ACCOUNTING SYSTEM STUDY

This aspect of the study presents the business cycles of the company as well as the accounting system and its internal controls necessary for

proper communication and relaying of information from one cycle to another, including the business forms and papers linked in a business

transaction. The cycles include the revenue or receipt cycle, purchase and expenditure or disbursement cycle, the production cycle, the payroll cycle,

and the conversion cycle, which are independent from one another.

Flowcharts are used to represent the cycles wherein the roles of each employee is shown. It is used to showcase the simplified system of the

business. Step-by-step process of each cycle and their corresponding internal controls are also illustrated in the flowcharts.

The internal control system of the business plays a crucial role to the maintenance of efficient communication and information security

within the organization. A mere implementation of the internal control system is not enough but it should be monitored and checked periodically.

The business’ policies and its implementation is also discussed in this aspect.

Chart of Accounts

The chart of accounts is a financial organizational tool established by the company to provide a complete listing of every account used in a

company’s accounting system. These accounts are classified as Assets, Liabilities, and Equity. Such are considered real and permanent accounts.

Some accounts are nominal or temporary, which can be classified as revenue or expense and are closed in the real account at the end of the accounting

period.
 Table 42.1 – Chart of Accounts

Assets Account Title Normal Balance

Current Assets

1000 Cash and Cash Equivalents Debit

1050 Prepaid Expenses Debit

Non-Current Assets

1200 Machineries and Equipment Debit

1250 Accumulated Depreciation-Machinery and Equipment Debit

1300 Furniture and Fixtures Debit

1350 Accumulated Depreciation-Furniture and Fixtures Debit

Liabilities

2000 Income Tax Payable Credit

2050 Employee Benefits Payable Credit

2100 Utilities Payable Credit

Partner's Equity

3000 Aquino, Capital Credit

3001 Baquing, Capital Credit

3002 Batalla, Capital Credit

3003 Gabor, Capital Credit

3004 Soto, Capital Credit

Table 42.2 – Chart of Accounts

Revenue

4000 Net Sales Credit

4100 Other Income Credit

4150 Income Summary Credit

Expenses

5000 Cost of Goods Sold Debit

5050 Purchases Debit

5100 Direct Labor Debit

5150 Factory Overhead Debit

5200 Depreciation Expense Debit

5250 Rent Expense Debit

5300 Repairs and Maintenance Debit

5350 Salaries Expense Debit

5400 Supplies Expense Debit

5450 Taxes and Licenses Debit

5500 Advertising Expense Debit

5600 Transportation Expense Debit

5650 Feasibility Cost Debit

5700 13th Month Pay

5750 Utilities Expense Debit

Table 42.3 – Chart of Accounts

Expenses
 5800 SSS Contribution Expense Debit

5850 PAG-IBIG Contribution Expense Debit

5900 PhilHealth Contribution Expense Debit

Description of Account Titles

Account titles are the names given to various categories used to keep track of the business’ transactions and finances. For any and every
transaction, these accounts are updated in an organized and consistent manner to reflect the activities that happened. These accounts are classified
into different types and are treated uniquely when increased or decreased depending on the nature of the transactions recorded. The following are
the description of account titles and their corresponding treatment.

Assets

There are resources with economic value that an individual, corporation or country own or control with the expectation that it will provide
a future benefit. Assets can be current or non-current, tangible or intangible.

Cash and Cash Equivalents

These are either cash or assets that are readily convertible into cash. Any items falling within this definition are classified within the current
assets category in the balance sheet of a business. Cash includes coins, currency, cash in bank accounts, and petty cash while cash equivalents include
commercial paper, marketable securities, money market funds, and treasury bills.

Prepaid Expenses

Is a type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received in the future.
Prepaid expenses are initially recorded as assets, but their value is expensed over time as the benefit is received onto the income statement, because
unlike conventional expenses, the business will receive something of value in the near future.
Furniture and Fixtures

Are long term assets which are movable equipment and used to furnish an office. Examples are bookcases, chairs, desks, filing cabinets, and
tables. This is a commonly-used fixed asset on an organization's balance sheet.

Manufacturing Equipment

Is a capital investment that a company has purchased to produce the units that a business sells. Machines and Equipment are presented in

the balance sheet classified under the non-current portion. Accumulated depreciation serves as a contra-account to the equipment in such way that

its usage progressively reduces its useful life.

Liabilities

A liability is a financial obligation of a company that results in the company’s future sacrifices of economic benefits to other entities or

businesses. A liability can be an alternative to equity as a source of a company’s financing.

Income Tax Payable

Is a type of account in the current liabilities section of a company's balance sheet. It is compiled of taxes due to the government within one

year. The calculation of income tax payable is according to the prevailing tax law in the company's home country.

Employee Benefits Payable

 Represents the amount of employer’s unpaid contribution to the employee’s SSS, PhilHealth and PAG-IBIG and 13th Month Pay. Separate

accounts are used to identify each premium that is contributed by the employer: SSS Payable, PAG-IBIG Payable, and PhilHealth Payable.

Utilities payable

Is the amount owed to suppliers for electricity, gas, Internet connections, telephones, and water. This liability is considered a current liability,

since the amounts owed are typically payable in less than one year.

Partner’s Equity

Is a common form of business organization that consists of two or more people who join together to operate a business and share in the

profits and losses of the business.

Revenue

Revenue is the amount of money that a company actually receives during a specific period, including discounts and deductions for returned

merchandise. It is the top line or gross income figure from which costs are subtracted to determine net income.

Net Sales

Is a term that refers to any operating revenues that a company earns through its business activities, such as selling goods, services, products,

etc. net of reduction in the price of a product or service that is offered by the seller, in exchange for early payment by the buyer.
Income Summary

The income summary account is a temporary account into which all income statement revenue and expense accounts are transferred at the

end of an accounting period. The net amount transferred into the income summary account equals the net profit or net loss that the business incurred

during the period.

Expenses

An expense in accounting is the money spent or cost incurred in an entity's efforts to generate revenue. Expenses represent the cost of doing

business where doing business is the sum total of the activities directed towards making a profit.

Cost of Goods Sold (COGS)

Refers to the direct costs attributable to the production of the goods sold in a company.

Purchases

A temporary account used in the periodic inventory system to record the purchases of merchandise for resale. This account reports the gross

amount of purchases of merchandise.

Direct Labor

Refers to the employees and temporary help who work directly on a manufacturer's products.
Factory Overhead

Is the cost incurred during the manufacturing process, not including the costs of direct labor and direct materials. Factory overhead is

normally aggregated into cost pools and allocated to units produced during the period.

Depreciation Expense

Expense account that refers to the portion of the total cost of usage fixed assets over time which is allocated to current operations.

Rent expense

Is an account that lists the cost of occupying rental property during a reporting period.

Repairs and maintenance

Repairs and maintenance expense is the cost incurred to ensure that an asset continues to operate. This may involve bringing performance

levels up to their original level from when an asset was originally acquired, or merely maintaining the current performance level of an asset.

Salaries Expense

Salaries expense is the fixed pay earned by employees. The expense represents the cost of non-hourly labor for a business.

Supplies expense

Refers to the cost of consumables used during a reporting period.

Taxes and Licenses

Composed of the business taxes, licenses and other mandatory legal fees. This includes costs incurred in the formation of the business, and

in advertising, promotional activities, employee training, etc., before it commence its operations.

Utilities Expense

Is an expense incurred by the business which may include electricity, internet, water, sewage, and telephone services.

Employee Benefits expense

These are the amounts paid to SSS, PhilHealth and PAG-IBIG as contribution of the employer and employee’s 13th Month Pay. Such

premiums has corresponding accounts that are separately presented in the income statement.

Advertising expense

Covers expenses associated with promoting an industry, entity, brand, product or service.

Revenue/Receipt Cycle
Figure 12 – Revenue/Receipt Cyle
 Revenue/Receipt cycle involves the sales transaction and collection process. Starts with the cashier, who receives customer orders, checks

for product availability and prepares the customer order slip. The slip is printed in duplicate, one copy for the productions supervisor and one for the

accountant. The transaction is then entered into the cash register and payment is collected. The official receipt is also printed in duplicate, with one

copy delivered to the accountant and the other is given to the customer upon payment.

The accountant, upon the receipt of the customer order slip and the official receipt verifies the transaction. If found to be in proper order,

the transaction is recorded in the sales journal, the receipt and the order slip is filed. If discrepancies are found, the accountant checks with the cashier

to consolidate. The sales journal is updated afterwards and the order slip and receipt is field.

Internal control system

Authorization: Care and diligence should be observed by the cashier in recording sales. In case of mistakes in recordings, only the general

manager is authorized to allow the cashier to make the necessary changes. The cashier needs to explain to the general manager how much mistake

was incurred. Only after verification of the reason shall the general manager authorize the change in the transaction.

Execution: Delay in the delivery of the product to the customer must be avoided at all times to minimize customer complaints. The specified

procedures in the process must be followed properly to avoid unnecessary delays and unintended misplacement of receipts and other documents.

Recording: The same care and diligence in recording transactions in the cash register should be practiced in recording transactions in the

sales journal. The management can control the recording function by using estimated written procedures, periodic checking and verification, and

reconciliation.
Access to assets - The most liquid asset is cash, it is also most susceptible to theft and mishandling. The management should therefore put up

sufficient physical safeguards to protect cash, and appropriate measures to protect and ensure accuracy of the transactions.

Expenditure Cycle

Figure 13: Expenditure Cycle

Expenditure cycle is a set of purchasing decisions and actions. It's the repetitive process of creating purchase orders and ordering goods and

services, receiving these items, approving the invoices for these items and services, and paying the invoices. Expenditure cycle would be creating

purchase orders from various employee requests for supplies of raw materials and calling the raw material supply store to place the order using the

purchase order. The purchased raw materials will be given to the production manager to be utilized for production and the payments for billing will

are to be handled by the finance department. The transaction would be settled according to terms and contracts of the company and its supplier.

Internal control system

 Authorization: Only the person in charge of purchasing materials can buy raw material by the use of requisition slip given by the production

manager. This is to ensure that separations of duties are made and only authorized transaction is done.

Execution: The materials should be bought according to quality and pricing of the supplier. Delivered materials are held for inspection

before storing or transferred for production. Other controls shall be applied in paying the bills for the materials.

Payroll Cycle

Figure 14: Payroll Cycle

 Payroll cycle includes updating profile of new hires and termination of personnel, the preparation and recording of payroll and the

distribution of paycheck to the employees. The documents necessarily involved in this cycle are the employee’s data or record, time card or DTR,

attendance sheet, payroll sheets and request forms.

The cycle starts with the employee’s update of DTR or time record which then will be reported to the immediate supervisor for verification.

Once verified by the supervisor, it will be recorded to the attendance sheet with a duplicate copy for the financial manager. The other copy is kept

by the supervisor or filing purposes. Upon finishing updates, the duplicate copy of attendance sheet and DTR will be then submitted to the finance

manager. The document aforementioned will then be subjected to review and verification by the finance manager. If there are no variances and

corrections, the latter officer will then prepare two copies of payroll sheets – one or filing and the other for general manager’s copy.

The general manager does the final review and verification of DTR, attendance sheet and payroll sheet. Upon approval, the general manager

would issue a request form with a duplicate copy for filing and or the finance manager. The finance manager would then release funds or necessary

disbursement upon receipt of the request form, after releasing the funds the key officer would update the accounting books and finally create a pay

slip to be issued to the employee.

Internal control system

Authorization: The management must set standards of hiring new applicants. The administrator must scrutinize applicants well and extract

those who are well-versed with the job requirements. By doing so, the management would minimize costs for training and minimize erroneous works

if an impotent applicant is hired. One thing that must also be considered when hiring an applicant is his personal background and attitude. To ensure

the legality of all his transactions, legal documents and clearances form government authorities is a must from the applicant.
 Execution: The supervisor must closely monitor the employee's work performance and an evaluation must be done. The management must

also consider deductions and compensation according to the employee's performance evaluation, as this could possibly prevent excessive

disbursements. Through compensations, employees also get motivated to work better for the betterment of the company. Upon doing so, a strict

review and verification for approval of disbursements must also be strongly established and an up to date employee record must also be observed

for efficient management of salaries.

Conversion Cycle

Figure 15: Conversion Cycle

 Conversion cycle is concerned with the conversion of raw materials to finished products. The cycle starts with the general manager or one

of the partners checking the availability of the quantity of raw materials and factory supplies to be used. The said quantity of materials and supplies

will be delivered to the mixture and baking preparation department, who will process these into finished goods. The finished products will be then

reported back to inventory control and the general manager.

Internal control system

Authorization: To ensure uniform and consistent taste and quality of product, only the general manager will be able to authorize the proper

quantity of raw materials to be brought out from the storeroom and used in production.

Execution: Only the designated trained persons will be allowed to prepare the product to ensure the confidentiality of the recipe, along with

the consistency of the taste and quality of the product.

BUSINESS PAPERS AND FORMS

These are essential documents that help the business operations. They are used in the transactions between a company and other entity.

Business papers and forms are helpful in maintaining the internal control of the company.

1. Customer Order Slip

KARROTTE ENTERPRISE
1st Floor Baguio Center Mall, Magsaysay Road, Baguio City
Contact Number: 09092347352/09051224187

CUSTOMER ORDER SLIP

No. :
Date :

Description Quantity Unit Price Total

Prepared by
2. Purchase Requisition

KARROTTE ENTERPRISE
1st Floor Baguio Center Mall, Magsaysay Road, Baguio City
Contact Number: 09092347352/09051224187

PURCHASE REQUISITION

No. :
Date Needed : Date :

Description Quantity Unit Price Total

Prepared by Approved by
3. Purchase Order

KARROTTE ENTERPRISE
1st Floor Baguio Center Mall, Magsaysay Road, Baguio City
Contact Number: 09092347352/09051224187

PURCHASE ORDER

Vendor : No. :
Address : Date :
Date Needed :

Description Quantity Unit Price Total

Prepared by Approved by
4. Request Form

KARROTTE ENTERPRISE
1st Floor Baguio Center Mall, Magsaysay Road, Baguio City
Contact Number: 09092347352/09051224187

REQUEST FORM

Name : No. :
Position : Date :

Requests disbursement fund in the sum of (Php.) for the purpose of

settling the following :

Supplier/Vendor Invoice No. Total

Prepared by Approved by
5. Receiving Report

KARROTTE ENTERPRISE
1st Floor Baguio Center Mall, Magsaysay Road, Baguio City

Contact Number: 09092347352/09051224187

RECEIVING REPORT
Received by : No. :
Shipper : Date of Receipt:
Carrier :
Invoice No. :

Description Qty Unit Price Total

Checked and Inspected by Date of Inspection

6. Official Receipt

KARROTTE ENTERPRISE
1st Floor Baguio Center Mall, Magsaysay Road, Baguio City
Contact Number: 09092347352/09051224187

OFFICIAL RECEIPT

Customer Name : No. :

Date :

Description QTY Unit Price Total

TOTAL SALES
Less: SC/ PWD Disconts
Amount Due

Senior Citizen TIN :

OSCA/PWD ID No. :

Signature over printed name Received by

*This document is not valid for claiming input ta. This receiot shall be valid for five(5) years fom date of ATP.*
7. Personnel Record

KARROTTE ENTERPRISE
1st Floor Baguio Center Mall, Magsaysay Road, Baguio City
Contact Number: 09092347352/09051224187

PERSONNEL RECORD

I.D No. :
Name :
Position :
City Address :
Provincial Address :
Contact Numbers/s :
Email Address :
Salary :
Deductions :
Benefirs :
Promotions :
Previous Employer :
Other Information :

Signture over printed name

8. Payroll Register

KARROTTE ENTERPRISE
1st Floor Baguio Center Mall, Magsaysay Road, Baguio City
Contact Number: 09092347352/09051224187

PAYROLL REGISTER

For the period ended :

EARNINGS DEDUCTIONS
NAME Regular Overtime Cash NET PAY
Others Total
Pay Pay Advances
 9. Pay Slip

KARROTTE ENTERPRISE
1st Floor Baguio Center Mall, Magsaysay Road, Baguio City
Contact Number: 09092347352/09051224187

PAYMENT SLIP

I.D No. : Date :

P Employee's Name :

Gross Earnings Php xx

Add: Benefits xx
Total xx
Less: Deductions
PAG-IBIG Php xx
SSS xx
Phil Health xx xx
NET PAY Php xx

Prepared by
10. Attendance Sheet

KARROTTE ENTERPRISE
1st Floor Baguio Center Mall, Magsaysay Road, Baguio City
Contact Number: 09092347352/09051224187

ATTENDANCE SHEET

DATE I.D NO NAME IN OUT

Checked and Approved by

BOOKS OF ACCOUNTS

These are where all business transactions are recorded and posted. These are essential in making the financial statements of the company.

They are strictly confidential and are only accessed by authorized personnel.

1. General Journal

This is also called as the book of original entry. This is where business transactions are initially recorded. The purpose of this journal

is to provide a permanent and complete record, arranged in chronological order for future reference, of all business transactions of

a firm.
 KARROTTE ENTERPRISE
1st Floor Baguio Center Mall, Magsaysay Road, Baguio City
Contact Number: 09092347352/09051224187

GENERAL JOURNAL

Document
Date Account Title Post Ref. Debit Credit
Number

2. General Ledger

This is an accounting record a business uses to keep track of financial transactions in a chronological order. With the use of this,

transactions are categorized and summarized according to their nature and classification.
 KARROTTE ENTERPRISE
1st Floor Baguio Center Mall, Magsaysay Road, Baguio City
Contact Number: 09092347352/09051224187

GENERAL LEDGER
Account title : Account No. :

Date Description Post Ref. Debit Credit Balance