Deposit Slip) (Filled-up Cash Deposit Slip)
-POY BANK- -POY BANK-
CAS H DEP O S I T S LI P CAS H DEP O S I T S LI P
ACCOUNT NAME: ACCOUNT NAME: JTT COMPANY
ACCOUNT NO.: ACCOUNT NO.: 06151988

CURRENT OTHERS CURRENT OTHERS
SAVINGS SAVINGS
PESO OTHERS PESO OTHERS
DOLLAR DOLLAR
BREAK DO WN BREAK DO WN
Denomination No. of pieces Amount Denomination No. of pieces Amount
1,000 1,000 5 5,000
500 500
200 200 2 400
100 100 7 700
50 50 3 150
20 20
10 10 2 20
Others Others 7 25
To tal amo u n t o f d ep o sit To tal amo u n t o f d ep o sit 6,277 25
This serves as your receipt when validated. This serves as your receipt when validated.
98 Fundamentals of
Accounting 2
Figure 8.6 (Blank Check Deposit Slip) (Filled-up Check Deposit Slip)
CHECK DEP OSI T SLI P CHECK DEP OSI T SLI P

ACCOUNT NAME: JTT COMPANY ACCOUNT NAME: JTT COMPANY
ACCOUNT NO.: 06151988 ACCOUNT NO.: 06151988

CURRENT OTHERS CURRENT OTHERS
SAVINGS SAVINGS
DOLLAR DOLLAR
Check Type Check Type
LOCAL ON US CHECK OTHERS LOCAL ON US CHECK OTHERS
REGIONAL MANAGER'S CHECK REGIONAL MANAGER'S CHECK
BREAK DOWN BREAK DOWN
Bank/Branch Check Number Amount Bank/Branch Check Number Amount
MEM Bank/Manila 02282017 50,125 67
JTMD Bank/Makati 000677222 7,230 25
ALD Bank/Taguig 00665290 100,501 77
To tal amo u n t o f d ep o sit To tal amo u n t o f d ep o sit
This serves as your receipt when validated. This serves as your receipt when validated.
99 Fundamentals of
Accounting 2
Figure 8.5.1 (Blank Withdrawal Slip) (Filled-up Withdrawal Slip)

WI THDRAWAL SLI P WI THDRAWAL SLI P
ACCOUNT NAME: ACCOUNT NAME: JTT COMPANY
ACCOUNT NO.: ACCOUNT NO.: 06151988

DOLLAR DOLLAR
Amount in words: Amount in words: One Hundred Thousand Only.
In figure: In figure: 100,000.00
With d rawals th ro u gh rep resen tativ e
With d rawals th ro u gh rep resen tativ e
I/We hereby authorize whose signature appears
below to effect this withdrawal for and in my behalf. I/We hereby authorize whose signature appears
below to effect this withdrawal for and in my behalf.
n d er th e p en alties o f p erju ry th at my /o u r c o -d ep o sito

r/s is/ n d er th e p en alties o f p erju ry th at my /o u r c o -d ep o sito
r/s is/
Signature of Depositor/s
Signature of Depositor/s
VERIFIED BY:
VERIFIED BY:
APPROVED BY:
APPROVED BY:
BREAK DOWN
BREAK DOWN
Denomination No. of pieces Amount
Denomination No. of pieces Amount
1,000
1,000 100 100,000
500
500
200
200
100
100
50
50
20
20
10
10
Others
Others
To tal amo u n t o f d ep o sit
To tal amo u n t o f d ep o sit 100,000
Payment received by:
Payment received by:
SIGNATURE OVER PRINTED NAME

SIGNATURE OVER PRINTED NAME
Machine validation
Machine validation
BANK RECONCILATION
Bank sends a report of the transactions and balances of the depositor’s account.
However, the company should also have a cash record for its internal use. That record is the
Cash account’s general ledger. The company’s cash balance should tally with the bank’s
balance. Thus, all transactions of banks with regards to depositor’s account must be
accounted by the company and recorded in the company’s
100 Fundamentals of
Accounting 2
book. Hence, bank reconciliation is the process of reconciling the bank’s balance with the
company’s book balance.
Reasons why the bank balance is not the same as the book balance
Timing difference is one of the main reasons why the bank balance doesn’t tally with the
book balance. Bank reconciliation is prepared at the end of the month. However, there
are last minute transactions that the bank records to the depositor’s account, and there
are transactions the company records but not presented with the bank. These are the
reconciling items. Examples are:
1. Bank Debits and Bank Credits – Bank Service Charge and Interest Income are
posted by the bank at the end of the month. The company sees the amount of the
service fee once the Bank Statement has been received, which is weeks after end
of the month.
2. Deposit in Transit –these deposits are cash of the company currently in transit. As
basic company control, all cash collections must be deposited immediately or the
next banking day. For example, if the company has a collection of P100,000 on
March 31, 2017, the same must be deposited the following day which is on April 1,
2017. In the Company’s Cash general ledger, it will be recorded and posted on
March 31. However, it will reflect in the bank on April 1, thus, in the April Bank
Statement.
3. Outstanding Checks – checks that are withdrawn by the depositor but not yet
presented by the payee with the bank for payment. For example, the company
prepared a check on March 1, 2017 as payment to Supplier A. However, Supplier A
went to the bank only on April

5, 2017 for presentation. Hence, the check payment was already recorded by the
company
in its Cash account general ledger. The bank will record the check only on April 5.
Hence, it
will reflect in the depositor’s bank on April 5.
4. Bank errors – these errors should not be adjusted by the company in its books as
these are bank mistakes. It will be corrected by the bank the following month.
5. Book errors – these errors are errors of the company that should be adjusted.
These errors
will not reflect in the company’s bank account as the bank doesn’t care of them.
101 Fundamentals of
Accounting 2
Bank Reconciliation Format – Adjusted Balance
The reconciliation format is as follows:
Book Bank
Unadjusted ending balance xxx Unadjusted ending balance xxx
Add: Add:
Bank credits xxx Deposits in transit xxx
Book error, if any xxx Bank error, if any xxx
Total Less: xxx Total xxx
Bank debits Less:
(xxx) Outstanding checks (xxx)
Book error, if any (xxx) Bank error, if any (xxx)
Adjusted balance xxx Adjusted balance xxx
Again, the adjusted balance of Book and Bank should be equal.

Illustration
ELREY CORPORATION has various transactions. The company made deposits and withdrawn
checks for payments. The Bank Statement from MED BANK, INC. was received on July 10,
2017. Assuming there are no reconciling items in May, ELREY has the presented the following
information:
Bank Statement
MED BANK, INC. Account No: 0228-2017
MARULAS Account Name: E LRE Y COMP
BRANCH ANY
Balance
5/31/2016 BEGINNING BALANCE 125,250.00
6/2/2016 1-002 CHECK WITHDRAWAL 1002 12,560.52 112,689.48
6/3/2016 1-001 CHECK DEPOSIT CH6-1 18,000.00 130,689.48
6/7/2016 1-001 CHECK DEPOSIT CH6-2 25,000.00 150,018.94
6/12/2016 1-005 CHECK DEPOSIT CH6-2.1 5,000.00 44,862.09
6/13/2016 1-001 CHECK DEPOSIT CH6-3 154,678.00 199,540.09
6/17/2016 1-003 CASH DEPOSIT CD6-1 1,567.52 201,107.61
6/18/2016 1-004 FUND TRANSFER - ELR FT6-1 150,000.00 351,107.61
CO.
6/20/2016 1-001 CHECK DEPOSIT CH6-4 67,285.56 418,393.17
6/22/2016 1-003 CASH DEPOSIT CD6-2 12,520.00 430,913.17
6/24/2016 1-005 NSF CHECK NSF6-1 5,000.00 425,913.17
6/28/2016 1-003 CASH DEPOSIT CD6-3 980.00 398,176.17
6/30/2016 1-001 CHECK DEPOSIT CH6-5 100,228.15 498,404.32
6/30/2016 617-ELREYi INTEREST INCOME II6-1 497.30 498,901.62
6/30/2016 617-ELREYsc BANK SERVICE SC6-1 250.00 498,651.62
CHARGE
6/30/2016 E NDING B ALANCE 498, 651. 62
102 Fundamentals of
Accounting 2
ELREY COMPANY - GENERAL LEDGER
DATE PARTICULARS REFERENCE CASH
6/1/2016 PAYMENT TO SUPPLIER A CHCK NO.1001 25,156.85
6/3/2016 COLLECTION FROM CUSTOMER 1 DEPO-1 18,000.00
6/4/2016 PAYMENT TO MERALCO - ELECTRICITY CHCK NO.1002 12,560.52
6/6/2016 SALES TO CUSTOMER 2 DEPO-2 25,000.00
6/7/2016 PAYMENT TO SUPPLIER B CHCK NO.1003 5,670.54
6/10/2016 PAYMENT TO MAYNILAD - WATER CHCK NO.1004 10,000.00
6/11/2016 SALES TO CUSTOMER 3 DEPO-2.1 5,000.00
6/13/2016 PAYMENT TO GMA-7 - ADVERTISING CHCK NO.1005 85,000.00
6/16/2016 PAYMENT TO SUPPLIER C CHCK NO.1006 6,500.00
6/19/2016 PAYMENT TO LANDEELORDEE - RENT CHCK NO.1007 5,500.00
6/22/2016 ADVANCES TO EMPLOYEE 1 CHCK NO.1008 22,217.00
6/25/2016 PAYMENT TO SUPPLIER D CHCK NO.1009 12,000.00
6/28/2016 SALES TO CUSTOMER 8 DEPO-6 980.00
6/28/2016 PAYMENT TO SUPPLIER E CHCK NO.1010 8,562.77
6/30/2016 TOTAL 576,634.73 193,167.68
6/30/2016 BALANCE 383,467.05
Required: Prepare a bank reconciliation using adjusted balance format.
To prepare for a bank reconciliation, we must first look for the reconciling items.
1. Find the transactions and amounts recorded in the book but were not recorded in
the bank (bank reconciling items).
2. Find the transactions and amounts recorded in the bank but were not recorded in
the book (book reconciling items).
3. Take note that the bank deposits are equivalent to book debits while bank
withdrawals are equivalent to book credits.

4. The bank reconciliation will be prepared once the Bank Statement is received which
is on
July 10. Thus, bank reconciliation will be prepared in July.
103 Fundamentals of
Accounting 2
Solution:
Book Balance - Highlighted are the bank reconciling items:
ELREY COMPANY - GENERAL LEDGER
DATE PARTICULARS REFERENCE CASH
6/1/2016 PAYMENT TO SUPPLIER A CHCK NO.1001 25,156.85
6/4/2016 PAYMENT TO MERALCO - CHCK NO.1002 12,560.52
ELECTRICITY
6/7/2016 PAYMENT TO SUPPLIER B CHCK NO.1003 5,670.54
6/10/2016 PAYMENT TO MAYNILAD - WATER CHCK NO.1004 10,000.00
6/11/2016 SALES TO CUSTOMER 3 DEPO-2.1 5,000.00
6/13/2016 PAYMENT TO GMA-7 - ADVERTISING CHCK NO.1005 85,000.00
6/16/2016 PAYMENT TO SUPPLIER C CHCK NO.1006 6,500.00
6/19/2016 PAYMENT TO LANDEELORDEE - CHCK NO.1007 5,500.00
RENT
6/22/2016 ADVANCES TO EMPLOYEE 1 CHCK NO.1008 22,217.00
6/25/2016 PAYMENT TO SUPPLIER D CHCK NO.1009 12,000.00
6/28/2016 SALES TO CUSTOMER 8 DEPO-6 980.00
6/28/2016 PAYMENT TO SUPPLIER E CHCK NO.1010 8,562.77
6/30/2016 TOTAL 576,634.73 193,167.68
6/30/2016 BALANCE 383,467.05
∙ Deposits in transit – collections from customers 9 and 10 are deposits already

recorded in the book but not yet reflected in the bank.
∙ Outstanding checks – checks nos. 1004, 1007, 1009, and 1010 are checks already
withdrawn and recorded by the company but not yet presented by the payees with
the bank.
∙ For this example, no book errors were encountered.
104 Fundamentals of
Accounting 2
Bank Balance - Highlighted are the book reconciling items:
MED BANK, INC. Account No: 0228-2017
MARULAS BRANCH Account Name: E LRE Y
COMP ANY
Balance
6/3/2016 1-001 CHECK DEPOSIT CH6-1 18,000.00 130,689.48
6/7/2016 1-001 CHECK DEPOSIT CH6-2 25,000.00 150,018.94
6/12/2016 1-005 CHECK DEPOSIT CH6-2.1 5,000.00 44,862.09
6/13/2016 1-001 CHECK DEPOSIT CH6-3 154,678.00 199,540.09
6/17/2016 1-003 CASH DEPOSIT CD6-1 1,567.52 201,107.61
6/18/2016 1-004 FUND TRANSFER - ELR FT6-1 150,000.00 351,107.61
CO.
6/20/2016 1-001 CHECK DEPOSIT CH6-4 67,285.56 418,393.17
6/22/2016 1-003 CASH DEPOSIT CD6-2 12,520.00 430,913.17
6/24/2016 1-005 NSF CHECK NSF6-1 5,000.00 425,913.17
6/28/2016 1-003 CASH DEPOSIT CD6-3 980.00 398,176.17
6/30/2016 1-001 CHECK DEPOSIT CH6-5 100,228.15 498,404.32
6/30/2016 617-ELREYi INTEREST INCOME II6-1 497.30 498,901.62
6/30/2016 617-ELREYsc BANK SERVICE SC6-1 250.00 498,651.62
CHARGE
6/30/2016 E NDING B ALANCE 498, 651. 62
∙ Bank Debits – NSF Check means No Sufficient Fund Check. On June 11, ELREY
collected P5,000 cash sales to customer 3 (see General Ledger) and was deposited on
June 12 (see Bank Statement). However, on June 24, the bank statement shows that
the P5,000 was debited by the bank due to no sufficient fund. This means that the
check given by customer 3 has no value as the bank where it was withdrawn has no or
insufficient balance. ELREY just noticed that the check is NSF in July when ELREY
received the Bank Statement. Bank Service Charge is recorded by the bank but was
not recorded by ELREY in its book.
∙ Bank Credits – MED BANK recorded P150,000 fund transfer and was added in the
deposit column of the bank statement. However, this is neither collection nor receipt of
ELREY because this should be added to the bank of ELR CO. Accordingly, it is a bank
error. Interest Income was recorded by the bank but not recorded by ELREY in its
book.
105 Fundamentals of
Accounting 2
Bank reconciliation will appear as follows:
Book Bank
Unadjusted ending balance 383,467.05 Unadjusted ending balance 498,651.62
Add: Add:
Bank credits - interest income 497.30 Deposits in transit 66,125.50
Total 383,964.35 Total 564,777.12
Less: Less:
Bank debits - bank service charge (250.00) Outstanding checks (36,062.77)
Bank debits - NSF check (5,000.00) Bank error, if any (150,000.00)
Adjusted balance 378,714.35 Adjusted balance 378,714.35
Take note that the adjusted balance must be

equal.
106 Fundamentals of
Accounting 2
107 Fundamentals of
Accounting 2
108 Fundamentals of
Accounting 2
109 Fundamentals of
Accounting 2
Unit 9: Income and Business Tax
Learning Objectives
1. Define income and business taxation and its principles and processes;
2. Prepare the list of sources of gross income from compensation and gross income from
business, and the corresponding personal and additional deductions;
3. explain the procedure in the computation of gross taxable income and tax due;
4. prepare the BIR forms;
5. explain the principles and purposes of taxation;
6. distinguish individual from business taxation; and
7. compute the gross taxable income and tax due.
What is Taxation?
Taxation is the power to tax inhabitants in a sovereign state to raise money for public
use. In other words, the Government collects money from its people (the taxpayer). Tax is the
money that will be used to pay Government expenses such as salary of public teacher,
government infrastructures like bridges, road improvements, free medicines and the like. Our
Philippine Bureau of Internal Revenue (BIR) administers the collection of the tax. This book
will focus in two types of taxation, the income and business taxation.
Income Taxation
Income taxation simply means tax on income. Hence, money will be collected from
people that earns income. Generally, no tax will be collected from people with no source of
revenue. Income tax is computed quarterly and annually both for corporation and individuals.
Income tax is computed based on the net taxable income. Figure 9.1 shows the basic
formula in computation of income tax:
Figure 9.1 Gross revenue xxxxx
Deductions xxxxx
Net taxable income xxxxx
Gross Revenue
Gross revenue is means income from whatever sources. As a general rule, all income
is taxable including illegally obtained income. Taxable income includes:
110 Fundamentals of
Accounting 2
1. Compensation income – income derived for rendering services. Generally, this is
the salary, allowance, bonus and retirement received by an employee from its
employer.
2. Gross income from business – means income in the conduct of trade or business.
Examples are gross sale of merchandise and gross revenue from the conduct of
services.
3. Professional income – it represents fees paid to professionals such as lawyers,
doctors and CPAs.

4. Other income – it consists of interest, rent, gain from sale of assets, royalties,
dividends, annuities, prizes and winnings. However, some income is not taxable. It
includes income derive by a minimum wage earner, 13th month bonus and other benefits
not exceeding P82,000, benefits received from SSS and GSIS and winnings from
Philippine Charity Sweepstake Office (PCSO)
Deductions
Meanwhile, deduction represents expenses and exemptions allowed by the tax law.
This amount helps in reducing the income tax of a taxpayer. As a rule, deduction should be in
connection with the taxpayer’s conduct of business or profession. Taxpayer may use
Optional Standard Deduction (OSD) or Itemized Deduction. Itemized Deduction includes the
following:
5. General and business expenses – these represent expenses directly related to the
conduct of business of profession such as salaries, supplies, repairs, transportation,
advertising and rental.

6. Interest – it represents the cost of money the taxpayer needs to pay because of
indebtedness in connection with his business of profession.
3. Taxes –it includes taxes paid such as Mayor’s and Sanitary permit, LTO registration
fees, community tax, documentary taxes and import duties.
4. Bad debts – receivables that are already worth less. Thus, a mere allowance is not
deductible.
5. Depreciation – periodic allocation of the cost of fixed assets as discussed in the
previous Units.
6. Charitable contributions – means contributions to Non-Government
Organizations (NSO), donation to the Government of the Philippines.

Deductions are allowed only to those individuals and corporation earning in the conduct of their
business or profession. Individuals earning pure compensation income are not allowed to used
deductions to lessen their income tax. For these expenses to be allowed as deduction, these
must be: 1st ordinary and necessary, 2nd substantiated with official receipts or other adequate
documents, 3rd withheld with tax, if any, and 4th it’s not contrary to law.
111 Fundamentals of
Accounting 2
OSD however is a different kind of deduction. This represents 40% of gross income as
presented in Figure 9.2 and 9.3 below.
Figure 9.2
Individual Corporation
Gross revenue xxxxx Gross revenue xxxxx
Less: Cost of sales Less: Cost of sales xxxxx
Gross income xxxxx Gross income xxxxx
Multiplied by 40% OSD xxxxx Multiplied by 40% OSD xxxxx
OSD xxxxx OSD xxxxx
The computation of net tax taxable income will appear as

follows: Figure 9.3
Individual Corporation
Gross revenue 10,000 Gross revenue 10,000
Less: Cost of sales Less: Cost of sales 5,000
Gross income 10,000 Gross income 5,000
Less: 40% OSD 4,000 Multiplied by 40% OSD 2,000
Net taxable income 6,000 Net taxable income 3,000
Take note that and individual taxpayer is not allowed to deduct its cost of sales unlike of
a corporation. Further, the taxpayer should choose either itemized deduction or OSD but
cannot use both.
Personal and Additional Exemption
The law granted individual a personal and additional exemption on top of the above
deductions.
All individual taxpayer has a P50,000 personal exemption. In addition, they could also
claim up to 4 additional exemption for dependent. Each dependent costs P25,000 or a
total of P100,000. The requisites for additional exemption are as follows:
1. Taxpayer’s child (legitimate, illegitimate or adopted);
2. chiefly depends support from and living with the taxpayer;
3. neither married nor employed; and
4. not more than 21 years old. If the child is a person with disability (PWD) this
requisite
doesn’t apply.
As a rule, parents and siblings, even if chiefly depends from or living with the taxpayer,
PWD or senior citizen are not qualified as dependent. Hence, they are not qualified for the
P25,000 additional exemption.
Who has the right to claim additional exemption? The husband has the right to
claim the exemption. If the husband has no earnings, then wife is the proper claimant.
112 Fundamentals of
Accounting 2
Figure 9.4 Individual Tax Rate
Over But not over Basic tax Rate Othe excess
of
0 10,000 0 5% 0
10,000 30,000 500 10% 10,000
30,000 70,000 2,500 15% 30,000
70,000 140,000 8,500 20% 70,000
140,000 250,000 22,500 25% 140,000
250,000 500,000 50,000 30% 250,000
500,000 0 125000 32% 500,000
Corporate Tax Rate is 30% of the net taxable income.
Illustration Individual engaged in trade or business

Denver is a sole proprietor and engaged in a buy-and-sell business. He is married and
has 2 children, both minor and living with him. The following information pertains to his
business for the year:
Gross sales P 620,000
Cost of sales (200,000)
General and operating expenses (itemized) (150,000)
His income tax will be computed as follows:
Net income is P270,000 (620,000 – 200,000 – 150,000). However, his net taxable
income is P170,000 (270,000 – 100,000) only because of his personal exemption of
P50,000 and P50,000 additional exemption (2 children at 25,000). Based on the individual
tax table, his tax is computed as follows:
Basic tax: P 22,500
Rate: 25% of 30,000 7,500
Tax due for payment P 30,000

Denver’s income of P170,000 is under the bracket:
Over But not Basic Rate Othe excess
over tax of
140,00 250,000 22,500 25% 140,000
0
His basic tax is 22,500 and the excess is 30,000 (170,000 – 140,000) that has a
25% tax rate. If Denver will use OSD, his net taxable income will be computed as
follows: OSD: P620,000 x 40% = 248,000
Net taxable income: P620,000 – 248,000 OSD – 100,000 exemptions = 272,000
Denver’s tax due for payment will be computed based on P272,000 under the
bracket:
113 Fundamentals of
Accounting 2
over tax of
250,00 500,000 50,000 30% 250,000
0
Basic tax: P 50,000
Rate: 30% of 22,000* 6,600
Tax due for payment P 56,600
*(272,000 – 250,000)
Illustration 2 Individual earning pure compensation income

Nicole is a supervisor of KONGKONG Company. She is married and has 3 qualified
dependents.
She earns 30,000 per month, net of mandatory contributions*. The BIR has provided a
monthly computation of withholding tax as presented below in Figure 9.5. Withholding tax
means monthly income tax.
Figure 9.5
MONTHLY 1 2 3 4 5 6 7 8
Exemption 0 0 41.67 208.33 708.33 1,875.00 4,166.67 10,416.67
Status +0% over +5% over +10% over +15% over +20% over +25% over +30% over +32% over
A. Table for employees without qualified dependent
1. Z 0 1 0 833 2,500 5,833 11,667 20,833 41,667
2. S/ME 50 1 4,167 5,000 6,667 10,000 15,833 25,000 45,833
B. Table for single/married employee with qualified dependent child(ren)
1. ME1 / S1 75 1 6,250 7,083 8,750 12,083 17,917 27,083 47,917
2. ME2 / S2 100 1 8,333 9,167 10,833 14,167 20,000 29,167 50,000
3. ME3 / S3 125 1 10,417 11,250 12,917 16,250 22,083 31,250 52,083
4. ME4 / S4 150 1 12,500 13,333 15,000 18,333 24,167 33,333 54,167
Z = no exemption SE1 = single with one qualified dependent and so

on…
S = single
ME1 = married with one dependent and so on…
ME = married
*SSS, Philhealth and Pag-ibig
Nicole is under the bracket of ME3 (married with 3 qualified dependents) as highlighted above.
Her monthly withholding tax is computed as follows:
Basic tax: P 1,875.00
Rate: 25% of 7,917** 1,979.25
Tax due for payment 3,854.25
**(30,000 – 22,083)
The 3,854.25 will be remitted by KONGKONG Company with the BIR. Nicole’s tax will
be computed again at the end of the year, which must consist of her income for the whole
year. Her yearly income tax will be presented as follows:
114 Fundamentals of
Accounting 2
Net revenue for the year (30,000 x 12 months) P 360,000
Personal (50,000) and additional exemption (3 children @ 25,000) (125,000)
Net taxable income 235,000

Based on the tax table (Figure 9.4), Nicole’s tax is computed under bracket:
over tax of
140,00 250,000 22,500 25% 140,000
0
Basic tax: P 22,500

Rate: 25% of 95,000*** 23,750
Tax due for the year 46,250
Monthly withholding income tax paid**** (46,250)
Tax due for payment -0-
***(235,000-140,000)
****(3,854.25 x 12 months)
With the help of the monthly withholding tax, Nicole will no longer pay P46,250 annual
income tax because her employer had paid it in advance. Note that individual earning pure
compensation income is not allowed to claim itemized deduction or OSD.
Illustration 3 Corporation
PAPAJEF Corporation is engaged in a manufacturing and sale of baked products.
It has the following information for 2016:
Gross sales P
5,000,000
Cost of goods sold
(2,200,000)
General and operating
expenses (1,000,000)
PAPAJEF has a net income of P1,800,000 (5,000,000 – 2,200,000 – 1,000,000).

Consequently, its net income represents the net taxable income because corporation is not allowed
to claim personal and additional exemption. Thus, tax due for payment is P540,000 (1,800,000 x
30%).
If PAPAJEF opted to used OSD, his net taxable income will be computed as
follows: OSD: (P5,000,000 – 2,200,000) x 40% = 1,120,000
Net taxable income: P5,000,000 – 2,200,000 Cost of goods sold – 1,120,000 OSD =
1,680,000 Tax due for payment: P1,680,000 x 30% = 504,000
Take note that under OSD computation, corporation could deduct cost of sales unlike of
an individual.
115 Fundamentals of
Accounting 2
116 Fundamentals of
Accounting 2
ABOUT THE AUTHORS
Jeffrey T. Tillo is currently a professor at Our Lady of Fatima University
– Valenzuela, City of Malabon University and a former professor at
University of Caloocan City. As a Certified Public Accountant, he is
currently engaged in public practice of accounting and he has 10 years
of experience and exposure in various fields of accounting, auditing
and taxation. He graduated at City of Malabon University in 2008 and
took the CPA Licensure Examination in 2009
with a general weighted average of 84.79%.
Julieta Inocencio-Dillena is a Certified Public Accountant and a

graduate of Master in Business Administration from Our Lady of
Fatima University and currently has already taken up thirty three
units of Doctor in Business Administration also in the same
University. She is the current Coordinator for the SHS-ABM strand in
Valenzuela Campus of OLFU. She was the former SOCI Coordinator
for the College of Business and Accountancy-
Valenzuela Campus. The author is happily married to Enrico Dillena
and is blessed with five blissful and successful children with one bubbly grandson, Abraham
Louise Dillena- Enano.
Benjie M. Sia is a Certified Public Accountant. He graduated as

Cum Laude on April 2014 at University of Caloocan City and
passed October 2014 CPA Board. He is an Accredited Accounting
Teacher and currently taking Master of Business Administration at
University of Caloocan City. Currently connected as faculty member
of Our Lady of Fatima University, Pamantasan ng Lungsod ng
Valenzuela, Global Reciprocal Colleges and
University of Caloocan City.
117 Fundamentals of
Accounting 2

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FUNDAMENTALS OF ACCOUNTING 2

FOR ACCOUNTANCY, BUSINESS AND MANAGEMENT – SENIOR

JEFFREY TILLO, CPA

Elements of the Statement of Financial Position ………………………………….……………………… 3

Current Assets ……………………………………………………………………………...………………… 4

Unit 2: Statement of Comprehensive Income …………………………………………..………………. 19

Unit 3: Statement of Changes in Equity ………………………………………………………………… 29

Unit 4: Cash Flow Statement …………………………………………………………………………..… 36

Unit 6: Accounting Books - Journal and Ledger …………………………………………………………… 66

Unit 7: Accounting Practice Set ……………………………………………………………………………… 86

Unit 8: Bank Accounts and Bank Reconciliation ………………………………………………………… 93

Unit 9: Income and Business tax ………………………………………………………………………… 110

This manual is a product of the authors’ substantial experience in teaching basic

Constructive criticisms, no matter how minute, are most-welcomed from our

as SFP or Balance Sheet) and describe each of them;

What is the Statement of Financial Position

TOTAL ASSETS P 748,663

Total liabilities 102,644

TOTAL LIABILITIES AND EQUITY P 748,663

See notes to the Financial Statements.

are the assets that will be discussed in this context:

This balance sheet account represents cost of unsold merchandise. Inventoriesare

as inventories. A business that manufactures clothing classifies its clothing as inventories.

asset until such expense is consumed.

Equity– credit is the normal balance

and owner’s withdrawals. This will be

Preparation of Statement of Financial Position

FS Account Class Acct Debit Credit

Property, plant and equipment Assets Land improvements 8,000

Property, plant and equipment Assets Building 320,000

Property, plant and equipment Assets Accumulated deprecition - Building 32,000

Property, plant and equipment Assets Building improvements 10,260

Property, plant and equipment Assets Furniture and equipment 55,000

Property, plant and equipment Assets Delivery equipment 120,000

Non current Asset

TOTAL ASSETS P 1,628,174

Total liabilities 848,600

TOTAL LIABILITIES AND EQUITY P 1,628,174

*Net income is computed simply by deducting Expenses from Revenue account

Assets = Liabiliti + Equity Differenc

as SCI or Income Statement);

What is the Statement of Comprehensive Income?

If Revenue > Cost and Expenses = Net

Less: Cost of sales

Service revenue 1,600,000

Elements of Statement of Comprehensive Income

However, for tax purposes, revenue

What is the Statement of Changes in Equity?

Beginning balance P 100,000

Additional investments 400,000

Owner's drawings (120,000)

Net income 150,000

2. Additional investment – some owners invest additional cash or other assets to

finance the operation of their business.

Parnter 1 Parnter 2 Parnter 3 Total

Beginning balance P 100,000 200,000 300,000 600,000

Partners' drawings (120,000) (100,000) (170,000) (390,000)

Additional investments 250,000 120,000 350,000 720,000

Share in net income 123,656 118,280 258,065 500,000

Actually, a Partnership Capital Statement has the same structure of a Sole

INTRODUCTION TO CASH FLOW STATEMENT:

the statement of cash flows is required.

CASH FLOW STATEMENT EXAMPLE – DIRECT AND INDIRECT METHOD: