Professional Documents
Culture Documents
INTRODUCTION
This presentation covers the concepts and practice of accounting fundamental. From the concepts and information about accounting up to the accounting cycle, which includes journalizing, reversing and closing entries. Accounting is a profession similar to medicine and law. Such profession continually evolve and change as society and the needs of society change. The objective of this presentation is to make people aware of how accounting works in relation to business and also how can it be helpful even in a simple way of living. This also emphasized the importance of accounting in any types of business. Little by little, you will be able to understand how accounting works and you will realize its significance to our daily living. This presentation is based on the book of Bayani D. Edlagan and Ma. Cecilia S. Mercado, Accounting Fundamental.
CHAPTER 1
Introduction to Accounting Concepts and Practice
CHARACTERISTICS OF ACCOUNTING INFORMATION Accounting information is composed principally of financial data about business transactions, expressed in terms of money. The mere records of transactions are of little use in making informed judgments and decisions. The recorded data must be sorted and summarized before significant reports and analyses can be prepared. The basic raw materials of accounting are composed of business transaction data. Its primary end products are composed of various summaries, analyses, and reports.
Accounting provides the techniques for accumulating and the language for communicating economic data to various categories of individuals and institutions. Investors in a business enterprise need information about its financial status and its future prospects. The government agencies are concerned with the financial activities of business organizations for purposes of taxation and regulation. The individuals most dependent upon and most involved with the end products of accounting are those charged with the responsibility for directing the operations of enterprises.
For example, in the conduct of day-to-day operations, management relies upon accounting to provide the amount owed to each creditor and by each customer and the date each payment is due. The relevant information for one category of users may differ markedly from that needed by other users. Once the user groups are identified, however, and the nature of the relevant data determined, the accountant is able to establish an information network to assist each group in forming judgments and making decisions regarding future actions.
Everyone engaged in business activities, from the youngest employee to the manager and owner, comes into contact with accounting. The higher the level of authority and responsibility, the greater is the need for an understanding of accounting concepts and terminology. The importance of understanding accounting is not limited to the business world. Many employees with specialized training in non-business areas also make use of accounting data and should understand accounting principles and terminology.
PROFESSION OF ACCOUNTANCY
Accountancy is a profession with stature comparable to that of engineering or law. The rapid development of accounting theory and technique during the current century has been accompanied by an expansion of the career opportunities in accounting and an increasing number of professionally trained accountants. Accountants who render accounting services on a fee basis, and staff accountants employed by them, are said to be engaged in public accounting. Accountants employed by a particular business enterprise or not-for-profit organization, as chief accountant, controller, or financial vice-president, are said to be engaged in private accounting.
PUBLIC ACCOUNTING
The practice of public accounting is generally restricted to licensed CPAs. Recognizing the need for reliable professional accounting service, the Philippine Legislature passed the Accountancy Act in March 1923. This act created the Board of Accountancy which was given the power among other, to issue the certificate of Certified Public Accountant, abbreviated as CPA. In May 1975, The revised Accountancy Law was released which define the practice of accountancy to include not only CPAs in public practice, but also those in private accounting, in government services and in education, and increased the contents and coverage of subjects in the CPA examinations.
PUBLIC ACCOUNTING
In Section 10 of the Law, it is provided that: an applicant for the CPA certificate must be a Filipino citizen (or a citizen of foreign country granting reciprocal privileges, by law, to Filipino with respect to the practice of accountancy), of good moral character and at least twenty one year of age. He/she must be a holder of a degree of Bachelor of Science in Commerce or its equivalent from any college or university recognized by the government. The CPA candidate is required to successfully pass a written examination, given by the Board of Accountancy, covering theory of accounts, business law, taxation, management advisory services, auditing theory, auditing theory, auditing problems, practical accounting problem1, problem 2. To practice public accountancy, CPAs and firms or partnerships, including partners and staff members must register with the Professional Regulation Commission, such registration to be made annually.
PRIVATE ACCOUNTING
The scope of activities and duties of private accountants varies widely. Private accountants are frequently called management accountants. If they are employed by a manufacturing concern, they may be call industrial or cost accountants. The chief accountant in a business may be call controller. Various governmental units and other not-for-profit organizations also employ accountants. Internal auditors are accountants who review the accounting and operating procedures prescribed by their companies. Accountants who specialize in internal auditing may be granted the Certified Internal Auditor (CIA) certificate.
For example, an engineer responsible for selecting the most desirable solution to a technical manufacturing problem may consider cost accounting data to be the decisive factor. Lawyers use accounting data in tax cases and in lawsuits involving property ownership and damages from breach of contract. Governmental agencies rely on accounting data in evaluating the efficiency of government operations and for appraising the feasibility of proposed taxation and spending programs. Accounting plays an important role in modern society and, broadly speaking, all citizens are affected by accounting in some way.
FINANCIAL ACCOUNTING It is concerned with the recording of transactions for a business enterprise or other economic unit and the periodic preparation of various reports from such records. Corporate enterprise must employ such principles in preparing their annual reports on profitability and financial status for their stockholders and the investing public.
AUDITING It is a field of activity involving an independent review of the accounting records. In conducting an audit, public accountants examine the records supporting financial reports of an enterprise and express an opinion regarding their fairness and reliability. COST ACCOUNTING It emphasizes the determination and control of costs. It is concerned primarily with the costs of manufacturing processes and of manufactured products, but increasing attention is being given to distribution costs. In addition, one of the principal functions of cost accountants is to assemble and interpret cost data, both actual and prospective for the use of management in controlling current operations and in planning for the future.
MANAGEMENT ACCOUNTING It employs both historical and estimated data in assisting management in daily operations and in planning future operations. It deals with the specific problems that confront enterprise managers at various organizational levels. The management accountant is frequently concerned with identifying alternative courses of action and in helping to select the best one. TAX ACCOUNTING It encompasses the preparation of tax returns and the consideration of the tax consequences of proposed business transactions or administrative courses of action. Accountants specializing in this field, particularly in the area of tax planning, must be familiar with tax statutes affecting their employer or clients and also must keep up to date on administrative regulations and court decisions on tax cases.
ACCOUNTING SYSTEM It is the special field concerned with the design and implementation of procedures for the accumulation and reporting of financial data. The systems accountant must devise appropriate checks and balances to safeguard business assets and provide for information flow that will be efficient and helpful to management. BUDGETARY ACCOUNTING It presents the plan of financial operations for a period and, through records and summaries provides comparisons of actual operations with the predetermined plans. A combination of planning and controlling future operations, it is sometimes concerned to be a part of management accounting.
INTERNATIONAL ACCOUNTING It is concerned with the special problems associated with the international trade of multinational business organizations. Accountants specialized in this area must be familiar with the influences of customs law, and taxation of various countries bear on international operations and accounting principles. NOT-FOR-PROFIT ACCOUNTING It specializes in recording and reporting the transactions of various governmental units and other not-for-profit organizations such as church, charities, and educational institutions. An essential element in an accounting system that will insure strict adherence on the part of management to restrictions and other requirements imposed by law, by other institutions, or by individual donors.
BOOKKEEPING is the recording of business data in a prescribed manner. A bookkeeper may be responsible for keeping all the records of a business or only a minor segment, such portion of customer accounts in department store. Much of the work of the bookkeeper is critical in nature and increasingly being accomplished through the use of mechanical and electronic equipment. ACCOUNTING is primarily concerned with the design of the system of records, the preparation of reports based on the recorded data, and the interpretation of the reports. Accountants often direct and review the work of bookkeeper. In event, the accountant must possess a much higher level of knowledge, conceptual understanding, and analytical skill than is required of the bookkeeper.
The business entity concept is based on identifying the individual economic units for which economic data are needed. Once the entity is identified, the accountant can determine which economic data and activities should be analyzed, recorded, and summarized in reports. The business entity concept is based on the applicability of accounting to individual economic units in society. These individual economic units include all business enterprises organized for profit, numerous governmental units, such as provinces, cities, and towns, other bit-for-profit units like church and clubs, and individual persons and family units. The basic economic data for a unit must first be recorded, followed by analysis and summarization, and finally by periodic reporting. Thus, accounting applies to each separate economic unit.
This subject is concerned primarily with the accounting principles and techniques applicable to profit making businesses. Such businesses are customarily organized as a sole proprietorship, partnerships, or corporations. A sole proprietorship is owned by one individual. And is owned by two or more individual in accordance with a contractual agreement. A corporation, organized in accordance with the Corporation Law, is a separate legal entity in which ownership is divided into shares of stock.
SERVICE Companies perform services for a fee. Example: Accounting firms, law firms, and other service establishments
MERCHANDISING Companies purchase goods that are ready for sale and then sell these goods to customers.
MANUFACTURING Companies buy raw materials, convert them into another form of products and the sell the products to other companies or to final consumers.
BUSINESS TRANSACTIONS
A business transaction is the occurrence of an event or of a condition that must be recorded. A particular business transaction may lead to an event or condition that constitutes another transaction.
Every business transaction affects the assets, liabilities and/or capital of the business. However, the changes in these items are such that the equality of two sides of the accounting equation is always maintained.
Based on the positions of increases and decreases in an account for an asset, liability, or capital item, the rules of debit and credit may be stated as follows:
TABLE 1.1
DEBIT
1. Increase in Assets 2. Decrease in Liabilities
CREDIT
1. Decrease in Assets 2. Increase in Liabilities
3. Increase in Capital
a. Investment by the Owner b. Decrease in Expenses
c. Decrease in Revenue
c. Increase in Revenue
Which item (items) is/are affected Assets, Liabilities, Capital? How is each item affected it is increased or decreased? According to the rules of debit and credit, is the increase or the decrease in the item to be debited or credited? What account titles should be used to record the debit or credit item?
The effect of these changes on the accounting equation can be demonstrated by studying some typical transactions using the analysis sheet as follows:
Table 1.2
ASSETS
LIABILITIES
CAPITAL
As the basis of this illustration, assume that on September 1, 19xx Nick Requijo establishes a sole proprietorship to be known as Requijo Taxi. Each transaction or group of similar transactions during the first month of operations is described followed by an illustration of its effect(s) on the accounting equation and the corresponding two-column journal entry and explanation of entry for each give transaction.
TRANSACTION ONE Nick Requijo deposited P500,000 in a bank account in the name of Requijo Taxi. The effect of this transaction is to increase the asset cash by P500,000 and to increase capital, on the other side of the equation, by the same amount. After the transaction, the equation for Requijo Taxi will appear as follows:
Table 1.3
ASSETS
LIABILITIES
CAPITAL
+ Cash 1 P500,000
It should be noted that the equation relates only to the business enterprise. Nick Requijos personal assets, such as his home, car, his personal bank account, and his personal liabilities are excluded from consideration. The business is treated as a distinct entity, with cash of P500,000 and the owners equity of P500,000.
Table 1.4
Date DESCRIPTION
Post Ref.
Debi Credi t t
Sept. 1 Cash
The explanation of each debit or credit entry on the journal is based on the rules of debit and credit. Cash was debited because of increase in asset while Capital was credited because of increase in capital due to investment of the owner.
TRANSACTION TWO Requijos next transaction on September 5 is to purchase land as a future building site, for which P100,000 cash is paid. This transaction changes the composition of the assets but does not change the total amount. The items in the equation prior to this transaction, the effects of this transaction, and the new balance after the transaction are as follow:
Table 1.5
LIABILITIES
After the transaction, there is a land costing P100, 000 but the balance is reduced to P400, 000. The total assets composed of cash and land total to P500, 000. Notice that there is no change in the liability and capital items.
Table 1.6
Date DESCRIPTION
Post Ref.
Debit
Credit
100,00 0 100,000
In the transaction recorded, there was a change in the asset element. Land was debited because of increase in assets while Cash was credited because of decrease in assets. The reason for the debit and credit comes from the rules of debit and credit.
TRANSACTION THREE Requijos current plans are to lease cars and other equipment from California Bus Company for several months until he can arrange financing for the purchase of cars and other equipment and for the construction of garage and storage facilities. On September 7 Requijo purchases P60, 000 of parts and other supplies from various suppliers, agreeing to pay in the near future. This type of transaction is called purchase of supplies on account and the liability created is termed accounts payable. Consumable commodities acquired, such as supplies, are considered to be prepaid expenses. Prepaid expenses are expenses paid in advance and are classified as asset.
In actual practice, each purchase would be considered and recorded as it occurred and a separated record would be maintained for each creditor. In this illustration, however, the purchases are recorded as a group. The effect is to increase the assets and liabilities by P600, 000, as indicated below:
Table 1.7
ASSETS + Cash 1. P500,000 - Cash 2. P100,000 + Land P100,000 LIABILITIES CAPITAL + Requijo, Capital P500,000
+ Supplies 3. 60,000
Table 1.8
Date DESCRIPTION
Post Ref.
Sept. 7 Supplies
Accounts Payable
60,000
In the transaction recorded, Supplies (unused) was debited because of increase in assets while Accounts Payable is credited because of increase in liability.
TRANSACTION FOUR On September 9, P10,000 is paid to creditors on account, thereby reducing both assets and liabilities. The effect on the equation is as follows:
Table 1.9
ASSETS + Cash 1. P500,000 - Cash 2. P100,000 + Land P100,000 + Supplies P 3. 60,000 - Cash 4. 10,000 P +Account Payable P60,000 - Account Payable P10,000 LIABILITIES CAPITAL + Requijo, Capital P500,000
Table 1.10
Date DESCRIPTION
Post Ref.
Cash
To record payment of account
10,000
In the transaction recorded, Accounts Payable was debited because of decrease in liability while cash was credited because of decrease in assets.
The excess of the revenue over the expenses incurred in earning the revenue is called net income or net profit. If the expenses of the enterprise exceed the revenue, the excess is a net loss. Since it is ordinarily impossible to determine the exact amount of expense incurred in connection with each revenue transactions, it is considered satisfactory to determine the net income or the net loss for a specified period of time, such as a month, or a quarter, a semester, or a year, rather than each of small group of sales.
Table 1.11
1. 2. ASSETS + Cash P500,000 - Cash P100,000 + Land P100,000 + Supplies P 60,000 - Cash P 10,000 LIABILITIES CAPITAL + Requijo, Capital P500,000
3. 4.
+ Cash 5. P150,000
In the transaction recorded, Cash was debited because of increase in assets while Fares Earned was credited because of increase in capital due to increase in revenue.
Table 1.12
Date DESCRIPTION
Post Ref.
Debit Credit
150,0 00 150,00 0
Table 1.13
ASSETS LIABILITIES
1.
2.
+ Cash - Cash
+ Land
P500,000 P100,000
P100,000
3. 4. 5.
+Account Payable + Supplies P 60,000 P60,000 - Account Payable - Cash P 10,000 P10,000 + Cash P150,000 + Fares Earned P150,000 - Wages Expense P 40,000 - Rent Expense P 20,000 - Gas & Oil P 50,000 - Misc. Expense P
6.
- Cash
P120,000
After this transaction, the total asset amount to P580, 000 composed of Cash P420, 000, Land P100, 000, and Supplies of P60, 000. The total equities are also P580, 000 composed of Accounts Payable P50, 000 and Capital of P530, 000. It should be remembered that revenue and expense accounts are temporary capital accounts; these items are closed to capital at the end of the accounting period.
Table 1.14
Date DESCRIPTION Post Ref. Debit Credit 40,00 0 20,00 0 50,00 0 10,00 0 120,00 0
Sept. 30 Wages Expense Rent Expense Gas and Oil Expense Miscellaneous Expense Cash To record payment of expenses.
In the transaction recorded, Wages Expense, Rent Expense, Gas and Oil Expense, Miscellaneous Expense were debited because of decrease in capital due to increase in expenses while cash was credited because of decrease in assets.
After this transaction, the total assets amount to P560, 000 composed of Cash P420, 000, Land P100, 000, and Supplies of only P40, 000. The total equities are also P560, 000 composed of Accounts Payable of P50, 000 and Capital of P510, 000.
Table 1.15
ASSETS 1. 2. + Cash - Cash P500,000 P100,000 LIABILITIES CAPITAL + Requijo, Capital P500,000
+ Land
3. 4. 5. 6.
P100,000
+Account Payable P60,000 - Account Payable P10,000 + Fares Earned P150,000
-Wages Expense P 40,000 -Rent Expense -Gas & Oil -Misc. Expense P 20,000 P 50,000 P 10,000
7.
- Supplies
P20,000
Table 1.16
Date
Particulars Supplies Expense Supplies To record part of the supplies used in the operation of the business
Debit P20,000
Credit
P20,000
Date
DESCRIPTION
Post Ref.
Debit 20,000
Credit
20,000
In the transaction recorded, Supplies Expense was debited because of decrease in capital due to increase in expenses while Supplies (Unused) was credited because of decrease in assets. Note to Students The terms unused, unexpired, inventory, and prepaid denote asset.
After this transaction, the total assets amount to P540, 000 composed of Cash P400, 000, Land P100, 000, and Supplies of P40, 000. The total equities are also P540, 000 composed of Accounts Payable P50, 000 and Capital P490, 000.
Table 1.17
ASSETS 1. + Cash - Cash + Land 3. 4. 5. 6. P500,000 P100,000 P100,000 +Account Payable P60,000 - Account Payable P10,000 + Fares Earned P150,000 LIABILITIES CAPITAL + Requijo, Capital P500,000
2.
-Wages Expense P 40,000 -Rent Expense -Gas & Oil -Misc. Expense P 20,000 P 50,000 P 10,000
7. 8.
- Supplies - Cash
P20,000 P20,000
Table 1.18
Date . DESCRIPTION Sept. 30 Requijo, Drawing Cash To record withdrawal of owner. Post Ref. Debit Credit 20,000 20,000
In the transaction recorded, Requijo, Drawing was debited because of decrease of capital due to withdrawal and cash was credited because of decreases in assets
SUMMARY
The business transactions of Requijo Taxi are summarized in tabular form below. The transactions are identified by transaction numbers and the balance of each item is shown after each transaction. The following observations, which apply to all types of businesses, should be noted: The effect of every transaction can be stated in terms of increases and/or decreases in one or more of the accounting elements. The equality of the two sides o the accounting equation is always maintained.
Table 1.19
ACCOUNTING STATEMENTS
BALANCE SHEET A kind of financial statement that list the assets, liabilities, and capital of a business entity as of a specific dated, usually at the close of the last day of a month or of a year. It is a kind of financial statement that shows the financial position of the business entity as of a given date, usually the end of the year.
The amount of Requio Taxis assets, liabilities, and capital at the end of the first month of operation appears on the last line of the summary in the preceding page. Minor arrangements of these data and the addition of a heading yield the balance sheet illustrated below. This form of balance sheet, with the liability and capital section presented below the asset section, is called the report form. Another arrangement in common use lists the assets on the left and the liabilities and capital on the right. Because of its similarity to the account, a basic accounting device described earlier in the chapter, it is referred to as the account form of the balance sheet.
It is customary to begin the asset section with cash, which is followed by receivables, inventory (for trading business), supplies, prepaid expense items, and other assets that will be converted into cash or consumed in the near future. The assets of a relatively permanent nature, such as land, buildings, and equipment, follow in that order. Note that in the balance sheet presented the total assets and the total of liability and capital are equal. The balance sheet shows the liquidity (solvency) and stability of as enterprise. Solvency refers to the ability of the business to pay currently maturing liabilities while stability refers to the ability of the enterprise to pay maturing obligations and give return on the investment of the owner(s).
In the liabilities and capital section of the balance sheet, it is customary to present the liabilities first followed by capital. In the illustration for Requijo Taxi the liabilities are composed entirely of accounts payable. When there are two or more categories of liabilities, each should be listed and the total amount of liabilities presented in the following manner:
ACCOUNTING STATEMENTS
ACCOUNTING STATEMENTS
INCOME STATEMENT A kind of financial statement that shows the summary of the revenue and the expenses of a business entity for a specific period of time, such as a month or a year. It is a kind of financial statement that shows result of business operations for a period of time, usually a year. Revenue earned and expenses incurred during the month were recorded in the equation as increases and decreases in capital, respectively. The details together with net income in the amount of P10, 000, are reported in the income statement presented below.
Requio Taxi Income Statement For the Month Ended September 30, 19xx
Fares Earned Operating Expenses Gas & Oil Expense Wages Expense Rent Expense Supplies Expense Miscellaneous Expense Total Operating Expenses Net Income P150, 000 P 50, 000 40, 000 20, 000 20, 000 10, 000 140,000 P 10, 000
The order in which the operating expenses are presented in the income statement varies among businesses. One of the arrangements commonly followed is to list them in the order of size, beginning with the larger items. Miscellaneous expenses is usually shown as the last item regardless of the amount. In the income statement, users will know if the operation of the business is profitable. Profitability refers to the ability of the business to increase owners capital. If the total net asset inflow is more than the net asset outflow, the resulting effect is net income. If the net asset outflow is more than the net asset inflow, it is a net loss.
ACCOUNTING STATEMENTS
CAPITAL STATEMENT (Statement of Owners Equity) It is a statement that shows the summary of the changes in capital of a business entity that have occurred during a specific period of time, such a month or a year. Comparison of the original investment of P500, 000 at the beginning of the month with the P490, 000 of capital reported in the balance sheet at the end of the month reveals a decrease of P10, 000. This net decrease is composed of two significant changes in capital that occurred during the period: (1) the net income of P10, 000, and (2) a withdrawal of P20, 000 by the owner. This information is presented in the capital statement, which serves as a connecting link between the balance sheet and the income statement.
Requijo Taxi Capital Statement For the Month Ended September 30, 19xx
Capital, September 1, 19xx Net Income Withdrawal Decrease in Capital Capital, September 30, 19xx
P500, 000 P10, 000 20, 000 10, 000 P490, 000
Basically, there are two accounting period, the calendar year and the fiscal year. A calendar year is a twelve-month period that ends on December 31 while the fiscal year is a twelve-month period that ends at the end of any month other than December. In the Philippines, only partnership and corporation are allowed to use fiscal year, single proprietorship is allowed only to use calendar year.
ACCOUNTING STATEMENTS
STATEMENT OF CASH FLOWS The statement of cash flows consists of three sections: (1) operating activities, (2) financing activities, and (3) investing activities. Each of these sections is described below:
Cash Flows form Operating Activities This section reports a summary of cash receipts and cash payments from operations. The net cash flow from operating activities will normally differ from the amount of net income for the period. This difference occurs because revenues and expenses may not be recorded at the same time that cash is received from customers and cash is paid to creditors.
ACCOUNTING STATEMENTS
Cash Flows from Financing Activities This section reports the cash transactions related to cash investments by the owner, borrowing, and cash withdrawals by the owner. Cash Flow from Investing Activities This section reports the cash transactions for the acquisition and sale of relatively long-term or permanent-type assets.
The preparation of the statement of cash flow is required by pronouncement, every year that the income statement is presented. Preparing the statement of cash flows requires an understanding of concepts that we will not discuss in the chapter. But a simple illustration will be given to be able to illustrate how statement of cash flow is prepared.
Requijo Taxi Statement of Cash Flows For the Month Ended September 30, 19xx
Cash Flows from Operating Activities: Net Income Add: Increase in Supplies Total Less: Increase in Accounts Payable P10, 000 40, 000 P50, 000 50, 000
500, 000
CHAPTER 2
The Accounting Cycle
THE ACCOUNTING CYCLE The double entry accounting system provides a basic framework for the analysis of business activities. Now we wish to go into greater detail about the accounting procedures used to account for the operations of a business during a specific period. The accounting procedures of most businesses involve certain basic steps that are accomplished in a given order. This sequence of operations is known as the accounting cycle.
The annual period adopted by a business enterprise is known as fiscal year. Business enterprises whose fiscal year ends in December are said to be on a calendar-year basis. Many enterprises prefer to have their accounting year coincide with their natural business year; that is, the fiscal year ends when business is slow and inventory quantities are small and easy to count.
Source documents are printed or written forms that generate when the enterprise engages in business transactions. Even a brief source document usually specifies the peso amount involved, the date of transaction, and possibly the party dealing with the enterprise. Some examples of source documents are (1) a purchase or sellers invoice showing evidence of a purchase of merchandise (or supplies) on account, (2) a bank check indicating the payment of obligation, (3) a deposit slip showing the amount of funds turned over to the bank, (4) a cash receipt indicating funds received from a customer, and (5) a cash register tape listing a days over-the-counter sales to customers.
BUSINESS PAPERS
All business transactions are evidenced supported by printed forms or documents, called business papers. These business papers furnish the information needed in recording business transactions. Without business papers, it would be difficult to keep accurate record of business transactions. The following are good example of business papers commonly used in a business:
BUSINESS PAPERS
1. Sales or Service Invoice after the sale of goods of service has taken place, a business form called invoice is prepared. The invoice shows the date of sale/service rendered, list of the articles sold or list of services rendered, and other information. Invoices are prenumbered and usually made out in triplicate or quadruplicate depending upon the need of the business. The original of the invoice is given to the buyer of goods or services. In a merchandising business, from the point of vies of the seller, the invoice is called sales invoice; from the point of view of the buyer, it is a purchase invoice. The sample of an invoice is given below.
Table 2.1
BUSINESS PAPERS
2. Official Receipt official receipt are issued every time the business receives cash. The receipt shows the date on which the cash is received, the party from whom the cash is received, the amount of cash received, the explanation of the transaction, and the signature of the personnel who issued the receipt.
Table 2.2
BUSINESS PAPERS
3. Statement of Accounts many business like Meralco, P.L.D.T., M.W.S.S., SMART Communication, Inc., and others send bills to their customers to inform them of the amount they have to pay. Thus, there are electric bills, light bills, water bills, telephone bills, and many others. These bills sent by these companies are called Statement of Account. A sample of statement of account is given below.
Table 2.3
BUSINESS PAPERS
4. Deposit Slip at present, many businesses have current account or checking accounts with the banks. They deposit their money in the bank and the payment from their deposit are made by means of issuing checks. Deposit slip is filled up every time money is deposited in the bank. The deposit slip shows the date of the deposit , the name if the depositor, the account number of the depositor, the amount of cash deposited, and the signature of the depositor.
BUSINESS PAPERS
5. Check a check is an order to the bank signed by the person issuing it (the depositor), to pay the bearer or order a certain sum of money. After the bank have paid the payee, the amount is deducted from the deposit of the person who issued the check.
BUSINESS PAPERS
6. Cash Voucher the cash voucher is the document prepared every time payment of an obligation is made. The voucher is a business preprinted form that is prenumbered, and should include the following information; date of payment, name of the payee, address of the payee, description of the obligation to be paid, amount paid, approval of payment\, and signature of the payee. A sample of cash voucher is presented below.
Table 2.4
BUSINESS PAPERS
7. Cash Register Slip in many businesses, like in restaurants, cash registers are used. Strip of paper comes out as evidence of the money received by the cashier. The slip shows the date, items ordered, amount paid, and other information. 8. Other Business papers there are many other documents that are used by accountant to obtain information regarding business transactions. When buyer/customer is given allowance, returned the goods purchased, or discovered error in the invoice, the seller of the goods or services should be notified. If the claim is valid, the seller of goods or services sends a credit memorandum which shows the amount by which account is reduced. When the depositor obtains a checkbook from the bank and the depositor did not pay it, the bank charges the depositor a debit memorandum. Promissory Notes may be received by the business from its debtors, or the business may give it to its creditors. A promissory note is a written promise to pay signed by one party, called the maker, to pay a certain specified sum to another. The note may or may not be interest bearing. The amount to be paid not including the interest, is called the face of the note. The amount to be paid including the interest is called the maturity value.
STEP 2 JOURNALIZING
Journalizing is the process of recording business transactions to the book of original entry called journals. Journals, or records of original entry, are tabular records in which business activities are analyzed in terms of debits and credits and recorded in chronological order before they are entered in the general ledger. An accounting journal may be one of a group of special journals, or it may be a general journal.
STEP 2 JOURNALIZING
A special journal is designed to record a specific type of frequently occurring business transactions. For example, a business with 100 employees who are paid every two weeks would probably use a special journal for payrolls. Because two paydays would normally occur in a month, at least 200 payroll transaction would be recorded. Special journals are used to facilitate the recording of business transactions in the book of accounts. Other types of transactions that are often recorded in special journals are cash receipts, cash disbursements, sales of goods or services, and purchases of goods or services.
STEP 2 JOURNALIZING
In contrast to the special journals, the general journals (two-column journal) is a relatively simple record in which any type of business transaction may be recorded. All businesses, even those using many special journals, have a general journal. Transactions that do not occur often enough to warrant entry in a special journal are recorded in the general journal.
STEP 2 JOURNALIZING
The procedure for recording entries in the general journal is as follows: Indicate the year, month, and date of the entry. Usually the year and month are rewritten only at the top of each journal or at the point where they change. Enter titles of the accounts affected in the description column. Accounts debited are entered close to the left-hand margin and are traditionally recorded first. Accounts credited are then recorded, indented one-half inch to the right. Place the appropriate money amounts in the left-hand (debit) and right (credit) money columns. Write an explanation of the transaction below the account titles, indented one-half inch from margin. The explanation should be as brief as possible, disclosing the information necessary to understand the event being recorded.
STEP 2 JOURNALIZING
Each transaction entered in the journal should stated in terms of equal debits and credits. The account titles cited in the description column should correspond to those used for the related general ledger accounts. To separate clearly the various entries, we should leave a line blank between entries. We will explain the use of the column headed Post Ref. (posting reference) later in step 3 of the accounting cycle.
Table 2.5
STEP 2 JOURNALIZING
Compound Journal Entries A journal entry that involves more than just two accounts is called a compound entry. The last journal entry in Exhibit 1-2 is an example of compound journal entry involving three accounts. The debit of P9,600 to Test Equipment is offset by credits of P5,000 to Cash and P4,600 to Accounts Payable. Any number of accounts may appear in a compound entry; but regardless of how many accounts are used, the total of the debit amounts must always equal the total of the credit amounts.
STEP 2 JOURNALIZING
Correction of Journal Errors Certain procedures should be followed when errors are found in journal entries. Errors should not be erased, because erasures completely remove the original recording. As you might imagine, the acceptance of erasures might allow someone to falsify accounting records; consequently, other procedures are used. If an error journal entry has not been transferred to the general ledger, a single line is drawn through the erroneous amount or accounts title, and the correction is entered on the same line just above the error. Often the person correcting the entry must place his or her initials near the correction. This facilitated any further inquiry about the nature of or reason for the correction. Once an erroneous journal entry has been transferred to the ledger accounts, both records contain error. The recommended procedures for correcting this situation are discussed in step 3 below.
Chart of Accounts A chart of accounts is usually prepared in order to facilitate the analysis of activities and the formulation of journal entries. The chart of accounts is a list of the titles and numbers of all accounts found in the general ledger. The account titles should be grouped by, and in order of, the five major sections of the general ledger (assets, liabilities, owners equity, revenue, and expenses). Exhibit 1-3 shows a chart of accounts for Dalay TV Service, indicating the account numbers that will now be used.
Table 2.6
The date (year, month, and day) is entered in the appropriate account. Note that this is the date of the journal entry, not necessarily the date of the actual posting. As with journals, the year and month are restated only at the top of a new accounts page or at the point where they change. The amount is entered in the account as a debit or a credit, as indicated in the journals money columns, and the new balance is calculated. The posting reference from the journal (both symbol and page number) is placed in the posting reference column of the ledger account. The account number is placed in the posting reference column of the journal.
the nature of the transaction the related journal entry, and the subsequent postings. Bear in mind that the account numbers in the posting reference of the journal are not entered when the journal entry in recorded; they are inserted when the entry is posted.
Table 2.7
CHAPTER 3
Adjusting Entries and the Preparation of the Financial Statements
The application of the accrual basis of accounting necessitates adjusting entries for the following seven items: Doubtful Accounts Depreciation Accrued Expenses Accrued Revenue Prepaid Expenses Unearned Revenue (Deferred Revenue) Ending Merchandise Inventory
DOUBTFUL ACCOUNT
DOUBTFUL ACCOUNTS When a business allows customers to avail services on credit, it maybe inevitable that some of the receivables will not be collected. The loss which is a result of worthless or bad accounts is referred to as doubtful accounts expense. For proper income measurement, it is important that a provision for the uncollectible accounts be provided during the same period that the income from services is recognized. This produces a better matching of revenues and expenses and, therefore, a better income measurement procedure. Using this procedure, operations are charged with estimated expenses, and receivables are reduced by means of a contra asset account Allowance for Doubtful Accounts.
DOUBTFUL ACCOUNT
The provision for doubtful accounts is based on estimate and is computed usually as a percentage of credit revenues or as a percentage of outstanding accounts receivable. The purposes of the adjustment are: (1) to record the doubtful account expense during the same period that the related revenue is recognized, and (2) to report the accounts receivable at the approximate collectible amount.
DOUBTFUL ACCOUNT
ADJUSTING ENTRY FOR DOUBTFUL ACCOUNTS The pro-forma adjusting journal entry for the estimated loss on uncollectible account is: Table 3.1
To illustrate, let us assume the following data as part of the trial balance of an enterprise rendering repair services for home appliances: Table 3.2
DOUBTFUL ACCOUNT
Percentage Revenue Assume it was provided that the expected uncollectible account during the year would be equal to 1% of the Service Income earned during the period, the adjusting entry for doubtful accounts would be:
Table 3.3
DOUBTFUL ACCOUNT
Percentage Receivable When the provision for doubtful accounts is based on percentage of receivable, it may based on the following estimates of computation: (1) allowance for doubtful accounts increased (decreased) by percentage of outstanding receivable, or (2) allowance for doubtful accounts increased (decreased) to percentage of outstanding receivable. It should be noted that the difference of the two methods is only the words by and to, but it should be remembered because it makes a lot of difference.
DOUBTFUL ACCOUNT
Allowance for Doubtful Accounts Increased BY percentage of receivable Assume that it was agreed that the allowance for doubtful accounts will be increased by 1% of the outstanding receivable. The adjusting journal entry will be: Table 3.4
Note that if the allowance for doubtful accounts will be increased by percentage of receivable, the doubtful accounts expense is computed by multiplying the receivable by the given percentage.
DOUBTFUL ACCOUNT
Allowance for Doubtful Accounts Increase TO percentage of receivable Assume that it was agreed that the allowance for doubtful accounts will be increased to 1% of the outstanding receivable. The adjusting journal entry will be:
Table 3.5
DOUBTFUL ACCOUNT
Computation: Balance after adjustment (P50,000 x 1%) Less: Balance before adjustment Amount of adjustment for Doubtful Accounts
Note that if the allowance for doubtful account will be increased to percentage of receivable, the doubtful account expense is computed by multiplying the receivable by the given percentage to compute for the desired balance of the allowance after adjustment, then the balance before the adjustment is deducted from it to arrive at the amount of doubtful accounts to be provided.
DEPRECIATION
DEPRECIATION When the business entity acquired tangible fixed assets such as delivery equipment, furniture, computer, machines, building, and other long-life assets, it is basically paying in advance for the usefulness of such asset. These assets help generate revenue for the entity. Each accounting period in which such assets are used should share a portion of their cost as expense. Proper accounting requires the systematic allocation (assignment) of the cost of the assets over its estimated useful life. Depreciation is the assignment of part of the cost of the asset over the period it was used to properly match the revenue and cost of that period. The following three factors are considered in the computation of depreciation: Cost of the fixed asset The estimated useful life The estimated scrap value of the asset
Table 3.6
Adjusting Entry for Depreciation
Date
19xx
DESCRIPTION
Post Ref.
Credi Debit t
xxx
xxx
DEPRECIATION
The account Depreciation is an expense account while the account Accumulated Depreciation is a contra asset account which is deducted from the appropriate fixed asset account when preparing a balance sheet. To illustrate, assume that an equipment was purchased on January 1 of the year for P1,000,000. It has an estimated life of 10 years and a scrap value of P100, 000 after its useful life. At the end of the year, before the financial statements are prepared, annual depreciation should be adjusted. The annual depreciation is computed as follows: Formula to Compute Annual Depreciation: Cost of Asset - Scrap Value Estimated Useful Life
DEPRECIATION
At the end of the accounting period, the depreciation to be provided would amount to P90, 000 (P1,000,000 P100, 000 10 years ). Accordingly, the adjustment would be: Table 3.7
Date 19xx DESCRIPTION Post Ref. Debit Credit
Depreciation ExpenseDec. 31 Equipment Accumulated Depreciation-Equipment To record depreciation for the period
90,000
90,000
The method used in computing depreciation for the equipment is the straight-line method. This is the simplest and the most commonly used method in computing depreciation.
DEPRECIATION
Depreciation expense is the assigned portion of the cost of the fixed asset to the periods during which it is used. Accumulated depreciation is the total accumulated amount of depreciation that has been recorded for the fixed asset. The difference between the cost of the fixed asset and the accumulated depreciation is the book value of the asset. The book value represent the portion of the cost of the fixed asset that has not yet been recorded as depreciation expense. In the illustration provided above, the equipment would be presented in the balance sheet as follows: Equipment Less: Accumulated Depreciation Book Value P1,000,000 90,000 P 910,000
The accumulated depreciation account is known as the contra-asset account, since it is presented as a deduction from the asset account.
DEPRECIATION
Fractional Depreciation In the illustration given, it was assumed that the asset is used for one year. Let us assume now that the equipment was acquired only July 1 (not January 1) and was used only for six months. How much depreciation should be provided as of December 31 of the year? Formula to Compute Fractional Depreciation
Cost of Asset Scrap Value Estimated Useful Life x = Fractional Depreciation
DEPRECIATION
Following the given formula, the depreciation to be provided at the end of the year would be P45, 000 (P1,000,000 P100, 000 10 years x ). The adjusting entry to record the depreciation of the above equipment would be:
Table 3.8
Post Ref. Debit Credit
Date 19xx
DESCRIPTION
45,00 0 45,000
ACCRUED EXPENSES
3. ACCRUED EXPENSES Accrued Expenses are expenses already incurred but not yet paid. The business usually incurs expenses but may take time before it could pay them. Usually expenses is recorded when payment is made. If at the end of the period the expense is not yet paid, it may therefore still be unrecorded. This situation creates understatement of expenses on the income statement which will overstate the net income and understate liabilities in the balance sheet. Consequently, an adjustment is needed to up-date the accounts for proper financial statement presentation. The accrued expenses are usually incurred on various continuing services provided to the business such as electricity, water, telephone, taxes, rental, interest, salaries and many others.
Adjusting Entry for Accrued Expenses The pro-forma adjusting journal entry for accrued expense is:
Table 3.9
Date DESCRIPTION 19xx Dec. 31 An Expense Account (Name of expense) Payable To record accrued expense for the period Post Ref. Debit Credit 20, 000 20, 000
ACCRUED EXPENSES
Illustration. Assume Nikko Jay Service Co. is renting a shop location at the rate of P20, 000 per month. Its lease agreement provides that payment of rental should be made on or before the 5th day of every month for the month after the facility was used. Meaning, October rental should be paid by November 5, November rental should be paid December 5, and so on. At December 31, when the business will prepare the financial statements, the December rental is still unpaid although they have use the facility. Correspondingly, because rent expense is understated and liability is understated too, an adjusting entry as follows is necessary:
Table 3.10
Date 19xx DESCRIPTION Post Ref. Debit Credit 20, 000 20, 000
ACCRUED REVENUE
ACCRUED REVENUE Accrued revenues are revenue already earned but collection has not yet been received. Many kinds of revenues like revenue from interest, revenue from commission, from rental on property, are recorded only when received. It goes to say, therefore, that when no collection is received these revenues are not yet recorded. This results in the understatement of revenue account on the income statement and subsequently understatement of receivable account in the balance sheet. Consequently, an adjusting entry is necessary to up-date and correct the accounts to be able to present reliable financial statements. Adjusting Entry for Accrued Revenue The pro-forma adjusting entry for accrued revenue is:
Table 3.11
Date 19xx DESCRIPTION Post Ref. Debit Credit
(Name of Income) Dec. 31 Receivable Revenue Account To record accrued revenue for the period
xxx xxx
ACCRUED REVENUE
Illustration: In the preceding illustration for Nikko Jay Co. above, was analyzed on the point of view of the lessee. Let us now analyze it from the point of view of the owner of the owner of the property. If you were the owner of the property, at the end of December, you have already earned your rent revenue because they have already used the property but you have not received their payment. This is a good example of accrued revenue. For this illustration, the necessary adjusting entry is:
Table 3.12
Date 19xx DESCRIPTION
Post Ref.
Debit Credit
3 Dec. 1 Rent Receivable Rent Revenue To record accrued rent for December.
20,000 20,000
PREPAID EXPENSES
PREPAID EXPENSES Prepaid expenses are expenses already paid but not yet incurred. Expenses could be paid in advance. Some example of prepaid expenses are rent paid in advance, advertising paid in advance, interest on discounted notes, purchase of supplies, and insurance premium paid on the beginning of the policy period. Prepaid expenses are assets, not expenses. The terms prepaid, unexpired, unused, on hand, and inventory denotes assets. At the end of the accounting period, when the portion of these assets have been used or expired, they become expense that requires adjustment.
Advance payment of expenses (Prepaid expense) could be recorded in the accounting records under any one of the two methods: (1) the asset method, and (2) the expense method.
PREPAID EXPENSES
The Asset Method The asset method is the procedure of recording the advance payment of expenses by debiting an asset account. At the end of the accounting period, the asset recorded could have been partly used up, rendering the asset account debited to be overstated while the expense account is understated. This situation requires the preparation of an adjusting entry to correct and up-date the accounts for proper financial statement presentation. Entry for Prepaid Expenses using Asset Method The journal entry to record the payment of expenses using the asset method is:
Table 3.13
Date 19xx Asset Account (Prepaid, Sept. 1 Unused, etc.) Cash To record advance payment of expenses. xxx xxx DESCRIPTION Post Ref. Debit Credit
Note that asset account is debited to record the advance payment of expenses. For this reason, it is called asset method.
PREPAID EXPENSES
Adjusting Entry for Prepaid Expenses using Asset Method The pro-forma adjusting journal entry for prepaid using the asset method is:
Table 3.14
Date 19xx DESCRIPTION
Post Ref.
Credi Debit t
xxx
xxx
PREPAID EXPENSES
Illustration. Assume that on September 1 if the current year, Ma. Gina Trucking Service paid six-month advertising amounting to P120, 000 to Ace Advertising Company. If the asset method of recording is used, then the entry on September 1 will be: Table 3.15
Date 19xx
DESCRIPTION
120,00 0
Analysis. The rate of advertising per month is P20, 000 (P120, 000 6). At December 31, the end of the accounting period, P80, 000 (P20, 000 x 4 months) of the advertising applicable to the months of September to December have expired while P40, 000 (P20, 000 x 2 months) the portion applicable to the months of January and February (next year) remains unused. At December 31, the recorded prepaid advertising is P120, 000, when it should only be P40, 000.
PREPAID EXPENSES
The asset is overstated by P80, 000, the same amount of understatement of the advertising expense account. At December 31, the adjusting entry should be: Table 3.16
Date 19xx
DESCRIPTION
Post Ref.
It should be noticed in the analysis, that the account debited in the original entry (upon payment) is the account credited on the adjustment. It is so because the account debited in the recording of the payment is overstated at the end of the period.
PREPAID EXPENSES
The Expense Method The expense method is the procedure of recording the advance payment of expenses by debiting an expense account. At the end of the accounting period, the expense recorded could not have been used up, rendering the expense account debited to be overstated while the asset is account understated. This situation requires the preparation of adjusting entry to correct and up-date the accounts for proper financial statement presentation. Original Entry for Prepaid Expenses using Expense Method The journal entry to record the payment of expenses using the expense method is:
Table 3.17
Date DESCRIPTION 19xx Sept. 1 Expense Account Cash
To record advance payment of expenses Note that expense account is debited to record the advance payment of expenses. For this reason, it is call expense method. Post Ref.
Debit Credit
xxx xxx
PREPAID EXPENSES
Adjusting Entry for Prepaid Expenses using Expense Method The pro-forma adjusting journal entry for prepaid expenses using the expense method is: Table 3.18
Date 19xx
DESCRIPTION
Post Ref.
Credi Debit t
3 Asset Account (Prepaid, Dec. 1 Unused, etc.) Expense Account To record Unexpired expense during the period
xxx xxx
PREPAID EXPENSES
Illustration. We will be using the same data for asset method, on the P120, 000 advertising paid by Ma. Gina Trucking Service to Ace Advertiser Company for the period September 1 (current year) to February (next year). If the expense method of recording is used, then the entry for September 1 would be:
Table 3.19
Date 19xx
DESCRIPTION
Post Ref.
Debit Credit
120,00 0
120,00 0
Analysis. The analysis made using the asset method is still valid. But, because the expense account was debited and the P120, 000 is not all used up, the expense account is overstated by P40, 000, the portion applicable to the months of January and February (next year). It is the same amount of understatement of the asset (prepaid) account. Table 3.20
Date 19xx
DESCRIPTION
Post Ref.
Dec. 31 Prepaid Advertising Advertising Expense To record the amount of unexpired advertising at the end of the period.
40,000
PREPAID EXPENSES
It should be noticed in the analysis, that the account debited in the original entry (upon payment) is the account credited on the adjustment. It is so because the account debited in the recording of the payment is overstated at the end of the period. In the two analysis provided, both for the asset method and the expense method, it should be noted that after the adjustment have been recorded in the accounts the resulting balance for both accounts will be the same, P80, 000 for Advertising Expense and P40, 000 for Prepaid Advertising. The amounts represent the correct balances in our analysis.
Table 3.21
Date 19xx 1 Aug. Cash Unearned (Name of Revenue) Account To record advance receipt of revenue xxx DESCRIPTION Post Ref. Debit Credit
xxx
Adjusting Entry for Unearned Revenue using Liability Method The pro-forma adjusting journal entry for unearned revenue using the liability method is: Table 3.22
Table 3.22
Date 19xx Liability (Unearned) Dec. 31 Account Revenue Account To record revenue earned for the period. DESCRIPTION Post Ref. Debit Credit
xxx
xxx
Illustration. Assume that on August 1, the business received P72, 000 from a tenant, representing 6-month advance rental, covering the period from August (current year) to January (next year). If the liability method is used, the entry on August 1 would be:
Table 3.23
Date DESCRIPTION 19xx Aug. 1 Cash Unearned Rent To record advance receipt of revenue.
Post Ref.
Debit
72,000
Credit
72,000
It should be noted in the analysis, that the account credited in the original entry (upon receipt of revenue) is the account debited on the adjustment. It is so because the account credited in the recording of the receipt of revenue is overstated at the end of the period.
Table 3.24
Date DESCRIPTION 19xx Dec. 31 Unearned Rent Rent Revenue To record revenue earned during the period
Post Ref.
Debit
60,000
Credit
60,000
Table 3.25
Date DESCRIPTION 19xx Aug. 1 Cash Revenue Account To record advance receipt of revenue. Post Ref. Debit Credit xxx xxx
Table 3.26
Date 19xx DESCRIPTION
Post Ref. Debit Credit
3 Dec. 1 Revenue Account Unearned (Name of Revenue) Account To record revenue unearned at the end of the period
xxx xxx
Illustration. Applying the same example in the liability method, that on August 1, the business received P72, 000 from a tenant, representing a 6-month advance rental covering the period from August (current year) to January (next year), if the revenue method is used, the entry would be:
Table 3.27
Date DESCRIPTION 19xx Dec. 31 Revenue Account Unearned (Name of Revenue) Account To record revenue unearned at the end of the period
Post Ref.
Debit Credit
xxx
xxx
Table 3.28
Date 19xx DESCRIPTION
Post Ref.
Debit Credit
12,00 0
3 Dec. 1 Rent Revenue Unearned Rent To record revenue unearned at the end of the period
12,000
It should be noticed in the analysis, that the account credited in the original entry (upon receipt of revenue) is the account debited on the adjustment. It is so because the account credited in the recording of the receipt of revenue is overstated at the end of the period.
Compute adjustments and the adjusted balances of the accounts. Classify the accounts into income statement accounts (nominal accounts) and balance sheet accounts (real accounts) for financial statements preparation. Determine net income (or loss).
Complete the statement sections, extend the fourth section (seventh and eight columns) all income statement accounts (nominal accounts), and to the fifth section (ninth and tenth columns) all balance sheet accounts (real accounts). Determines the net income (or net loss) by analyzing the column totals of the income statement columns. If the credit column total exceed the debit column total, it represent net income. If the debit column total exceed the credit column total, it represent a net loss.
Illustrative Problem Preparation of Work Sheet. Sagum Laboratory began operation on January 1, 19xx, and provides various diagnostic services for physicians and clinics. Its accounting period ends December 31 and the accounts are adjusted annually on this date. Its unadjusted trial balance at December 31, 19xx, is as follows:
Sagum Laboratory Trial Balance December 31, 19xx Account Titles Credit Cash Accounts Receivable Medical Supplies Prepaid Insurance Laboratory Equipment Accumulated Depreciation Laboratory Equipment Accounts Payable Unearned Diagnostic Fees Cecil Sagum, Capital Diagnostic Fees Salaries and Wages Expense Rent Expense Total Debit 1, 000
Table 3.29
STEP 6 PREPARATION OF FINANCIAL STATEMENTS Kinds of Income Statement Single-step form in this type of income statement, all revenues are grouped together in one section, and all expenses in another section. The net income or net loss are determined by deducting the total expenses from the total revenue. Multi-step form Forms of Balance Sheet Report Form - a balance sheet that presents the assets on the top section and the liabilities and owners equity at the bottom section of the report.
Sagum Laboratory Balance Sheet As of December 31, 19xx ASSETS Current Assets Cash Accounts Receivable Less: Allowances for Doubtful Depreciation Medical Supplies Prepaid Insurance Total Current Assets Property, Plant, and Equipment Laboratory Equipment Less: Accumulated Depreciation Total Property, Plant, and Equipment Total Assets LIABILITIES Current Liabilities Accounts Payable Unearned Diagnostic Fees Salaries Payable Rent Payable Total Current Liabilities OWNERS EQUITY Cecil Sagum, Capital (per Capital Statement) Total Liabilities and Owners Equity
P 1,000 P 9,200 P 300 P 8,900 P 6,300 P 4,500 P 20,700 P 270,000 P 90,000 180,000 P 200,700
194,000 P 200,700
Account Form the balance sheet that is presented in account form presents the assets o the left side and the liabilities and owners equity on the right side of the statement. Name of Company Balance Sheet As of December 31, 19xx
ASSETS
Total Current Assets Total Property, Plant, and Equipment Total Assets xxx xxx xxx
STEP 6 PREPARATION OF FINANCIAL STATEMENTS Other method of Presentation There is a Form of balance sheet presentation that gives emphasis on the current working capital position of the business, the financial position form. In the first section, the total current liabilities are deducted from the total current assets to arrive at the working capital. In the second section, the total of the property and equipment is added to working capital and the long-term liabilities are deducted to arrive at the net assets and owners equity.
Cash is any medium of exchange that the bank accepts at face value. It includes deposits in banks available for current operations at the balance sheet date, plus cash on hand consisting of currency, undeposited checks, drafts, and money orders. These are items without restriction and available for current operations of the business. Accounts Receivable is the amount owed to a business by customers (clients). It is evidenced by an oral promise to pay. Notes Receivable is same as account receivable except that the customer or client gives a promissory note to evidence its obligation. Prepaid Expense is also known as Deferred Expenses which is the expenses paid in advance. It is an asset awaiting assignment to expense. An example is prepaid insurance.
Land is the ground on which the business buildings of the enterprise are located. Land can also be used for outside storage space or a parking lot. Building is an edifice or structures constructed on the land, such as office building. Equipments are those items refer to the filing cabinet, calculator, adding machine, cash register, and computer used either in the office, store, or for delivery. Delivery Equipment refers to trucks, cars, motorcycles, and other transportation vehicles used for delivery purposes. Furnitures and Fixtures refers to the tables and chairs, cabinet, counter, and other fixtures used in the business.
Accounts Payable is the amount owed by the business to creditors for the items or services purchased from them. Notes Payable are unconditional written promises by an enterprise to pay certain sum of money at a determinate future date. Salaries and Wages Payable are amounts owed to employees for services rendered but for which payment has not been made at the balance sheet date. Interest Payable arises when interest has been incurred but not yet paid at the balance sheet date because the amount is not due on Notes Payable until later. Unearned Revenue or Deferred Revenue is payments for services or sale of goods that are received in advance from customer or client.
Long-term Liabilities are liabilities not due for a relatively long period of time, usually more than one year.
STEP 6 PREPARATION OF FINANCIAL STATEMENTS Classifications of Revenue Professional Fees is the income or remuneration received by professionals from rendering services to clients. The fee could be described depending upon the line of professional like legal fee for lawyers, dental fee for dentist, medical fee for doctors, and retainers fee or audit fee for CPAs. Other Revenues are revenues derived from sources other than the principal line of service rendered like interest, rent, and commission.
Debiting all nominal accounts with credit balances (revenues) and crediting the total to Income Summary account. Crediting all nominal accounts with debit balances (expenses), and debiting the total to Income Summary. the Net Income is transferred to the Capital account by debiting the Income Summary for the amount of its balance and the Capital account is credited for the same amount. (The accounts debited and credited are reversed if there is a net loss). the drawing account is transferred to capital account by debiting the capital account and crediting the drawing account for the same amount.
Table 4.1
Balancing and ruling After the closing process, a line should be inserted in both balance columns opposite the final entry. If the books will still be used in the next accounting period, the next periods transaction for the revenue, expense, and drawing will be posted directly below the closing entry.
Table 4.2
Instead of preparing a formal post-closing balance, it is possible to list the accounts directly from the ledger, using a printing calculator or a computer. The calculator tape or computer printout, becomes the post-closing trial balance. Without such tape or printout, there are no efficient means of determining the cause of inequality.
Table 4.3
Date 19xx Dec. 3 1 Description Post Ref. Debit Credit
Interest Expense Interest Payable To record accrued interest for the period.
515 202
300 300
The closing entry for the Interest Expense account at December 31 is: Table 4.4
Date Description 19xx Dec. 31 Income Summary Interest Expense To close interest expense
Post Ref. 303 515
Debit Credit
300 300
On January 1, the Reversing Entry for the accrued interest (expense) is:
Table 4.5
Date Description 19xx Dec. 31 Interest Payable Interest Expense To reverse the adjusting entry for accrued interest on Notes Payable Post Ref. 202 515 Debit Credit 300
300
Table 4.6
INTEREST PAYABLE Date Items Ref. Debit 19xx Jan. 1 Revers GJ ing 300 account no. 202 Ref. Credit
Items
Adjusti GJ ng
300
Table 4.7
INTEREST EXPENSE Date Items Ref. Debit Date Items Ref. 19xx 19xx Adjust Dec. Closin Jan. 1 ing GJ 300 31 g GJ Revers Jan. 1 ing GJ
Credit
300 300
Table 4.8
INTEREST EXPENSE Date Items Ref. Debit Date Items Ref. 19xx 19xx Dec. Adjustin Dec. Closin 31 g 300 31 g Jan. 1 19xy 19xy Payment of Revers Apr.30 Interest 900 Jan. 1 ing
Credit
300
300
Table 4.9
Date Description 19xx Dec. 31 Interest Receivable Interest Revenue To record accrued interes revenue for the period
Post Ref. 107 405
Debit Credit
300 300
The closing entry for the Interest Income at December 31 is: Table 4.10 On January 1, the reversing entry for the accrued interest revenue is: Table 4.11
Table 4.10
Date Description 19xx Dec. 31 Interest Revenue Income Summary To close interest revenue Post Ref. 405 303 Debit Credit 300
300
Table 4.11
Date Description 19xx Jan. 1 Interest Income Interest Recevable To reverse the adjusting entry for accrued interest on Notes Receivable
Post Ref. 405 107
Debit Credit
300 300
Table 4.12
Date 19xx Dec 31 Adjusting GJ 300
Table 4.13
INTEREST REVENUE Date Items
Cre Ref. Debit Date Items Ref. dit 19xx Dec Adjust 300 1 ing GJ
300
19xx Dec 31
Jan 1
Closing
Reversing
GJ
GJ
300
Table 4. 14
This shows that while the interest collected in April amounted to P900, only the balance of the account of P600 (P900 P300) is the revenue earned and collected in April, and the P300 is collection of accrued interest.
Table 4. 14
INTEREST REVENUE Date 19xx Dec 31 19xx1 Reversin g GJ Items Ref. Debit Date 19xx Dec- Adjusti 300 03 ng GJ 19xx 1 Collecti Apr on of 300 30 Interest GJ
Closing
GJ
300
Jan 1
900
Table 4.15
Date Description 19xx Dec 1 Expense Cash To record payment of rent in advance Post Ref. 508 101 Debit 50,000 50,000 Credit
The adjusting entry for the Prepaid Rent at December 31 is: Table 4.16 The closing entry for the Rent Expense at December 31 is as follows:
Table 4.17
Table 4.16
Date Description 19xx Dec 31 Prepaid Rent Rent Expense To record Prepaid REnt
Post Ref. 110 508
Debit
20,000
Credit
20,000
Table 4.17
Date Description 19xx Jan. 1 Rent Expense Prepaid Rent To reverse the adjusting entry for Prepaid Rent.
Post Ref. 508 110
Debit
20,000
Credit
20,000
After these entries are posted, the Prepaid Rent account and the Rent Expense account will be as follows:
Table 4.18 Table 4.19 It should be noted that the Prepaid Rent has become a closed account and the Rent Expense account has a debit balance of P20,000. Thus, in the next period, the adjustment under the expense method can be used again.
Table 4.18
PREPAID RENT Date Items 19xx Dec.3 Adjusti 1 ng Ref. Debit Date Items Credi Ref. t 20,00 0
GJ
GJ
Table 4.19
Date Items Ref. Debit Date Items 19xx Payment 19xx Adjust Oct.31 of Rent GJ 50,000 Dec. 1 ing 19xx1 19xx1 Reversi Closin Jan 1 ng GJ 20,000 31 g Ref. Credit
GJ 20,000
GJ
30,000
Table 4.20
Date Description 19xx Sept. 1 Cash Rent Revenue To record collection of rent in advance Post Ref. 101 404 Debit 48,000 48,000 Credit
The adjusting entry for the Unearned Rent at December 31 is: Table 4.21 The closing entry for the Rent Revenue at December 31is: Table 4.22
Table 4.21
Date Description 19xx Dec. 31 Rent Revenue Unearned Rent To record Unearned Rent
Post Ref.
404 207
Debit 16,000
Credit
16,000
Table 4.22
Date Description 19xx Dec. 31 Rent Income Income Summary To close Rent Revenue
Post Ref. 404 303
Debit
32,000
Credit
32,000
On January 1, the reversing entry for the Unearned Rent is: Table 4.23 After these entries are posted, the Unearned Rent account and the Rent Revenue account will be as follows: Table 4.24
Table 4.23
Date Description 19xx Jan. 1 Unearned Rent Rent Revenue To reverse the adjusting entry for Unearned Rent.
Post Ref. 207 404
Debit
16,000
Credit
16,000
Table 4.24
UNEARNED RENT Credi Date Items Ref. Debit Date Items Ref. t 19xx 19xx Reversi 16,00 Dec. Adjus 16,00 Jan 1 ng GJ 0 31 ting GJ 0
Thank you!
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Acknowledgment
Special thanks to the writers of the book Accounting Fundamental, Bayani D. Edlagan and Ma. Cecilia S. Mercado, for without them this presentation would not be possible.
As partial requirement in the subject OS 341Web Page Development , this project is submitted by Julie Anne Jamora and Nancy Buag to Prof. Angela David.