ABRAHAM, Daisy Jane ACCT1A&B Reviewer
Introduction to Accounting
Business – An organization engaged in the trade of
goods, services or both, to consumers.
 Profit-oriented – administered to earn profit
to increase the wealth of owners
 Non-profit oriented – uses surplus revenues
to achieve its goals (ex. charity)
 Forms of Business Entities According to Nature
• Service Business
- simplest form among the three - offers
services and generates profit by charging a
fee.
• Merchandising Business - buys goods and
sells them in their original form; no change in
product
• Manufacturing Business - buys goods called
raw materials, then converts them into finished
products; MOST COMPLEX because of the
conversion of the raw
materials into finished goods
 Legal Forms of Business (Business Ownership)
• Sole Proprietorship
- one owner; can operate on his own or employ
others as business operations expand; most
basic legal form of business
Advantages
- Easiest to form
- Less complex business transactions
- Minimal regulatory requirements
- Decisions implemented faster
- Proprietor enjoys all profits
Disadvantages
- Limited ability to raise capital
- No second opinion
- Proprietor bears the risks and losses of the
enterprise
- Unlimited personal liability
 Partnership - an association of two or more
persons, the partners, who bind themselves to
contribute money, property or industry to a
common fund, with the intention of dividing the
profits among themselves.
- governed by the Civil Code of the Philippines
Advantages
- Easier to organize compared to a corporation
- Burden is shared
- More ideas are exchanged, better decision
making
Disadvantages
- May result to disagreement
- Life of partnership is fragile
- Unlimited personal liability for partnership
debts
 Corporation - Most complex form of business
organization; Corporation code defines
a corporation as an artificial being created by
law. They can sue and be sued.
 Stockholder - a person who invests
and becomes an owner of the
corporation
Advantages
- Has the greatest capacity to raise capital
 - Stockholders may transfer their shares Accounting Association)
- Limited liability of owners
Disadvantages “Accounting is a service activity. Its Function is to
provide quantitative information, primarily financial
- Cost of forming and managing is relatively high
in nature, about economic entities, that is intended
- Subject to greater scrutiny, regulation, control
to be useful in making economic decisions.”
and supervision by the government
(Accounting
- Has limited powers
Standards Council)
- Higher income tax rate
 Economic Decisions  Basic Purpose of Accounting
- One important assumption in decision making - Supply financial information to users to
is the existence of reliable information help them make informed judgments and
- Significant number of this comes from better decisions
accounting information
Accounting – the language of business; used to
- Making right decisions requires great skill,
communicate financial information to interested
timing, sound professional judgment, and the
parties; through accounting, different users of
use of reliable financial information
financial information understand what is happening
 Financial Information
in the business enterprise.
-Decision making process requires financial and
nonfinancial information as well  Accounting And Bookkeeping Distinguished
-summary of all the transactions of the business • Bookkeeping - procedural or mechanical
over a period of time aspect of accounting; involves the set-up,
- Transactions of the business are recorded by update and maintenance of accounting records
bookkeepers or accountants
• Accounting – conceptual and goes beyond
 Accounting Defined bookkeeping; includes interpretation of
“Accounting is the art of recording, classifying information recorded under bookkeeping
and summarizing in a significant manner, and in
 The Accountancy Profession
terms of money, transactions, and events which
The profession is relatively new; accounting is a
are in part at least of a financial character and
profession because it has the attributes required
interpreting the results thereof” (Committee on
of a profession:
Accounting Terminology of the American
1. Mastery of a particular intellectual skill,
Institute of Certified Public Accountants)
acquired by training and education
“Accounting is the process of identifying,
2. Adherence by its members to a common
measuring and communication economic
code of values and conduct established by its
information to permit informed judgment and
administrating body, including maintaining an
decision by users of the information.” (American
outlook which is essentially objective
 3. Acceptance of a duty to society as a whole
(usually in return for restrictions in use of a title
or in the granting of a qualification)
 The Philippine Accountancy Act Of 2004 This
profession is governed by law; R.A. NO. 9298–
was signed into law with the following objectives:
- Standardization and regulation of accounting
education
- Examination for registration of certified public
accountants
- Supervision, control, and regulation of the
practice of accountancy in the Philippines
Article II of RA 9298 -Creates the Professional
Regulatory Board of Accountancy
PRBA - Agency tasked to enforce the provisions
of the Philippine Accountancy Act; also granted the
right to issue, suspend, revoke or reinstate CPA
certificated for the practice of the profession
- Composed of a chairman and six members, all of
whom are appointed
 The CPA Board Exams
Requisites for any person applying
examination:
- Filipino citizen
- Good moral character
- Holder of the degree of Bachelor of Science in
Accountancy conferred by a school, college,
academy or institute duly recognized and/or
accredited by the CHED or other authorized
government offices - Has not been convicted of
any criminal offense involving moral turpitude
Subjects, but not limited to:
- Management Services
- Business Law and Taxation
- Theory of Accounts
- Auditing Theory
– Auditing Problems
- Practical Accounting Problems I
- Practical Accounting Problems II
75% - general average, with no subject lower than
65% Conditional credit – must retake subjects
lower than 65% and should pass it
After 2 failed attempts in the boards, candidates should
enroll 24 units of the subjects again
 Sectors Of Accounting Practice
 Public Practice – includes individual
practitioners, small accounting firms, medium
sized and multinational accounting firms that
render independent professional accounting
services to the public; CPAs charge
professional fees
Examples of services by CPAs
 Auditing – the most common service being
provided by CPAs; involves the independent
examination of financial statements for the
for
purpose of expressing an opinion on the
fairness of these statements
 Tax services – this includes the preparation
of tax returns for various clients, provision of
advice on tax matters, and representation of
clients in tax cases
 Management consulting services –
involves providing/ consulting services to
clients on matters of accounting, finance,
business policies, organization procedures,
 budgeting, product costing and the conduct of
operations
• Commerce And Industry – Accountants in
commerce and industry assist management in
planning and controlling a company’s operations
 Comptroller – highest accounting officer
in a business organization
• Education – employs accountants as professors,
reviewers or researchers; they take steps to clarify
ad address emerging accounting issues
encountered by accountants in other sectors
• Government – may be hired as staff, auditor,
budget officer, or consultant in government units
like CoA, BIR, DF, DBM, and SEC
 Brief History Of Accounting
Accounting traces its roots to the Middle East region,
where as early as 850BC, tradesmen use clay objects
to represent commodities such as flocks of sheep, jars
of spices and oil, bolts of clothing and other goods
The ancient civilizations of Babylon, Greece and
Egypt also used clay tablets (in later years, papyri
were used as the medium for record-keeping)
13th to 15th centuries – growth of trade, more
systematic recordkeeping methods were developed;
FLORENTINE, VENETIAN and GENOAN
merchants used these methods to keep trac of their
business. DOUBLE ENTRY RECORDS first
appeared in Genoa in 1340AD Luca
Pacioli And The Summa
1494 – Friar Luca Pacioli wrote a book which
contains discussions on the double-entry
bookkeeping entitled Summa De Arithmetica
Geometria, Proportioni Et Proportionalita
(Everything about Arithmetic, Geometry, Proportions
and Proportionality). This is a summary of the
existing mathematical knowledge at that time. He
was considered the “Father Of DoubleEntry
Bookkeeping” because of this.
The Industrial Revolution
Mid 18th to mid 19th century – from craftsmen
method to assembly-line method; overhead costs
became problematic. To solve this, cost accounting
was developed.
Cost Accounting – specialized field of accounting
which deals with the allocation of costs to products.
The corporate form of business organization was
created to accommodate the need for increasingly
large amounts of funds which are required to
finance the expansion of business during this period
 Fields Of Accounting
•Financial Accounting – focuses on the
preparation and presentation of general-purpose
financial statements with the aim of meeting
most of the needs of external users
•Management Accounting – is concerned
primarily with financial reporting for internal
users, such as management. These users have
control over the accounting system and can
specify precisely the type of reports needed for
use in decision-making
•Cost Accounting – measures a business’s costs
to help management in controlling expenses.
Cost accounting records guide managers in
setting prices for their products and services to
achieve greater
profits
 •Tax Accounting – has two aims: compliance
with the tax laws and minimizing
company’s tax bill through legal means.
Accountants provide tax planning and tax
consultancy services, such as giving advice to
clients on what type of investments to make and
on how to structure business transactions
FRSC – is the official accounting standard setting
the body in the Philippines
Upon recommendation of BoA, the PRC created
FRSC
Primary Task: – improve and establish accounting
standards that will be generally accepted in the

•Government Accounting –the focus is the Philippines

proper custody, disposition and accounting for Structure: – has a chairman and 14 representatives
public funds
BSP – 1

BOA – 1
BIR – 1
COA – 1
Basic Accounting Concepts & The Financial Major organization of preparers and users of
Statements financial statements – 1
SEC – 1
Financial Statements – are the means by which
Accredited Nat’l Professional Organization of
the information accumulated and processed in
CPAs in Commerce and Industry – 2
financial accounting is communicated to users on a
Public Practice – 2
timely basis.
Academe – 2
Accountants/ Bookkeepers accumulate Government – 2
financial information thru the Total – 14
preparation of financial statements
Chair and members – serve a term of 3 years
GAAP “Generally Accepted Accounting Principles”
which is renewable
-comprises the conventions, rules,
processes, principles, standards, and
Philippine Financial Reporting Standards( FRSC) -
underlying assumptions that are used in preparing
pursuant to its task, issues accounting standards called
financial statements
Philippine Financial Reporting Standards
-not rigid or unchanging – accounting principles
PFRS - constitute the generally accepted
continue to evolve as a response to the changes in
accounting standards observed in the Philippines
the financial information needs of business
PFRS includes the following:
stakeholders  Financial Reporting Standards - PAS – Philippine Accounting Standards
Council - PFRS
 - Philippine Interpretations developed by the
Philippine Interpretations Committee
 Basic Accounting Concepts
-Accounting calls for scientific approach toward the
recording of innumerable business transactions
• Business Entity Principle –the business is
considered distinct and separate from the
owners of the business; business is a separate
accounting entity
• Accounting Entity – is an organization that is
accounted for as a separate economic unit
• Matching Principle- profit or loss
computed by deducting the expenses incurred
from the income earned during an accounting
period.
- This means that the income recorded and reported
in one accounting period should be matched against
the expenses that directly
• Accrual Basis – income is recognized when it is
earned, regardless of when cash is received.
Expenses are recognized when incurred, regardless
of when cash is paid
• Cash Basis Of Accounting – income is
recognized when cash is received, and expenses
are recognized when cash is paid
• Stable Monetary Unit – business transactions
must be expressed in terms of a uniform means of
measurement
- Transactions which do not involve cash are
assigned values according to acceptable bases for
measurement
- Accounting assumes that the peso is not
materially affected by inflation
• Periodicity (Time Period Concept) – assumes
that the operating life of an enterprise may be
conveniently divided into time periods of equal
length, called accounting period
Types: Calendar and Fiscal Accounting Period
• Going Concern (Continuity Assumption) – The
financial statements are normally prepared on the
assumption that an enterprise is a going concern
and will continue in operation for the foreseeable
future. It is assumed that the enterprise has neither
the intention nor the need to liquidate or curtail
materially the scale of its operation
 The Accounting Framework
is
-sets out the concepts that underlie the preparation
and presentation of financial statements for external
users
Purposes Of The Framework
a) Assist the FRSC in developing accounting
standards that represent GAAP in the Philippines
b) Assist the FRSC in its review and adoption of
existing International Financial Reporting
Standards c) Assist preparers of financial
statements in applying FRSC Philippine Financial
Reporting Standards and in dealing with topics that
have yet to from the subject of an FRSC Statement
d) Assist auditors in forming an opinion as to
whether financial statements conform with
Philippine GAAP
e) Assists users of financial statements in
interesting the information contained in financial
statements prepared in conformity with Philippine
GAAP
f) Provide those who are interested in the
work of the FRSC with information about its
 approach to the formulation of Philippine
Financial Reporting
Standards
Is The Framework Part Of Accounting
Standards?
– The Framework is not a PFRS and hence does
not define standards for any particular
measurement or disclosure issue. In case of
CONFLICT, requirements of PFRS shall prevail.
Scope of the Framework
a) Objective of financial statements
b) Underlying assumptions in the preparation of
financial statements
c) Qualitative characteristics that determine the
usefulness of information in financial statements
d) Definition, recognition and measurement of the
elements of the financial statements
e) Concepts of capital and capital maintenance
Financial Statements – are the means by which
the information accumulate in and processed by
financial accounting is communicated to users on
a periodic basis; the END-PRODUCT of the
financial accounting process
Complete set:
a) Statement of Financial position or balance sheet
b) Statement of comprehensive income
c) Statement of changes in equity
d) Statement of cash flows
e) Notes to the financial statements
Users Of Financial Statements
1. Investors
- “providers of risk capital”;
- Concerned with the risk inherent and in return
provided by, their investments;
- Need information to help them determine whether
they should buy, hold, or sell their investments
-In the case of corporations, shareholders are also
interested in information, which enables them to
assess the ability of the enterprise to pay dividends
2. Employees
-Interested in information about the stability and
profitability of their employers
- Interested in information which enables them to
assess the ability of the enterprise to provide
remuneration, retirement benefits and employment
opportunities
3.Lenders - Interested in information that enables
them to determine whether their loans and the
interest attaching to them, will be paid when due
4.Suppliers And Other Trade Creditors -
Interested in information that enables them to
determine whether amounts owing to them will be
paid when due
-Trade creditors are likely to be interested in an
enterprise over a shorter period than lenders
unless they are dependent upon the continuation
of the enterprise as a major customer
5.Customers - Interest in information about the
continuance of an enterprise especially when they
have a long term involvement with, or are
dependent to the enterprise
6.Government And Their Agencies - Interested in
the allocation of resources, and therefore the
activity of the enterprise
- Require information in order to regulate the
activities of enterprises, determine taxation
policies and as the basis for national income and
similar
 statistics
7. The Public - Providing information about the
trends and developments in the prosperity of the
enterprise and the range of its activities
Main Users Of Financial Statements –for the use
of INVESTORS and CREDITORS
Information Provided By Financial Statements –
aim to provide information about the FINANCIAL
POSITION, FINANCIAL PERFORMANCE,
AND CASH FLOWS of an entity that is useful to a
wide range of users in making economic decisions
Financial Position
- the condition of a business, in monetary terms, as
of a given date or point in time
- Information about this is primarily provided in a
statement of financial position or BALANCE
SHEET
-Financial position is affected by the economic
resources it controls, its financial structure, its
liquidity and solvency, and its capacity to adapt to
changes in the environment in which it operates
Liquidity – availability of cash in the near future
to cover currently maturing liabilities
obligations Solvency – is the availability of cash
over the long term to meet obligations when they
fall due Capacity For Adaptation - is the ability
of the enterprise to use its available cash for
unexpected requirements and investment
opportunities
Performance Or Profitability
– refers to whether a company is able to generate
profit or incur a loss during a particular accounting
period; this is usually provided in a STATEMENT
OF COMPREHENSIVE INCOME; it has two parts
 Profit/loss portion
 Other comprehensive income portion
 Income Statement/ Result Of Operation/
Statement Of Performance/– is a useful tool for
evaluating management’s stewardship of the
resources of the enterprise; also useful in assessing
the inflow and outflow of cash
Changes In Financial Position
- useful in order to assess its investing, financing and
operating activities during the reporting period.
• Statement of Changes in Equity - shows the
balance of the owner’s investment in the business
at the beginning of the accounting period,
additional investments made by the owner,
withdrawals by the owner for personal use, the
profit or loss for the period and the balance of the
owner’s investment at the end of the accounting
period.
• Statement of Cash Flows - summarizes cash
activity (inflow and outflow) for the period,
classified according to the nature of activity
(Operating, Investing Or Financing)
or
Frequency Of Preparation Of Financial Statements
-Financial statements are prepared at least
annually -Financial statements for periods of
less than one year may also be prepared, such as
monthly, quarterly or semi-annually
-Shorter-period financial statements are called
Interim Financial Statements
-The frequency of preparation depends on the
needs of users and the cost-benefit consideration
-The cost of preparing financial statements
more frequently must not exceed the benefits
 obtained from the use of these financial
statements
Responsibility For Financial Statements
-The management of an enterprise has the
primary responsibility for the preparation and
presentation of the financial statements of the
enterprises -Management is also responsible
for selecting and applying the accounting
policies and principles which are appropriate
for the company
 The Elements Of The Financial Statements
- Financial statements portray the financial
effects of transactions and other events by
grouping them into broad classes(“Elements Of
Financial Statements”) according to their
economic characteristics
• Assets, liabilities, equity – elements directly
related to the measurement of financial position
• Income, expense – elements directly related to
the measurement of performance
• Statement of changes in equity and statement
of cash flows – reflect a combination of all
these
elements
Elements Pertaining To Financial Position
 Assets – resources owned and/or controlled by
the enterprise
-Expected to provide future economic benefits to the
enterprise Examples:
 Cash – money on hand, or in banks, and other
items considered as medium of exchange in
business transactions
 Accounts Receivable – valid claims from
customers or clients arising from the provision
of services or delivery of goods in the ordinary
course of business, where the price for these
services or goods have not yet been paid (on
account or on credit)
 Supplies On Hand – refers to supplies
purchased by an enterprise which are unused
as of the reporting date
 Merchandise Inventory – goods which have
been bought from suppliers for resale to
customers at a price higher than cost
 Property, Plant And Equipment – long lived
assets that have been acquired for use in
operations. Land, building, machinery,
furniture, fixtures, equipment, transportation or
delivery vehicles are examples of PPE.
 Liabilities – present obligation of the enterprise
arising from past events, which are to be settled in
the future; debts of the business Examples:
 Accounts Payable – amounts due, or payable
to, suppliers for goods purchased on account or for
services received on account
 Salaries Payable – salaries due to employees
which are unpaid as of reporting date
 Utilities Payable – amounts due, or payable
to, utility companies for electricity, heat, light, and
water changes
 Advances From Customers – amounts
received from customers, in advance, for the
delivery of goods or provision of services
 Loans Payable – obligations of an enterprise
to lenders to be paid on demand or at a specified
future date agreed between the enterprise and the
lender
 Equity – means a claim; technically, creditors and
owners both have claims on the assets of the
enterprise
- residual interest in the assets of the enterprise
after deducting all its liabilities
Elements Pertaining To Performance Or Profitability
• Income – refers to increases in economic
benefits during the accounting period in the
form of inflows or enhancements of assets or
decrease of liabilities that result in increase in
equity, other than those relating to contributions
from equity participants.
 Revenue arises in the course of the ordinary
activities of an enterprise and is referred to
by a variety of different names including
sales, fees, interest, dividends, royalties, and
rent
 Gains represent other items that meet the
definition of income and may, or may not
arise in the course of the ordinary activities
of an enterprise
• Expenses - refer to decreases in economic
benefits during the accounting period in the
form of outflows, or depletion of assets or
incidences of liabilities that result in decrease in
equity, other than those relating to distributions
to equity participants.
 Losses represent other items that meet the
definition of expenses and may or may not
arise in the course of the ordinary activities
of the enterprise
 Recognition Of The Elements Of The Financial
Statements
Recognition – process of incorporating in the
statement of financial position or statement of
comprehensive income an item that meets the
definition of an element and satisfies the criteria
for recognition
Criteria For Recognition
An item that meets the definition of an element
should be recognized if:
1. It is probable that any future economic benefit
associated with the item will flow to or from the
enterprise
2. The item has a cost or value that can be
measured with reliability
Following these two main criteria, we can
summarize the recognition principles for each
element, as follows:
-An asset is recognized in the statement of
financial position when it is probable that the
future economic benefits will flow to the
enterprise and the asset has a cost or value that can
be measured reliably.
-A liability is recognized in the statement of
financial position when it is probable that an
outflow of resources embodying economic
benefits will result from the settlement of a present
obligation and the amount at which the settlement
will take place can be measured reliably.
-Income is recognized in the statement of
comprehensive income when increase in future
economic benefits related to an increase in an
asset or a decrease of a liability has arisen that can
be measured reliably.
-Expenses are recognized in the statement of
comprehensive income when a decrease in
future economic benefits related to a decrease in
 an asset or an increase of a liability has arisen -Assets are carried at the amount of cash or cash
that can be measured reliably. equivalents that could currently be obtained by

 Measurement Of The Elements Of The Financial selling the asset in an orderly disposal.

Statements -Liabilities are carried at their settlement values;

-measurement is the process of determining the that is the undiscounted amounts of cash or cash

monetary amounts at which the elements of the equivalents expected to be paid to satisfy the

financial statements are to be recognized and liabilities in the normal course of business

carried in the financial statements • Present Value

-Assets are carried at the present discounted value
Measurement Bases
of the future net cash inflows that the item is
expected to generate in the normal course of
 Historical Cost
– Assets are recorded at the amount of cash or business

cash equivalents paid or the fair value of the - Liabilities are carried at the present discounted

consideration given to acquire them at the time value of the future net cash outflows that are

of their acquisition expected to be required to settle the liabilities in

-Liabilities are provided at the amount of the normal course of business

proceeds received in exchange for the

obligation or in some circumstances (ex,  Qualitative Characteristics Of Financial
income taxes), at the amounts of cash or cash Statements - attributes that make the information
equivalents expected to be paid to satisfy the provided in financial statements useful to users
liability in the normal course of business -Relevance and reliability – refer to content of FS
-Most commonly used measurement basis in -Understandability and comparability – refer to
accounting because it is deemed as the most the way FS are presented
objective basis 2 Fundamental or Primary Qualitative
Characteristics
• Current Cost
-Assets are carried at the amount of cash or cash (1) Relevance -Information has the quality of
equivalents they would have to be paid if the relevance when it influences the economic decisions
same or an equivalent asset was acquired of users by helping them evaluate past, present, or
currently. -Liabilities are carried at the future events, or confirming or correcting their past
undiscounted amount of cash or cash evaluations
equivalents that would be required to settle the
Ingredients of Relevance
obligation currently

• Realizable (Settlement) Value • Predictive Role (Value)– information is

relevant if it is used to make predictions of,
 say, future cash inflows or income in future
periods
• Confirmatory Role (Feedback Value) –
information is relevant if it used to confirm or
correct the earlier expectations of a financial
statement user
Materiality – information is material if its
omission or misstatement could influence the
economic decisions of users taken on the basis of
the financial statements; there is no clear-cut
amount considered to be material – what is
material to one company may be immaterial to
another
(2) Faithful Representation –information must
represent faithfully the transactions and other
events it either purports to represent or could be
reasonably expected to represent; this means that
the actual effects of transactions should be
properly accounted for and reflected in the
financial statements
• Completeness - includes all information,
including all necessary descriptions and
explanations necessary for a user to understand
the phenomenon being depicted.
• Neutral – one without bias in the selection or
presentation of financial information
• Free from error - no error or omissions
4 Enhancing or Secondary Qualitative
Characteristics
(1) Comparability – enables users to identify
and understand similarities in, and differences
among items
(2) Verifiability – helps assure that information
faithfully represents the economic phenomena that
it purports to depict
(3) Timeliness – information is available to
decisionmakers in time to be capable of influencing
their decisions
(4) Understandability – information is made
understandable by classifying, characterizing and
presenting it clearly and concisely
The Accounting Equation And The Double-Entry
Bookkeeping System
Business Transaction – an exchange of values
(expressed in terms of money) involving two parties
(for external transactions) or within the enterprise; it is
an economic activity that causes increases and/or
decreases in the elements of the financial statements
 External Transactions – include the
sale of goods to customers or the
provision of services to clients
 Internal Transactions – include the
manufacture of goods for sale and
incurrence of losses by the company
resulting from fire or flood (casualty
losses)
-Not all events in business enterprise are considered
accountable; only if it has an effect on the elements of
the financial statements
Source Documents – is the original record of a
business transaction; at a minimum, source documents
contain the following: date of transaction, nature of
transaction, and the amount involved; also contains
names of parties involved Control Over Source
Documents
-All business transactions that are taken up in the
accounting records of the enterprise should have
supporting source documents
-Usually, the source documents supporting the
transactions for the day are collected, classified, and
filed in CHRONOLOGICAL ORDER or
SEQUENTIAL ORDER
Examples Of Source Document:
 Sales Invoice – a cash sales invoice is
issued to evidence a sale for cash; a charge
sales invoice or credit sales invoice is issued
to evidence a sale where goods are sold on
account or on credit
 Delivery Receipt – a document prepared by
the enterprise and signed by the customer to
evidence the acceptance/ receipt of the
goods delivered to the customer
 Official Receipt – issued by the business to
evidence the receipt of cash from
customers, the proprietor, and other parties
 Vendor’s Invoice – this is actually a “Sales
Invoice”, except that it is issued to the
enterprise by the enterprise’s suppliers or
vendors; a bill for goods purchased or
services availed
 Purchase Requisition Forms – source
document which evidences an employee’s
request for the purchase of needed goods or
supplies; purchase requests must be
approved by the company management
before an actual purchase is made
 IOUs – a note acknowledging indebtedness
to the enterprise; usually prepared, signed,
and issued by employees who request and
receive cash advances from the enterprise
 Promissory Notes – an unconditional
promise in writing made by one person
(called the maker) to another, signed by the
maker, engaging to pay on demand, or at a
fixed or determinable future time, a sum
certain in money to order or to bearer
 Bank Statements – a summary of all
financial transactions occurring over a
certain period (usually a month) on a bank
account; it shows the beginning balance of
the account, any increases or decreases
(with brief explanation) and the ending
balance of the account
 Minutes Of Meetings – written record of a
meeting
 Business Letters – business
correspondence with government agencies,
customers, suppliers or other parties
 Job Time Tickets – forms containing
information on time spent working at a
particular customer order (job)
 Certificates Of Stock – documents
evidencing ownership of shares in a
corporation
 Time Records/ Timesheets – a detailed
record showing time-in and time-out of
 employees for a particular period of time g) Increase Equity = Decrease Liability
(usually every halfmonth) h) Increase Liability = Decrease Liability
 Check Voucher – form used to facilitate i) Increase Equity = Decrease Equity
the authorization of cash disbursement
Expanded Accounting Equation – includes the
transactions; a voucher contains the name of
elements of income and expense
the payee, the reason for disbursement, and
the amount involved; management affixes Assets = Liabilities + Equity + Income – Expenses
its signature on the voucher, evidencing
The Account – This is the basic summary
approval of the cash disbursement
device of accounting; separate accounts are
 Journal Voucher – document used for
maintained for each element; an account
transactions and journal entries for which
records the increases, decreases, and balance of
there is no other source document; usually
each element of the financial statements
prepared in connection with year-end
adjustments to the accounting records and Debit – left side of an account
for correcting errors in the records
Credit – right side of an account
 The Basic Accounting Equation
Common Examples Of Account Titles Used
Assets = Liabilities + Equity
Asset Accounts
Business Transactions And The Accounting Equation
• Cash – the medium of exchange for business
In analyzing business transactions for purposes of transactions; it is accepted by a bank for deposit
recording, remember the following and immediate credit at face value; cash
-In every transaction, VALUE RECEIVED = includes: currency and coins, checks, money
VALUE PARTED WITH. The two values must orders, bank drafts, and demand deposit accounts
always be equal -The basic accounting equations • Held For Trading Securities – Temporary
must always be maintained investments of excess cash which are primarily
held for short-term gain; technically, this account
Business transactions, therefore, have the following
is known as “Investments At Fair Value Through
possible effects on the accounting equation:
Profit Or Loss”
a) Increase Assets= Increase Liabilities • Loans And Receivables – loans and
b) Increase Assets= Increase Equity receivables include trade receivables and non-
c) Increase Asset = Decrease Asset trade receivables; trade receivables are claims
d) Decrease Assets = Decrease Liabilities against others which arise in the ordinary course

e) Decrease Asset = Decrease Equity of doing business;

Examples:
f) Increase Liabilities = Decrease Equity
  Trade Accounts Receivable – these are
claims against customers arising from the
provision of services or delivery of goods
on credit
 Trade Notes Receivables – a note
the production or supply of goods and services,
or for rental to others, or for administrative
purposes and which are expected to be used
during more than one accounting period;
examples: land, building, transportation and

receivable is a written promise from the delivery vehicles, furnitures and fixtures,
customer to pay a fixed amount of money machinery and equipment

on a certain future date; being a formal • Intangible Assets – these assets are
and written document, it offers more identifiable, non-monetary assets without
security physical substances; examples: patents,
than accounts receivable copyrights, licenses, franchises, and trademarks

 Non-Trade Receivables – represent all Liability Accounts

other claims which are not trade; they
may be nontrade accounts receivable or
nontrade notes receivable
• Inventories – these are assets which are (a)
held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be
consumed in the production process or in the
rendering of services
• Prepaid Expenses – these are expenses paid
for by the business in advance; prepaid expenses
are assets when they are paid for. Subsequently,
they become expenses.
• Long-Term Investments – an investment as
an asset held by an enterprise for the accretion of
wealth through capital distribution, such as
interest, royalties, dividends and rentals, for
capital appreciation or for other benefits to the
investing enterprise such as those obtained
through trading relationships
• Property, Plant And Equipment – these are
tangible assets held by an enterprise for use in
• Accounts Payable – this account is the
opposite of accounts receivable
• Notes Payable – note payable is like a note
receivable, except that this time the enterprise is
the one who promises to pay
• Accrued Liabilities – these are amounts owed
to others for unpaid expenses; they are similar to
accounts payable, except that accounts payable
are for items which have already been
consummated, while accrued expenses are for
items which are continuing in nature (such as
utility services); examples are: salaries payable,
interest payable, taxes payable, accruals for
utility expenses
• Unearned Revenues – sometimes the
enterprise receives payments before providing its
customers with goods or services; this creates an
obligation on the part of the enterprise to deliver
goods or provide services; once the enterprise
complies with what is required of it, the advance
collections from customers are already earned
and become part of income
• Mortgage Payable –used for recording Expense Accounts
longterm debt of an enterprise for which the
 Cost Of Sales – the cost incurred to
company has pledged certain assets as security
purchase or to produce the products sold to
for the debt (collateral). In the event that the
customers during the period. For a service
debtor could not pay the obligation, the creditor
business, any expense which could be
can FORECLOSE or cause the mortgaged asset
directly attributed to the provision of
to be sold and the proceeds are used to settle the
services is called cost of
debt.
services
• Bonds Payable – large sums of money are
• Salaries And Wages Expense – includes
often required by a business for working capital
all payments as a result of an employer-
and expansion purposes. An enterprise often
employee relationship such as salary or
obtains the needed funds by issuing (floating)
wages, 13th month pay, and other related
bonds. A bond is a contract between the issuer
employee benefits. Salaries are normally
and the lender specifying the terms of repayment
paid for workers who use analytical skills
as well as the interest to be paid. Interest is
(white-collar employees) on the other hand,
normally paid on an annual, semi-annual or
wages are paid to workers who use manual
quarterly basis Equity Accounts
labor (blue-collar employees)
• Equity – “capital”, is used to record the
• Utilities Expense (Telephone, Electricity,
original and additional investments of the owner
Fuel And Water Expense) – expenses
of the business entity. Capital is increased by net
related to use of communication facilities,
income earned during the year. Conversely, a net
the consumption of electricity and water
loss decreases capital.
• Rent Expense – expense for leased office
• Withdrawals – when the proprietor withdraws
space, equipment or other assets rented
cash or other assets for non-business use, such
from other
withdrawals are reflected in the Withdrawals
• Supplies Expense –used for recording the
account.
usage of supplies in the normal course of
• Income Summary – it is a temporary account
business
used to summarize all income and expenses for a
• Insurance Expense – portion of premiums
given period.
paid on insurance coverage which has
• Service Income Or Fees Income – revenues
expired
earned by performing services for customers
• Depreciation Expense – the portion of the
• Sales – revenues earned as a result of sale of
cost of a tangible asset allocated or charged
merchandise
as expense during an accounting period
 • Bad Debts Expense – the amount of (right side) and decreases are entered as debits
receivables estimated to be uncollectible (left side)
and charged as expense during an
c.Income increases equity, hence, income is
accounting period.
recorded in the same manner as equity (credit to
• Interest Expense – an expense related to increase, debit to decrease)
use of borrowed funds. This is also known d.Expense decreases equity, hence, increases in
as “Finance Cost”. expenses are debited, while decreases are
 The Double-Entry Accounting System credited

Under the double-entry accounting system the DUAL

T-Account – is a simplified form of an
EFFECTS of a business transaction is recorded (both
account. Using this, the rules of debit and
the value received and the value parted with). The
credit are presented as follows:
following summary would prove useful in applying
the system:

1.For every debit (Dr.) entry, there must be a

corresponding credit (Cr.) entry. The accounting
equation must always be maintained Account Balances
2.Each transaction affects at least two accounts
-The difference between the total debits and
(one debited, one credited)
the total credits of each account is called an
3.Total debits for a transaction must equal total
account balance
credits
-If the total debits are greater that the total
4.An account is debited when an amount is
credits, the account balance is called a Debit
entered on the left side of the account and
Balance
credited when the amount is entered on the right
-If the total credits are greater that the total
side
debits, the account balance is called a Credit
5.The account type determines how increases or
Balance Normal Balances – is the usual
decreases in it are recorded. Increases are
balance of an account assuming proper
recorded on the side of an account based on its
accounting has been made
position in the accounting equation
Normal Debit Balances – assets and
a.Since assets are on the left side of the
expenses Normal Credit Balances –
accounting equation, increases in assets are
liabilities, equity, and income
recorded as debits (left side), while decreases are
recorded as credits (right side) If an account has an abnormal balance, it is usually
b.Since liabilities and equity are on the right side an indication of possible errors in the recording of
of the accounting equation, increases in business transactions. Abnormal balances require
liabilities and equity are recorded as credits
investigation by the company regarding the cause of
the abnormality, followed by adjustments or
corrections to bring the account into normal
balance.
Accounting Cycle – Service Business
Procedures For Recording Journal Entries
 Steps In The Accounting Cycle
I. Analyzing business transactions through
source documents
II. Journalizing, or the recording of transactions
in a journal
III. Posting or transferring of the entries from the
journal to the ledger
IV. Preparing the trial balance
V. Preparing a 10-column worksheet and making
the necessary adjusting journal entries VI.
Preparing the financial statements based on
adjusted account balances
VII. Recording adjusting entries to the
journal and posting the same to the ledger
VIII. Recording and posting of closing
entries IX. Ruling and balancing real and
nominal accounts
X. Preparing a post-closing trial balance
XI. Preparing reversing entries
 Book Of Accounts
The Journal
-the book where transactions are initially
recorded in a systematic and chronological order
(hence, journals are called the “books of original
entry”)
-For each transaction, a journal shows the debit
and the credit effect of transactions on specific
accounts
General Journal – the most basic form of a
journal; the journal may be part of either a
manual accounting system or a computerized
accounting system
The following procedures are used when
recording journal entries in a two-column general
journal, assuming a manual accounting system is
in place: 1. Analyze The Business Transactions
– the entry to be made should reflect a
transaction’s economic substance rather than its
legal form. Proper analysis of a transaction can
only be done by reviewing the source documents
that support the transaction
2. Write The Date Of The Entry In The
Date Column – the date can be readily
determined based on the date per source
document
 Write the year in small figures at the
top of the column. The month is
written below the year, on the first
line.
 Write the day of the month on the first
line in the second column
immediately after the name of the
month
 The date is written only once for each
entry. The month need not be repeated
for other entries within the same
month
 3. Record The Debit Part Of The Entry
 Write the account title at the extreme
left edge of the Account Title column.
Write the amount of the amount in the
Debit column
4. Record The Credit Part Of The Entry
no debit or credit which shows only the date and a
brief explanation or reminder, is known as a
Memorandum Entry 5. If an error is made in
writing any part of the entry, the entry is corrected
by drawing a line through the incorrect part and
writing the correction immediately above it

 Indent each account title about one-half The Chart Of Accounts

-list of all the accounts of the business and their
inch from the left edge of the Account Title
respective account numbers.
column. Write the amount of the credit
-Using this would reduce confusion as to the
item in the Credit column.
choice of account titles and permits uniformity in
recording routine transactions
5. Provide A Brief Description Of The
-The accounts are arranged in the
Transaction To Explain The Journal Entry
following order: Assets, Liabilities, Equity,
Made
Income, Expenses.
 Indent each line of the description about one
-Ordinarily, the chart of accounts is
inch from the left edge of the Account Title
prepared by the accountant who set up the
column.
accounting system of the business
-The group of accounts is called a Ledger
Other Things To Remember When Recording Entries
-It is also known as the book of Final
1. The accountant should have a clear
Entry -A general ledger contains the
understanding of what the transaction is all about
entire set of accounts used by a business
in order to permit the selection of the appropriate
-The effects of business transactions are
accounts to debit and to credit
summarized in individual accounts and
2. If there is only one account debited and one
each account has an individual record in
account credited, the entry is known as a Simple
the ledger
Journal Entry. Where more than one account is
involved in a single entry, it is known as a
Procedures For Posting Journal Entries
Compound Journal Entry
3. Using peso signs in columnar books of -The process of transferring the entries from the
accounts is NOT REQUIRED – unless otherwise journal to the accounts in a ledger is called Posting
stated, the amounts are assumed to be in
-Normally, posting is done at the end of the month,
Philippine peso 4. Sometimes, the accountant
when all journal entries for the month have been
makes an entry in narrative format – there are no
recorded
accounts debited or credited. An entry which has
The following steps are observed during posting: Footing The Accounts
Footing – adding all the debits and the credits; this
1. Using the ACCOUNT NUMBER (as
is done after all the entries are posted from the
provided for in the chart of accounts) locate
journal to the ledger
the account title in the ledger
Trial Balance – is a summary of accounts with
2. Write the DATE of the journal entry in the
open balances (accounts with a debit/ credit
date column of the ledger
balance); commonly taken every MONTH-END
3. Write in the REFERENCE
(after posting procedures) to check the equality of
COLUMN
(JOURNAL REFERENCE OR JR) of the debits and credits

ledger the page of the journal where the Open Account – if it has a balance, either on the

journal entry came from debit or credit side

4. Transfer the DEBIT AMOUNT from the Closed Account – if the debits equal the credits

journal entry to the DEBIT COLUMN per

ledger, and the CREDIT AMOUNT per  Procedures For Preparing A Trial Balance
journal entry to the 1. On a separate sheet of paper, indicate the
CREDIT COLUMN per ledger HEADING. The heading is composed of
5. Enter the account number in the three items, namely, the NAME OF THE
REFERENCE
COMPANY, THE TITLE OF THE
COLUMN (POSTING REFERENCE OR PR) the
REPORT AND THE DATE
account number once the figure has been posted to
2. Review the general ledger and note all
the ledger
open accounts
3. Immediately below the heading, transfer
Trial Balance
the account numbers, account titles, and
-After all transactions for the period have been
account balances of all accounts with open
posted to the ledger accounts, the balance for each
balances. List down the accounts in the
account is determined
following order: Assets, Liabilities,
-Every account will either have a debit balance, a
Equity, Income, Expenses
credit balance, or a zero balance
-A trial balance is a list of all accounts and their 4. Determine the total debits and the total

balances credits. Both totals should be equal.

-It indicates whether total debits equal total credits When The Trial Balance Is Not Balanced
-This only proves, however, that all entries
recorded have equal debits and credits; it does not If total debits and credits do NOT balance, it

guarantee that all transactions have been recorded signifies that there was an error committed along
the process, which may be any of the following:
 a) Error in footing the debit and credit divisible by 9. If it is divisible by 9, this suggests
columns either a transplacement error, or a transposition error.
b) Error in transferring from the ledger to
3. Where the error is still not located, perform the
the trial balances
following:
c) Errors in posting, say posting a debit
entry to the credit side of an account a. Compare the amounts and accounts in
d) Error in journalizing, for example, if the trial balance with those in the ledger and
the debit side is not equal to the credit side of correct any discrepancies or omissions
an entry b. Recheck the footing of the accounts in
e) Error of omission, when the debit is the general ledger
posted but the credit is not posted c. Trace the postings from the journal to
the ledger. Be alert for possible omissions
d. Recheck the entries made in the
The Working Back Method proves effective in
journal and ensure that total debit amounts
locating the error. This means that you start re-
are equal to total credit amounts
checking the correctness of the accounting
procedures you performed in REVERSE Adjusting Journal Entries
chronological order, i.e., start with the trial balance Accrual basis accounting – recognizes transactions as
and work backwards towards the entries in the they occur. Income is recognized when earned and
general journal expenses are recognized when incurred, regardless of
the inflow or outflow of cash.

Cash basis accounting – recognizes income only

Working-Back Method
1. Recheck the footing of the debit columns and
credit columns of the trial balance If the footings are
correct and totals are not equal, determine the
difference between debit and credit columns. A
possible reason for the difference would
erroneously listing a debit balance account as part of
the credit column, or vice versa. An error of this type
would cause a difference between debits and credits
which is twice of the amount involved.
2. If the error is still not located, check if the
difference between debit and credit columns is
when cash related to income is collected and expenses
are recognized only when paid.
Adjusting process is made in order to comply with
the GAAP regarding revenue recognition and
be matching
principles.
Adjusting entries – adjustments used to bring the
assets, liabilities, revenues and expenses up-to-date
at the end of accounting period.
-They are usually made at the end of the accounting
period.
-Necessary to properly report the truthful net 1. Accruals – means to recognize revenue earned and
income or loss at the end of the accounting and to expenses incurred, regardless of inflow or outflow
appropriately report assets, liabilities, and equity. of cash.

 Accrued expenses – expenses incurred during

Why is there a need to adjust the accounts at the end of
the period? the accounting period but has not been paid and
is still unrecorded at year-end.
Because, during the reporting period, cash receipts
-Affects 3 concepts: (1) Expense recognition principle
and cash payments primarily serve as the bases for
(2) liability recognition principle (3) accrual basis
recording income and expenses, the accounting
assumption
records need to be updated for revenues and
-If not adjusted, expenses will be understated, profit
expenses earned and incurred but not yet collected
will be overstated, Liabilities will be understated,
or paid and for cash receipts and cash payments
Equity will be overstated.
made during the period but are not yet earned or
incurred.
AJE:
Journalizing and Posting Adjusting Entries Expense xx
Liability(Payable) xx
-Follows the principle of accrual basis of
accounting. -Follows the principles of matching
JE: (following year)
(properly match revenues earned for the period with
Expense xx
expenses incurred for same period) and going
Liability xx
concern (the entity is assumed to continue its Cash xx
operations for an indefinite future period of time,
 Accrued revenues – revenue earned during
unless liquidation appears imminent).
the accounting period for which no cash has
-The going concern assumption provides the basis
been collected yet.
for the recognition of depreciation and deferrals.
-If not adjusted, income will be understated, profit will
-An adjusting entry affects both real and a nominal
be understated, assets will be understated, Equity will
account.
be understated.
Calendar year – one where the period ends in -Affects 3 concepts: (1) income recognition (2) asset
December 31. recognition principle (3) accrual basis assumption

Fiscal year – a period of 12 months that ends at any AJE:

time except December 31. Asset(Receivable) xx

Types of adjusting entries: Income(Revenue) xx

JE: (following year)

Cash xx
 Revenue xx Unearned income xx
Receivable xx Recognize the earned portion
2. Deferrals - receipts of assets or payments of cash AJE:

in advance of revenue or expense recognition. Unearned income xx

Revenue xx
 Prepayments – cash paid not but not yet
Income Method OJE:
incurred.
Cash xx
- Opposite of accrued expense.
Revenue xx
-3 concepts are involved: (1) expense
Recognize the unearned portion
recognition principle (2) asset recognition
AJE:
principle (3) accrual basis assumption
Revenue xx
Asset Method
Unearned income xx
OJE: xx
 Adjusting entries involving estimates
Prepaid asset xx
Cash xx 1. Depreciation
Recognize the used -The concept of depreciation involves the systematic
portion AJE: and rational allocation of the cost of long-lived assets
Expense xx over multiple accounting periods it is used to generate
Prepaid Asset xx revenue (cost allocation, not valuation concept).
Expense method -Follows the matching principle.
OJE: -PPE, with the exception of land, are subject to
Expense xx depreciation.
Cash xx
Recognize the unused Straight-Line method of depreciation: (the simplest
portion and most widely used method of depreciation) AJE:
AJE: Depreciation Expense xx
Prepaid Asset xx Accumulated Depreciation xx
Expense xx

 Deferred revenues – cash received but not yet Annual Depreciation=

earned. -The use of the contra account allows the

-Opposite of accrued income. disclosure of the original cost of the asset in the
-3 concepts are involved: (1) income recognition statement of financial position.
principle (2) liability recognition principle (3) accrual -Carrying value of PPE is computed as the
basis assumption. difference of the cost and the accumulated
Liability Method OJE: depreciation account.
Cash xx 2. Bad Debts Expense
-Estimating uncollectible accounts on receivable receivables. -The accounts receivable account
accounts. is not directly
-Also known as “Impairment of Receivables”. -The credited,
total amount of uncollectible accounts is an expense -If the base used for estimating uncollectible account
that arises by selling on credit. is:
-Net realizable value of Accounts receivable is o A balance sheet account, the amount estimated is
equal to the difference of Accounts receivable the required balance of the allowance account.
ending balance and Allowance for doubtful o An income statement account, the amount
accounts balance.
estimated is an addition to the balance of the
allowance account.
Two methods of recording bad debts:
-In contrast to the direct write-off method, recording
1.Direct Writeoff – directly removes the write-offs and recoveries under the allowance method
estimated uncollectible amount from does not affect profit.
receivables whether it is probable or not that the (Recognition of bad debts)
amount will not be collected. Bad debts expense xx
o The only method allowed for income tax Allowance for bad debts xx
purposes.
(write-off of AR)
(write-off AR/ Recognition of bad debts) Allowance for bad debts xx
Bad Debts Expense xx Accounts receivable xx
Accounts Receivable xx
(recovery of accounts written-off)
(Bad debts recovery) Accounts receivable xx
Accounts receivable xx Allowance for bad debts xx
Bad debts recovery xx Cash xx
Cash xx Accounts receivable xx
Accounts receivable xx

Aging analysis of receivables – bad debt expense is

Bad debts recovery - other income account
2.Allowance Method – a more prudent method
of estimating uncollectible accounts. It sets up
first an allowance account for the estimation of
uncollectible accounts. Once it is probable that
the account is uncollectible, derecognize the
allowance and remove the amount from
computed under the premise that the longer an amount
is past due, the more likely it is to be uncollectible. -
Higher percentage (%) will be assigned to older
receivables and the lowest percentages to new
receivables or to those which are not yet due.
Completing The Accounting Cycle
 Adjusted trial balance is prepared
-After journalizing and posting the adjusting entries,
adjusted trial balance can be prepared. The amounts
here are all adjusted and updated. A worksheet is
necessary to complete this step.
Closing entries -Journal entries that
temporary accounts to zero balance and transfer
their balances to the permanent capital account at
the end of the accounting period.
-Temporary accounts include all Statement of
Comprehensive Income accounts and withdrawal
account. They are known as nominal accounts.
-Permanent accounts carry forward their ending
balances to the next accounting period. They are
known as real accounts. They comprise items in the
Statement of Financial Position.
Income summary account – used as another
temporary account in which the revenue and the
expense accounts are closed to determine whether
the business operations results to income or loss.
Also known as Revenue and Expense Summary
-There is net income if the resulting balance of the
Income summary account (after closing revenues
and expenses) is credit balance (Revenues >
Expenses) otherwise, there is net loss.
Procedures in closing the nominal accounts:
1. Close all revenue accounts by debiting the
amount and crediting income
account.
2. Close all expense accounts by crediting the
amount and debiting income
account.
3. Close the balance of the income summary
account to the capital account, which balance
represents profit (credit balance) or loss (debit
balance) for the period.
4. Close the drawing account to the capital
account.
bring
Post-closing trial balance is prepared
-The purpose is to check the equality of debits and
credits in the ledger after the adjusting and closing
entries are recorded and posted.
-At this point, the only accounts with balances are
assets, contra accounts, liabilities, and capital.
Reversing entries
- Optional because it does not change the
amount reported in the financial statements.
- Journal entries made at the beginning of the
next accounting period and are exactly the
reverse of some adjusting entries.
- They are made after the preparation of FS and
closing the books of accounts, but before the
recording of the regular transactions for the
next accounting period.
- Purpose: Not to correct the AJE but to simplify
the recording of recurring transactions of the
next accounting period.
- Also for consistency in the recording of
income and expenses.
summary Rules in reversing journal entries
 General rule: a reversing entry is made if an
adjustment previously entered increases the
summary
SFP account totals.
 Sales returns – customers who may return all or a
portion of the goods that they purchased, due to
Reversing entries are prepared for: wrong specifications, poor quality of the
1. Accrued expenses merchandise, or erroneous merchandise being

2. Accrued income delivered

Sales allowance - customer is willing to accept the
3. Prepayments under expense method
goods despite certain defects, in exchange for an
4. Deferred income under income method
allowance or price adjustments granted by the seller.
The rest will not need any reversing entry.
Sales returns & allowances – only one account title;
contra-revenue accounts
Merchandising Business

Credit memorandum – document which informs a

Merchandise inventory – goods intended for sale;
customer that a credit has been made to the customer’s
asset (unsold)
account receivable for a sales return or allowance
Sales - revenue from selling merchandise Cost of
Sales returns & allowances xx
Goods Sold - cost of buying and preparing the
Cash/AR xx
merchandise; expense(sold)
Operating expenses – merchandiser’s expenses
Sales discounts – contra-revenue account - If
Point of Sale – most common point of income
payments are received within a certain number of days
recognition
from the date of sale, the seller reduces the amount to
Beginning Inventory – “opening stock”
- represents the cost of goods that are still unsold as of be paid by the buyer Example:

the start of the period 2/10, n/ 30

Net purchases – cost of acquiring inventories during

2% may be deducted from the amount due if the
the period
customer pays within 10 days from the date of sale.
Ending inventories – “closing stock”
-inventory at the end of the period
If customer doesn’t pay within 10 days, he/she must
pay the full price within 30 days from the date of
 Inventory system used for merchandising
sale.
transactions
Cash xx
Sales discount xx
Periodic Inventory System - CGS is determined
only at the end of an accounting period Accounts receivable xx
Trade discount – used to reduce the list price to
Cash/AR xx
actual sales price which may be due to the volume of
Sales xx
transactions
 -not recorded; the amount recorded is always net of - seller has agreed to pay all the shipping costs and
the trade discount the purchaser receives title to the goods at the point
Purchases – goods purchased for resale of destination.
Purchases xx Freight out/transportation cost xx
Cash/AR xx Cash xx
Purchase return – if a buyer decides to return  FOB destination, freight prepaid -
purchased goods freight cost is chargeable to the seller who pays the
Purchase allowances – when the company is still shipping company
willing to accept the said goods, but with a
reduction price Seller’s book: Buyer’s book
Debit memorandum – a document the purchaser AR/cash xx Purchases xx
issues to inform the supplier of a debit made to the Sales xx AP/cash xx
supplier’s account including the reason for the
Freight out xx (No JE for the freight cost)
return of allowance
Cash xx
AP/cash xx
 FOB Destination, freight collect
Purchases return & allowances xx
-freight cost is chargeable to the seller but the buyer
Purchase discount – sales discounts from the buyer’s
has to pay the shipping company upon receipt of the
viewpoint
goods
-contra account having a normal credit
Seller’s book: Buyer’s book
balance 3 alternative methods:
AR/cash xx Purchases xx
(1) Gross Price Method – purchases and AP are
Sales xx AP xx
recorded at gross; Purchase discount are
Freight out xx AP xx
recorded only when taken.
AR/cash xx cash xx
(2) Net Price Method – purchases and AP are
recorded at net of the discounts offered; (2) FOB Shipping Point
Purchase discounts lost is used to record
- purchaser has agreed to shoulder all the
purchase discounts which have been forfeited.
shipping costs and the purchaser receives title to
(3) Allowance Method – purchases are recorded at
goods at shipping point
net and AP at gross.
 Shipping Charges on Merchandise Purchased or  FOB shipping point, freight collect
Sold point of passage title – point of transfer of
Seller’s book: Buyer’s book
ownership freight terms:
AR/cash xx Purchases xx
(1) Free on board(FOB) destination
Sales xx AP/cash xx
(No JE for freight) Freight-in xx
 Cash xx Purch R&A xx
 FOB shipping point, freight prepaid Purch disc xx
Purchases xx
- all the shipping cost is for the account
Freight-in xx
of the buyer but the seller advanced the payment to
3. Setting up the ending inventory figure Merch invty
the shipping company
xx
Seller’s book: Buyer’s book CGS xx
AR/cash xx Purchases xx
Sales xx AP/cash xx  Preparation of a worksheet
AR xx Freight-in xx (1) CGS method
Cash xx AP/cash xx (2) Direct extension method

 Perpetual Inventory System Filling up the worksheet of a merchandising business

- records are kept of the quantity and cost of (1) Unadjusted Trial Balance Columns
each item as it is bough, held in inventory and
CGS DE
sold. - the cost of each item is debited to the
Transfer the unadjusted ledger balances to the
merchandise inventory account upon purchase
columns of the worksheet
- at the time of sale, the cost of each item is
transferred from the merchandise inventory
(2) Adjustment Columns
account to the cost of goods sold account
CGS DE
CGS xx
Merch. Invty. xx

CGS xx
End of Period Adjustments and Completion of
Accounting Cycle Merch invty, end xx
No AJE to set up CGS
Purch R&A xx

 Adjusting Entries Purch disc xx

Cost of goods method - method of adjusting MI, beg
merchandise inventory xx
Purchases
xx
1. Removing the beginning inventory from the Freight-in xx
merchandise inventory account (3) Adjusted Trial Balance Columns
CGS xx
Merch invty, beg xx
2. Closing the purchases account and purchase-
related accounts
CGS xx
 CGS DE
MI – contains ending no CGS account
balance MI – beginning bal Inc summary xx

Purch and Purch Purch and PurchR&A

R&A are still open Inc summary xx
are closed Drawing xx
MI and CGS –

CGS DE Drawing xx
CGS – debit bal sheet Purch and Freight-in
Capital xx
- debit inc statement - debit inc statement
DE method – “closing entry method”
MI – debit bal sheet Contra-purch – credit
Remaining open MI, end xx
Sales xx PR&A xx

(4) Income statement and Balance sheet PD xx

columns Inc summary xx

inc statement MI,

Inc summary xx
beg – debit inc
MI, beg xx
statement
Sales R&A xx
MI, end – credit inc
Sales disc xx
statement, DE to debit
Purchases xx
bal sheet
Freight-in xx
 Preparation of AJE and CE CGS method OPex xx
– purchases and purch related accounts
have already been closed to CGS CE:
Inc summary xx
Sales xx
Drawing xx
Sales R&A xx
Sales discount xx
Drawing xx
Expenses xx
Capital xx
CGS xx

Remember: Special Journals and Subsidiary Ledgers

Freight-in – account debited by the buyer
- added to purchases Purchase Journal – use to record purchases on
Freight-out – account debited by the seller account
- selling expenses Sales Journal – use to record sales on account
FOB Shipping Point – buyer Cash Receipt Journal - record all receipt of cash from
FOB Destination – seller any source
Freight Prepaid - seller paid cash to shipping Cash Disbursement Journal - record all disbursement
company of cash
Freight collect – buyer paid cash to shipping company Subsidiary Ledgers – group of accounts with common
Credit memorandum – sales R&A characteristics
Debit memorandum – purch R&A -frees the general ledger from the details of individual
balances
Income statement: Controlling account – summary account in the general
Purchase ledger
+ Freight –In

Gross Purchases Manufacturing Business

- Purchase Returns&Allowances
- Purchase Discounts 3 Departments:

Net Purchases (1)Production Department(production area) - in

+ Merchandise Inventory, Beginning charge of manufacturing the finished products of the

Cost Of Goods Avabilable for Sale company

- Merchandise Inventoty, Ending (2) Administrative Department(non-production area)

Cost of Goods Sold (3) Sales Department(non-production area)

Sales  Classifications of Manufacturing costs

- Sales Returns & Allowances Direct materials – essential part of finished product
- Sales Discount -easily traced to the product

Net Sales Direct labor – directly incurred in manufacturing the

- Cost of Goods Sold product

Gross Profit -easily traced to specific product

- Operating Expenses Manufacturing Overhead – “factory overhead” Operating
Income – all manufacturing costs or expenses incurred in the +Other Income
manufacturing or production department.
-Other Expense -excludes direct materials and direct labor

Net Income -cannot be easily traced

 Indirect materials – raw materials that are traced

part of finished product; cannot be easily
  Indirect labor costs – cannot be directly Work in Process xx
traced to the production of the products Cash/salaries and wages payable xx

 Classifications of Non-Manufacturing costs (1) Indirect labor incurred in the production:

Selling Costs - all costs to sell the finished FOH xx
products Cash/ salaries and wages payable xx
(2) Administrative costs - organizational and
executive costs related with the administration of an Expenses incurred in the manufacturing or production
organization department other than direct material, indirect material,
direct labor, indirect labor:
Product costs – “inventoriable cost” – all the costs that FOH xx
are incurred in manufacturing a product Various accounts xx

-includes direct materials, direct labor and

manufacturing overhead Administrative expenses:
Period costs - includes administrative and selling Expenses-G&A xx
expenses
Various accounts xx
- recognized as expense in the period incurred Prime
cost – sum or total of direct materials and direct labor
Selling expenses:
Conversion cost - sum or total of direct labor and
Expenses-selling xx
factory overhead costs
Various accounts xx

Journal Entries for a Manufacturing Company

Purchase of raw materials: Raw Materials Inventory- goods a company acquires
Raw materials xx to use in making products

Cash/AP xx -direct and indirect materials

Goods In Process Inventory – “Work In Process

Direct raw materials used in the production: Inventoy”

Work in proces xx - products in the process of being manufactured but not

yet complete.
Raw materials xx
Finished Goods Inventory – completed products ready
for sale
Indirect raw materials used in the production:
FOH xx
Raw Materials xx

Direct labor incurred in the production:

 Purchases Prime Cost
Gross Purchases Direct Labor
+ Freight-In
-Formulas:
Purchase Return&Allowances + Factory
Direct OverHead
Materials
+ Direct Labor

- Purchase Discounts Conversion Cost

Net Purchases
+ Raw Materials, Beginning

Total Raw Materials Available For Production

- Raw Materials, End

Total Raw Materials Used

+ Direct Labor
+ Factory Overhead

Total Manufacturing Cost

+ Work In Process, Beginning

Total Goods Put Into Production

- Work In Process, End

Cost of Goods Manufactured

Finished Goods, Beginning

Cost Of Goods Available for Sale

+ Finished Goods, End

Cost of Goods Sold

Sales
- Sales Returns & Allowances
- Sales Discount

Net Sales
- Cost of Goods Sold

Gross Profit
- Operating Expenses

Operating Income
+ Other Income
- Other Expense
Net Income